G.P. International Pipecoaters Pty Ltd v The Commissioner of Taxation

[1990] HCATrans 32

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth No PS of 1989

B e t w e e n -

G.P. INTERNATIONAL

PIPECOATERS PTY LTD

Appellant

and

THE COMMISSIONER OF TAXATION

Respondent

BRENNAN J
DAWSON J
TOOHEY J
GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

Pipecoat.:ers(2)

AT CANBERRA ON WEll-~SDAYL 7 MARCH 1990, AT 11.15 AM

(Continued from 27/10/89)

Copyright in the High Court of Australia

C2Tl/l/RB 93 7/3/90

BRENNAN J:  Is it the same appearances as on the last occasion?

MR FLETCHER: Yes, Your Honour.

MR CARR:	Yes.
BRENNAN J:	It is a long odyssey that you gentlemen have had.

Yes, Mr Carr.

MR CARR:  Your Honours will recall - or could be forgiven for

not recalling - that the question in these matters

is whether three equal payments each of $1.53 million,

totalling $4.6 million, made to the appellant at

90-day intervals during the course of construction of

a pipe-coating plant by the appellant pursuant to the

terms of a contract requiring the appellant taxpayer

to construct plant and to coat some 1500 kilometres
of that pipe, whether those three payments were

properly characterized as income.

There are, Your Honours, the 1000 pages of

transcript; it is four months since I was last

addressing you and I have taken some small steps to

assist in the assimilation of the facts.

The first thing I would like to do is pass up

to Your Honours a chronology, a short one page

chronology, of the facts, if I may.

BRENNAN J: Is this in addition to your aide memoire.

MR CARR:  Yes, Your Honour, it is simply dates and events. I

propose to go back, if I may, very briefly through

the salient facts. In summary, the salient facts

as we see them are that in 1979 the State Electricity

Cormnission, as it then was, of Western Australia,

SECWA, was obliged to take or had the right to take

vast quantities of natural gas from near Dampier and

it was obliged to construct a pipeline from Dampier,

initially, to Perth to take that gas to Perth and then

Tl eventually it was extended on to Bunbury. It became known to the company first mentioned

in the chronology, Gardner Bros & Perrott, the West

Australian company, Gardner Bros & Perrott (WA) Pty

Limited, that this work was available, that the SECWA pipeline project was available, but it decided that it

was too small for that type of work; that the job was

too big for it.

BRENNAN J:  Mr Carr, we have in fact traversed these facts

before, have we not?

MR CARR:  Yes, Your Honour.

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Pipecoaters(2)
BRENNAN J: And they are in the transcript of the argument

before this Court?

MR CARR: Yes, Your Honour.

BRENNAN J:  If you wish to briefly refresh our memories orally,

well that is one thing, but I do not think you need
to take us in detail through that which is already
in the printed word and which we will be constrained

to read, in any event, in order to equip ourselves.

MR CARR:  No, Your Honour, thank you for that. In short then,

a Dutch company got in touch with the West Australian
company and persuaded them to join a joint venture -

that is the first joint venture between the Dutch

company and the West Australian company which resulted

in the incorporation of a joint venture vehicle, a

Pty Limited company. Then SECWA advertised for

persons interested in this work to register their

interest and this company that they incorporated

registered its interest and was invited in July or

August to tender.

BRENNAN J:  Mr Carr, you can proceed on the footing that members

of the Court have reread the transcript from the

previous occasion and the judgment in the court

appealed from.

MR CARR:  Thank you, Your Honours.

BRENNAN J: And the memorandum which you provided.

MR CARR:  Could I just round that off in about a minute please,

Your Honour?

BRENNAN J: Yes.

MR CARR:  The other limb, as it were, of the joint venturers

comprised an American company, CRI, and a Victorian

company who, in turn, formed a joint venture and who,

to the tendering process joined together and put in	in turn, were invited to tender. So the two invitees
the joint tender. Now, in our submission, the most
crucial aspect of this case is that nothing changed
from that joint tender - nothing of substance. The joint tender was for $31 million and was accepted by
the letter that is in the aide memoire from SECWA at
that price, $31 million. There were some irrelevant
extras and that price found its way through to the
contract.

As early as the tender, the joint tenderers

stipulated that they wanted the upfront payments.

They expressed it as a percentage; 5 per cent on day one, 5 per cent on day 90 and 5 per cent 90

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days thereafter. The rest - and that is at page 498

of the transcript, also in the aide memoire - the
rest of the payments, right from the very first, were
to be spread - 85 per cent of the rest of the money,

the $31 million was to come in as the pipe was coated.

I will skip through the rest of the resume that

I was going to give Your Honours, the recapitulation,

to the full broad bases upon which we invite the Court

to confirm the characterization of these three receipts

as income in the appellant's hands. I have reduced

these to a sheet of paper too, if that would be of any

assistance to Your Honours.	Would Your Honours like
time to read it?

'	BRENNAN J: Yes, if you would give us a moment, Mr Carr.
MR CARR:  The full broad bases that we put forward for

characterizing these receipts as income are, first of
all, that the appellant earned the money in exchange
for the promise to perform the performance of the

contract as a whole; to render services,intially

building services,and make available plant and

equipment and subsequently coat the pipe. That

proposition, in our submission, does not depend upon

showing that the appellant carried on business or

business of any type. It just simply was paid money

T2 in return for a consideration.

BRENNAN J: There is one proposition in the first paragraph

there that seems to me to be open, perhaps, to some

doubt and that is:

in exchange for the promise to perform and

the performance of the contract -

now, as I understand the contract, there was no

provision that there was a payment to be made, for

example, as a progress payment on the building. It

was payable at certain elapsed times.

MR CARR:  Your Honour, that is true in respect to the first

payment in December. Obviously no work had proceeded

then. Thereafter - and I will take Your Honours to
the condition - there was a condition that the

engineer certified that the work had progressed to a

certain stage. On top of that, there were the critical

path schedules and what might be called bar schedules

showing the progress of the work at 90 day, 180; so in
a sense the first payment, we would suggest, is a
payment in return for a promise to do the work, but

the other two payments at day 90 and day 180 were

progress payments duly certified by the engineer.

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BRENNAN J: Well, is that right? If one looks at SC2.6,

subclause 42.1 at page 639 in volume 3.

MR CARR:  Yes, Your Honour. There is a specific condition of

the type that I have mentioned in the contract that I

was proposing to take Your Honours to later but I

will try and pick it up.

BRENNAN J:  In that way in which it is expressed, at least, on

that page is that it is payable at certain lapsed

times. Then there is a critical path which is to be

followed and in the event of non-completion of the

work in accordance with the critical path plan, then

the undertak:hgs, which are cash undertakings

redeemable, can be cashed in by SECWA.

• MR CARR: Yes, and of course those undertakings carried forward

beyond that through to the coating of the pipe. I am

sorry, Your Honours, I cannot pick up that particular

clause just off the cuff, I know it is there in the

contract and that my learned junior will find it, but

I assure Your Honours, I saw it last night, that there

is a clause requiring the work to progress to

particular stages and for the engineer to certify to

that effect. There is a special condition for that

purpose.

BRENNAN J: Yes, but my question was: was the payment conditioned

upon the certification of the engineer?

MR CARR: Yes, Your Honour, but that is my recollection of the

specific clause that I am referring to which I have

in my outline aniI just cannot pick up at this point.

DAWSON J: While you are interrupted, Mr Carr, can you remind

me what happened to the cost? Did the contractor

claim an investment allowance in relation to it?

MR CARR:  The contractor did, yes, Your Honour, but in addition,

of course, the contractor depreciated the whole of

the plant; not the whole of the building, because

there was a limit on the amount of depreciation that

could be claimed for the building, but the whole of

the plant,and all of that is summarized at page 889

of the appeal books in the fourth volume.

On the question of the money involved, Your

Honours, the arithmetic, in our submission, is very

simple but very crucial to the decision of the case.

On the income side or on the receipt side $4.6 million

came in in the three instalments. On the estimate of

expenditure on the plant, the estimated gross cost
of the plant was $4.2 million. That is at page 8
of the exhibit that I have put as document A in the

aide memoire.

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On that page, two items of the plant - the

two most expensive items - were reckoned by the

estimator to have a residual value of 35 per cent,

so there would be some salvage. That worked out

at $1.1 million in round figures. So that the

estimated gross cost of the plant was $4.2 million,

the estimator reckoned that they would get $1.1 million

in the way of salvage which brings the estimated

net cost of the plant down to $3.1 million. So it

can be seen from that simple arithmetic that what

the taxpayer received in the $4.6 million was not just the estimated net cost of the plant but also the salvage, the 35 per cent, and also something on

top of that.

' I will be taking Your Honours to evidence where

the accountant for the taxpayer, Mr Baker, said that
some $300,000 - and Mr Perrott also says it in his

evidence - or $400,000 of off-site expenditure;

people working down in Perth and, according to

Mr Baker, they were all working for the first seven

months of the job on the construction of the plant.	So
there was another $400,000 out of this difference of

T3	about $1.5 million. And on our case, on top of that,
there was the profit of 17.6 per cent on top of all those items.

So that this $4.6 million represents a global

payment, not just of the estimated net cost of the

plant, and at the end of the day what has happened,

of course, is that the taxpayer has received some of

the money that, in the estimator's mind, was spread

over the coating of the pipe.

DAWSON J:	Do you make anything out of the investment allowance
which was claimed?
MR CARR:	Only this, Your Honour, that the accountants - and I

will be taking Your Honours to the evidence - talk

about the matching principle - one of them does,

anyway, the more academic of the experts, Dr Monroe -

and he says accountants like to match income with

expenditure and that if you can see there is a

claimable expenditure, a deductible expenditure, then

there is legitimacy, from an accounting point of view,

of regarding the receipts as being income. So we do,

to that extent, Your Honours, in the same way as

we do with the depreciation.

DAWSON J: In other words, you cannot claim an investment

allowance for something that you have not, as it were,

paid for and the way in which it was paid for here

was by the receipt of income. That is just

extrapolating what you have just said, is it not?

MR CARR: Yes, Your Honour, that summarizes part of our case,

but we would say the fact that they spent it on

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a piece of capital equipment plays no part in the

characterization - with all due respect, should

play no part in the characterization of the receipts.

DAWSON J: It demonstrates in a way that they were spending

their income in this manner, which presupposes income.

MR CARR:  Yes, Your Honour. The only difference between this

type of contract and an ordinary building contract

where a builder is building a block of flats or a
factory, White Industries or whatever building a

block of flats or home units or offices, is that in

this case the owner had only a - the builder got to

keep the plant, although he had given credit for

the salvage value in the quotation, he got to keep
the plant but only conditionally. The builder's

title to it was very much defeasible in terms of

SCIO of the contract. So that SECWA, regardless of

any default on the builder's part, could take over

the whole works, the plant, and become a true

building owner.

So that, in our respectful submission, is the

only difference between this case and any other

building-type supply agreement-type case.

BRENNAN J: That again turns on whether or not the payment is

for the doing of the building. I do not know

whether the clause that you had in mind before is

that to be found at page 666, SC19.1. If so, it

does not seem to me that it does the job.

MR CARR:  No, Your Honour, that is not the clause. I can

picture it vividly in my mind. I can see it on the

page in my hotel room last night, but I just cannot

put my finger on it.	I will by the time I sit
down.

BRENNAN J: It does not seem to me that it is necessarily

against your argument. Your argument, on the one

hand, I understand to be that this is, as it were,

a cotmnercial building contract with a slight
variation.	The other way of looking at it is that

it is simply a payment made under an entire contract.

MR CARR: Yes, Your Honour, that is part of our case.

BRENNAN J: And whichever way you look at it, on your argument,

I take it you-would say it is income.

MR CARR:  Yes, Your Honour. We have some problems with the way

that the courts below approached it, that they did

tend to segregate the payments in their reasons for judgment as being - this 4.6 was for the plant but

in retrospect, the proper way of going about it would

have been to - we have argued that it was a complete

contract, not a divisible contract. Not the

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composite type of contract in BOYCE's case, we

have argued that, but the proper way of looking at

it really, in retrospect, might have been simply to

regard it as three mobilization payments of 5 per cent

which converted, when the dollars were fixed, into

$1.55 million each, and that was for the whole job, for the setting up of your plant and your tools and everything, and for putting on the paint.

TOOHEY J: But the way your argument is going at the moment,

you appear to be not content to take a stand on the
contract itself but rather take us into areas of

pre-contract area of negotiation and the way in

which moneys were to be paid and the reason why they

were to be paid. Is that being offered to us merely
by way of background or are you going to argue

eventually that that is relevant to the question we

have to determine?

MR CARR:  I am taking Your Honours to those pre-contractual

aspects on the question of carrying on a business.	I
wanted to show Your Honours just how businesslike
they were; how they went about it like merchant
adventurers of the 17th century all over the world; they got together to win this contract and I wanted to show that they went about it in that sort of way;

the Dutch company and the West Australian company,
the American company and the Victorian company joining

together in their respective joint venturers, the

commercial approach to it to win the contract. The

T4 contract, of course, stands on its own feet. But it

is the carrying on business aspect that I really

regard the background as being relevant to, Your Honour.

BRENNAN J: Was the character of the payment to be ascertained

by reference to the contract under which it was paid

to the taxpayer or by reference to the history of
the matter as between SECWA and the corporators of

the taxpayer?

MR CARR:  Your Honour, in our submission, from the contract,

but there is a dearth of authority on just how wide one can go in this characterization process. It is

very hard to say something is irrelevant in the

characterization of a receipt as being income or

capital. So I rather diffidently opt for the contract -

diffidently not in the sense that I am worried by

anything in the contract. In the contract it seems

to us very plain that it is consideration for - that

the money was consideration for the carrying out of

the contract and	thus assessable income, gross
income.

Secondly, Your Honours, the second broad basis

is that the moneys were received in the ordinary

course of the appellant's business, being the business

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of carrying out the contract which it was
incorporated to carry out. It was incorporated
within a month of the contract being awarded and

the contract was awarded in December 1981 and the

parties signed their formal joint venture agreement
the second week in January 1982 and three days later

they incorporated the appellant to take over their

rights.

TOOHEY J: But is that not a somewhat circular proposition,

because the ordinary course of this appellant's
business is only to be found in the contract? It

was a one-off project.

MR CARR:  We would submit that helps us, Your Honour, in the

sense that a business has to start somewhere and

there is authority for that proposition, but its
ordinary course was that contract, the fulfilment,

the carrying out of that contract with SECWA. That

is what it was incorporated for, that is what it did.

For the first seven months, it built plant, and for

the following year it coated the pipe.

TOOHEY J: Yes, but insofar as the proposition is that the

moneys were received in the ordinary course of the
appellant's business, my question is, is the appellant's
business to be found anywhere other than within the

four corners of the contract?

MR CARR:  Oh yes, in my respectful submission, yes, Your Honour.

It can be seen from the antecedent events, the

parents, as it were, on both sides getting together,

because after all reflected in the joint venture,the two joint venture agreements is what it is all about.

They say, and I will be taking Your Honours to it in
a moment, to win the contract and carry out the

contract for reward; that is what the joint venturers

were all about and then they incorporated this company

simply for that purpose. So one is not, with all

due respect, confined to the contract when looking

to the business of the company, but the business of

company to continue in business after the completion	the company was to carry out this contract. And if any one of the parties did not want the
of the SECWA contract, then the terms of the joint
venture agreement required the company to be wound up.

Thirdly, in the alternative, if the plant

construction must be viewed as a one-off transaction,

we submit that it was entered into with the intention

or for the purpose of making a profit and the receipts

are income on the principles discussed in MYER.

Fourthly, alternatively, there was a sufficient

nexus between the receipt of the moneys and the

appellant's business for -the moneys to be

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characterized as income and we pray in aid the

SQUATTING INVESTMENT case where the woolgrowers, years after the event, received a further

distribution and the way they were selected was

because they happened to be woolgrowers and therefore

it was held to income.

One point that I would not like to leave

unemphasized is this point which has bedevilled

the judgments in the court below, with all due

respect to the courts below, that there was some
rearrangement following the submission of the tender.

During the period August - well, it is certainly in

early September 1981 - there were discussions between

representatives of SECWA and the appellant and in

effect the appellant was asked: supposing you were

not to be paid these three up-front payments of

5 per cent each of the contract price, how much more

would SECWA have to pay? The answer came back,

$602,000. Well, that was never proceeded with. SECWA

decided to go ahead on the basis of the figures that

were tendered.

But inevitably, because of the way the tender

was framed, the rates expressed in the tender, $17 per

lineal metre, in any event had to be reduced because

of these three up-front payments because that rate

of $17 per lineal metre reflected all of the costs of

material, energy and labour from day one right through

to the end of the contract. All the costs, labour

costs, material costs and energy costs for constructing

the plant and all the costs for coating the plant.	So
once having paid 15 per cent of $31 million out,

obviously the all up rate expressed in the tender had

to be reduced, and that is precisely what happened.

On the last occasion I was addressing Your Honours, Your Honour Justice Dawson was having trouble

reconciling the figures in SECWA's acceptance of the

appellant's tender - that was at page 519 - and the

figures which appeared in the formal contract at

page 583. If it would be of any assistance, I have

prepared yet another piece of paper which explains

the figures and shows the total - the difference

come to $4.6 million exactly. If that would assist,

I would simply pass that up.

DAWSON J: Thank you.

BRENNAN J: Is it right to say that at the tender stage there

was a general rise and fall clause and in the contract

a rise and fall clause was restricted to the application

of the lineal foot charges as distinct from the up-

front payments?

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MR CARR:  Yes, Your Honour, I think that is right that there

was rise and fall applicable for the whole of the
work under the contract but that in the formal

contract there was no rise and fall applicable to

that portion of the work which related to the

construction of the plant.

(Continued on page 104)

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BRENNAN J:  Or in relation to those payments?

MR CARR:  Yes, Your Honour.

DAWSON J:  Do we know just exactly how it was that the

amounts were reduced to reflect the fact that

mobilization payments were to be made or had

been made?

MR CARR:	Except for this $290,000, yes, Your Honour.
It is pretty clear that they took $3,450,744
off the figure for external FBE coating.
DAWSON J:	But how did they calculate that amount?

MR CARR:  That I do not know, Your Honour. We tried to

work back but the calculations become more and

more confusing. The result is that they have

reduced the external coating by 3.4 million and

the internal by just over point nine of a million.

And the balancing factor is that 290,000 which

is not - it does not have the risk of a balancing

item because it does, in fact, relate to some

specific item. There is extra over for Australian

made epoxy powder.

DAWSON J: Is there some specific evidence to establish

that this reduction was made because of the mobilization payments or is it a matter of inference?

