Glenfield Estates Pty Limited v The Commissioner of Taxation

[1989] HCATrans 84

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S99 of 1988

B e t w e e n -

GLENFIELD ESTATES PTY LIMITED

Applicant

and

THE COMMISSIONER OF TAXATION OF

THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave

to appeal

MASON CJ
BRENNAN J

GAUDRON J

Glenfield

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 14 APRIL 1989, AT 10.02' AM

(Continued from 9/12/88)

Copyright in the High Court of Australia

SlT2/l/PLC 14/4/89

MR R.L. BAINTON, QC: If the Court pleases, I appear with my

learned friend, MR C.L. LONERGAN, for the applicant.

(instructed by J.W. Walker & D.K.L. Raphael)

MR R.A. CONTI, QC: If the Court pleases, I appear with my

learned friend, MR R.B. WILSON, for the respondent.

(instructed by the Australian Government Solicitor)

MASON CJ:  Mr Bainton, we had the opportunity, I think, of the

written notes of argument that you handed up on the

last occasion and taking advantage of that opportunity,

we have given consideration to them in the meantime.

MR BAINTON:  So that I may assume the matter can truly be

described as part-heard?

MASON CJ:, I think so, yes.

MR BAINTON:  The questions left outstanding, as it were, that is

to say not covered in the document, have, for the most

part, in our submission, been answered favourably to

the present applicant by the decision in JOHN's case.

I would have no doubt that each of Your Honour's

recollection of that decision has not entirely evaporated

but none the less - - -

MASON CJ: No, it is firmly etched on our minds.

BRENNAN J: If you have the answers, do you need special leave?

MR BAINTON:  At the moment, yes, because we have a decision

against us. So far as the edification of the

profession generally is concerned, I suppose the answer to that question, Your Honour, might be "No" but so far

as the pocket of the appellant is concerned the

answer, regrettably, is "Yes, we do need it".

The applicant failed in the Federal Court because,

first, it was said that there was not a sufficient

nexus between the relevant outgoing and the derivation

of assessable income. That cannot stand with the
decision in JOHN.	It was said, secondly, that in

any event the relevant outgoing was of a private nature.

Apart from the difficulty of seeing how it could be that expenditure by a body corporate could be private,

that part of the decision also, in our submission,

will not stand with JOHN's case.

The reason why the matter was, as it were, stood over on the last occasion pending JOHN's case was the

suggestion, I think from Mr Justice Toohey, that perhaps

as the judge at first instance had substantially decided

the matter on section 260 though the Federal Court

had not because of earlier decisions in that court,

it might be appropriate to see what, if anything, was

left of section 260 after this Court had delivered its

judgments in JOHN's case; and, once again, the judgment

in JOHN's case would not permit the application of

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Glenfield

section 260 to anything that happened here. So that

in our submission the first of the two questions
canvassed in the document that Your Honours have read

would have to be answered that there are errors in
had the benefit of the decision in JOHN's case it

the judgment below inconsistent with a decision in

would have decided this matter otherwise.

Now, in a sense, I suppose that question of law

has been decided by this Court but, we would submit

special leave would not be refused simply for that
reason when a large amount of money is involved in the

matter and the - - -

GAUDRON J: But the question still is, is it not, Mr Bainton,

whether any liability was incurred? Is that not

ultimately the question which you must find in issue

in this case?

MR BAINTON:  Your Honour, that question was decided by the trial

judge. The trial judge's decision on that question

was adopted by the Federal Court but unfortunately

when the judge who wrote the main judgment came to

consider ~ection 51(1) and questions of private expenditure,

he overlooked that he had already adopted that.	May I
tell Your Honours where it is.	I think it is noted
on the -

BRENNAN J: Is it page 2, paragraph (h) that you are thinking

of, of your notes I am speaking of?

MR BAINTON:	I am sorry, Your Honour, page - - -?
BRENNAN J:	I thought you were looking for where the trial judge

made his findings and I assumed that you were thinking

of the passage referred to on page 2 paragraph (h)

which is appeal book pages 18 and 53. Is that - - -?

MR BAINTON: Yes, thankyou, Your Honour, that is the passage.

The finding is that:

The trial Judge said: 

..... satisfied that the directors ..... resolved

to the effect that the sale was subject to
all outstanding mortgages and to the option in

that Glenfield undertook to pay the difference

between the -

two amounts. The passage is reproduced on page 53

in the Federal Court judgment, in terms, and obviously

accepted as a finding of fact which the Federal Court

would not go behind.

BRENNAN J:  How does that finding of fact accord with the terms

of the deed which is recited on the following pages?

A.nd.perhaps you might explain to me what the finding means.

