GKN Kwikform Services Pty Limited v The Commissioner of Taxation

[1991] HCATrans 285

..

.

• 1.6

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney Nos S47-S49 of 1991

B e t w e e n -

GKN KWIKFORM SERVICES PTY

LIMITED

Applicant

and

THE COMMISSIONER OF TAXATION

Respondent

Applications for special leave

to appeal

BRENNAN J
DAWSON J

TOOHEY J

Copyright in the High Court of Australia 1 4/10/91

TRANSCRIPT OF PROCEEDINGS
AT SYDNEY ON FRIDAY, 4 OCTOBER 1991, AT 9.33 AM

MR D.H. BLOOM, QC:  If it please the Court, in this matter I

appear with my learned friend, MR A.H. SLATER, for

the applicant. (instructed by Mallesons Stephen

Jaques)

MR D.M.J. BENNETT, QC: If the Court pleases, I appear with

my learned friend, MR S.J. McMILLAN, for the

respondent. (instructed by the Australian

Government Solicitor)

MR BLOOM: 

If the Court pleases, I can tell the Court that

this matter involves no question under Part 3A of
the Income Tax Assessment Act. It involves what is
or ought to be a fairly simple question, namely,

whether compensation for the involuntary disposal

of capital assets is capital or income and,

although seemingly a simple question, it is a
question which has divided the Federal Court and

produced two plainly inconsistent decisions.

Your Honours, may I hand up a bundle of

documents and ask Your Honours to turn to the first which is an extract from Dr Hannan's 1946 Treatise. Your Honours will see at the page numbered 280, at

about the middle of the page:

Since capital receipts are not income, it follows that any enhancement of the value of a

capital asset is not income and therefore

cannot be treated as income for taxing

purposes. This proposition is indisputable,

and its corollary is that capital outgoings

and capital losses cannot be taken into

account when the taxable quantum is being

calculated. It would be no more correct to

say that capital losses and capital outgoings
are costs incurred in earning income than to

say that capital receipts and enhancements of

capital represent earnings of income.

There being no justification, in

principle, for bringing a capital item into a

revenue account, the first step necessary in

calculating the taxable quantum is to exclude

all capital elements, whether receipts or

enhancements, losses or outgoings.

TOOHEY J: But in a sense, that begs the question here, does

it not, Mr Bloom?

MR BLOOM: It is a starting point, if I may, Your Honour.

TOOHEY J: Yes.

DAWSON J:  So far, so good.

2   4/10/91

MR BLOOM:  Yes. Well, it was indisputable in 1946,

Your Honour.

TOOHEY J: It is not the principle I was casting in doubt,

it was its application in the present case.

MR BLOOM:  Your Honour, the difficulty is this, with

respect: as the author goes on to point out, the

taxing statutes traditionally provide a special

deduction for depreciation or wastage of capital

assets or plant and, so here, the assets with which

we are concerned were plant and held by the Full
Federal Court to be indisputably so. There was

simply no question that they were plant and capital assets. No deduction was available for the cost of

them under section 51(1) because it was a purchase

of a capital asset.

So, it is our submission that one goes to

sections 54 and 59 which appear next in this bundle

of documents we have handed up. They deal with,

firstly, the depreciation allowed for plant. That

is section 54. And section 59 then brings to

account recouped depreciation when plant is lost.

Your Honours, it is also axiomatic that in the

absence of a provision such as section 59,

compensation for the loss of a capital asset is

capital. And we have given Your Honours a passage

from the judgment of Your Honour Justice Brennan in

Federal Coke, when Your Honour was on the Federal

Court. That is in the third segment, at page 475,

the third line on the page:

The evidence shows that Bellarnbi directed the

payments to be made, and Federal received the
payments, as compensation for the loss in

value of capital assets. The consequence of

this finding is that the receipts bear the

character of receipts on capital account and

do not form part of Federal's assessable

income.

So, that is the principle, Your Honours.

DAWSON J:	What happens if you make a profit though?
MR BLOOM:	A capital profit, Your Honour, is still a capital

profit and remains so.

DAWSON J: But you have replaced the depreciated item.

MR BLOOM:  Yes, Your Honour.

DAWSON J: But in addition to the cost of doing that, you

make something in addition.

4/10/91

MR BLOOM:  Yes, Your Honour.

DAWSON J: Is that not the problem?

MR BLOOM: Well, it is not a problem if it is capital,

Your Honour.

DAWSON J:	No, it is not.
MR BLOOM:	It is only a problem if it is income.

DAWSON J: But that is the question.

MR BLOOM:	Yes, that is the question.
DAWSON J:	How can it be capital when it represents a

profit, and not a capital profit? That begs the

question.

MR BLOOM: Well, it does beg the question, with respect.

The question is as to the nature of the profit.

What converts a capital profit into a revenue

profit? The cost of the asset is on capital

account and that is clear.