MR CARR: These specific figures, no, Your Honour. That

there were adjustments made, there is specific

evidence, which I will take Your Honours to.

But my point was that it was inevitable, no matter

what happened, that there would have to be these
adjustments made. Otherwise the taxpayer would

have been paid 4.6 million in addition to the

$31 million. So that, of necessity, the rate

per lineal metre to carry out all the work under

the contract, the construction of the plant and

the coating, had to be adjusted downwards by

15 per cent.

Of course, supposing SECWA had agreed to

pay the $602,000, again the rates would have

had to have been adjusted, this time upwards,

but the payments would have simply started on

1 July when the pipes started coming out of the

works.
At this stage, if I may, Your Honours, I would like to, if I could, take Your Honours

to the statement of principle in a case which is not on our list but which I understand has

been passed up. The case is the case of FEDERAL

COKE COMPANY PTY LIMITED V FEDERAL COMMISSIONER

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OF TAXATION, a decision of the Full Court of

the Federal Court, 77 ATC 4255, and the reference

that I seek to make is at page 4273.

But the facts of the case, really, have

no bearing on this matter at all but, in short,

a supply contract entered into by a subsidiary

for the supply of coke was cancelled and the compensation payment for the cancellation of

that long term supply contract was paid not to

the company that had entered into the contract

but to the parent. At page 4273, Your Honour

Mr Justice Brennan made this statement:

When a recipient of moneys provides

consideration for the payment, the

consideration will ordinarily supply the

touchstone for ascertaining whether the

receipt is on revenue account or not.

The character of an asset which is sold -

where an asset is sold -

for a price, or the character of a cause

of action discharged by a payment will

ordinarily determine, unless it be a sham

transaction, the character of the receipt

of the price or payment. The consideration

establishes the matter in respect of which

the moneys are received. The character

of the receipt may then be determined by the character, in the recipient's hands, of the matter in respect of which the moneys

are received.

At the risk of being sycophantic, that statement

has been approved twice last year - and I shall

not take Your Honours to the cases but I will give the reference: in the Full Court of the Federal Court in ALLIED MILLS INDUSTRIES PTY

LIMITED V FEDERAL COMMISSIONER OF TAXATION,

89 ATC 4365, at page 4369, in the right-hand
column, at the bottom.	And also approved again

last year by His Honour Mr Justice Sheppard.

in STAPLETON V FEDERAL COMMISSIONER OF TAXATION,

89 ATC G818, .at page 4824, in the right-hand

column, again at the bottom of the page.

That, in our submission, was a useful start

to the chart, looking for the indicia of the

characterization of this money as income. I

was in the middle of completing paragraph - towards

the end of paragraph l(a) of my outline of

submissions when the matter was adjourned in

Perth on this question of profit-making intent

and I would like to round that submission off

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by a reference to what we see as the salient

passages of MYER.

Again, if this is somehow viewed as a one-off transaction, is not viewed as remuneration for

services or ordinary income in the ordinary course

of carrying on a business, then we submit that

it falls within the principles of COMMISSIONER

OF TAXATION:,V MYER EMPORIUM LIMITED,

(1987) 163 CLR 199. In that case the respondent

taxpaye~ had lent $80 million to a related

corporation at a rate of interest, for a period

of seven years at 12½ per cent. The right to

receive that interest.would, one would have thought,

with all due respect, usually be characterized

as being of a capital nature.

(Continued on page 107)

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:t-1R CARR (continuing): Three days later it assigned that

right to a finance company for the sum of

$45.37 million which it received immediately.

The company the taxpayer had never previously

carried out such a transaction but the evidence

was that it was a carefully planned commercial

transaction made with the intention or purpose of

making a profit or gain, rather than a simple

realization of a profit on sale of a capital

asset.

Could I take Your Honours, very briefly,

to passages at page, first of all page 209, again this is

on our alternative argument that it is a one-off

transaction. Two-thirds the way down the page,

at page 209 of the joint judgment:

Although it is well settled that a profit

or gain made in the ordinary course of
carrying on a business constitutes income,
it does not follow that a profit or gain

made in a transaction entered into otherwise

than in the ordinary course of carrying on
the taxpayer's business is not income.

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. 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. Generally

speaking, however, it may be said that if

the circumstances are such as to give rise to
treinference 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 judged by reference

to the ordinary course of the taxpayer's business.

Nor does the fact that a profit or gain is made

as the result of an isolated venture or a
"one-off" transaction preclude it from being

properly characterized as income.

Across the page there to 211, in the second paragraph,

Your Honours:

The important proposition to be derived from

CALIFORNIAN COPPER and DUCKER is that a receipt

may constitute income, if it arises from

an isolated business operation or commercial

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transaction entered into otherwise than in

the ordinary course of the carrying on of

the taxpayer's business, so long as the

taxpayer entered into the transaction with the

intention or purpose of making a relevant

profit or gain from the transaction.

Over at page 212, down at the bottom of the page:

The judgments in some of the English decisions

naturally reflect the language of the United

Kingdom statutory provisions, which have no

precise counterpart in this country. However,

over the years this Court, as well as the

'	Privy Council, has accepted that profits derived in a business operation or commercial transaction carrying out any profit-making
scheme are income -

then there is talk about -

whereas the proceeds of a mere realization

or change of investment or from an
enhancement of capital are not income.

Again, to page 215, about the middle of the page

there is a passage which starts with the words

"Both":

Both the "ordinary usage meaning" of income

and the "flow" concept of income derived

from trust law have been criticized -

and there is a reference to an article by Professor

Parsons -

For present purposes it is sufficient for us

to say, without necessarily agreeing with

these criticisms, that, valuable though these

considerations may be in categorizing receipts

as income or capital in conventional situations -

this is scarcely a conventional situation in this case -

their significance is diminished when the

receipt in question is generated in the course

of carrying on a business, especially if it

should transpire that the receipt is generated

as a profit component of a profit-making

scheme. If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract

from its significance that the particular

transaction is unusual or extraordinary,

judged by reference to the transactions in

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which the taxpayer usually engages, if it

be entered into in the course of carrying on

the taxpayer's business. And, if it appears
that there is a specific profit-making scheme,

it is pointless to say that it is unusual or

extraordinary in the sense discussed.	Of
course it may be that a transaction is

extraordinary, judged by reference to the

course of carrying on the profit-making

business, in which event the extraordinary

character of the transaction may reveal that

any gain resulting from it is capital, not

income.

And then, Your Honours ·drew to the conclusion

at page 220 which raises a point Your Honour

Mr Justice Toohey raised with me shortly before

we adjourned last time, at page 220 the second-

last paragraph:

What we have said leads to the conclusion
that the amount in question formed part of the
income of Myer under s.25(1) of the Act. A

similar chain of reasoning would have led to

the conclusion that the amount constituted

assessable income under the second limb of

s.26(a). The relationship between s.25(1) and

26(a) has been the subject of much previous
discussion involving considerable differences
of opinion about the extent (if any) to which
the provision of the second limb of s.26(a)

supplemented the provision of s.25(1): see,

WHITFORDS_BEACB. _ It is, however,

unnecessaiy that we examine that question here

since, as we have indicated, we consider that
the amount in question in the presant appeal
constituted income of the taxpayer both pursuant

to s.25(1) and 26(a).

And Your Honour Mr Justice Toohey asked me whether the

Commissioner was relying on second limb of

section 26(a) and I 'Will be comin~ back to that in a

moment with a separate submission. In the appellant's

proposed amended grounds of appeal, paragraph 2.16

and also in the appellant's outline of submission,

at paragraph 2.6 the appellant says if there is taxable

income· here it should only be the net profit.	Of
course there is no net profit.

Either the net profit brought in under

section 25(1) or the net profit brought in

under 26(a), second limb.

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MR CARR (continuing):  To that we say - and I will develop

this later - but, to that we say, in short, if

it comes in under the second limb of section 26(a),

ordinary concepts and usages. If it comes in under
both those subsections, then the teaching of it has got to be income in accordance with gross income under section 25(1).

As to the proposition that it should be net

income brought in under section 25(1), in other words,

that net income comes in as gross income then, we

say, yes, that has happened,by consent in

WHITFORDS BEACH,and it has happened also in the

INSURANCE COMPANY cases, where insurance companies

having spare cash have purchased securities in one

year and then sold them in another year and I will

be taking Your Honours to those cases if necessary.

And then, in that situation it would be very - I was

going to say grossly unfair - unfair to not allow

the deduction which had been incurred some years
earlier to buy the securities and so what happens is,

by a course of judicial decisions starting with the

COLONIAL MUTUAL LIFE INSURANCE case and finishing up

with CARGILL, a netting out process occurs in that

type of case and also in the CURRENCY EXCHANGE GAINS

AND LOSSES caseswhere an exchange gain has been made
not so much on trading accouns but, say, a. company

borrows United States dollars overseas for the
purpose of strengthening its capital structure, and
then when it comes to repaying those dollars, the

Australian dollar has appreciated and less money has to go out and then there is a profit made.

The teaching of the case is that that is another

exception, only the second exception, to this idea
that you gut something out before you bring it under
section 25(1) because the traditional approach of
tax and gross income, of course, is to bring it in

under section 25(1) and then allow your allowable

deductions under section 51 or whatever other

specific deductions there are and I will be developing

that in more detail later on.

Your Honours, I now move, if I may, to

paragraph (b) of our outline of submissions

where I say the_ appellant was incorporated by the

members of a consortium for the purposes of

combining their relevant business construction and

operational expertise to tender for the contract, to

secure the contract and carry out the contract.

I am a little bit hesitant about taking Your Honours

to the page references - this, after all, is the
highest appellate Court in Australia - but it is,

again, a tax case where the Judges make their own

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impression as to capital or income and I was
proposing to follow it through from pages 800
to 806 from the principals of agreement through

so, in volume 4 - - -

TOOHEY J: Just before you do that, where there have

been relevant findings of fact by the primary

judge as there were in a number of instances here and those findings were not challenged, as I understand they were not in so far as

they were findings of fact, it would be more

economical to rely upon the findings in the

evidence. I mean, it may be that these matters

to which you are about to take us are not

reflected in any findings but all I am suggesting

is that where they are it may be sufficient

to rely upon the finding rather than the evidence.

MR CARR:	Your Honour, that is precisely the trouble;
detailed as His Honour Mr Justice Pidgeon's
reasons were, he does not pick up the various pages. I intend to be very brief; perhaps if I could be permitted to start and then, if it
becomes unnecessarily tedious, I would desist from taking Your Honours - but it is really a factual exercise and at the end of the day
it is an impression on the evidence adduced. In volume 4, at page 800 is the agreement
made between the joint venture company formed
by the Western Australian company and the Dutch
company on the one hand and Commercial Resins-
Indeng Pty Ltd, the American-Australian joint
venture on the other. That latter company had expertise in particular in connection with the fusion bonded epoxy system which was then
beginning to appear as the likely method which SECWA would choose. Perhaps I could just take Your Honours to just four lines there:

It is agreed that Gardner Perrott C.K.K.

Pty Ltd ..... and Commercial Resins-Indeng Pty Ltd ..... will work together to

perhaps I could emphasize that -

try to secure the contract for the internal

and external coating of the Dampier to

Perth natural gas pipeline.

Then, over the page, to recital G:

When GPCKK/CRI are notified that they have

been successful and will be awarded the

coating contract, they both agree to

immediately form a joint venture company

for the project. The coating contract

will be performed by the new joint venture

company.

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Then, over the page, at 802, paragraph lettered A:

The JVC -

which stands for joint venture company -

will have as its primary purpose the performance

of the terms and conditions of the pipe coating

contract. However GPCKK and CRI agree to

discuss the possibility of the JVC pursuing

"spin off" work related to the pipeline project.

Then, perhaps down to the bottom of the page, at paragraph C:

The share ownership and financial basis

of the JVC will be dependent on the type

of external coating eventually selected

by the client, but will be one of the following -

then, the one that was chosen was number one:

Fusion bonded epoxy system -

so, the share up would be 70 per cent for GPCKK

and 30 per cent for CRI and, perhaps, Your Honours,

at page 805, paragraphs lettered Kand L - and, in

our submission, all this is very businesslike, as

you would expect for a large project of this nature.

(Continued on page 113)

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MR CARR (continuing):

Both GPCKK and CRI may (basically for

tax purposes) receive all or part of
its share of the joint venture profits

in one or more mechanical ways, i.e.,

equipment lease, royalty, technical

assistance, dividends, etc. provided

this in no way affects the percent share

of gross profits to which each is entitled.

These alternatives for removing money from

Australia are not intended to influence

the share participation of the partners

in the JVC.

And I mentioned earlier in paragraph L, this is

reflected, that:

At the completion of the contract for the

coating of the Dampier to Perth pipeline,

GPCKK and CRI may mutually agree to allow the JVC to continue. However, if either party does not wish the JVC to continue, the company will be closed in an expedient

manner and always in conformance with

applicable laws and regulations. In this

case the assets of the JVC will be sold
and disposed of with the net proceeds
being distributed according to the

percentage share ownership.

Then, perhaps, Your Honours. in the same volume

there is a formal joint venture agreement. I

seek only to take you to a few passages - page 759 -

and this is at the time when the consortium had

won the contract; the consortium had been awarded

the contract. At the bottom of the page, the

first recital, Your Honours;

Whereas the parties to this Agreement are

substantial and experienced commercial

corporations each with a particular expertise

in its sphere of operation which in tandem

will be complimentary one to the other and

will work to their mutual advantage in

relation to the joint venture undertaking

herein specified.

Then, over the page:

The parties hereto have decided to join

forces and to enter into the joint venture

project of applying the internal and external

coating of and to the natural gas pipeline

now being or about to be laid between Dampier

and Perth -

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There is a description of the parties:

Gardner Perrott C.K.K. Pty Ltd is a joint

venture company -

and I will not read that but it describes the

parentage of the joint venture company. In the

middle of the page there is an important couple

of lines:

The Principals bring to the project through

their respective joint venture companies

specialist skills -

and I would emphasize those two words -

as follows:

Gardner Bros & Perrott (WA) Pty Ltd - local

marketing, commercial, industrial relations

and management skills.

That was the Western Australian company -

Cindu Key & Kramer N.V. - specialist engineering

and production skills for pipe coating plants -

and I emphasize the word "plants" -

around the world.

And:

Carlson Reserve Corporation - specialist fusion bonded epoxy pipe coating equipment, design, manufacturing and production skills.

At page 761, the second paragraph:

The parties hereto have agreed to incorporate

a proprietary company with limited liability

which will carry out the joint venture project.

Then there is a recital in the next paragraph:

The parties have been awarded the contract .....

to undertake the work involved in the said

project and with the consent of the State

Energy Commission they will have that contract

assigned to and executed by the said joint

venture company.

Paragraph 1 obliges the parties:

A proprietary company with limited liability .....

will forthwith be incorporated to undertake the

project.

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That is in clause 1, third line. There is the name

of the company, paragraph 2, and then in paragraph 4,

on page 762, the share up; how the money is going

to be split up because by this time, of course,

SECWA has made its decision as to which of the alternative methods of coating was going to be

chosen. So, it was going to be 70 per cent,

30 per cent.

BRENNAN J: This agreement simply gives effect to the intention

to create a joint venture agreement; specifies the
proportion of the shareholding and what is to happen

in the event of the project terminating and their not

desiring to continue.

•	MR CARR:	Yes, Your Honour, and finally, at page 764, at
clause 14:

The parties with the consent of the State Energy

Commission will cause the company to execute the

said contract.

I mentioned something about the specialist skills -

perhaps, just writing off the reference to the c0ntact

as Your Honours observed, that simply reflects

the heads of agreement in the document I took

Your Honours to first. I mentioned the specialist

skills; at the bottom of page 767 there is a sentence

which starts:

Each of the parties hereto shall fully and

faithfully carry out its responsibilities

in relation to the said project in a most

efficient manner and shall execute such

agreements and/or securities as any

financier to the joint venture company

shall reasonably require. The parties

hereto mutually covenant and agree to

hold continuing discussions from time to

time in order to arrange to their mutual

satisfaction all matters relating to the

joint venture project and for all incidental

purposes.

The evidence of the specialist skills is contained in volume 2 at page 475.

BRENNAN J:	Why do we need to go to that?
MR CARR:	Your Honour, there is some suggestion that this
construction of the plant was something one off
or unusual.  In our respectful submission, the
fact that the two overseas companies had specialist skills as referred to in the formal document, in the
construction of plants assists in the characterization
of what they were doing when they built the plant in
Western Australia. They were simply extending their
business into Western Australia.

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BRENNAN J:  Do you want to show that it is an integral part

of the business which was the contemplated joint

venture business?

MR CARR:  Yes, Your Honour. The fact that it was a separate

proprietary limited company really is not to the

point. We have not treated it as being a significant

factor in the case because, for example, the first

payment was received before it was incornorated.	No
point was taken on that.	But th~ specialist skills,

in our submission, of the parents reflect in the

business of the vehicle which those joint venturers

chose. The Dutch company had built a similar plant

in Scotland and it told SECWA that and made it part of

its selling point at these pages. It was part of

the tenders documents that they submitted with these

specialist skills that they had.

The American company had plant building skills

that had built two plants - certainlv two plants in

North America and one in Argentina: As r· say, very

briefly, at page 475 in volume 2, Your Honours, the

names of the parties are set out in the middle of

the page and then over on the next page, on page 476,

schedule C to the tender document, about line 20,

describing Cindu Key & Kramer, the Dutch company: The company is also involved in the building

industry, and thermal acoustical waterproofing

and insulation, plus resin and coal tar

chemistry and manufacture.

Then at line 25, dealing with Carlson Reserve:

The business activities of Carlson Reserve include the external epoxy coating of line pipe up to

20" diameter at Tulsa, Oklahoma; the engineering

fabrication and start up of the two line coating

plants up to 60" diameter at Dammam, Saudi Arabia;

the plants at Tampa, Florida -

so presumably there is more than one -

and Newport Minnesota -

and perhaps the plants are at Florida and Minnesota. So

there is plant building expertise; and over at

page 477, line 15:

The company, Commercial Resins-INDENG Pty. Ltd.,

was formed to market the following services -

and the first one is:

The lease and/or sale of fusion bonded epoxy line

pipe coating process equipment.

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The last sentence on that page:

In summary the joint venture will offer to the
Australian pipeline industry, and to the
Dampier/Perth pipeline project in particular,

the combined resources and exnertise of a

world-wide consortium, managed by a

West Australian company.

So to draw in the threads of that, it was all a very

business-like approach and without reading to

Your Honours, at page 513 there is a letter

post tender when SECWA asked for a bit more information about the joint tenderers. The West Australian company wrote a letter on behalf of the joint tenderers in

the post tender pre-contract period, at page 513,

setting out the plant building skills of some of

the personnel involved.