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MR BAINTON:	The antecedent facts are rather complex.	Reduced

to the relevant bare bones, an option had been granted

on, let me call it, day 1. It had been assigned -

that is not strictly correct. The option was to A

or his nominee and a nominee had been appointed but the

effect is the same - to somebody else on day 2. And

it was an option to purchase at a price that had an

escalation clause in it. There were two escalation

factors:	one was CPI; the other was any development
expenditure.	I think there was a third though it

probably is not relevant.

BRENNAN J: Well, it does not matter. The relevant figure was

arrived at as 1.3 million.

MR BAINTON:  But a figure was arrived at. Now, that option

created an equitable interest in the land, in our

submission, on the better view of the law but whether

that is right - - - -

GAUDRON J: There is no finding to that effect, is there? That

is not an issue that has been dealt with: whether or

not it created an equitable interest in land?

MR BAINTON: Well, that is a question of law rather than a

question of finding but it does not particularly matter

in this case because if it did not create an equitable

interest it was at least an enforceable equity and

there is no doubt that the relevant company here that
acquired the land eventually with a peculiar name of

Ehkuk Pty Ltd was aware of the existence of the option

because it had common directors with the grantor of it

so that it could never have been a bona fide purchase

of a value without notice. So, it would have been

bound by the option, had the -

BRENNAN J: Real property land, was it?

MR BAINTON:  It was partly real property and I think from

recollection, p_artly old system. The majority of it, I think, would have been real property land. Perhaps

what I have just said could have been defeated by a

race to the register but unless and until it was the ultimate purchaser of the property, Ehkuk, had notice

of the equity constituted by the grant of the option so that for it to obtain the benefit of the entirety of the land, unencumbered by either a mortgage that

also existed which is not presently in question, or the

option, it had to procure the discharge of the option

either by buying it from the holder of it or by

procuring the vendor to it to obtain a discharge of

the option. Now, it is that, in our submission, that

the trial judge was dealing with in the two passages

cited, and the provisions of the deed that were set

out do not, in our submission, affect that. All it

really does is to recite those facts - refer to the

subsisting mortgage of $681,000 which, again, is not

directly in issue. That had to be discharged from

anybody's view. And 6, the then value of the option

of the 1.3 million-odd.

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Now, for a taxpayer to be entitled to receive

the full purchase price of 3.915 million he would
have to procure the discharge or release of the
option by payment of the 1.317 million.

BRENNAN J: Why do you say that? Where is the clause that

requires that, or the finding that says there was

such a clause?

MR BAINTON:	The clause of the deed does not say it but the finding on page 18, reproduced on page 53, does.
GAUDRON J:	An undertaking though is different from an incurred

liability, is it not?

MR BAINTON:  Sometimes, not always. This was a case where

had the option not been vacated, Ehkuk would have been

entitled to recover the - as it were, the amount that

it would have had to pay to get rid of it from the

vendor who sold upon an unencumbered basis. Now,

what this finding means is that the vendor undertook
that it would discharge it. Had it not done so

it wouldhavebecane liable to pay it.

GAUDRON J:  What, _ the vendor's liability to the option

holder - if we can look at it in those terms - had not

arisen, had it?

MR BAINTON:  The option had not been exercised, no.

BRENNAN J: Never was, was it?

MR BAINTON:  No, it was never exercised because it was, in effect,

bought back.

BRENNAN J:	But it was not bought back, was it? Money was paid but the time expired without exercise.
MR BAINTON:	No, the money was paid.

BRENNAN J:  Two days before the expiry date.

MR BAINTON: The payment of the money, on those circumstances,

obviously vacated the option. Whether it is two days

before the expiry date - and I am not sure,I had not

looked at that piece of evidence - - -

GAUDRON J:  I find some difficulty , Mr Bainton, with the notion "vacated the option". I mean, any liability as between

the taxpayer and the option holder, if any, must have

been one for druµages of breach of contract - if any?

MR BAINTON:  No, Your Honou~. the option holder, on exercise of the

·optt:ion, could obtain · a decree for specific performance

and it wished to. Prior to the exercise of the option,

of course, it could not but it was free to exercise it

at any point of time up until it expired. And there

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was a very considerable difference between the exercise
price and the then value of the land because of the
operation of the excalation provisions. There is no
finding and there could not have been that had it

not been, and I use the word rather colloquially,

bought back or bought out, that it would not or could

not have been exercised.

BRENNAN J: 

Could I just take you to that finding because I

must confess I have difficulty in understanding it.
The last sentence in the second paragraph on page 18:

In the event that the option was not exercised, Glenfield undertook to pay

this sum to the holder of the right to

nominate.

MR BAINTON:  As a matter of grarmnar, that seems to say that

after expiry it would be paid but that could not have

been meant, really.