DAWSON J: Appreciation in the value of the asset normally

is, but, you see, that is not the case here.

MR BLOOM:  Your Honour, the evidence below was clear that it

is far more valuable to the taxpayer to keep these

assets and to rent them out than to lose them.	The
non-return was actively discouraged and, indeed, the only reason that the particular clause

specified the current list price of the merchandise
or the plant was to try to discourage people from

not returning it. But what has to happen is that

when you lose that piece of capital item, you have

to go out and buy another piece at current list

price and you do not get a reduction for that. So,

in a very real sense, in an economic sense, if one

is permitted to say that, there is no profit at

all, with respect.

The fact is, Your Honour, that if one disposes of a capital asset at a profit, that produces,

generally - - -

DAWSON J: Is the scaffolding depreciated?

MR_ BLOOM:  Yes, Your Honour, under section 54.

DAWSON J: So, at least you get a new piece of scaffolding

for an old at no cost.

MR BLOOM:  No. But, Your Honour, the evidence is that

scaffolding - that nobody cares whether it is nice

and new or old; it can be, apparently, hired out

4   4/10/91

for many, many years, and it is a very valuable

commodity as an asset which can be held and hired

out.

DAWSON J:  So that it does not really depreciate although

you do depreciate it?

MR BLOOM: Well, you depreciate it because the Tax Act says

that is what happens to plant.

BRENNAN J:  Is the amount for which you have presently been

assessed to tax the difference between the amount paid by the hirer for the lost piece of equipment

and the depreciated value of that equipment?

MR BLOOM:  No. Could I take Your Honour back to section 59

which is after the second tab in the bundle of

documents. Section 54 and section 59 are both set

out there, or the relevant portions of them.

54(1) Depreciation during the year of income

of any property, being plant or articles owned

by a taxpayer and used by him during that year

for the purpose of producing assessable

income ..... shall ..... be	an	allowable
deduction.

Then 59(1) says, that where you dispose of

property:

in respect of which depreciation has been

allowed -

then -

the depreciated value ..... less the amount of

any consideration receivable -

is a deduction. But if it works the other way so

that the amount you receive exceeds the depreciated

value, then the excess to the extent of the sum of

the amounts allowed for depreciation under	section 54 is specifically included in the
assessable income. So, that is the regime with
capital. You get no deduction for its cost; you
depreciate it, but if you recoup that depreciation,
you bring that recoupment back into account, and
that has happened here.

TOPHEY J: But is that the foundation for an argument that

in some way sections 54 and 59, as it were,

override section 51?

MR BLOOM: Well, we would certainly wish, if special leave

is granted, to put an argument that those sections

are specific.

4/10/91

TOOHEY J:	Was that argued below, Mr Bloom?
MR BLOOM:	It was not, Your Honour, but it was not because

there was already a Full Federal Court decision,

Memorex, in which that argument had been rejected

and so this would be an appropriate forum for that

argument to be resuscitated.

TOOHEY J: But was it formally raised?

MR BLOOM:  I believe it was not formally put. It could only

have been formally put but I believe it was not,

Your Honour. But it is a pure argument of law

dependent on no question of fact.

DAWSON J:  I know you have answered this question before:

what amount was included in the assessable income?

MR BLOOM:  The entire profit over the original cost was

included, so if the property was disposed of and

the current list price of that property was higher,

as was normally the case, than at the time of

acquisition - say, the property was acquired for a

$1, by the time it was lost, it cost to buy $3.

Three dollars came in to some extent under

section 59 and to the balance, under section 25.

DAWSON J:  It was not the excess of the amount received over

the depreciated value of the stock that was lost?

MR BLOOM:  No. It was the profit over historical cost taken

away from the amount received and that came in, to

the first extent, under section 59 and then, to the

extent of the balance, was brought in by the

Commissioner under section 25.

TOOHEY J: The hirer who does not return the scaffolding is

obliged to pay a sum, what, equivalent to the then

current sales price of comparable scaffolding?

MR BLOOM: Yes, the then current cost to the hirer - to the

bailor.

TOOHEY J: Well, that is one way of putting it, perhaps, but

it is expressed in terms of sale price, is it not?

MR BLOOM:  The then current list price of that scaffolding.

Now, this taxpayer does not sell scaffolding.

TQOHEY J:	No, I appreciate that.
MR BLOOM:	In Cyclone, of course, the taxpayer did sell

scaffolding and in Cyclone, what the taxpayer did

was to treat all the scaffolding it bought as

trading stock but then anything that was still on

hand after one year it treated as capital and as

plant and depreciated it and the question in

6   4/10/91

Cyclone, which divided the Federal Court, was the

same question then as in this case, namely, whether

the amounts received for the sale of what was

undoubtedly plant was income or capital, and the

majority of the Full Court in that case said it was

capital. So, the two cases are completely in

conflict, Your Honours.