So there was nothing unprecedented so far as the parent companies were concerning in building a plant

and then operating it to coat pipe. Mr Perrott

enlarged on that aspect in his evidence, at page 152

in volume 1, at line 40:

Did any particular party involved in the joint venture have any special expertise in that

area?---Yes, Key & Kramer were particularly
expert at the plant construction -

line 42 -

Yes, Key & Kramer were particularly expert at

the plant construction and the handling of the

pipes -

Finally on that, at the top of page 206 in the same

volume, the word from the previous page is "You".

The first line:

You have agreed I think that at a certain stage you had discussions with CRI and the purpose of those	discussions was to seek its assistance, was it not,
in the construction of the plant?

And the answer from Mr Perrott is, yes, when, in fact,

taxpayer was carrying on a business at the relevant

to some extent, it was conceded before the Federal

time. The issue was what sort of a business was it?

Paragraph (c)in our outline is that the work

required to be carried out pursuant to the contract

included construction of the coating plant and that

can be seen, in a preliminary way, from the

advertisement which SECWA placed, in volume 2,

at page 448, summarising:

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Parties interested in supplying materials

and setting up coating plants at one, two or

three central yards in WA for the application of internal and external corrosion protection coating of High Test Line Pipe ..... are

invited to register in writing their interest - So right from the start

(Continued on page 119)

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TOOHEY J: Mr Carr, are these facts in issue? The inferences to

be drawn from them for the purposes of the appeal may

well be but, would it not be enough just to tell us in

a general way of these matters - to the extent that

issue is taken with them, as facts no doubt

Mr Fletcher would want to know.

MR CARR:	No, Your Honour, in those circumstances our submission
is set out there in paragraph(c4 that it is quite clear
in terms of the contract and the documents to which reference may be made, as the phrase is used, in the
contract, that the contracter bound itself to build
the plant described in drawings which are incorporated
by reference - drawings prepared by Painter and Dixon
and so described the critical path schedule - a bar schedule was incorporated by reference; that showed the
progress of the works from day one, and the works
at that stage were the building of the plant. There
were progress payments, and I undertake to come back
to that clause, Your Honour.  The progress payments
were claimed on the evidence by three invoices raised
just like any other progress payments raised; the
claimis ma.de by a builder; sent to the consultant engineer and certified for, just like any other building contract, and paid for just like any other building contract - paid at the end of the December,
the second payment in March and the third payment
about 11 June.

The undertakings in respect of the receipts, we

submit,are important because those undertakings to

which Your Honour Justice Brennan referred to, cash

on demand undertakings, were under the terms of the

contract not to be released. The very first undertaking

relating to the first payment of $1.5 million in

December 1981, that was not to be released until the

very last piece of pipe had been coated.	The very last
coating of pipe in fact took place in late 1983.	So we
say that - - ·-

BRENNAN J:  Mr Carr, perhaps you can help me to find this, because as I read it, they were to be released:

in accordance with Schedule B Item B2.4.3 -

and I am taking that from SC19.5 at page 667.	I cannot
find schedule B Item B2.4.3.

MR CARR:  I think at the.bottom of page - - -

MR FLETCHER:  I may be able to assist there, Your Honour. There

is no such clause. That is one of the anomalies.

The contract does not contain a clause which is referred to in the contract, it simply is not there. It was referred to at some length by His Honour, now the

present Chief Justice David Malcolm, who is appearing

for the appellant at the trial. It appears in the

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transcript, and I can take you to it, Your Honour,

if it is required, but it is simply an anomaly, it is

just not there.

MR CARR:  The page reference which I was going to

take Your Honours to is at page 668, which I think

contradicts what my learned friend has just said.

BRENNAN J:	I am so·rry, what ·page, Mr Carr?
MR CARR:	668, and one needs to keep a finger in page 576, where
schedule B can be found.  At the top of the page:

Performance and Payments Bonds in the case

of payments made under Items B2.2 and B2.3

of Schedule B securing the Principal's payments

shall be lodged by the Contractor prior to the

commencement of the period for which such

payments become due.

Then, if one skips the rest and comes down to the

middle of the page:

Release of Bond

Performance Bond lodged with respect to

payments under Schedule B Items B2.2 and

B2.3 shall be released as follows:

Now, B2.2 and 2.3 can be seen at page 576 as being:

Establishment costs to be paid on Day 90

of the Contract -

that is B2.2 and -

B2.3 Establishment costs to be paid on

Day 180 of the Contract.

It goes on:

Bond lodged for payment made under

Item B2.2 -

which is Day 90 -

shall be released when a Certificate of

Practical Completion for the fifth (5th)

separable part has been issued by the

Engineer in accordance with Clause 42.2 of

the General Conditions.

The "fifth separable part" is a section of coated pipe.

Bond lodged for payment made under Item B2.3 - which is the third	payment, as is abundantly clear
from page 576 -

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shall be released when a Certificate of

Practical Completion for the tenth (10th)

separable part has been issued by the

Engineer in accordance with Clause 42.2 of

the General Conditions.

And, as I was saying a moment ago - (iii) at the

bottom of page 668:

Undertaking lodged for payment made

under Item B2.l -

which is the first payment of $1.5 odd million that

they got in December - it was paid in December 1981 -

shall be released when Practical

Completion of the whole of the works has

been certified by the Engineer in accordance

with Clause 42.0 of the General Conditions. That is not practical completion of the plant. That

is practical completion of the whole contract, includi~g

coating the very last segment of pipe and~ in our

respectful submission, this is one of the clearest

possible indications of the linkage of the plant
construction obligations with the pipe coating
obligations. The first of the undertakings of
$1.5 million was not to be released until practical

completion of the whole of the pipeline being coated.

And, Your Honour Mr Justice Dawson, when we were in

Perth, showed some interest in the undertakings, they are

simply bank undertakings to pay up - I will not burden

Your Honours with it, but they were simply bank

undertakings to pay on demand and no questions asked.

BRENNAN J:  You have ju$t been conflating two things, have you

not? One is the bank undertakings, and the other is

performance bonds. They are separate. Bank undertakings

are dealt with in SC19; performance bonds in SC20, is

that not right? (Continued on page 122)

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MR CARR: Well, 19 certainly deals with the provision of the

undertakings. I was dealing with the release of

them, Your Honour.

BRENNAN J: In SC20?

MR CARR: Yes, in SC20, yes, Your Honour.

BRENNAN J:  Does not SC20 relate to performance bonds?

MR CARR: It relates, Your Honour, with respect, to both.

It says:

Performance and Payment Bond

in the case of payments made under

Items B2.2 and B2.3 -

and then it talks about, in 20.6:

Release of Bond -

and then in (i) it talks about:

Bond lodged for payment -

and in (iii):

Undertaking lodged for payment -

they use the words almost interchangeably: "Bond",

"Bond", "Undertaking" in (i), (ii) and (iii) at

the bottom of the page.

BRENNAN J:  But that rather makes the point, does it not-~ that

there was two different things: one is undertakings

and the undertaking is an undertaking which the

SECWA could, without any questions asked, as you say,

go and ask for the money for; no question of breach

of a condition of a bond in the case of the

undertakings.

MR CARR:  No, Your Honour.

BRENNAN J:  I do not think it makes much difference but I just

want to try and understand whether you are talking

about the same thing.

MR CARR:  I think we are, Your Honour, with respect. At SQ9.5

at page 667:

Release of Undertakings

Undertakings lodged with the Principal in

accordance with Sub-Clause SC19.l - - -

BRENNAN J: That is right.

MR CARR:

shall be released to the Contractor in

accordance with Schedule B Item B2.4.3.

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And when one goes back to schedule Bone sees:

For conditions relating to payments made

under Item B2.0 above. Refer to

Clauses SC2.6, SC19.0 and SC20.0.

BRENNAN J: Perhaps it does not matter very much but I must

confess I have read 19 as relating to undertakings

which are different from the bonds which are provided for in clause 20. However, it does

appear that clause 20.6(a)(iii) relates to an
undertaking in relation to payment B2.l and

not to a performance bond.

MR CARR:  That would probably be enough for my purposes,

Your Honour, just - - -

BRENNAN J:  Yes. I would not have thought it matters very

much. It just seems to me to be -

the only difficulty that arises is in relation to

undertakings which ought to be released to the

contractor in accordance with schedule B,

Item B2.4.3 which does not exist.

MR CARR:  No, Your Honour.

BRENNAN J: Attribut_e it to the word processing, perhaps.

MR CARR: Quite possibly, but at least the first payment - the undertaking in respect of the first payment

was not to be released. There was oral evidence

about that as well. That was the way the

contract was administered, that those undertakings -

Mr Perrott gave evidence that he negotiated with

the engineers - because they started off that the

undertakings were not going to be released until

practical completion and he gave evidence that he

negotiated with the engineers for at least the first two - the release of the first two to be

brought forward. So, that is probably the

explanation why the last one is referred to as

an undertaking.

BRENNAN J: While I am troubling you about these provisions

of the contract, cauld I ask you about one other

definition, "separable parts". You have said that

there are separable parts and you have identified

one of the separable parts. as the	provision of
a certain amount of piping.	Now, as I see it

"separable part" is defined at page 672 as:

part of the Works specified in the

Specification or Drawings as a
separable part.

Now, are there any specification or drawings which specify "separable parts"?

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MR CARR: Yes, I am about 80 per cent confident in saying,

yes, there are, Your Honour. They have identified

them geographically as being Dampier to Cossack

or Cossack to Geraldton, and so on, but I cannot

give you the page reference.	It will be coming
forward very quickly.

I mentioned when I was addressing on the question

of carrying on a business this problem of a business
having to start with one particular transaction

and I would like to refer Your Honours to a case on

that point:  LONDON AUSTRALIA INVESTMENT COMPANY

LIMITED V FEDERAL COMMISSIONER OF TAXATION, (1977)

138 CLR 106. I regret I have not got that

report available, Your Honours, but the passage in

particular - - -

BRENNAN J: You have a passage you wish to cite, perhaps,

Mr Carr?

MR CARR:  Yes, I did, Your Honour, and we were going to do a

fair amount of photocopying this morning and that

is one of the cases - in fact, there is a bracket

of similar cases where the work was not done,

I am afraid, and I apologize for that.

BRENNAN J:  Have you got it in front of you, the part you wish

to quote?

MR CARR:  Thank you, Your Honour, yes. The facts of the matter

were - it was one of the cases where the question

was whether the profits from the sale of securities

purchased by a company were assessable income and

the question was whether the purchase and sale of

those securities performed part of the ordinary

business of the company.

(Continued on page 125)

C2Tl2/3/PLC	124	7/3/90
Pipecoaters(2)

MR CARR (continuing):  At the bottom of page 128 His Honour

Mr Justice Jacobs, having found that the first limb

of section 26(a) did not apply said:

Therefore, once profits on sale are

found not to fall within the first

limb of s.26(a), the determinant is

the carrying on of a business, not any

associated business in a general sense,

but the specific business of acquisition
with a purpose or intention or expectation

of resale and subsequent resale with

consequent profit. Though frequent activity

of acquisiton and resale does not necessarily

signify a business, it is evidence from

which it may be in£erred that there is a

business. First, the frequency of the

activity may itself tend to show that

it is not of a private or of a casual

nature ..... Secondly, the frequency of the

activity may enable the inference to be

drawn, if the fact be in dispute, that

there was a purpose ..... Nevertheless,

it must be made quite clear that frequency

of an activity is not synonymous with

business. There may be no business

despite frequency and on the other hand

there may be a business where the

activity is an isolated one. Every

business must begin with an initial

transaction.

We would pray in aid that short passage from that judgment as being applicable to the present

circumstances of this matter.	The cases which my
learned friend has cited of SUN NEWSPAPERS	and

HALLSTROMS, in our respectful submission, are not

directly in point as they are concerned with the

question whether expenditure should be characterized

as capital or income under section 51(1), but it is

a different issue, in our respectful submission, in

this case.	The other side of the equation are the
receipts to be characterized as capital and income

and whilst there may be some guidance from.the

SUN NEWSPAPERS and the HALLSTROMS case we would

submit, respectfully, they are not directly in point.

My learned friend frequently referred to the plant

as being a profit yielding subject in that context.

In our submission, the commercial reality of this

matter was that the whole contract was the profit-

yielding subject. That was what was assigned when the

documentation came to be done in July 1983. It was

the contract and that, in our submission, was the

profit-yielding subject for these joint venturers.

In paragraph (d) we make the point that the appellant

company, from the·date of its incorporation, carried

C2Tl3/l/HS	125	7/3/90
Pipecoaters(2)

on business and earned money for the first six months

of its effective commercial life of just over two years

and it earned the receipts in accordance with schedule B

of the contract. That was its whole business life and

its business was a reflection or duplication of the

business of one or other or possibly two of the

corporate parents.

At paragraph (e), the receipts were received in

the ordinary course of carrying on that business. There
is evidence, which I have tabulated there, that these
up-front payments were not uncommon in the construction
industry and on the suggestion of Your Honour
Justice Toohey that if any of this is in issue it will

be raised in reply, I shall not take Your Honours to

those passages. We say the receipts.were essentially

progress payments made under the contract and were so

intended. Your Honour Justice Brennan raised that

question of progress payments. I think that is probably

where I should take Your Honours. In volume 3, page 550:

The Tenderer shall enter in Schedule F, the dates and amounts of progress

payments, payable under the Contract which

he estimates he would require during the

progress of the Works. The Principal

requires this information as a guide to

enable him to make suitable provision for

the capital funds -

et cetera. Then paragraph (b):

Notwithstanding the amounts stated in amounts only if the progress of the Works justifies such payments as determined by the Engineer.

That was the passage that stuck in my mind earlier on this morning.

BRENNAN J:  Well, this is in the tender documents.

MR CARR:	Yes, Your Honour.
BRENNAN J:	Then it is carried through to page 498 where you

get the tender and then it is carried through to the

clauses to which I earlier drew your attention

in 2.1, 2.2 and 2.3. Then there is the

provision that it can be applied for and paid on

the certification of the engineer but the contractual obligation is to pay it at the expiration of the time.

The remedy which SECWA had was to cash in the undertakings

if the work was not done.

MR CARR:  Or to take over the plant?

C2Tl3/2/HS	126	7/3/90
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BRENNAN J:  Or to take over the plant, but the payments were

not payments against the progress in the work. They

were payments under the contract on the expiration

of time.

MR CARR:	I was just looking to see whether it might be
legitimate to read that CT, which is conditions of tender, in paragraph 16 as a part of the contract.
It may well be, but it is not specifically set out
at page 567. So, with all due respect, it may not
be a term of the contract other than the reference to the critical path which is a contract document.
BRENNAN J:	Yes, but that is the point. If the critical path

is not adhered to, the remedies of SECWA are

enlivened but it would seem, as a strict matter of

• contractual obligation, that payments were made

simply in accordance with schedule B 2.1, 2.2 and

2 . 3 .

(Continued on page 128)

C2Tl3/3/HS	127	7/3/90
Pipecoaters(2)

MR CARR: Yes, Your Honour, but suppose then that a date have been reached without the work progressing

as far as the critical path indicated, then the

contractor would be in breach and for a contractor

then to be in breach and to come to the principal

and ask for payment, I would have thought it would

be rather difficult for the contractor to justify

in terms of the contract being paid,when having '

convenanted to comply with the critical path

schedule, it simply had not.

BRENNAN J: That raises interesting problems of interdependence

of promises.

• MR CARR: I hope it is not very useful in this case. I would

not have thought it had much to do with the, with

all due respect, characterization of the receipt,

but it arose out of what Your Honour just said about

the question of whether there was any obligation to

reach a certain stage. The only contractual

document to which I can point is the critical path

schedule. The evidence of the four accountant8:

Mr Justice Pidgeon in his reasons for judgment got

it wrong when he said that the two accountants

which the respondent called, had said that the

receipts should be characterized as capital. At

page 913, in the middle of the page, His Honour said:

I have also received expert evidence from

accountants called by the respondent

expressing the view that the payments should

be treated as capital.

That is quite wrong. They each in turn said that

in accordance with accountancy practice they would

be categorized as income. The authorities which I

have referred to there,and there are other authorities,

support the proposition that it is legitimate in

the characterization process to look to the practice

of accountants and what happened, as Mr Baker's

evidence reveals, was that he being the accountant

for the taxpayer in fact treated the mobilization

payments as income. They were held in suspense

until the coating part of the work started and at

that stage from then on until the following June -

from September 1982 in fact, onwards, that was when

the posting started - he debited mobilization payments;

debited the suspense account and credited an item,

a sales item, a revenue item with these mobilization

payments, intending to spread the mobilization payments

by way of sales over the coating part of the works.

Well the authorities, which I will not take

Your Honou:i:s to,sa.y that is not determinative, but it

is of some comfort that that is the way the taxpayer

treated it. We do not rely on that totally - - -

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DAWSON_ J-.~- Claiming that an investment allowance is

inconsistent with that, is it not?

MR CARR:  The investment allowance, Your Honour is, perhaps

to put it loosely, a bit of - It has eot

really very little to do with matters of

accountancy. It is a political matter. The

investment allowance is to encourage people to

invest in a new client.

DAWSON J:  I know, it is inconsistent with the payments being

income.	You treat this as a capital asset, do you
not, to claim an investment allowance.	You say,

all right, well that is the way the taxpayer chose

to regard,it. That is his choice. That ~s his

exercise and option. We do not regard it that way.

He cannot then, of course, claim the outgoings in

respect of the plant as well as the investment

allowance, but that was his choice. That is the

way you put it. But at least it shows that, at

least for some purposes, the taxpayer in his

accounting treated this as a capital asset.

MR CARR: Well, in fairness to the taxpayer, he depreciated

it as well and was -

DAWSON J: Yes ..... He chose to

do that for his own reasons, so you cannot draw

much from the accounts at all, can you?

MR CARR: Well, I was not seeking to draw a great deal,

Your Honour - - -

DAWSON J:  No, I accept that.

MR CARR:  - · - - but was from the other three accountants, one

after the ocher.	Mr Humphreys being called for
the taxpayer.	Mr Humphreys was under a total

misapprehension of the facts, which is not really

hard. He was under the misapprehension that - - -

DAWSON J: Especially when there are clauses that are not there.
MR CARR:	There had been no adjust:n:ent to the linear rate, but when it was put
to him what in fact had happened  Mr Humphreys conceded
that from an accounting point of view the
mobilization payments should quite clearly be regarded as revenue, so - - -
DAWSON J:	What is the alternative to putting it into a

payment account? What would be the alternative,to

put it into a what account?

MR CARR:	Your Honour, as they did, to put it into a suspense account or to put it into a capital account, arid
treat it as -

C2Tl4/2/CM	129	7/3/90
Pipe coaters ( 2)

DAWSON J: If you had one.

:MR CARR:  Yes, Your Honour. And to treat it as a liability.

Mr Campbell, a seasoned professional accountant,

gave similar evidence and Dr Monroe gave similar

evidence that it should be characterized as income

and incidentally there is one piece of evidence,

in my haste, that I have not taken Your Honours to

but I would like to take you to, at page 320,

talking about Mr Baker's evidence. I ~-iave talked earlier

on about the work going on, not up at the plant

at Geraldton, but off-site during the first seven

months of the building stage, the people working in

Perth whose services were devoted to the construction of the plant.

(Continued on page 131)

C2Tl4/3/CM 130 7/3/90

Pipecoaters(2)
MR CARR (continuing): There is evidence elsewhere that

that was either $300,000 or $400,000, in that

vicinity, it is in Mr Perrott's evidence, there

was some 300,000, what they called indirect costs,

why, I do not know. But it is interesting - it

is also very useful - that Mr Baker says, in

answer to the question, at line 40:

Are you able to say from your knowledge

of affairs of the company whether there were in fact indirect costs incurred in connection with the construction of the

plant?---Yes, certainly, from the point

of view that during that period virtually

all of us were working on the construction

of the plant. However, our wage and salary

costs, if you like, are not treated as a

capital item here -

and he is referring to a document.

So we take Your Honours to that for two

reasons: first, to show, if we need continuity in carrying on a business, that they were - all of them, in the company, were engaged - this

is coming from the accountant who should know,

the taxpayer's accountant - but during this period virtually of them were working on the construction of the plant and yet here they are claiming this

is an item of capital and they are writing all

that expense down in Perth against whatever income

came in during that year ended 30 June 1982.

It is totally inconsistent if what they

are doing is generating a capital receipt and

the whole company's efforts are directed to that

end for that not to be treated as a capital item.

They simply write that off against their gross

receipts for that financial year. And that,

of course, has some relevance to the problem

raised by my learned friend's application to

amend the grounds of appeal, that if we are going

to look at net profit - if it has got to go back

to the supreme court for an assessment of net

profit - that is just one item that is going

to have to be built under very much closer scrutiny.

DAWSON J:	What he is saying there simply is that they
used the income at this time, the money coming
in to use a neutral term, to pay current expenses, it is nothing more than that, is it not?
MR CARR:	With all due respect, it is more than that,
Your Honour, because those expenses were confined
to the construction of the plant which the taxpayer says is capital and that the taxpayer, in the
same breath, says, "No, we didn't capitalize
C2T 15/1 /ND	7/3/90
Pipecoaters(2)

them. We wrote them off against current income.

We regarded them as day-to-day expenses so far
as tax and as far as reporting the financial

results of the company were concerned, the like."

BRENNAN J:  What was the current income?

MR CARR:	There is one page of the appeal books which should
not be there but given that I can take Your Honours to the tax return - - -

BRENNAN J:  But you can tell us, what was the current income?

MR CARR:	There were moneys on deposit .. It is reflected
in the income tax return for the year ended
30 June 1982 but there was some interest earned and my problem is that we sought to produce a
particular page at the Federal Court level which
is part of the income tax return which had not
gone into evidence at the supreme court level
and it has somehow or other found its way into
the appeal books.  But I can probably show
Your Honours without going to that page -

BRENNAN J: If it was not in evidence in the courts below

it is not in evidence here.

MR CARR:	No, Your Honour.
BRENNAN J:	In all events, it does not matter very much.
MR CARR:	Very briefly, at page 871, which is part of the -
and is in evidence, there is the figure there:

INCOME

Interest Received	$158,042
Contract Work in Progress -

I do not kriow what that would have been because

there was no coating done - my point might get lost in that aspect; the point is simply that

for seven months, on Mr Baker's evidence, the

company was in - all of them were engaged in

building the plant. Instead of capitalizing that

expenditure they wrote it straight off against
the interest and whatever they earned during

the period. That, Your Honours, is at page 320,

at the foot of the page.

The alternative submission made at

paragragh (g) at page 4 of our outline is what
might be termed the SQUATTING INVESTMENT principle.

That is No 7 in our list of authorities. If

all else fail~ in our submissions, we say that the

money would be caught under this net, that there

was a sufficient nexus between the receipts.

The receipts were made because the appellant

C2T15/2/ND	132	7/3/90
Pipecoaters(2)

had agreed to construct, was in the course of

constructing and had constructed, the planter

had agreed to use that plant to coat the pipes.

We say there was a direct link between the

receipts and the commercial activities of the

appellants. There was a sufficient nexus between

the receipts. They did not fall into the lap

of the taxpayer accidentally, as some items of

capital fall into one's hand.

The facts in the SQUATTING INVESTMENT COMPANY

case were that there existed a wool distribution

scheme in the Second World War, just as there

was in the First World War, with the United Kingdom

and Australian Governments combined to compulsorily

acquire all the wool and sell it and distribute

part of the proceeds to the wool-growers. Long

after the distributions anticipated there was

a stockpile of wool and an unexpected distribution

occurred years later, by which time wool-growing

partnerships had dissolved, all kinds of problems

occurred in the context of entitlement of life

tenants and remainder men and this problem of
the distribution of the wool moneys has been

up to the Privy Council twice and in this case

the question was whether this almost gratuitous -

in fact it was gratuitous, there was no statutory

entitlement to the moneys, the distribution of

these moneys was that income. It was long after

the event and the dissenting judgments of

Their Honours Mr Justice Fullagar and

Mr Justice Kitto, at page 623, I would refer

Your Honours to that, were upheld on appeal.

(Continued on page 134)

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MR CARR (continuing):  I would refer Your Honours to the

passage at page 623, in the middle of the page:

It is, of course, not impossible that

moneys, which trustees must treat as income in their estate accounts, may

constitute a capital receipt for taxation

purposes. But the whole of the reasoning

in RITCHIE's Case -

and that was the other case of the wool realization

scheme that went to the Privy Council -

is quite inconsistent with the view that

the moneys now in question constitute a

capital receipt for taxation purposes.

The judgment is based from "beginning to end on the view that those moneys were

paid in respect of wool supplied for

appraisement in the course of a business

carried on by the taxpayer. They are

attributable to that wool. They are paid

because that wool has been supplied, and

their amount is calculated by reference to

the appraised value of that wool. They

are proceeds of the taxpayer's business.

And at page 634 at about point 3 there is a passage

in His Honour Mr Justice Kitto's reasons:

The Act makes it plain -

and we would interpose there, "the contract makes

it plain", the contract with SECWA -

that these amounts are made payable in

respect of the wool which was supplied and

because it was supplied; not because of

any admiration for the personal qualities

of the suppliers or because of gratitude

for their having supplied wool - '

and at page 636, again in the same judgment at

about the same position, about point 3 on page 636:

The moneys payable under the Act, being bestowed as the Parliament had seen

fit to bestow them, were described by

their Lordships as "payable to the
supplier". "It is a true gift", they

said, "to the supplier of the wool"; "a personal gift to the parties concerned".

His Honour then, having finished that quote from

the board, said:

C2Tl6/l/PLC	134	7/3/90
Pipecoaters(2)

It seems clear that what their Lordships were insisting upon by their use of the

term "personal gift" was that s.10 must be

construed in the light of the essential

point in the scheme of the Act, which was
that the wool disposals profits were to be

put into the very hands from which

participating wool had been compulsorily taken.

So construed, s.10 had the effect of
attaching to those profits, when they reached

the hands of a member of a partnership

which had supplied participating wool for

appraisement, the incidents which would

have attached at the time when the wool was

supplied to the proceeds of a sale of the

wool made by the partnership at that time.

Further down the page there is a passage:

The destination remained what it would have

been if those events had not happened;

the recipients were selected by reference
to the fact that it was they who had supplied
wool for appraisement; the Act operated in

favour of them personally.

BRENNAN J: What does that have to do with this case?

MR CARR:  Simply, that the nexus - all else failing, whether they

were considered to be - that payments were income

from services rendered; all the other bases of our

submissions. If all of those are dismissed then,

in our submission, there is a sufficient nexus

between the payments from SECWA - these three

payments - and the carrying on of the taxpayer's

business, the construction of the plant and the
using of that plant to coat the pipe, for it to be
characterized as income in much the same way

that the Privy Council eventually accepted those

two judgments that I have just referred you to,

Your Honours. There was a sufficient nexus.

That is how the taxpayer was - - -

BRENNAN J: It depends on how you identify the business, does

it not? Your first proposition is that the

business includes the construction of the plant.

If the business were regarded contrary to that

submission as being the production of the pipe from

the plant, then your argument would not run, would

it?

MR CARR: In relation to SQUATTING INVESTMENT, Your Honour,

I do not think it depends on the proposition that they were carrying on a business. It is sufficient

that there is the nexus between the construction of

the plant and the coating of the pipe and the

receipt of that $4.6 million, a la SQUATTING INVESTMENT.

C2Tl6/2/PLC	135	7/3/90
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It does not require a business to be carried on.

There is nothing in the guidelines in SQUATTING

INVESTMENT that requires any particular business.

It is the question of the nexus between the payment

and the activity, with all due respect.

I have pointed to the fact that the receipts

were of a periodical nature. Sometimes in the

characterization process it is important that the

payments be made periodically. At paragraph (i)

I refer to the fact that on the expenditure side of

the transaction the appellant was legally entitled

to - and I have cited the sections there - write

off virtually all of the receipts. It was allowed

the investment allowances, the depreciation and the loss sustained on the disposal of the plant.

So, all of the money expended on the plant was

written off either by depreciation or loss sustained

on disposal.

The appellant put up a hypothetical situation

of SECWA exercising its rights to take over the
plant prior to commencement of the coating and
said that there would not be any deduction there.
In our submission, there are two-and-a-half answers
to that; the first is that in that situation
the characterization of the deductions would not be
the same but what would have happened was that the

title to the plant would have vested in the building

owner; SECWA would have become a building owner

and it would be exactly the same fact situation as if White Industries had built a factory or a

block of offices or a block of flats and so the

characterization would be that the expenditure

was not capital and it would be deducted under

section 51(1) because ownership of the plant would

have passed to the building owner in the usual way.

Tl6	Secondly, as an alternative, the plant would have been in readiness for use under section 54
and the depreciation provisions could have followed
from that. But the main point would be that on the
facts which transpired in this hypothetical situation
there would have been a straight deduction of all of
the expenditure. It would not have been of a
capital nature on the facts - if SECWA
had taken over the plant and exercised its rights.

Thirdly, there was provision for compensations,

is the half answer, in SClO and one heading of

compensation might be the income tax liability to

which my learned friend referred which we say

would not exist. The problem with that is that

there was a limit in SClO on the total quantum of

compensation, that the limit would not have been

enough.

C2Tl7/l/PLC	136	7/3/90
Pipecoaters(2)

A very important point, at the bottom of page 4,

in our submission, is that there was no requirement
for the appellant to account to SECWA for the

actual cost of the plant and it did not do so.

Mr Perrott made that very clear. It never accounted

to SECWA for the expenditure of the $4.6 million

and it was entitled to keep for itself and to

apply the receipts as it wished so long as it carried

out its constructional and other obligations

under the contract. And that, in our submission, is

a very clear distinction from the situation in the

BOYCE V WHITWICK case, the Court of Appeal decision,

so heavily relied on by the appellant and, also,

the Australian case of APA INVESTMENTS where

His Honour Mr Justice Owen - it does not matter.

It was not in this Court.	He was sitting at that
time in the Supreme Court of New South Wales.	It is
very clear in that case that it was a precise

recoupment down to the last shilling of the capital

items there.

The submission in paragraph (k), again, I have I think I have probably made it ad nauseam, that - - -

BRENNAN J: You have covered that, I think, have you not?

MR CARR: Yes, Your Honour. And in paragraph (1) I think I have

made the point that the $4.6 million far and away

exceeded the estimated net cost of the plant which

was $3.1 million. In our submission, that

reinforces - just as the hanging on to the
undertakings until the very last pipe was coated,
so the fact there is this large difference between
the net amount of 3.1 and the actual amount

received of $4.6 million reinforces the

conclusion that constructing the plant was part

of a total indivisible contract because some of
the money which, at the end of the day, the appellant

was receiving for coating the plant can be found in

that $1.S million. It is still the same$~ million

but they, at the end of the day, received about

$1.S million of it through these three payments at the

beginning, the $4.6 million.

BRENNAN J: Would this be a convenient time then to adjourn,

Mr Carr?

MR CARR: Yes, Your Honour.

BRENNAN J: One question before we do adjourn: at page 889,

exhibit 59, what is that document?

MR CARR: That document, Your Honour, is a comparison of the

accounting business treatment of the receipts and

expenditure with the tax treatment. What happens

for tax purposes compared to what as far as

connnercial reporting by those responsible for the

accounting of the company to their directors. That

is what page 889 is about.

C2Tl7/2/PLC	137	7/3/90
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BRENNAN J:  But who asserts that that is the way in which it

either should be done under income tax law or has

been done under general accounting? Whose document

is it, first of all? Who tendered it?

MR FLETCHER:  I may be able to assist, Your Honour. It was

a document produced by the respondent and tendered

at the trial by counsel for the respondent,

the Commissioner.

BRENNAN J:  Thank you. We will adjourn now until 2.15 pm.

Tl7	AT 1.00 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.18 PM:
MR CARR:  Your Honours, at the top of page 6

of the outline there is an alternative submission,

a very basic one, that if the correct

characterization of this contract is as a contract
for the coating of about 1500 kilometres of pipeline
then in our submission, the receipts were payments
in advance of part of the consideration payable

for coating the pipes. In other words, three

payments each equal to 5 per cent of the contract

sum.

The next paragraph turns to some of the

authorities relied upon by my learned friend

and we distinguish the petrol service station

cases on the basis that the consistent thread

of principle running through those cases is

that an amount received for giving up the freedom
to deal should be characterized as a capital

receipt.	The service station proprietor, for a
sum of money, agrees to sell only X brand of

petrol then the receipt is received as a capital
receipt.

In the CITY MOTORS case - the New Zealand case - similar principles, we would say, were

applied but with a different result as in the SQUATTING INVESTMENT company case, that there

was not sufficient nexus between the business which

City Motors conducted and the receipt of the

moneys. They were not earnings of the business nor

were they sufficiently related or connected with the

carrying on the business nor were they derived from

the current operations of the business so as to be

income.

C2T18/1/JL	138	7/3/90
Pipecoaters(2)

Your Honours, BOYCE's case, at first glance,

has a striking factual similarity with this case

but, in our submission, they are the same

distinctions which we made in the Full Federal

Court, some of which were found to be acceptable.

BOYCE's case, Your Honours, is in the

appellant's list No 6, Your Honours, and in that

case the facts were that an urban district council,
it might have been a rural district council, an

urban district council required some water - had

a need for some water - and a colliery had

a mine which had filled up with water and which

could be pumped up and processed and made available

to the urban district council. The contract for

that provided for the outlay of money on the

pumping plant - capital item - and the recoupment of- the precisE

amounts of the capital outlay by half-yearly payments

over a period of 30 years with a possibility that

there might be a renewal and extension for another

20 years; a very, very long contract. In addition

to that the capital payments themselves, on a reducing

basis, attracted a rate of interest and that fact,

I will show Your Honours in a moment, was certainly

important to some of the Lords Justices in that

case.

But it is a very different case in that the business of the company was that of a colliery

mining for coal and the supply of water was merely

an incidental matter. That surfaces at pages 709

to start with, with the Master of the Rolls, but

paragraph H:

The primary business of the company was the

getting of coal from their colliery.

Incidental to the getting of coal they had to keep their coal mine free of water.

Again, at the next page 710, letter F:

What was the situation thus created? The

company were to make an outlay unnecessary

for their coal-getting business, an outlay

which in a certain contingency of their not

continuing to get coal might not inure at

all for their benefit -

Incidentally, at letter Hat that page is the

reference to interest:

interest at the rate of 5 per cent. per annum

on any portion of such cost for the time

being unpaid.

Page 711, at letter E, again the :Master of the Rolls says:

C2Tl8/2/JL 139 CARR 7/3/90

Pipecoaters(2) (Continued on page 139A)

I intend to look at the agreement as a

whole, and I find in the agreement a capital

outlay made not really for the purpose of
the company but for the purpose of this supply
of water and on assets, the user of which in

certain events might pass to the council.

And the bottom of the page, the last few lines:

In the present case the company were not,

when this agreement was made, trading in

selling water.-

Of course, in passing, the English tax cases depend

very much on this question of trading.

(Continued on page 140)

C1Tl8/3/JL	139A	7/3/90
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MR CARR (continuing):  My learned friend referred to the

SEAHAM HARBOUR DOCK case for a proposition in

his outline of submissions. That case, with respect,
is ·not an authority for that proposition at all.

The House of Lords decided that case simply because the Seaham Harbour Board was not trading. It is quite clear that that is the basis of the decision. With respect to the BOYCE's case,

their main business, as I have pointed out, was the

getting of coal and it goes on in like vein. Then

at page 712, about the fifth line, on the question of

interest being attracted:

The agreement does not provide for an inclusive

payment for water over a time certain in any

event, it provides for the repayment of

one-sixtieth part of the capital and provides that

interest should be recoverable only upon such

portions of capital a·s remain unpaid ~

Lord Justice Romer, at page 714, harks on the_point,

in the middle of the page at letter E:

At the time when that agreement was entered into,

it is sufficiently plain that the company,

though no doubt well equipped both as regards

machinery and building for the purposes of

carrying on a colliery business, was not

properly equipped in either respect for the

purpose of supplying water to the council.

On the following page, page 715, between letter

C and D, Lord Justice Romer points to a factor

which in His Lordship's mind was determin,ative

of the interest factor:

Then follows sub-cl. (c), which to my mind

is conclusive on the matter. It says there
is to be naid in addition interest at the
rate of 5-per cent per annum on any portion

of such cost for the time being unpaid.

In those circumstances the Court of Appeal held

that the payments being made precisely to recoup

the capital disbursements were in the hands of the

colliery company capital receipts, and,; incidentally,

capital expenditure by the council.

In this case, further, the appellant taxpayer

bound itself to carry out the whole of the work

and could not, without being in breach of the contract
with SECWA, stop carrying out the work. In BOYCE's

case the colliery had the right, if it ceased its

main business of coal mining, to terminate its

obligation to supply water.