Can I take Your Honours to Cyclone? Firstly,

there is an extract from the judgment of

Mr Justice Hunt in the supreme court at first

instance.

BRENNAN J: Which tab are we looking at, Mr Bloom?

MR BLOOM:  I am sorry, Your Honour: behind tab 4 at

page 150 of the report in Cyclone at first

instance. Do Your Honours have that?

BRENNAN J: Yes.

MR BLOOM:  Your Honours will see at about line 11:

The taxpayer owns scaffolding equipment.

The major part of its business in relation to

that equipment is hiring it out, but it does

sell some of the scaffolding. This is mainly

to governmental and semi-governmental

authorities; hardly anyone else finds it

economic to purchase instead of hire. The

taxpayer will usually make a special purchase of equipment specifically for the purposes of

such a sale, but it may also sell some of the

equipment from the general pile from which it

hires it out.

There is also a third way in which the taxpayer receives payments in relation to what

the Commissioner asserts is the sale of its

scaffolding equipment. The hiring contracts

contain an obligation - expressed in slightly

different ways over the years - to the effect

that the hirer will pay to the taxpayer the

cost of replacement by new equipment (at the

taxpayer's latest current list price) of any

hired equipment which has been either lost or
irreparably damaged.

Now, that is the exact same clause in all relevant respects as is involved in the present case.

When that case went to the Full Federal Court,

the majority, Sir Nigel Bowen and
Mr Justice Beaumont, held that the profits received

were capital and not assessable to any extent under
section 25. If Your Honours go to tab 5, we have

7   4/10/91

extracted the relevant portion of the judgment. At

page 323, about line 27:

Recognising that there is a possibility of sale, the equipment is first looked at as

stock. But if it is not sold and, instead, is

devoted to the hiring side of the business, it

is appropriate to regard it as plant, that is

to say, as having ceased to be circulating

capital and to have become fixed capital

instead: it has become part of the taxpayer's
profit-making apparatus as distinct from its

stock in trade.

Now, they were dealing with the profits on that

equipment, that which had become plant. And the

only difference between that case and this is that

here the property was always plant.	It was never
first trading stock.

TOOHEY J: Except that in the case with which we are

concerned, the Full Court below does not seem to

have seen Cyclone as any obstacle to its decision.

MR BLOOM:  Yes, Your Honour and, with respect, they are

entirely wrong. They have misunderstood Cyclone

and they have misapplied it. The court below, when

I come to their judgments, with respect,

Your Honour, three different reasons are given for

the judgment and it is hard to discern which is the

reason and there cannot be discerned any

distinction between this case and Cyclone, with

respect.

BRENNAN J: But does Cyclone do more than say that this

equipment is fixed capital?

MR BLOOM:  Not on this page, Your Honour, but on the next

page it deals with the consequences of disposal of

fixed capital. At page 324, about the middle of

the page, Your Honours will see his real

contention - that is the Commissioner's

contention - is:

that all equipment acquired by the taxpayer

should be treated, for all purposes, as if it

were acquired for sale. He says that it is

enough that the taxpayer was prepared to sell

its equipment if asked. In so contending, the

Commissioner is really saying that the whole

of the equipment is trading stock at all times

and that none of it is ever plant, that is,

part of the taxpayer's profit-making

apparatus.

We cannot accept the Commissioner's

argument. In the first place, it is at odds

4/10/91

with the finding of fact made by Hunt J that

although the activities of the taxpayer

included both selling and hiring equipment,

hiring was the rule and sale the exception.

Moreover, the Commissioner's contentions are

inconsistent with his acceptance of the

taxpayer's accounting practice of treating as

plant any equipment not sold by the end of the

financial year. ·

And then, over the page, 325, line 41:

The vice in this approach -

that is the approach of the Commissioner -

is that the transactions relied upon by the

Commissioner cannot be looked at in isolation. scheme of the taxpayer's treatment of its

activities. So regarded, the sales in

question are treated as the disposal of part
of the taxpayer's profit-making apparatus and
thus of fixed assets. Any profit thus
accruing is on capital, not revenue account.

Now, whatever one says about the correctness of this or the correctness of the present case,

there we have the clear contradiction between

Cyclone and the present case.

TOOHEY J:  On your argument, you would still have to account

for the difference between the depreciated value

and the cost which you get, would you not?

MR BLOOM:  Recouped depreciation, yes, Your Honour, under

section 59 still has to come in and has come in.

There is no argument about that, yes.

TOOHEY J: But there would be an amount over and above which

you would claim does not constitute part of the

assessable income?

MR BLOOM: That is right, Your Honour, it is capital and it

goes to be used by the taxpayer to purchase

equipment for which it gets no deduction because

the purchase price is capital, and that is the way

it works. If it were trading stock, it would get a

deduction for the cost when it purchases and what
it received when it is sold would come in as
income, but it is not trading stock, it is plant,

and there is absolutely no dispute about that.