C2Tl9/l/LW	140	7/3/90
Pipecoaters(2)

Again, in BOYCE's case, there was a precise,

as I say, reimbursement. There was no intentional

purpose of making a profit on the cost of

construction of the plant because there was a

separate charge for the water - a penny a thousand

gallons. There was separate payment for the water.

Whereas in our submission it is quite clear that

the appellant had that intention and purpose from

the outset, right through to the completion of the

contract. I have referred, I think, sufficiently to the

interest payments which encrusted on the receipts

in BOYCE's case, which we do not see here, and,

incidentally, which affected the decision in our

submission of His Honour Mr Justice Owen in the

APA case.

BRENNAN J:  Mr Carr, in BOYCE's case, page 714, letter H to I,

Lord Justice Romer posed the question for

determination. Do you accept that as the critical

question for determination in BOYCE's case?

MR CARR:	I think that is right, Your Honour, with respect, yes. Was it a composite contract with two severable parts?
I think that is very different from the contract in
the present case where it is an integrated contract.

DAWSON J: It really puts it in a complicated way, does it not?

What you are saying is - correct me if I am putting

wrongly - but in any contract for the supply of goods,
which essentially this is, or even services for that

matter, the price will contain various elements including
the cost of the plant which is used to produce the
product. Normally that is not separated out but it is

in the price nevertheless. Here, because there was only

one customer and because it was convenient,because

the plant had not yet been built, to separate out

an amount in· respect of the cost, it was done.

But the contract, in essence, being the one contract,

is no different from any other contract for the

supply of a product, at a price, the price containing

an element for the cost of the plant to produce it and t'be
cost of raw materials and so on.	Is that not all
that you are really saying?

(Continued on page 142)

C2Tl9/2/LW	141	7/3/90
Pipecoaters(2)

MR CARR:  Yes, Your Honour, and that, in essence, is what we

seek to say in subparagraph (c) at the top of page 7.

DAWSON J:  I just was looking down to the example in your next

point, and that seems to be an unnecessarily complicated

example. It would be easier to view it in the way in

which I was putting it to you in aid of your case.

MR CARR:  Yes. I gratefully accept that summary as being

applicable to the distinction between the two cases,

Your Honour.	The APA case was another case of
precise recoupment.	I will not take Your Honours to

the case itself but it can be seen at page 370, half-

way down the page, in that case, that the outlay on

the building and the land was precisely calculated

at £18,011 and then interest was calculated on that

and there was a sinking fund which, in our submission,

effectively and totally distinguishes that case from

the present case and to the extent that the appellant

in its submissions suggests that in the APA case there

was an approximation of the capital expense, I would

suggest that is an oversight, that at page 370, half-

way down the pay, it is quite clear that it was a

very precise recoupment. That concludes my

submissions, Your Honours, on, as it were, the

respondent's case and, to a large extent, in response

to the appellant.

That leaves only the question of this net profit problem, whether this case should be sent back to the

supreme court for assessment of the net profit.

BRENNAN J:  Do we need, before we enter upon that, to

consider your response to the proposed amended notice

of appeal?

MR CARR:	That is part of my response, Your Honour.
BRENNAN J:	You will deal with that in the course of dealing

with this part, will you?

MR CARR:  That is what I was proposing to do, Your Honour. I

was proposing to truncate it, to keep it as short as

possible, but our objection to the proposition is that

the - and the proposition, of course, is that there

should be a net profit calculated and that brought
to tax either as a gross income under section 25(1),

or as~ net profit under the second limb of

section 26(a). ·

TOOHEY J:  Could I just interrupt you for a moment. You say

that is your objection to the proposition, but what

is the respondent's attitude towards the application

to amend the notice of appeal?

MR CARR:  I have just stated the appellant's proposition,

Your Honour . The obj e c t i on i s , ( a ) , th a t we have always

C2T20/l/HS	142	MR CARR	7/3/90·
Pipecoaters(2)

fought this case as a section 25(1) case, whether the

receipts were gross income; secondly, that there will

need to be considerable further evidence if we are

going to be assessing - if a net profit has to be

brought to tax, and, as a matter of law, I will be

submitting no net profit should be brought to tax.

If I am wrong on that, then I will just simply point

to the evidence that would have to be adduced to

arrive at the net profit.

BRENNAN J:  I must be missing something. I should not have

imagined that the appellant here would be wanting to

have anything brought to tax at all that he could avoid

having brought to tax. Do you wish anything to be

brought to tax which you have not thus far sought to bring

to tax?

MR CARR:	No, Your Honour, but it is in the alternative, as I
understand it, that the appellant is seeking in proposed paragraph 2.16 of the - - -
BRENNAN J:	Paragraph .15 or .16?
MR CARR:	I think the amended notice of appeal was passed back

to my learned friend, or the proposed amended - - -

TOOHEY J:  No, the Court was left with copies in Perth.

(Continued on page 144)

C2T20/2/HS	143	7/3/90
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MR CARR:	The language of proposed 2. 16 is clearly in the
alternative. Well, it looks as though it is
in the alternative.
TOOHEY J:	I am not sure what you mean by that, alternative

to what?

MR CARR:	To being brought to tax as gross income. The
alternative to the $4.6 million being brought to gross income is, as I understand the appellant to be putting it in 2. 16, · that there exists
a lesser figure, being a net profit, that should properly be brought to tax.
MR FLETCHER:	I might be able to assist here, Your Honours. There is no such assertion by the appellant -

BRENNAN J: Mr Fletcher, if you would just come to the

microphone - - -

MR FLETCHER:  I am sorry, Your Honour. The fact of the

matter is that it has been found by the trial

judge as a matter of fact that there was no profit

and so the appellant certainly is not asserting

that there is smaller component that ought to

enter assessable income as a net profit. I simply

want to correct my learn friend on that point.

That is not the appellant's assertion.

BRENNAN J:  What then is the purpose of 2. 16 of your proposed

amendment in the notice of appeal?

MR FLETCHER:  The purpose of that paragraph, Your Honour,

in the proposed amended notice of appeal is to

meet head on - if it is the case that the

respondent is entitled -is given leave to raise

this matter at this point, that is to say whether

or not there was a profit-making intention in

relation to the construction of the plant which

we contend should not properly be raised now,

if that is to be raised, then we say that we

must look for the profit. ought to be entitled to say in that case one

McHU9H J:	But this is not a ground of appeal, it is just an ar8lJIIlellt.
TOOHEY J :	Do you irean "prof it-rraking intention" as throwi..11.g some light on the chata<:!ter of the business which was being conducted or do y..ou mean up.r,af.tt,,,mgk:1rtg. iil:tention~:.'--.. :in tems
of section 26(a)?  · ·
MR FLETCHER:	In terms of both 25(1) and 26(a).
TOOHEY.J:	But why should we be trouble with 26(a), the

respondent does not rely upon 26(a)?

C2T2 l /1 /ND	144	7/3/90
Pipecoaters(2)

MR FLETCHER:  We say that in this case, if there is an

assertion that there ought to be included an

amount of the establishment costs in the assessable

income of the appellant then the only appropriate

amount is that amount of actual gain, if there

is any. And that is the purpose of that paragraph,

to raise that as the issue if we are talking

about profit-making intention.

BRENNAN J:  What do you mean by "some appropriate amount"?

If there is $4½ million received, that is a gain, is it not?

MR FLETCHER:	No, with respect, Your Honour.
BRENNAN J:	Why is it not?
MR FLETCHER:	The point being that it was received upon

terms that it had to be expended upon creating
the plant and the plant immediately it was

constructed had no more than scrap value and,

accordingly, it would be quite incorrect to say

that the receipt of the $4.6 million in itself

amounted to a monetary gain in that amount.

The gain, if one is to look for a gain, can only

be the actual benefit at the end of the day for

the appellant.

DAWSON J:	This is looking at the plant building enterprise as a separate profit-making undertaking or scheme?
MR FLETCHER:	Yes, Your Honour.

DAWSON J: Necessarily.

MR FLETCHER:  That is quite correct.

DAWSON J: Quite separate from the rest?

MR FLETCHER:  Yes. The point is, of course, that if it

is the case that these payments of $4.6 million

in total represent a flow of revenue pursuant

to the pipe coat:ing contract, then we do not argue

with the position as it stands.

(Continued on page 146)

C2T21/2/ND	145	7/3/90
Pipecoaters(Z)

MR FLETCHER (continuing): What we say is that is not the case

but my learned friend is arguing that, in any event,

there was a profit-making intention in there and

we say, "Well, if that's the case, if you were to

find that there was a profit-making intention or

that that question was open, then we must address

what is the profit" and the profit is not, in

that context, the 26(a) context, or a 26(a)-type

profit coming to 25(1) entering assessable income

via the gates of 25 ( 1 ), we have to ascertain

what is the monetary value of that particular

profit. So it is, we say, a separate exercise.

TOOHEY J:	Why are we concerned with profit?	We are concerned
with income, are we not?

• •

MR FLETCHER:	Yes, Your Honour, but -
TOOHEY J:	As to whether a particular sum of money possesses
the character of income for the purpose of the
INCOME TAX ACT.  Now, if it does not, it does not.
If it does, well I suppose it does.  What is
offset against that by way of outgoings is another
matter.
MR FLETCHER:	Yes, the appellant does not dispute that but the point is, Your Honour, that as my learned
friend has pointed out quite correctly, it has been established in certain instance~ and we say
that this would be one of those instances, that
in trying to determine the true reflex of the
assessable income of a taxpayer, one must get
down to what is the true gain.  I think my
learned friend's words were, "It wouldn't be fair
in the exchange game cases or the INSURANCE COMPANY cases to say, 'Okay, that is assessable but we' re going to ignore the fact that you had to incur
this outgoing which is deductible"'. The reality
is one must look to find the net assessable item and, in those cases, it has been established that
there will be an item - call it profit - which
enters assessable income via 25(1).

BRENNAN J: Mr Fletcher, if that be the way in which you

wish to put it, it is being put only in response

to an argument which you apprehend is going to

come from the respondent, is that so?

MR FLETCHER:  It is put only in response to the assertion

by the respondent that it is open to this Court

to entertain the proposition that in relation to

the construction of the plant there was an intention

or purpose to profit.

McHUGH J: That is what I put to you ten minutes ago. This is

an argument. It is not a ground of appeal at all.

C2T22/1/SH	146	7/3/90
Pipecoaters(2)

You are not appealing against the judgment below

on this ground. This is in answer to the oral

argument of your opponent, is it not?

DAWSON J:	In other words, no one is saying that you should
be taxed under section 26(a) on either side.
MR FLETCHER:	We are saying that that has never been raised.

No reliance has now been placed upon 26(a) but

reliance is being placed upon 25(1) and profit

of a 26(a) type, in my submission, coming through

the back door. So we say it all comes in a

circular fashion back to what is the profit and

that was the purpose of that.

TOOHEY J:  But you want to argue that income equals profit

'

do you and that, therefore, the amount of the

assessable income cannot be determined until

the profit, whatever that may mean, has been

arrived at?

MR FLETCHER:  No, Your Honour. The argument for the appellant

is that if it was the case that the outgoings which

had to be incurred in order to generate the incoming which was the $4. 6 million in the establishment costs were

deductible then the corollary is that the receipts

could well be assessable but if it is as a matter

of fact that they are not deductible, then we are
thrown squarely into the arena of these cases my

friend referred to earlier where one just obtains

a distorted reflex of the taxpayers' taxable

position.

TOOHEY J:	But you want us to determine now what are outgoings?
MR FLETCHER:	I can deal with this in reply to my friend in

more detail, Your Honour, if you wish.

(Continued on page 148)

C2T22/2/SH	147	7/3/90
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BRENNAN J:  Is·that not exactly what Justice McHugh put

to you. If we do not give you leave to amend by

inserting paragraph 2.16, will you be any the worse

off?

MR FLETCHER:  If it is the case that my learned friend is

denied leave to rely upon the proposition that there

was an intention to profit from the construction activity

in itself, then, no.

BRENNAN J: Well, how can your insertion of a so-called

ground of appeal affect his position as to whether

he is given leave to raise a point or not?

MR FLETCHER:  I do not suggest, Your Honour, that it can

affect that. But the question I understood was, would we be any worse off if we were denied our

application to amend - - -

BRENNAN J: That is right.

MR FLETCHER:  - - - the notice of appeal, and at the same

time my learned friend was granted his application to

raise the matter of profit-making intention.

BRENNAN J: Well, he is allowed to raise something; you can

reply to it. It is a matter of argument, not a

matter of a notice of appeal - ground of appeal.

MR FLETCHER: Well, that being the case, Your Honour, I have

no difficulty~ As long as it is open to the appellant

to raise the arguments that I have foreshadowed, then

perhaps, with respect, His Honour Justice McHugh is

correct. It may be that it goes to the matter of

reply, but it was by way of meeting,· really,the

notice of contention that was filed by the respondent,

Your Honour.

BRENNAN J: This was inserted in order to meet a notice of

contention, is that the situation?

MR FLETCHER: Well, as a consequence of a notice of

contention being filed. It raised the very matter

of the profit-making intention.

BRENNAN J: That applies to paragraph 2.16?

MR FLETCHER: It .does.

BRENNAN J: 2.15?

MR FLETCHER:  Bear with me, Your Honour, if I might just check

the original notice of appeal.

McHUGH J: You do not rely on these as grounds to set aside

the Full Court judgrrait, because these issues do not

arise.

C2T23/l/FK	148	7/3/90
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MR FLETCHER: Well, that is correct, Your Honour, yes.

They would arise before this Court if it was the

case that my friend was given leave to raise that

point, and if they do arise by that reason we would

simply want to be able to meet that argument. If it

is not necessary to have 2.16 in there for that

purpose well then, we happily withdraw our request

for leave to amend. If it is necessary then we would

wish to have that leave .

Your Honour, no, 2.15, we would wish to have

leave to amend to include "in any event". That

goes to the question of what was - it simply
re-fonnulates in a clearer form one of the issues arising,

and that is what was the profit-making business

purpose - the activity of the appellant infused with

the profit-making purpose: what was that? The purpose

of 2.15 is to more clearly formulate that issue.

BRENNAN J:  Thank you, Mr Fletcher.

McHUGH J: Well, just for my benefit, because I am afraid I am

a black letter lawyer about notices of appeal: what

is the error of the Court of Appeal? I mean,grounds

of appeal should state what the error of the court

below is either by way of omission or commission. does throw up the difference between argument and

grounds of appeal. Now, what is the error that the

Full Court made that 2.15 is directed to?

MR FLETCHER:  Your Honour, might I be given the opportunity to

examine - you take me unawares, Your Honour.	I
cannot point immediately to the passage in the
answer to that question. -	judgment of the Full Federal Court which would give the

. (Continued on page 150)

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MR FLETCHER (continuing):  I do believe it is there and it

may be a fair criticism of the notice of appeal or

the proposed amended notice of appeal that i.J: does

not make it crystal clear, on its face, what is the

error.

McHUGH J: See, all your other grounds do, or most of the

others down to 2.10.

MR FLETCHER:  The Federal Court erred in holding that.

BRENNAN J: Well then, to deal with 2.16 now. In 2.15 you

want to see whether or not - .. whether the fOl.mdation

in the Federal Court's judgment, is that - - -

MR FLETCHER:  Yes.

BRENNAN J: Yes, very well.Thank you, Mr Fletcher. Well now

Mr Carr, 2.16 seems to be very much a matter of

argument. We need not bother about that as a

notice of appeal.

MR CARR:  Thank you, Your Honour. I am left with the problem

of paragraph 6 which I have wrongly been referring to

as 2.6. Paragraph 6 of my learned friend's contentions.

The bottom of page 2, Your Honours, when my learned

friend says, or the respondent says: If it were to

be held that there was an isolated business venture - - -

BRENNAN J: Is this in the notice of appeal or in the notice

of contention?

MR CARR:  No, Your Honour. The appellant's outline of argument.

TOOHEY J:	What page was that?
MR CARR:	At the bottom of page 2, Your Honour. Paragraph
numbered 6.

BRENNAN J: And we need not trouble about section 26(a), need we?

MR CARR:	That would be our submission, that if it comes under the
second limb of section 26(a) as a profit-making
undertaking or scheme, then it must surely fall within
25(1) I would have thought. That would be our
submission.  The references -
BRENNAN J: ~~	':-:our proposition is, as I understand it, that

if this contract or this transaction is subdivisible

into the construction of the plant, on the one hand,

and the production of the pipe, on the other, then

so far as the manufacture or so far as the construction

of the plant is concerned, that, in itself, is an

ordinary building contract, which was entered into

for profit-making purpose.

C2T24/l/CM	150	7/3/90
Pipecoaters(2)
MR CARR:	Yes, Your Honour.	We do not rely on 26{a) at all

and we point to the intention to generate a profit
in the same way, assuming that it is a building

contract and it is an isolated transaction and

so characterized we say that because, as in MYER,

it was carried out with the purpose or intention of

making a profit, then it comes in as gross income

under section 25(1). That is the only purpose of

referring to the intention or purpose of profit.

Not to pray in aid the second limb of 26(a). or anything

else, but just to bolster an alternative fullback

position if it is held not to be in any of the

other three categories, but if we have to rely on

MYER.

BRENNAN J:  So the total receipts are the amount received and

the deduction will, on that basis, be the amount

that was expected?

MR CARR:  Yes, Your Honour. If the taxpayer , had chosen to claim

its deductions that way and if the eormnissioner

had allowed him to claim them that way and as it

turns out the taxpayer has claimed them by way of

depreciation and investment allowance and what have you.

TOOHEY J: Is it right to say that the only argument that has

even been before the supreme court and the Federal

Court has been as to what was income? Perhaps even

that is putting it too loosely. Whether the amount

received constituted income or did not?

(Continued on page 152)

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MR CARR:	Yes, Your Honour, that is right.	The whole case

has been fought on that very short question.

I suppose the questions is, "Is it income?" And

then, "Is it gross income within section 25(1)?"

TOOHEY J: Well, was the supreme court involved at all

in any consideration of what constituted outgoings

that might be offset against receipts?

MR CARR:  No, Your Honour.

McHUGH J: That is why this case is so artificial, there

is nothing in the case at all and if you are

right, and the Commissioner's view is accepted,

the appellant could have claimed the outgoings

as a deduction and therefore, in all probability,

on the finding of the trial judge, there would

have been no tax payable because the outgoings

would have equalled. Is that not right?