TOOHEY J: Yes, but it does not seem to have been the way in

which the court approached it below. That is not

to say that the decision is necessarily correct,

but it seems to have been approached in terms that

9   4/10/91

the hiring agreement was entered into which obliges

the hirer to pay X dollars.

MR BLOOM:	Yes, Your Honour.
TOOHEY J:	The hirer does not return the scaffolding. The

hirer is obliged to pay X plus Y or is obliged to

pay Y dollars, being the list price, and there is

inevitably a difference between the two. And that

sum the court below seems to have regarded as part

of sort of an incident of the business carried on

by the taxpayer and therefore - perhaps "therefore"

is oversimplifying it - but attributable to income.

DAWSON J: They really say, do they not, "Look, this sort of

stuff is often not returned. It is part of the

business that it is not returned and it is just

part of revenue." That is the way they approach

it, is it not?

MR BLOOM: Well, you see, it is rather curious. With

respect, first only one judge said that and that is

Mr Justice Davies, and he was the only one who said

that, and he said it by reference to some cases on

deductions where recurrence was held to be the

critical factor.	I think BP and Ampol Exploration
were the cases he relied upon.	Now, if you turn

this case around and you say, "Look, is there a

recurrent purchase of scaffolding equipment by this

taxpayer?", well, there is more purchased than
there is lost. So, does recurrence of the purchase

make that a non-capital outgoing? Well, of course,

it does not, Your Honour, because this is capital

and the purchase price of capital remains capital

notwithstanding how many times you buy capital.

BRENNAN J:  Perhaps it depends where you start from. The

question is whether or not the money that you

received has the character of income and recurrence

is relevant to that, is it not?

MR BLOOM: Well, Mr Justice Davies used the expenditure

cases to support the proposition that recurrence

here led to assessability.

BRENNAN J: Well, use the income cases instead.

MR BLOOM:  Yes, Your Honour, and the income cases make it

very clear that recurrence is one factor.

.

BRENNAN J:	Yes .
MR BLOOM:	One what might be called hallmark.

BRENNAN J: Yes. Certainly a very distinguishing factor

from Federal Coke.

10   4/10/91

MR BLOOM:  Yes, Your Honour, but not from Cyclone.

BRENNAN J: Well now, I appreciate what you say about

Cylone, but is it right to describe the amount that

you receive in respect of the unreturned property

as a sale price of the property?

MR BLOOM: With respect, no, Your Honour.

BRENNAN J: Well then, if it is not a sale price of the

property, it is simply money which is received

pursuant to the contracts which you enter into

recurrently.

MR BLOOM:  Yes, Your Honour.

BRENNAN J: That being so, prima facie, it bears the

character of income, does it not?

MR BLOOM:	No, Your Honour.
BRENNAN J:	Why not?

MR BLOOM: Because it is received as compensation for the

capital item. It is agreed liquidated damages as
compensation for the loss or taking of an item

which does not belong to you.

DAWSON J:  It is more than the cost price to you, is it not?

MR BLOOM: Well, yes, but not the cost price of what you

have to spend to go and replace it, Your Honour.

DAWSON J: Is that right?

MR BLOOM:  Yes. The reason the current - - -

DAWSON J:  You pay exactly the same amount as the customer

who loses the stuff pays to you.

MR BLOOM:  Yes, but if the Commissioner is right, what happens is you get the money and you pay tax on it

and you have got less to go out and buy new

equipment.

DAWSON J:  No, no, but I just want to go back and be sure

about this point. The amount that you receive for

the scaffolding which you lose, tax aside, is

exactly the same amount as you pay to replace it?

MR BLOOM: Yes, current list price.

DAWSON J: Is that right?

MR BLOOM: Yes, Your Honour, exactly.

11   4/10/91

TOOHEY J: Well, that assumes, I suppose, that the taxpayer

pays the current list price.

MR BLOOM: Well, it does assume that, yes, Your Honour.

TOOHEY J: It would be surprising if he did, I suppose, but

that may be by the way.

MR BLOOM:  I do not know, Your Honour. But, Your Honour, we

should not deal with it that way, perhaps.	Can I
take Your Honours to - - -

TOOHEY J: No. Well, I am not suggesting - but, in the end,

I think, the approach taken by Justice Beaumont is

perhaps along the lines that Justice Brennan has

just put to you, that this was really part of the

total consideration received for the carrying on of

the business.

MR BLOOM:  Your Honour, we say, no, for this reason -

perhaps it can be put more eruditely by taking

Your Honours to a decision in Canada which looked

at the problem in the same way that

Mr Justice Beaumont did. It is behind tab 6:

Anthes Equipment v Minister of National Revenue.

If I could be forgiven for taking Your Honours to the headnote:

The taxpayer corporation was primarily in

the business of renting scaffolding and shoring for construction and renovation

projects. The taxpayer sold the rental

equipment when its usefulness became exhausted

by reason of wear and tear or when it became

technically obsolete. Occasionally, the
taxpayer would sell the equipment to customers

if that was what the customer wanted and if it

was considered that the business of the

customer was important enough to justify the

loss of potential rental income which could

have been realized from the asset. The

customers when the equipment was damaged or	taxpayer also received certain amounts from	lost while in the possession of the customer.
The taxpayer reported the amounts received in
respect of these transactions as capital
gains. The Minister assessed the
taxpayer ..... and the taxpayer appealed to the
Tax Court of Canada.
Now, if Your Honours go over to page 62, the

first full paragraph on that page:

The payments received by the appellant in

respect of the third category of dispositions
are capital receipts. In support of his

12   4/10/91

contention that the payments are trading

receipts, counsel for the respondent -

the Commissioner -

stressed, and the evidence supports him, that

revenues from these dispositions were

predictable and significant from year to year.

He also underscored the fact that what the appellant initially sought to recover was much

in excess of the cost to it of replacing the

lost or damaged equipment and that what was in

fact recovered normally, if not invariably,

exceeded that cost.

So, there, Your Honour Mr Justice Toohey sees there

is that fact.

I do not regard these things as leading to the conclusion that what would otherwise be

regarded as capital receipts should be

labelled business income. Up to the time of

loss or damage rendering it unfit for rent, the equipment was clearly capital assets in

relation to the appellant's business of

renting scaffolding and shoring material. The

appellant claimed and was allowed capital cost

allowance in respect of it while it

constituted part of the rental pool. The

existence of this course of action was
discussed at the hearing, but its correctness
was not called into question. Further, where
there is a bona fide negotiated settlement of
a claim for breach of contract the amount paid

and received is compensation for breach of

contract. It does not become something else

simply because it exceeds or is less than the

actual loss suffered by the breach. The

appellant is entitled to succeed on this

aspect of the appeal.

Now, Your Honours, Mr Justice Foster, in first

instance, in this case, held exactly the same thing

- not referring to the Canadian case - but he held

that the amounts received were not additional

hiring fees but were compensation to the taxpayer

for deprivation of its capital asset.

Now, the three judges in this case, when we

get to the Full Federal Court, give completely

different reasons, with respect, for their

conclusion that this was income. Mr Justice Davies

says that regularity and the fact that it was an

expected incident makes it income, and as I have

indicated to Your Honours, he relied upon deduction

cases where recurrence was held to be a relevant

factor. But, as I have also indicated to

13   4/10/91

Your Honours, that if we went and looked at

deductions here and asked whether recurrence of

purchase of scaffolding ought, because of that

recurrence, to be income rather than capital, the

answer would be a resounding "No".

Mr Justice Beaumont held that it was

compensation for deprivation of the asset but said

it ought to be treated as additional hiring fees

and, with respect, there is no other case that

provides authority for that proposition.

Mr Justice O'Loughlin said that the case bore the

hallmark of revenue, and that is all he said. He

did not indicate which hallmark of revenue the case

bore.

Your Honours, we are in a position where

bailment of goods is commonplace and provision such

as the provision with which we are concerned

requiring compensation for deprivation of the loss
of the capital item it also commonplace. Anything,

these days, Your Honour, is hired, so it is a very

commonplace question in our society.

We have two conflicting decisions of the

Federal Court. Cyclone cannot be reconciled, with

respect, with the decision in this case.	The
decision in this case -

BRENNAN J:  How was it that this case was decided in the

light of Cyclone?

MR BLOOM:  Decided the way it was?

BRENNAN J: Yes, if there is the conflict that you speak

of.

MR BLOOM:  Can I take Your Honour to Mr Justice Davies at

the application book, page 41, and that is a

question we have been asking, Your Honour, with

respect. Line 14:

I therefore need not discuss Cyclone in which

the majority decision turned on the

appropriateness of the accounting system

adopted.

With respect, Your Honour, that is not right. What

the majority decided in Cyclone was that the

accounting system was appropriate and that it had

an effect. The effect was that the particular

equipment sold was plant and the effect of that was

that what was received for sold plant was capital

because the plant was capital. But it did not just

turn on the accounting question.

Mr Justice O'Loughlin did not refer to Cyclone.

14   4/10/91

DAWSON J: But an accounting system cannot turn capital into

something else.

MR BLOOM: Well, of course not, Your Honour. In Cyclone the

taxpayer both sold and hired, and it is impossible

with a piece of scaffolding which might go to 20

different jobs around the city to work out whether

it is trading stock or hiring stock and so it

adopted an accounting system which said,

"Everything we purchase we will treat as trading

stock for the first year. If it is still on hand
after 12 months, we take it out of trading stock

and bring it into the plant side of the equation."