MR CARR:	To be fair to the appellant, that is not quite
right, with all due respect,  Your Honour.
The Commissioner accepted the categorization
as being capital expenditure.  Once the taxpayer
had got the money in, what he spent it on was
an item of capital equipment. Whether the
Commissioner was right or wrong, we accepted
that was money spent on a piece of capital equipment and therefore not claimable under section 51(1).
We were never put in the position where the taxpayer
claimed it under 51(1).  He might have claimed it,
been disallowed it, and he might have ended up
in this Court arguing that the BP principle applied to it.
DAWSON J:	I thought you put that he made his choice and

you accepted that, it might be right, it might

be wrong, but that has got nothing to do with

the argument?

MR CARR:	Yes, Your Honour, that is precisely our position.
was a clear-cut deduction.
But I think it would be unfair to say that it
TOOHEY J:	But the real question is that deductibility

has never entered into this litigation at any

stage?

MR CARR:  In a way, Your Honour, it has. I have argued

what one of the Federal Court judges called an

emotional plea that because they wrote most of

it off under one or other sections of the INCOME

TAX ACT then there was a matching and it was

fair that they should pay tax on the gross income.

DAWSON J: Really, what you are saying is, "Look, we do

not have to look to that but we may well say,

if we have to face up to it - you may well say -

C2T25/ 1 /ND 152 7/3/90

Pipecoaters(2)

that the outgoings were deductible." You do not

deny that that is a possibility, do you?

MR CARR:	I certainly do not, Your Honour.
DAWSON J:	And it would be the other side of saying that

this was income?

MR CARR:	Yes, Your Honour, but I think we have accepted - to apply the words of section 51(1) - that what
they spent the money on was an item of a capital
nature and therefore expressly excluded on - - -
DAWSON J:	Why do you say that you had accepted that, merely

because you have accepted their choice to make

deductions?

MR CARR:	That is part of it - I am arguing against myself,
Your Honour, but that is part of it. We have
all the way conceded - - -
DAWSON J:	What is the other part of it?
MR CARR:	The other part is that in argument, in addresses and what-have-you, we have accepted that the
coating plant was an item of capital equipment.
We have never resiled from that, whatever else
we are accused of.

DAWSON J: Obviously it is. It is just a question of how

you deal with the amounts of money and the fact

that it is an item of capital equipment would

not mean that the expenditure to pay for it would

not be the other side of the coin to treating

the amount that came in as income?

MR CARR: No, Your Honour. If the taxpayer had chosen

that course and pointed to the fact that it had

a defeasible title to the plant, that SECWA could

come in and resume it and take ownership of it,

then BP might have come into play and it might

have been regarded as, perhaps, on the borderline

but then a deductible item. Certainly, if that

had happened, the hypothetical situation my learned

friend put, if there had been a resumption by

SECWA of the plant, then as I explained this

morning there would be a very strong case for

deductibility just like any other building contract.

TOOHEY J:  But if your argument is accepted, your general

argument, is there any consequence other than

that the appeal be dismissed?

MR CARR:	No, Your Honour. That is all that we would -
TOOHEY J:	The Court would not then become involved in

a consideration of what constituted profit or

what constituted outgoings or deductions under

section 51, the appeal would be simply dismissed.

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MR CARR:	That is right, Your Honour, yes.
TOOHEY"J:	Well, why take us into that area?
MR CARR:	Because my learned friend, in his submissions, 1s

using as an argument, in my submission, putting the

cart before the horse, he is saying that the gross

income should not be brought in because there is a net

income which should be brought to tax, whereas the

cases say that when you do bring in net income under

section 25(1) it is because the gross income is not

assessable. That is the problem.

BRENNAN J:  Well, if you should fail in your argument, what

order should this Court make?

MR CARR:  That the assessment should be remitted to the

Commissioner for reassessment in accordance with

this Court's orders, Your Honour, depressing a

subject as that is. As I say, the only reason that

we put forward this profit argument was to help in
the characterization of the gross income under
section 25(1). If the Court is persuaded by my

learned friend that the facts might throw up a

situation in which there existed a net profit which

should be brought to tax under the second limb of

section 26(a), then I suppose it is my duty to bring

to Your Honours' attention a. case .. : .. this Court which says that

in those·circumstances the appropriate section to

apply is not section 26(a) but to bring in the gross

income under section 25(1). That may be otiose.

There may be no need for that.

We came here today to meet this argument that

the gross income should not come in because there is

a net income.

BRENNAN J:  I must confess I simply do not follow it. Perhaps

that is obtuseness on my part, but if you are not

yourself submitting that there is any net income

proposition, your case rests simply on the proposition

that it is a gross income or none at all, is that

not right?

MR CARR:	Yes, Your Honour. Sorrething that my learned friend said a
moment ago goes to the question of whether there is
any obligation in the contract that the moneys
received should be expended on capital equipment.
Now, it is quite clear that there is no such provision
in the contract and this point was canvassed in Perth
and I made my submission on that.  What happened in
the supreme court in addresses was that counsel who appeared for the Commissioner in its list of sort of unilateral statement of agreed facts read the contract as having such a requirement and one of the things he
said was that it was agreed when he was interpreting
the contract at page 574 in the supreme court - and

C2T26/l/HS	154	7/3/90
Pipecoaters(2)

Your Honours will not have this:

Next it was agreed that the amounts paid -

and by that he was referring to the contract -

it was agreed that the amounts paid and received as advance payments should be

applied to what was an estimated cost of

the construction of the coating plant.

In our submission, we are not held to that.	In other
parts of his remarks and in cross-examination	he talks
about"It may have been a term of the contract	that that
would be the case"and in his final submission Notwithstanding that, for the reasons	he said:

I have submitted, the whole way in which

this was approached was that the payments

were payments under the contract but to be

applied in a particular way.

So counsel for the Commissioner, at first instance, read
the contract in some way as having a condition that
the moneys be so applied. That was in final address
and, in my submission, would not have affected the
evidence, which, by that time, had been called by the

appellant and, in our submission, we were not precluded

from pointing to the contract for its express terms

and saying those are the express terms.

I shall not, in the circumstances, go to the cases relating to section 26(a), in view of what

Your Honour Justice Brennan has just said.

(Continued on page 156)

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MR CARR (continuing):  The appellant's case seems to rest

on one of Professor Parson's principles but -

it is not quite authority but in number 8 in

our list of authorities I have referred to a

particular page in Professor Parson's work where,

in my submission, he had to bring his mind to it

if he applied to this principle to it would quite

clearly form the opinion that this was income in

this case. At page 58, paragraph 2. 125 - and he

is the source of this contribution to capital idea

he says:

In their formulation of the contribution to

capital principle, these decisions -

• • and they included BOYCE's case quite clearly -

lead to a quite unacceptable extreme under

which a receipt for services rendered by a

taxpayer will not be income if under the

contract of service or by some stipulation

of the employer the receipt is to be used

to effect extensions to the taxpayer's home

or is received by way of recoupment of the

costs of extensions already made. It is

true that in all the cases referred to the person paying had an interest in a benefit derived from the improvements effected but this purpose will not preclude an income

receipt by the taxpayer receiving the payment

under the contribution to capital principle

if there is a gain to that taxpayer.

We would say in that paragraph Professor Parsons
has clearly excluded this case from the contribution

to capital principle. Unless there are any other

matters on which the Court would like me to assist,

those are our submissions.

BRENNAN J:  Thank you, Mr Carr. Yes, Mr Fletcher.

MR FLETCHER:  Your Honours, may I commence with a little

bit of housekeeping. I did agree in Perth at

the adjourned hearing to hand up to Your Honours
those pages of the transcript which are not in

evidence, which evidence the concessions made

by counsel for the respondent upon which reliance,

we say, was placed by counsel for the appellant, both in the way in which he dealt with witnesses

and in addresses and I do havethose pages of the

transcript photocopied and available for

Yours Honours, if I may hand them up now.

Your Honours, I have also taken the liberty

of preparing some written submissions in reply

to my friend's written submissions. If I may

hand those up, they may assist.

C2T27/l/SH	156	7/3/90
Pipecoaters(2)

BRENNAN J: Yes. Perhaps you might wait until these are

distributed. Do you wish to tell us what the

pages which are being handed out at the moment

relate to, what supposition?

MR FLETCHER:  Yes, Your Honour. Your Honours, page 677

is a page of the transcript recording the closing

address by counsel for the appellant and in

the first paragraph it refers to the concessions

that have been made at pages 248, 250 and 251

of the transcript by counsel for the respondent

and, I am sorry and also at page 256 of the

transcript.

Page 576-577 is a page from the closing

• address of Mr Greenwell, counsel for the respondent and half-way through the first paragraph is

a reference as follows:

Of course the coating plant was capital and of course the expenditure on it was

capital expenditure. There has never been

any question about that.

Page 606 is also from counsel for the respondent

I believe in closing address - yes, in closing

address. He refers there to the stress that:

was laid upon the fact that no profit was

made out of the construction of the coating

plant.

That is, stress by the appellant in its case.

(Continued on page 158)

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MR FLETCHER (continuing): Half-way through the paragraph

he also says:

I do not think it could be seriously

urged or, with respect, seriously

entertained that what we are concerned

about is profit in the sense of net gain.

So, once again, there is a disavowal of any

suggestion of profit in that sense, and towards

the end of that paragraph, Your Honours, the third

last sentence:

So on that ground there isno point to the

fact that as a matter of calculation this

contractor did not derive profit from the
construction of the plant, but only from
the coating of the pipe.

And what we say flows from this, Your Honours, is that it was always the respondent's case - I should rephrase that. It was never the respondent's case that it was

concerned to show any intention to obtain any net
gain from the construction process and the respondent

is, we say, from these passages forsaking any reliance

on the whole net profit-making point. In other words,

no suggestion - - -

BRENNAN J:  The next sentence on page 606 is:

He derived his profit from the whole

contract.

MR FLETCHER: Yes, I appreciate that,Your Honour,but we will

go in circles a little in relation to this profit point

I suppose but what, I submit, he was referring to there was - and it was perfectly clear from the rest

of the argument put by counsel for the respondent

that what he was saying was, "Here is a contract;

here are receipts under this contract; here are

some receipts which are admittedly revenue, or income

matter, coating pipe'.' and notwithstanding that it	receipts, they are all to do with the one subject
was an obligation to take some of those receipts and
apply them to the creation of what was admittedly
conceded to be a capital asset, the profit-yielding
structure in the sense of yielding the profit from
the coating of the pipe, nevertheless, every receipt
under this contract was a receipt of income. Therefore, he says, the profit was from the whole contract,
in that sense. What we say is that that completely
ignores the reality, or the substance of what was to occur. We. jumping. forward a little bit, rely upon the
fact that to do that, to say that because there are
admittedly income receipts from a repetitious

C2T28/l/JL	158	7/3/90
Pipecoaters(2)

business activity, coating pipe, received within
the same four walls contractually as receipts which

are to be applied on the creation of the capital

asset, all of the receipts must necessarily be

income. We say that it is overly simplistic and

quite wrong and can lead to quite unintended

consequences in the application of the INCOME TAX

ASSESSMENT ACT.

That is our essential case which I will, in

replying to the points that have been raised by

my friend and confill.±.:g mvself to these points, in my

submissions, deal with that in more detail.

But I do not want to lose sight of the fact that that

is what it is about and that the Commissioner, the

respondent, cannot suggest that the argument for the

respondent was anything other than that.	It was always
that.	There was never any ·su~estion of intention to ?rbfit fr01

construction of a plant and, Your Honours, it is

important to appreciate, in my submission, that is

the case because it is only now that there is being

developed this argument that, "Look at the profit-making
intention or the potential to profit, in relation to

the construction to plant and let that taint the whole

arrangement so that you can lump in the establishment

costs with the, admittedly, revenue receipts for
coating pipe. "

So that page, in my submission, makes it clear that that was abandoned from the very beginning.

Page 612-613, once again, is a copy of the transcript

of the closing address of counsel for the respondent.

At the bottom of the page is the sentence:

I do not question that once the plant was

being constructed it is obviously an instrument

for the coating of the pipe and as and when

it was being constructed you were adding to

the profit-yielding structure of this

particular joint venture company because there

was never any doubt or question that this

company owned the plant and there was never

any doubt that the plant could be used for the

purposes of coating. In other words, when the

coating plant is constructed it becomes, and

~tis added to, the profit yielding structure.

C2T28/2/JL	159	7/3/90
Pipecoaters(2)
BRENNAN J:	That does not add very much to it, does it?	I mean

that describes the nature of the asset which was

acquired by the expenditure by the company of money.

MR FLETCHER:  Your Honour, it adds rather a lot to it, with

respect, in that the suggestion is now being put

forward by counsel for the respondent that, in fact,

there was some sort of choice involved here, that

the taxpayer has made its bed and must lie in it, in

that it chose to claim that these outgoings were of a

capital nature, rather than choose to claim a

section 51(1) deduction.

BRENNAN J: But there is no dispute, is there, that it is a capital

asset?

MR FLETCHER:  Yes, and accordingly - there is no dispute, I believe.

There is dispute as to what was the profit-yielding

structure and there is a suggestion that although it

might be a capital asset, by some sort of alchemy,

the outgoings are deductible,if they had been so

claimed,under section 51(1).

BRENNAN J:  They were not so claimed and there is no suggestion

that they had to be so claimed.

MR FLETCHER:  No, Your Honour. The suggestion is that if they

were so claimed they may have been deductible. What

I am doing by providing a copy of this portion of the

transcript is pointing out that in so far as,in my
submission,there is a - it is impossible to argue in

the same breath that your outgoings have added to your

profit-yielding structure and yet that they are

deductible. Now, that is now being argued, it appears,

by the respondent, that if a choice had been made by

the taxpayer to claim these outgoings as deductible,
that that would have been allowed - or was allowable

in the circumstances. ·

DAWSON J:  He did not put it as high as that, he merely said

it may have been - there may have been an argument

to that effect, that is all it said.

MR FLETCHER:  No. I am saying that there is no argument -

DAWSON J: No, no. That is all that was said on the other side.

He did not say it would be deductible.

MR FLETCHER:  Your Honour, I stand to be corrected if that

is the case. I understood that my friend was, in fact,

arguing that there was a choice involved here, but perhaps I may be putting it a little bit too high.

BRENNAN J:  You do not need to be furiously in agreement about

it. Your proposition simply is that this was a

capital asset.

C2T29/l/FK	160	7/3/90
Pipecoaters(2)

MR FLETCHER:  Yes, and something flows from that, namely

that there was no prospect - it was never arguable
that the outgoings could be deductible under
section 51(1). The two things just cannot sit
together, so I am simply pointing out that that being

the respondent's case from day one presented in that

light - if it is the case that my friend, today, is

arguing that somehow there was a choice in operation

here, that is a new case.

TOOHEY J:  It does not matter much whether he argues that

or not, does it, unless he seeks to stamp the

receipts with some sort of character by reason

of what might have been claimed by way of outgoings?

That is a pretty hypothetical proposition and it is

not one that I understood to have been put.

MR FLETCHER: Yes, Your Honour, nevertheless I had referred in

the case presented for the appellant to the

concessions made, and these are those concessions

from the transcript.

If I may turn now, Your Honours, to the outline

of submissions in reply by the appellant. There are

a number of matters that have been raised by the

respondent which I think I should clear up irrrrnediately,

matters which are, in my submission, quite frankly,

blatantly incorrect, and I think they should be dealt

with, initially. In the first paragraphs of the

appellant's submissions in reply: at paragraph 1, I

point out that the statement at page 67 or the transcript

and at paragraph l(i) of the written submissions by

counsel for the respondent, that on the expenditure side the appellant's costs incurred in constructing the plant were deductible under the depreciation provisions, is not correct.

(Continued on page 162)

C2T29/2/FK	161	7/3/90
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MR FLETCHER (continuing): And I point out that

section 54 deemed a depreciation in value to

have occurred in relation to an asset. It does

not provide for any deduction for any outgoing

incurred. And the point is, of course, that

even if the asset in fact appreciates in value
then there will be, provided that all other
requirements of the section are satisfied, a

deduction allowed for depreciation.

So that the deduction is not related in

any way to any outgoing in a sense of a direct

outgoing by way of expenditure in acquiring the

asset or a notional outgoing in a sense of the

cost of lost asset value. The outgoing simply

does not give rise to any claim for a depreciation

deduction.

What my learned friend has said, of course,

is that on the expenditure side of the transaction

the appellant was legally entitled to and did,

in fact, claim and was allowed the investment

allowances and Your Honour Justice Dawson raised

the matter of investment allowances and I will

come back to that in more detail. In fact, if

it is case that the characterization of the

receipts was incorrect, the Commissioner was

wrong, the receipts were capital receipts by

way of recoupment of the estimated cost of certain

expenditure, including expenditure upon items

which are the subject of claims for investment

allowance, which had been allowed, then it is
open to the Commissioner to amend the assessment
now upon the finding of this Court that that
is what the receipts were, they were capital
for that purpose under section 82AO, there can

be an amendment, it provides precisely for that

eventuality,; namely that an outgoing which qualifies

for an investment allowance is incurred but

subsequently there arises an entitlement or there

occurs, in fact, a recoupment of the autoing

incurred. (Continued on page 163)

C2T30 /1 /ND	162	7/3/90
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MR FLETCHER (continuin~):  In that circumstance, the

Commission 1s empowered to amend. So there is no

problem with that aspect of it and I perceive,

Your Honour, that that may have been of some concern

to you. That is not a difficulty. Secondly, leaving

aside investment allowances, the whole depreciation

deduction point that the respondent's case seems to

rely upon largely is, in my respectful submission, a

total red herring and when it is said, in.his

submissions, that, apart from investment allowances,

on the expenditure side, the depreciation and that

portion of the ·loss sustained on disposal of the plant

which was not already recouped by the depreciation,

was allowed as a deduction. It was entitled to,and

obtained,the full cost of the plant as deductions.

That is simply fundamentally incorrect. It

obtained no deduction for any cost of the plant. It
obtained depreciation deductions which were effectively

statutory concessions which arose whether or not there

was depreciation and they simply arose quite

irrespective of whether the moneys expended upon the

asset which was then used in such a way that it gave

rise to the entitlement to the depreciation deduction

was money which had been derived as assessable

income and therefore subject to tax and, of course,

the same comment applies to investment allowances. There
is norequ:irement that the investment allowance to be

allowed must be in respect of receipts which have

first met tax. It does not matter where the money

comes from or what nature it has.

A similar submission was put at page 67 of the

transcript by my learned friend and what the appellant

says from this is that, there being no nexus at all

between the deduction for depreciation and the

application of assessable income to the acquisition

of the depreciable asset, it follows that while the

cost of an asset is relevant to calculation of its

depreciable value and therefore it is relevant to the

amount of deductions which are potentially allowable

provided the other requirements are satisfied, the

depreciable value of the asset, its potential

depreciable value, its potential built-in depreciation

deductions can simply have no bearing at all upon the

characterization of any receipt applied to its

acquisition.