Now, the question for the Federal Court in Cyclone

was this: was the equipment treated as plant when

sold, were the profits on its sale capital or

income? The same question, Your Honour, not

dependent upon the accounting treatment at all,

that question or the answer to it.

BRENNAN J: Well now, Mr Bloom, let it be assumed that your argument on Cyclone is fully to be appreciated and

that we can find therefore that there was some

disconformity, to some extent, between the present
decision and that of Cyclone, that means that in

the Federal Court there has been a failure to appreciate the extent of the disconformity in relation to the character of a particular item of

receipt in the conduct of a particular kind of

business. What is there about that question which

justifies the grant of special leave?

MR BLOOM:  Your Honour, it is not just to do with

scaffolding. This deals with every item that is

bailed, and everything these days, Your Honour, is
bailed. There are no goods that one cannot hire.

There is even a firm, rather curiously, known as

"Barwicks Hire" that hires all sorts of equipment -

tables and chairs and that sort of thing. Hire is
a real part of today's society. It is not just

limited to scaffolding.

BRENNAN J: Well, no doubt it is and hiring businesses are a

particular kind of business which, no doubt, is

quite extensive but what is there in terms of legal

principle which justifies the grant of special

leave when the question is, after all, whether or

not part of these receipts bear the character of

income according to ordinary notions.

MR. BLOOM:  Yes. The important thing is this: first of all,

we look at the Full Federal Court's decision in

this case. Mr Justice O'Loughlin gives no reason

for his conclusion, so we can put him to one side.

Mr Justice Beaumont says, "It is really

compensation for a capital item but, in my view,
compensation for a capital item equals hiring

15   4/10/91

fees." Mr Justice Davies says, "Recurrence is what

turns what would otherwise be capital items into

income." You see, Your Honour, what is important

is to know this: first of all, are either of those

two reasons correct or is the reasoning in Cyclone

correct and, as a general proposition, is what

Mr Justice Davies says correct? Can recurrence of receipt of capital items, items which are otherwise

clearly capital, mean that that becomes income?

DAWSON J: Well, obviously, at some point that must be so,

they cease to be capital items and become stock,

but you.say it is not this case.

MR BLOOM: Well, these are, unquestionably, at all relevant

times, Your Honour, plant. They never cease to be

plant. So, the question is - - -

DAWSON J: Yes.

MR BLOOM:  They never cease to be. On the facts of this

case, as found by the Full Federal Court, they

never cease to be plant.

DAWSON J: Well, you say Justice Davies cannot have it both

ways?

MR BLOOM:  That is right, Your Honour. I will not take

Your Honour back to the fairness of it because

perhaps Justice Toohey is correct, I do not know,

as to how much is paid for the new goods but the

point is no deduction is available for the cost of these capital items and it is our submission, with

respect, that that is because it is capital and,

similarly, no amount should be brought in when it

is disposed of, again, because it is capital,

unless there is a specific provision of the Tax Act

that does so such as section 59.

But that is not a question limited even to hiring businesses, Your Honour.	The question is
does the regular and recurrent, as an unwanted,

involuntary necessary activity of the business -

does the recurrence of capital receipts turn those

capital receipts into something they are not,

namely, income? And if it does turn them into

income, Your Honours, why only to the extent of the
profits? It is not a case like London Australia

Investment - and this perhaps does involve something like London Australia Investment in

context. This was not a case where assets were

bought to be traded in and switched and were sold

to make profits. There is none of that that led

this Court to depart from what was accepted theory

and to hold that profits could come into assessable

income under section 25. There is none of that

here.

16   4/10/91

Your Honours, in our submission, it is an

appropriate case for special leave.

BRENNAN J:  Mr Bennett.

MR BENNETT: If the Court pleases. Your Honours, I hand up

an outline of submissions.

BRENNAN J: Yes, Mr Bennett?

MR BENNETT:  Your Honours, my learned friend, with respect,

starts by asking the wrong question. He says, "Is

this plant? If it is, that's the end of the case."

There is a long line of cases starting with

California Copper Syndicate and going right through

in both England and Australia which lay down a very

clear rule as to what is to apply if one sells or

otherwise realizes one's capital equipment. The

principle is set out conveniently, if Your Honours

have my learned friend's book, under tab 7 in the

Memorex case.

If Your Honours go to page 305, beginning at

line 24, after referring to London Australia,

Their Honours set out the familiar line of cases and then at line 37 quote the ..... passage:

But in the words of the Lord Justice Clerk in

Californian Copper Syndicate v Harris which

have been so often quoted, "it is equally well

established that enhanced values obtained from

realisation or conversation of securities may

be so assessable, where what is done is not

merely a realisation or change of investment,

but an act done in what is truly the carrying

on, or carrying out, of a business".

Now, Your Honours, at page 50 of the

application book Your Honours see the statistics

which occurred in this case and Your Honours see,

starting at line 10, that the amount was

5.71 per cent of total receipts of business in one

year; 3.2 per cent in the next year; 3.2 per cent

in the next year and the amounts received for sales

were some hundreds of thousands of dollars. They

are set out. What the court did was to say,

applying that familiar test, applying the

well-known, well-established test to this type of

situation, this case falls on one side of the line

and that is all it did.

While I am on that page I might just divert

myself from the main point of my argument to deal
with the question of what happens because

Your Honour Justice Dawson asked a question to

which, at the bottom of page 50, really provides an

answer. Assume one has an item of equipment which

17   4/10/91

costs $100 and assume that today the replacement

value is $200 and assume that at the time it is

lost or destroyed or not returned by the customer,

$80 has been allowed as a deduction for

depreciation. So, the item one paid $100 has been depreciated down to $20, and one now gets $200 for

it. There is no doubt that the $80 is assessed

under section 59(2). That is the recoupment of

depreciation provision.

What we say is that the extra $100 is, for

practical purposes, money the taxpayer has made

from the carrying on or carrying out of a business.
It is a regular receipt each year; it is a regular

part of its business. It is a significant sum of

money and each year money comes in from that.

DAWSON J:	Does it involve, notionally, at any rate, turning the stock for which the compensation is received
into trading stock?

MR BENNETT:  No, Your Honour. It involves simply saying

this is a source from which the taxpayer receives

money each year. This clause in its contract which

says, "In the event of destruction of or non-return

of stock, the taxpayer is to be paid in a sum of

money."

My friend says, "Well, it's terribly unfair

because we have to go out the next day and buy it

at the same price." Like my learned friend, I

leave aside the question of whether it actually

gets it at that price or pays a bit less or does

not, the real point is that there was no evidence

to say that it always or, indeed, regularly

replaces the item immediately.

DAWSON J:  In fact, really what you are saying is he has

been compensated for that item, one way or another, by depreciation and by what he gets up to the point

that you - the $100?

MR BENNETT:  Yes. If he chooses to take the $200 and spend

the whole $200 on an identical item of scaffolding,

there has been an exchange. He now has a new item

which will be used in the business. He is richer

by the value of the new item; poorer, certainly, by

the amount he has spent for it, and it is a capital outlay which is treated in the same way over again.

But there is nothing unjust in saying this taxpayer

has made, as a regular part of its business, a

profit on the item which was thereby not returned.

Now, Your Honour, in relation to Cyclone

Scaffolding, can I just say this: it is quite

clear from the passages in Cyclone Scaffolding in

my learned friend's book that it was a case which

18   4/10/91

turned on the accounting system. If Your Honours

go to tab 4, first to the last page, page 150, it

says at line 40 - it refers to the:

arbitrary practices ..... the taxpayer has

adopted -

and -

One such accounting procedure ..... it

treats the proceeds of any sales of

scaffolding -

on a "li/fo basis" -

"last in - first out" -

If one then goes to what is said in the Full Court

about that, it is quite clear that the Full Court

relies on it.

On page 324, just before the passage my

learned friend read, the second full paragraph on

the page:

If the system of accountin.g, which until relatively recently has been accepted by the

taxpayer and the Commissioner as giving a

substantially true reflection of its income,

does not give a true reflection, then the

system requires alteration. But the

Commissioner did not seek to suggest that an

alternative accounting treatment was

appropriate. On the contrary, he was content

to accept the taxpayer's accounting method.

And then there is the passage my learned friend read, and then in the next paragraph, in the

middle:

Moreover, the Commissioner's contentions are

inconsistent with his acceptance of the

taxpayer's accounting practice of treating as

plant any equipment not sold by the end of the

financial year. The Commissioner can hardly

accept the taxpayer's treatment of the

equipment as plant or fixed capital at the end

of the first financial year and at the same

time contend that it should then also be

regarded as trading stock -

and it is made even clearer on the next page where

in, again, the passage my learned friend took

Your Honours to, at line 41:

The vice in this approach is that the

transactions ..... cannot be looked at in

19   4/10/91

isolation. They should be seen as part of the

whole scheme of the taxpayer's treatment of

its activities.

Not "of the taxpayer's activities" but "as part of the taxpayer's treatment of its activities."

So regarded, the sales in question are treated

as the disposal -

et cetera, and so on. And then the next few lines,

the bottom line of the page:

unless the taxpayer's accounting treatment is

undermined -

and so on.

Now, in this case the taxpayer worked on a

"fi/fo" system.

DAWSON J:	I am sorry, I did not catch that?
MR BENNETT:	I am sorry, first in/first out as opposed to

last in/first out. And that produced - it did not

give rise to the anomalies referred to and

His Honour was able to say, at page 41 - the

judgment of Mr Justice Davies, that he:

need not discuss Cyclone in which the majority

decision turned on the appropriateness of the

accounting system adopted.