(Continued on page 164)

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1:1R FLETCHER (continuing): This would appear to be self-evident,

but I take some trouble with it, Your Honours, because

of the fact that it did enter into, perhaps somewhat

peripherally, but it certainly entered into the

considerations which the Full Federal Court gave to

the question_of thecharacterization of the amounts

received.	It has also figured quite largely in the
argument put by counsel for the respondent.	The

second paragraph of the outline of submissions in

reply refers to the statement at page 67 of the

transcript by my learned friend, and that statement

is: "And it is up to the taxpayer to choose which way

it takes its deduction. Section 82 provides that the

Commissioner can allow, where there are two different

means of deductibility, that which he thinks to be
the most appropriate. Here the taxpayer has decided
to take the deductions by way of depreciation." Once

again, Your Honour, that is quite incorrect, with all

due respect. It is incorrect for the following reasons,

that section 82 has no application firstly. There is no section of the Act allowing the same deduction for the amount of the depreciation of property, other than

section 54, and I will not take Your Honours to

section 82, but it refers to - - -

BRENNAN J:  Do you really need to go through all these provisions?

I mean, let it be so that there is some looseness, if

one wishes, in the argument that is put. The

proposition is simply this, is it not, that you

received a revenue item which you applied in the

acquisition of a capital asset and in the working out

of the operation of the INeOME TAX A33E33M:ENT ACT.

There are various ways in which a wasting capital asset can be written off against income. Is that not the

simple proposition that we are concerned with? It

does not matter whether it is 54 or 82 or any other

section.

1:1R FLETCHER: Well, with respect, Your Honour, no, that is not

the proposition which my friend has put. He has

put that it is an extraordinary consequence, if it

is the case, that, notwithstanding that the entire cost, as he puts it and which I deny, of the acquisition

of the capital assets comprising the plant, has been

deductible, that nevertheless the amounts used to

acquire those assets is not assessable~ and I say,

Your Honour, that - - -

(Continued on page 165)

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BRENNAN J:  The amounts - that is where the gloss is coming,

is it. not, in your proposition? It is not the

amounts used in acquiring those assets. The amount

that was received is the question that is in issue

here, the character of the receipt. Having been

received it is then applied in the acquisition of an

asset. It is the conflation of the receipt with its

application which leads to the difficulty which you

are seeking to address.

McHUGH J:  So although there may have been some looseness

in your opponent's exposition, his point was this,was

it not: that if it is legitimate to look at what

the receipts were expended upon, which he denied, then the short life and consumable nature of this

plant, as reflected in the almost total deductions

which he said were claimed, were legitimate factors

to be taken into account in characterizing the

receipts? That was the way he sought to use it.

MR FLETCHER:  Yes.

McHUGH J:. He said you could look at the expenditure side

I put that in inverted commas - to characterize the

receipt. He pointed to the various provisions under

which you got depreciation and showed the short life

of the plant and,therefore, it was a legitimate factor

to characterize the receipt, to take into accmmt in

characterizin~ the receipt.

MR FLETCHER: 

Your Honour, apart from the fact that I quite

disagree with the proposition, of course, that
it is legitimate to take those aspects into account

and I also do not - in the appellant's submission,

it is not the case that these are consumable items.

I will not canvass that now. It has been canvassed

quite adequately in the case for the appellant, of
the reasons why these are in a class which is not

anything other than capital.

(Continued on page 166)

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MR FLETCHER (continuing): Quite apart from that, I am

simply addressing the clear statements made by
my learned friend and, in particular, paragraph 7

of his outline of submissions, he says:

It would be an extraordinary consequence

in commercial terms that the appellant

should receive these moneys without

bringing them to account as income and

yet obtain the full cost of plant as

an allowable deduction.

Then he goes on to say that:

A characterization (i.e. that the receipts

are gross income) which accords with what

can be seen as substantially just and

accords with the expert accounting evidence

wouldavoid such an extraordinary consequence.

So, to set the record completely straight, the

points that he has made are simply not correct.

McHUGH J: These are advocate's flourishes; they are rhetoric

and you are taking up the beginning of your reply

dealing with all these peripheral matters. At least,

speaking for myself, I am interested in you going to

the heart of the argument against you and coming to

grips with it.

MR FLETCHER:  Yes, Your Honour, I will endeavour to do that.

In dealing with the heart of the argument that is

raised by the respondent, I nevertheless with

your leave, Your Honours, would wish to follow

the written submissions and deal with those in

a sequential form. In paragraph l(a) of the

outline of submissions for the respondent, it

has been said in the second sentence:

The change in the manner of expressing the amount of progress payments ..... is in

substance and mathematics no change at

all and made no difference to the total

sum payable to the appellant under the

contract nor to the timing of such receipts.

(Continued on page 167)

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BRENNAN J: Mr Fletcher, why do you wish to take us through

these series of pages dealing with the peripheral

matters?

MR FLETCHER:  I wish to comment upon them, Your Honour.

I am sorry, this particular matter is not a

peripheral matter, in my respectful submission.

This goes to, perhaps, that area which we can

call the heart of the respondent's argument or

case and that is that the contract sum or the

contract value or the contract price, the same

various terms have been used interchangably,

was a price which was simply artificially divided

up, this portion was said to relate to the
construction of the plant and this portion was

therefore left to be received as assessable income

in the course of coating the pipes.

And what we say is that that is a fundamental misunderstanding of the facts of the case. But

the significant point is that whatever the quantity
of pipe coated, the SECWA, the State Electricity

Commission of Western Australia, agreed to pay

a sum which would recoup the estimated capital

cost of the plant. This, in my submission,

highlights a lack of connection between the

construction aspect of the contract and the coating

aspect.

It is common ground, I believe, that the

contract had the two component parts; one was

that there was an obligation arising out of the

contract to construct the plant and there was

an obligation to· coat pipe at certain rates but

the confusion that is coming into this with

the mathematical analysis which my learned friend

has done in his aide memorie and in his submissions,

particularly at the hearing in Perth, was that

there was juggling with the figures with the

result that there was a reduction or depression

of the amount that would be received in an

assessable form. (Continued on page 168)

C2T35/l /ND	167	7/3/90
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MR FLETCHER (continuing):  This, in my submission, 1s

terribly important because it gets to the very point which is
that it was a schedule of rates contract whereby the

appellant was obliged to quote a certain number of

kilometres of pipe, if the SECWA so chosej to coat them,

and the contract figure, so called, the contract

value, was simply the indicative figure arrived at by applying rates to kilometres of pipe and, quite apart

from that, there was a carefully detailed estimate of

the cost of constructing the plant with which to
coat the pipe and the amount that was determined to

be the estimate of that cost was to be paid to the

appellant, irrespective of whether the State Energy

Commission of Western Australia chose to cease and

desist after coating one kilometre or went on to

coat 5000 kilometres, instead of the notional figure

of 1500.

That is important for two reasons; firstly,

because it shows that there is a clear distinction

between the payment of the moneys for the construction
of the plant and the payment of commercial rates for
the coating of the pipe and, secondly, that the

mathematical analysis conducted by my learned friend

takes us nowhere. It does not show at all what he

says it shows and, in my written submissions, I detail

why that is the case. If I may, Your Honours, move

on to paragraph 5, which also deals with a very

important aspect of the respondent's case, and that

is what was the business of the appellant.

Paragraph 5 deals with paragraphs l(b) and l(d) of
the respondent's written submissions and in those
paragraphs the respondent has dealt with the fact
that on the respondent's case the appellant's business

was to carry out the whole of the contract.

(Continued on page 169)

C2T36/l/HS	168	7/3/90
Pipecoaters(2)

MR FLETCHER (continuing): And in l(d):

For the first six months of its business life,
its business was a reflection or duplication
of the business of one (or even possibly two)
of its corporate parents whose business or
businesses included constructing this type

of plant.

Now, in my submission - and it is outlined there -

the business of the appellant in the plant
construction period was the same as the "business"
of APA FIXED INVESTMENTS at the time during the
period in which it was setting up or building the

property which it was to rent to the party with

whom it was contracting. The appellant's submission

is that the derivation of amounts, which we say are

capital amounts, and the application of those amounts

in that construction period to the construction of

the plant, does not amount to earning in the sense

of earning revenue. It is simply an emotive word.

It does not answer the question. It goes no further

than, in this context, that is to say in the context

of this case,and APA FIXED INVESTMENTS, , and if

there had been payments in advance to the colliery

company it does no more than mean that the party has

complied with its contractual obligations. In no

other sense, in my submission, can it be said to

have earned the moneys.	It has received the moneys.
It has applied the moneys.

BRENNAN J: If the contractual obligation is to do something and

that something is done, and upon the doing of that

thing money is payable, is that not earning?

(Continued on page 170)

C2T37/l/CM	169	7/3/90
Pipecoaters(2)

MR FLETCHER:  Your Honour, in a sense it could be said to

have been earned but only in the sense, I suggest,

that it has become payable pursuant to an

agreement. If I could take, for example, the

APA FIXED INVESTMENT's case, what was there done

was the building of a property which was to be

rented. Now why would it be said that the moneys

were being earned in any revenue sense because the

entitlement to receive those moneys emerged as the

building went up, In my submission - the same thing

applies, of course, to the colliery company. It was

entitled, if it built the pumping station, to receive

the cost by way of recouprnent from the council which

would be receiving the water, pumped through that

station. But it does not take us anywhere, in my

submission, to say that the collier company or

APA or GPI, the appellant, was earning those

moneys merely because it was complying with this

agreement whereby it i;m.s to do a certain thing, create

a capital asset and be reimbursed for the expense of

so doing. I have great difficulty in seeing how that,

in any meaningful sense,can be said to amount to

earning the moneys, it just begs the question.

DAWSON J:	You are saying that it uas just as if
the moneys came through a conduit from the applied in the construction of this plant?

(Continued on page 171)

C1T38/l/JL	170	7/3/90
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MR FLETCHER:	I do, Your Honour.
DAWSON J:	Of course, the odd circumstance is that the plant

then becomes the plant of the contractor.

MR FLETCHER: Yes. It was an equally odd circumstance in BOYCE

and in APA.

DAWSON J:  Not really because it had no value there to the

colliery. It was something that was peculiar

for the benefit of the - was slipping into the water.

MR FLETCHER:  With all due respect, Your Honour, it had great

value to the colliery. It enabled the colliery to

commence business, the business of supplying water

at quite profitable rates- extremely profitable given

that the water simply gathered in the disused

quarries -to the council, extreme benefit to the

colliery. The colliery was able to, for 30 years -

and I suggest that the longevity of the benefit is

really of no importance - but it was able to, for

30 years, benefit most significantly.

DAWSON J:  Perhaps that was put badly. It was not the

colliery's enterprise, in essence. That seems to be

the way in which the case was decided. . It was providing

something but its business was something quite

separate which is something you could not say here.

MR FLETCHER:  Your Honour, with respect, that is not what the case stands for. One of the members of the Court

did touch upon the fact that this company was already

engaging in a main industry -it had its main industry

or activity, or business, which was the getting of coal-

but that seemed to play no part in the -

DAWSON J:  Well, if it is not something like that it is very hard to understand the case, is it not?

MR FLETCHER:  No. I have no difficulty, Your Honour, 1n

understanding the case at all, with respect.

reason why I have no difficulty with these cases is The

that if it was the case that any receipt - and this is
the respondent's case - that because this receipt was
to come pursuant to a contract which was admittedly

entered into in a very business-li.~e fashion and it

gave rise to ver½ very significant assessable sums

from coating pipe, if it was the case that just because

it is in company with provisions of a contract of that

type, giving rise to admittedly revenue receipts, such
as the payment for the water in the colliery company

case, the payment for the rent in the APA FIXED

INVESTMENTS case, if that, in itself, was sufficient to

tar the receipts with the revenue or income brush, then

it does work, or potentially works a distortion of the

whole basis upon which·the Act operates.

C2T39/l/HS	171	7/3/90
Pipecoaters(2)
DAWSON J:	But really you	say that here the contractor, the

respondent, was	not receiving the money for itself
really at all.	It was just receiving it to put up
a plant.

MR FLETCHER:  I do not quite put it that way, Your Honour,

with respect.

DAWSON J: That is the essence of it, is it not?

MR FLETCHER:  No, I am saying that the plant certainly

inured to the benefit of the contractor because

without that plant the contractor could not

possibly derive many millions of dollars from the

profitable coating of pipe at quite connnercial

rates unless, of course, the plant in Holland was

used. That is a rather important factor which I

would like to come back to. But, at the same time,

it was more akin to a joint venture and that comes

out in the evidence, that SECWA considered that

it was expending the moneys on a plant for the

joint benefit of itself because it wanted the

coated pipe, and also for the benefit of the appellant

because it got the means of production and it thereby

was able to go into the business of coating pipe.

I am not suggesting there was no benefit in that

sense.

DAWSON J:  It was really in the sense that the contractor was

a mere vehicle for the expenditure of the moneys.

MR FLETCHER: That is true.

DAWSON J: That is the way you put it.

MR FLETCHER:  That is the way in which we put it in that

quite contrary to my learned friend's submissions

it is fallacious,with respect, to suggest that this

company was in the business of constructing plants

for profit. Put it this way: it is fallacious to

suggest that it was in the business of constructing

plant and to look at what its shareholders and what	their business was, is nothing to the point.
They, in fact, made profit from constructing items
of plant which do form part of this plant which
absorbed the $4.6 million.

(Continued on page 173)

C2T40/l/LW	172	7/3/90
Pipecoaters(2)

MR FLETCHER (continuing):  But all that GP International

Pipecoaters did was receive the money and pay

it out to all and sundry. And that is dealt

with, in my submissions, and in particular

at pages 827 and 828 of the appeal book which

I will not take Your Honours to but at those

pages will be found a large list of outgoings

in relation to the plant. GPI was not building

the plant; it was simply receiving the moneys

and paying various contractors, paying some of

its shareholders to provide items; it was just

the mediator or the conduit, really. But then,

once the plant was in place they just dropped

out and GPI got down to coating pipe.

And that is what it was all about so far

as GPI was concerned. But the point is that

the respondent has attempted to meet, in my

submission, the problem that it is unarguably

correct, as the appellant asserts, that the mere

fact of the receipt of these amounts in the context

of this contract just does not answer the question
and so is looking to show some sort of overall
profit intention in relation to construction
of plant. That is its answer to that. And it

is trying to say that it is in business in

co~structing plant because its shareholders

are in that business.

That, in my submission, just does not work

and the point is that if the amounts are treated as assessable income because they are in company with rent or water payments or payments for coated

pipe and notwithstanding that there may be no

rent or there may be no coated pipe, it is

distorting the operation of the INCOME TAX ASSESSMENT

ACT.

DAWSON J: It is put - and I do not want to

persist with this but he is putting it much more

simply than that, really, is he not? He is saying,

"Look, if you had used the existing plant which you

had, wherever it was, in the cost that you put
forward per linear foot or whatever it is of

pipe would be the cost of the plant." Undoubtedly,

some provision in the price would have to be

made for that. The fact that there was no plant

available here and this was a one-off job does

not make any difference to the nature of the

contract. That is really what he is saying and

you are trying to say that there is a difference.

That is all.

C2T4 1 /1 /ND	173	7/3/90
Pipecoaters(2)

MR FLETCHER:  Yes. Your Honour, if it is the case trat that

is, in very simple terms what the respondent is saying, the answer to it, I suppose,is twofold.

Firstly, if it was accepted that that argument was

to be upheld and that because if one did not receive

the payments by way of a grant, or subsidy, or advance

of the sort, or, here is the money to build the plant

and then we will contract with you to coat pipe, then

if it is the case that the contracter would be
likely to conclude some charge for the use of plant
in the price for coating pipe, if those facts are
sufficient to justify the classification of these

receipts as assessable income, then BOYCE is wrong

and APA is wrong, and if those cases are wrong -

DAWSON J:  Not really, because taking the example I gave

you a bit further, what the State Electricity

Commission wanted was pipes, coated pipes, and it

said, ''Now· give us a price for the coated pipes'; and

you gave them the price for the coated pipes, and
you said, rrBut of course this is a di££ erent sort of

situation, really we cannot use our existing plant, we

have got to use some of that money which is admittedly

part of the price of the pipes, to put up our plant,

and we would like some of it in advance, please.''

And they said, "How much ?" and you said, "So much",

and they put it forward, but it did not alter the

nature of the contract.	That is the case that
you meet.

MR FLETCHER: Well, if that is the case that we are meeting,

then we have no case to meet, inmy submission,

because that is not what happened.

(Continued on page 175)

C2T42/l/FK	174	7/3/90
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MR FLETCHER (continuing):  The case went off on that tangent

in the supreme court and the respondent's case on

that point is simply misconceived because it assumes -

and I started to explain this before - that there

is an overall figure of, shall we say, $31. 1 million

which I think it was, which is the appropriate price

for coating 1500 kilometres of pipe.	But that is
not the case.	The appropriate price for coating

1500 kilometres of pipe is the product of the rates

that were worked out in the quotation document which

Your Honours have been taken to and taken through

in some detail and the product of those figures

is not $31. 1 million. The $31. 1 million is only

arrived at when you add in the cost of building

the plant with which to coat the pipes.

DAWSON J: That is what I say, it is a component of the cost

of producing the pipes.

MR FLETCHER:  But, with respect, Your Honour, I do not accept

that.

DAWSON J:	The mere fact that you can do sums and separate it
out as a separate item for your purposes does not
alter the nature of the contract. That is what is
being said.

McHUGH J: If you had stuck to the original plan, the $31 million

would have all come in on revenue account, would it

not, would have been taxable?

MR FLETCHER:	No.
McHUGH J:	Not even on the original plan?
MR FLETCHER:	No, Your Honour, because that is the whole point:

the original plan was the ultimate plan. There was

never any change to the plan. If I could just put

this to you, Your Honour, that - - -

BRENNAN J: Again, both sides are furiously in agreement?
MR FLETCHER:	Yes.

BRENNAN J: Right. Well, now, in that case, can we look at

the contract and ascertain the character of the

payment by reference to the contract under which

it is paid or should we look somewhere else?

(Continued on page 176)

C2T43/1/SH	175	7/3/90
Pipecoaters(Z)
MR FLETCHER:	No, Your Honour, you certainly are required to look at the contract.	Your Honour, would you

mind if I simply answer His Honour Justice McHugh's

point. I wish to disabuse any problem that might

lie there, and that is, Your Honour, that the

original proposal was always, from day one, that

the money would be paid, in advance, per the

estimate of the cost of constructing the plant and

how that estimate was arrived at is in the quotation

document, which is in evidence. In addition to that,

it was always proposed that a rate, which was based

upon cost of labour, cost of materials, profit margin,

for the coating of pipe, which rate on its own

would stand up as the rate for coating pipe, would be

paid for the coating of the pipe. The evidence is

quite clear , from Mr Perrott in particular, that

an existing plant could have been used. And a

different set of calculations would have been gone

through. There would be no need to build in $4.6million

for a plant that already exists.