Now, this case is a simple application of the

line of authorities following California Copper

Syndicate and that line does not depend on saying,

"This is plant, this is not plant."

Now, may I finally say something about the

"code" submission? The point was not raised below

although I accept it would have been a somewhat

formal submission, perhaps not totally formal

because the Full Federal Court is not bound by its

own decisions, but all Memorex did was to apply a

very long line of cases which are inconsistent with the suggestion that the depreciation provisions are

a code. Those provisions have been around a long

time. I am not sure if they were present in

comparable form at the time of California Copper Syndicate in the legislation under consideration

there but certainly that line of authorities

necessarily involves the assumption that one does

not treat these provisions as a code and say that a

regular receipt of this type is incapable of

constituting income according to ordinary
principles.

20   4/10/91

In my respectful submission, the Memorex

decision is clearly correct in that regard and

there is insufficient doubt to suggest that that is

a reason why special leave should be granted.

So, Your Honours, we submit it is a decision

on the application to special facts of very well
known general principles; there is no error of

general principle and the Cyclone case simply

involved a different accounting system and a

different approach to it. May it please the Court.

MR BLOOM:  Your Honours, if that was the application of a

very well-known general principle, it is

surprising, with respect, that three judges gave

different reasons for their conclusions. But,

Your Honours, in relation to the Memorex case which my learned friend last mentioned to Your Honours,

that was a case involving sale and sale, of course,

has always been traditionally different to loss.

Sale, as in London Australia Investment involves

something where somebody actively does something,

not where somebody loses something and he is

compensated for that loss. Those cases, California

Copper and the like, all deal with cases of sale,

active realization.

When one gets to a case like Whitford Beach -

and to deal with Your Honour Justice Dawson's point

as to whether one should then bring it in as

trading stock - Your Honours know that when a

capital item is suddenly to be treated as giving

rise to assessability in those circumstances, you

bring it in at its then value, not at its historic

cost.

Now, an item of scaffolding here could be on hand for 15 years and its historic cost could be

substantially less than the amount which is paid as

compensation for the deprivation of the taxpayer of

it. It is still a useful piece of equipment.

Whitford Beach, an application of that principle in

the California Copper line would say, "Well, look,

if you are going to tax the profit, you at least

bring it in now at its present value and you tax

only the difference between present value and sale

price, not the difference between that and historic

cost."

Your Honours, my learned friend, in his

attempt to distinguish Cyclone - he certainly

persuaded Mr Justice Davies that that was a basis

of distinction; with respect, it is not - Cyclone

dealt with two points.	One was the question of
accounting.	The second was "What, given that this

is plant, is the nature of what is received for

it?", and the answer was emphatically, "Capital."

21   4/10/91

And Your Honours can see that if Your Honours go

back to the decision in Cyclone behind tab 5.

There is the reference again at the bottom of

page 325 to:

the sales in question -

being -

the disposal of part of the taxpayer's

profit-making apparatus and thus of fixed

assets. Any profit thus accruing is on

capital, not revenue account.

That is not an accounting matter. And over the

next page the court distinguishes Memorex at about

the middle of the page:

We would add that the recent decision in

Memorex can be distinguished ..... It was there

held that the goods supplied by that taxpayer

were not part of its fixed assets at the

relevant date.

And the goods here are part of the fixed assets and

the disposal of them, in our respectful submission,

ought to be held to give rise to capital. But the

question is, none the less, sufficiently important,

in our submission, that this Court should deal with

it and answer once and for all whether Cyclone or

this case is correct. If Your Honours please.

BRENNAN J: This case raises for consideration the character

of part of the receipts of the taxpayer in respect

of unreturned items of equipment hired out by the

taxpayer in the course of its business. The

characterization of particular receipts in the
carrying on of a particular business as income,

according to ordinary notions, is not a question

which necessarily requires the grant of special

leave.

If, as counsel for the applicant contends,

there is a conflict of principle between the

Full Court's decision in this case and that court's

decision in Federal Commissioner of Taxation v

Cyclone Scaffolding Pty Ltd, (1987) 18 FCR 183, it

is desirable that the nature of the conflict be

identified by that court before application is made
to this Court to determine the question of

principle. If any question of principle is so

identified, it may well be resolved by the Full

Court of the Federal Court.

We do not perceive a question of principle in

this case of such importance as to warrant the

22   4/10/91

grant of special leave. Accordingly, special leave

is refused.

MR BLOOM: If the Court pleases.

MR BENNETT:  I ask for costs, if Your Honour pleases.

MR BLOOM: It is not opposed, Your Honour.

BRENNAN J: Refused with costs.

AT 10.20 AM THE MATTER WAS ADJOURNED SINE DIE

23 4/10/91