DAWSON J:: But there would be a need to build in something.

MR FLETCHER: There may well be, but - - -

DAWSON J: Representing the cost of the plant.

MR FLETCHER: Well, perhaps a charge in respect of the use of the plant. That is perhaps perfectly, commercially

correct, Your Honour, but I come back to the point

that if it is said that because it might have been

done that way, and there might rave been built - say

we take the example of the Dutch plant. If that was

used and there was a charge included, being a

component, shall we call it overheads, which is

added into the piµ=-coating rate and that somehow is

going to assist to recoup the wear and tear on the

plant, if it is the case~ because that could

be done, therefore the respondent's argument is

correct, this must be income, because it could have

been done that way, then it comes back to the point

I made, which is that APA is wrong and BOYCE is wrong. (Continued on page 177)

C2T44/l/CM	176	7/3/90
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McHUGH J: 

Yes, but I just go back - perhaps· I misunderstood

something, but the original plan was that your client
or at least its parents, quoted rates per linea:: foot

and when it was multiplied by the length of the pipe

that produced a single price of $31 million. Now,

that $31 million covered the cost of building the
plant but if the matter had gone off on that basis

and you got the $31 million on the basis of so much

per length of pipe, the $31 million would have all

been a revenue, would not it?

MR FLETCHER: 

No, Your Honour, because it was never put in those

terms. It was always intended that there would be the $4.6 million paid separately. It was only included -

the $4.6 million was arrived at, or a figure in that

region, as being the estimate of the cost of

'	construction and then because the tender strictly stipulated that every single amount had to be
reduced to this notional price, this overall price
based on a notional number of kilometre~ and that everything had - it was an all-inclusive rate that
had to be quoted.

McHUGH J:  I follow that, but you dispute that the $31 million

would have been revenue?	You say there would only have
been $26.5 million?

MR FLETCHER:	Yes.
McHUGH J:	Even though you were paid on a rate per linea foot

basis?

MR FLETCHER:  No, because they were never to be paid on a rate

per linear foot basis in relation to the plant. That

is the fundamental difference between what you are

saying and the facts, Your Honour. The facts are that

in the tender that was put in there was the provision

for the payments of three times $1.8 million, or

thereabouts.

McHUGH J:  Well, could I take you to page 941 of volume 4. (Continued on page 178)

C2T45/l/HS	177	7/3/90
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MR FLETCHER:  Yes - I am sorry, Your Honour, paragraph 1

is correct but the most important point is the

last sentence:

The taxpayer expressed its tender in this

way because it felt constrained to do so

by the tender documents.

And the point is that in the tender documents it,
nevertheless - there was an immediately apparent

dichotomy because notwithstanding that the tender
documents showed that the taxpayer was requiring

the $4.6 million to be paid in advance for the

construction of the plant, the rates included

that as well and that is why SECWA said, "Oh,

is that what you want? You want us to pay for

the plant and, in advance? Well, if that's the

case, the rates must come down" and the appellant

said, "Well, of course. We've only done it that

way because your documents forced us to put it in

that way" but - - -

McHUGH J:	But supposing you had been paid in fact on a rate
per linear metre?
MR FLETCHER:	But they never were to be - I am sorry,

Your Honour, "supposing", yes.

McHUGH J:  Yes. The $31 million would have been a revenue

receipt, would it not?

MR FLETCHER:  On that hypothesis, if it was the case that

there was no specific payment for the construction

of the plant - - -

McHUGH J:	Yes.
MR FLETCHER:	- - - there was only ever a .payment for coating pipe and out of that, having derived revenue,
moneys would be applied to recouping the cost of
constructing the plant, unarguably that would be
revenue in that there is -

McHUGH J: Well, all that was put to you earlier was that

what your opponent says is that is the substance

of the matter in any event.

(Continued on page 179)

C2T46/l/SH	7/3/90
Pipecoaters(2)

DAWSON J: But, in fact, what you said was, when you saw

the $31 million, you say, "Well, look, it happens

in this case we haven't yet got the plant, the

cost of which is included in that, we really

need a bit to put it up, will you put some up

front?" And the SEC said, "Yes, we will but,

of course, if you are going to get your money

early you've got to make an allowance for that."

And that is what happened, putting it in somewhat

crude terms.

MR FLETCHER:  No, Your Honour, with respect, what was said

was that "We have tendered on the basis that there

is a plant required; we don't have one; you

are to pay for it. We say it will cost around

about this amount which happens to accord with

about 15 per cent of the total notional sum that

you arrive at by your series of rates that you

have required that we generate. But we have

got no intention of charging you those rates for the coating of the pipe. We've had to put them

in this way even though they're ridiculous because

we want you to pay for the plant. And then,
of course, we'll charge you the appropriate rates

based on the cost of materials, labour, electricity,

everything that goes into coating pipe, plus

the profit margin." And those were the rates

that were eventually charged for coating pipe

and they were commercial and they represented

a very very profitable arrangement, indeed, and

they were assessable and tax was paid on them.

DAWSON J:	Now, that is the argument, is it not?
MR FLETCHER:	Of course, and the point is that APA, as

His Honour Mr Justice Owen said in that case,

if they had been forced to simply defray their

capital costs out of their revenue receipts,

they could not be heard to argue, "Well, you

can't tax me on that, it's not income."

(Continued on page 180)

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MR FLETCHER (continuing): But they were not required to do

that. There was, in the· wings,. the benefactor

prepared to pay the money - a most unusual

circumstance and the same thing applies here and
in W.j' outli.i.-ie of submissions I have, at the very end,

I have explained why it is highly unlikely to recur for a whole series of reasons, not the least of which

is that the person who makes the payment in that form

cannot claim a deduction for it. It is not a revenue

outgoing- it is a capital outgoing. There is a whole

series of reasons that are there as to why it is not

likely to recur but the fact is that if in a certain

circumstance such as the appellant found itself where

it said, "I am not yet in business, I want to go

into business coating pipe. Firstly I will commence

business for you using a plant in existence, or

alternatively if you insist upon the client being here you build it, or t11at is to say you pay for the

building of it and then we will use it to coat the

pipe".

Now, it is the same as APA - you want a

building to rent, okay, we will build it and rent it

to you but you are to defray the cost of building it
and it is the same with BOYCE - you want water we

will supply it but you are to pay for the cost of the

pumping station. Now we readily concede that if it

is the case that APA and BOYCE are, as my learned

friend suggested on Professor Parson's suggestion, and

mind you I would like to comment on what he had to

say, I do not think it stands for what my learned

friend says it stands for at all, but if it is the

case that that represents some sort of unacceptable
extreme of the contribution to capital principle

and that, therefore, those cases are simply wrong or

not to be followed in Australia now, notwithstanding

that one of them is a decision of this Honourable

Court, then we have to concede that the appeal cannot succeed, but if -

DAWSON J: You say this falls fairly and squarely within those

cases, it did not matter who owned the plant really,

in this case, give or take a few dollars.

(Continued on page 181)

C2T48/l/JL	180	7/3/90
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MR FLETCHER: Precisely. This company was not in the business

of constructing plant for profit. In terms of this

matter of what is its business, if you were to say
its business has to be something that is repetitive,

and that is one of the indicia of carrying on of a
business, all of the elements of the business are

satisfied in relation to coating pipe, but none of them are satisfied in relation to constructing the

plant. It was a prerequisite to the business. It

is no more in business than a mining company is in

business when it spends its capital on setting up

its mine, or APA was in business as it put up the

building prior to commencing to rent it.

DAWSON J:  You say, "We've got pipe-coating plant elsewhere.

That's how we conduct our business. If you want us

to come to this remote spot, then you've got to pay

for the plant"; that is what it amounts to.

MR FLETCHER:	Thati.s right.
McHUGH J:	But your proposition must go further than that.

Does it not come to this, that if a contractor requires

its principal to pay for the capital cost of

equipment to be exclusively used in construction

work for the principal, then receipt of a payment

for that equipment is a capital receipt?

MR FLETCHER:  Provided that the contractor is not in the

business of obtaining those sorts of payments

repetitively. This matter of income, capital, often

depends on the circumstances and if you see a

situation where someone is going about doing this in

a consistent fashion - for instance, if the colliery

company thought, "This is wonderful. We'll go and

buy up disused quarries around the cougtry and we

will obtain payments to put up pumping stations right,

left and centre", it may be it will start to -

particularly if there is any profit to be derived

out of the sale of the pumping stations - - -

McHUGH J:  Supposing every time there was a contract on you

had GP(l) International Pty Limited, GP(2), et cetera,

et cetera, what happens then?

(Continued on page 182)

C2T49/l/HS	181	7/3/90
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MR FLETCHER:  Quite apart from the fact that, be.cause of the

magnitude of this operation, it could not happen,,

if it was the case that there was a situation

where a series of coating plants were being required

to be built all around Australia and, well, if it

was the same company, certainly, doing it, it may

well be that that becomes, to use the analogy that

you were using, Your Honour, at the hearing in Perth,

more of a consumable item in the trade that that

company is conducting. What the position is in

relation to a series of taxpayers, independently going

into business, I am not so sure. I tend to think

that if the facts were identical to these, given the

inherent unlikelihood of that occurring, but if

they were, it may well be that they are capital items.

Unless it is the case that part 4(a) was considered

to apply, because it is a deliberate attempt by _th~-

same beneficial owners to avoid assessable income

or to avoid tax on assessable income by setting things

up so that there is a series of companies being

used rather than the one company continuing in. what

is quite obviously a continuous business, but

Your Honour, with respect, I think that the suggestion

is inherently improbable, because this was a

$650 million contract, that is to say the whole

contract, not this contract, the construction of the

pipeline, and this type of situation is highly

unlikely to arise and the further point is that as

my written reasons make perhaps a bit more clear,

there are very sound reasons why the payer, the

equivalent of the State Energy Connnission or the

private enterprise version of that, whatever that

may be, would not do that.

There would be no deduction available. There

would be no depreciation deduction. For instance,
the point is that the plant is owned by the

constructor. The person who is paying for it is

not going to be obtaining any depreciation

deduction for the use of it.

(Continued on page 183)

C2T50/l/CM	182	7/3/90
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MR FLETCHER (continuing):  But the further point is, of course, that

upon the disposal of that plaut at the end of the

day, given the capital gains tax regime and

section 160ZH(ll), the fact that the cost of
construction has been recouped erodes the asset

cost base and accordingly, you would disregard, in

terms of any calculation of an assessable capital

gain, what has been expended on the plant. So, it
may well be that there would then arise in the

proposition is not realistic today.

present day, an assessable amount - an amount
entering the assessable income via the capital

gains provisions. There are a series of reasons,

BRENNAN J:  Mr Fletcher, is there any reason why we should

,	not look at the contract as the source of instruction as to the character of the payments that are made
under it?

MR FLETCHER:  No, thet"e is no reason, Your Honour.

BRENNAN J: Is there any fact which lies outside the contract

which would affect, in any way, the characterization

of the payments as ascertained by reference to the

terms of the contract itself?

MR FLETCHER:  Yes, Your Honour. We would rely upon PRENN V SIMMONDS'

and CODELFA.

BRENNAN J: Well, they have to do with the construction of a

contract. What are the facts which, lying outside the

contract, are relevant to the characterization of the

payments here in question?

(Continued on page 184)

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MR FLETCHER: 

The facts which are not expressly stated in the

contract which are relevant to the characterization
of the receipts in question are the requirement
that the $4.6 million be expended by the appellant

on the construction of the pipe coating plant.

BRENNAN J: Where is the evidence of that?

MR FLETCHER:  The evidence, Your Honour, if I may take you to

it.

BRENNAN J: That is a contractual requirement, are you saying it is,

unexpressed in the terms of the document?

MR FLETCHER:  It is not,in express terms,stated in the document.

BRENNAN J: Let me understand precisely the proposition.

When you speak of the word requirement, are you

speaking of a contractual requirement?

MR FLETCHER:  Yes, I am, Your Honour.

BRENNAN J: And, therefore, you are unabl~ to point

to anywhere in the contract which contains that

requirement?

MR FLETCHER:	I am unable to point to any specific clause in the contract which says, in as many words, the moneys to
be paid pursuant to items B2.l, B2.2 and B2.3
shall be expended upon the construction of the pipe
coating plant and in no other fashion. Those words
are not in the contract. But the fact that there is

a contractual requirement that that occur can be

· inferred from what is in the formal contract and

bearing in mind that the contract in its formal - - -

BRENNAN J:	Can be inferred from the formal contract and what else?
MR FLETCHER:	And from the surrounding circumstances.
BRENNAN,J:	Namely?

MR FLETCH.BR:  Namely the circumstances which have been described

in the evidence of the various witnesses called and

are embodied in the transcript which is in the appeal

books, Your Honour.

(Continued on page 185)

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BRENNAN J:  What are the circumstances as you identify

them for the purposes of argument?

MR FLETCHER:  The circumstances are that the contract which

came into existence upon the acceptance of the tender

embodied the letter accepting the tender.

BRENNAN J:	I do not wish to interrupt you but which contract are we speaking about?
MR FLETCHER:	Your Honour, there is only one contract.
BRENNAN J:	With the taxpayer.
MR FLETCHER:	Yes.
BRENNAN J:	And that did not come into existence on the acceptance of the tender?
MR FLETCHER:	That contract says that it has an effective

date.

BRENNAN J: That is right which is anterior to the date of

its execution.

MR FLETCHER:	That is correct, Your Honour.
BRENNAN J:	So, which contract are we speaking about, the

one with the taxpayer?

MR FLETCHER:  Yes, we are speaking about that contract.

BRENNAN J: All right.

MR FLETCHER:  That contract was, prior to its formalization

in the document headed or described as the "formal
agreement'\ existing in terms of other documents
and oral agreements and it is with respect to the
circumstances under which the contract was drafted,

the background circumstances giving rise to the

formal contract and the evidence as to those

background circumstances - - -

BRENNAN J:  But what are the circumstances on which you are relying? Can you id~ntify them?

MR FLETCHER:  Yes, Your Honour. The circumstances are the

fact that the agreement reached and formalized

in the formal contract was that the State Energy

Commission of Western Australia would pay the

$4.6 million to the appellant for the purpose

of constructing the plant with which the appellant

would then commence to coat the pipe.

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BRENNAN J:  That is the ultimate term upon which you rely.

My question was, apart from the terms of the

contract, what are the extrinsic circumstances

which lead to that as being the term that was in

the contract?

MR FLETCHER:  The discussions, the background to - the

formalization of the contract being the discussions

between the parties as evidenced by the evidence

given by the witnesses.

BRENNAN J:  But, if one looks at the tender documents,

for example, at page 498, or the contract documents,

one finds that that is opposed to that proposition

because the obligation was to pay on the expiration

• • of a certain time.

MR FLETCHER:  Your Honour, the obligation was to pay upon

the expiration of certain times but subject to

certification by the engineer and the certification,

in my submission, was to the effect that the moneys

were being spent as required on the plant and that

is the evidence that was given and - - -

BRENNAN J:  But, there is not the slightest reason to

suspect that the moneys that were actually handed over

under the contract where the moneys that were to

be expended on the plant. The moneys expended on

the plant could have been borrowed.

MR FLETCHER:  That is correct, Your Honour. Money is

fungible. It makes no real difference to the

argument for the appellant whether we can identify a

bank account into which $4.6 million from SECWA

was paid and drawn upon but the fact of the matter is

that the evidence shows that there was no other

money, the money was being used for that purpose

and - - -

(Continued on page 187)

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BRENNAN J: But that is not the proposition that you must

make? The proposition that you must make is that
there wasa contractual obligation to expend the

moneys paid on the construction of the plant.

MR FLETHER: With respect, Your Honour, I do not know that that

is the proposition which we must make.

BRENNAN J:	Oh; what is it then?
MR FLETCHER:	The proposition which we must establish is that

there was an obligation upon the appellant to

expend moneys in the amount of the receipts,the

establishment costs,upon the construction of the plant.

Now if it was the case that the plant was simply not

• being constructed at all or that it was being

constructed in such a way that it was a mere shadow

of what it was intended to be, i.n other words, it

was not a $4 million plant, it was a $1 million cheap

versiony then the contractual obligation would not

be being honoured, but - - -

BRENNAN J:  But if the critical path had been followed and if

the building had corresponded with the plans and

if it had cost only, say, $2 million, would that have

made any difference to the contractual obligation?

MR FLETCHER:  N0.

BRENNAN J: Well how can it be that there was a contractual

obligation to spend either the money that was paid

or an equivalent amount on the plant?

MR FLETCHER:  Yes, if I can rephrase that proposition,

Your Honour. The obligation was to build a particular

plant and in so doing the contractor was obliging

itself, as a matter of practicality and commercial

reality, to expending moneys in that order. As we

know, in fact, it had to spend considerably more than

it received, hence the fact that there was no profit

But it is not suggested that the precise moneys

had to be put into an account and then taken from

that account and paid only to the persons who

were erecting the plant.

(Continuing on page 188)

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BRENNAN J: What then is the contractual requirement that

you say can be spelt out in intrinsic evidence?

MR FLETCHER:  The intrinsic evidence goes to the obligation

to build a particular plant and, Your Honour,

perhaps in the way in which you are putting it

it means that there is nothing in the intrinsic

•	evidence which adds to the fundamental written terms of the agreement and the inferences that can
be drawn from those terms, that may be the case. What my mind was being turned to was the assertion

by the respondent that there was no agreement that

these moneys were for any particular thing, the
suggestion that the moneys were simply part of
the overall price for the coating of the pipe.

I suppose that is really what the intrinsic evidence

is about, the fact that these moneys were for a

certain thing, whether they were required to be
themselves actually spent precisely on that and

nothing but that, or whether they were designed to

compensate for expenditure which had been agreed

to be incurred.

BRENNAN J:  How long would the remainder of your argument take

do you expect, given no interruptions from

this - - -

MR FLETCHER:  Your Honour I would anticipate that- with all

respect, I am not in any way seeking to dissuade

interruptions, but if I were to proceed uninterrupted

I would imagine that it would take no more than

another hour and 10 minutes thereabouts.

BRENNAN J: In that case we will adjourn at this stage,

Mr Fletcher,and we will resume at 10.00 tomorrow morning.

AT 4.17 PM THE MATTER WAS ADJOURNED

UNTIL THURSDAY, 8 MARCH 1990

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