BRENNAN J: Well, let me go on to the next part of it:

and in the event that the option was

exercised Glenfield undertook to repay

it -

that is, the difference between 3.9 and 1.3 -

to Ehkuk.

MR BAINTON:  Yes.

BRENNAN J: Well, if that had happened then what would Glenfield

have received?

MR BAINTON:  The same amount of money but from different parties,

I think.

BRENNAN J:  I just do not see, on those findings, that there is

the necessary foundation for your argument though.

MR BAINTON: Let me asstnne that the sentence reads - not in

the event that the option has not been exercised but,

for the purpose of avoiding the exercise of the option,

Glenfield undertook to pay to the holder of the option the particular sum being on the figures that were substantially agreed to be correct figures at all stages

is the 1.3 million-odd. Now, that is to say, it would

have got back, in effect - sorry, the holder of the

option would have got the value of the option to it,
the difference b.etween exercise price and agreed value
of the land. If the option was exercised, Glenfield
would have obtained the 3.9 million, the then value of
the land, but Ehkuk would have paid out what it did

pay out for something that, in the event, it did not get

it would therefore be refunded its purchase price. In

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other words, if the option were exercised, Ehkuk was to be put into the position where it would have been had it not entered into the transaction at all. If

the option was not exercised - to procure that the option
be not exercised, the value of the option was to be
paid to the holder of it. Now, which ever way one

looks at it, Glenfield would have ended up with the

same amount of money and it would have disbursed the

same amount of money. Now, what it ended up with

is not in dispute, it is 3.9. What it disbursed is

not in terms of value in any dispute, it is the 1.3.

The only unknown, prior to that time for expiry of

the option, was whether that would have to be paid

to the holder of the option or to someone else.	But
it would have to have been paid according - as we

would read the finding, to somebody to entitle Glenfield

to retain the whole of the 3.9 million which was the

purchase price on the sale to Ehkuk.

Essentially, the position, in our submission, is

no different from what it would have been had the

mortgage not been 618,000 but some $2 million. There

was an encumbrance on the land that had to be got
rid of one way or the other before anyone other than

the holder of the option could be persuaded to buy

the land for 3.9 million. The finding, in our

submission, is that Glenfield, as a term of the sale to

Ehkuk, was to pay part of the price into a suspense

account which is purely an accounting procedure and
then one of the two possibilities, the parties obviously
contemplating the preferable one being procuring
the discharge of the option, to pay out the value of
the option, the 1.3 million, to the holder of the
option. So that the sale, Glenfield to Ehkuk, for

3.9 million would remain as a sale, in effect, the

unencumbered value of fee simple. While the option

subsisted that could not have been effected in any

other way save, perhaps, I suppose, if it was all

Torrens land, by somebody who is prepared to take the risk of, though he knew of the option, getting to the register with a registrable dealing before

anybody could take proceedings to stop it. That

possibility, as far as I can see, was certainly never

canvassed at the hearing or at all until Your Honour

raised the question this morning. It was just taken

that the arrangement between the parties was that

recorded with a little bit of less than perfect clarity

in the last sentence as having been reached.

Your Honours, assuming that to be the finding

and to have been adopted, as it was~whatever it meant,

I suppose - by the Full Federal Court, one has the

position that the amount brought in as assessable income

which, in the light of the findings or, perhaps, more a
mutual agreement, that the vendor was carrying on the

business of a land dealer so that the land was trading

stock. To obtain assessable income of 3.9 million it

was necessary to disburse the 1.3 to ensure clear title.

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If that be so, we would submit that there just cannot

be any argument that the 1.3 is an allowable deduction

whether you look at it under the first limb of - sorry,

the difference, the 2.5, is an allowable deduction -

I have perhaps got the figures round wrong because

I have to confess I had not anticipated I would be

asked to go into those specific facts but whatever
the actual figure disbursed was, it was plainly, on

that basis, disbursed as a step in realizing the

full amount of the assessable income. Had it been

sold subject to the option the sale price would have

been that amount of money less. Now, whether one looks

at that as the first limb of section 51(1) which it

really does plainly enough fall into or whether one

simply looks at the second limb because this was a

company carrying on a business, in our submission, the

result has to be the same. It is precisely within

what was described in JOHN's case as the cost of a

step taken in the process or gaining or producing

the assessable income. That is on page 4,105, column

1, almost at the bottom where the joint judgment

commences to examine the operation of section 51(1).

MASON CJ: 

Was this expenditure incurred or a liability incurred?

discharged in the following year of income as a matter
of fact.

MR BAINTON: 

It was an outgoing incurred in that year and

MASON CJ: What do you say constituted the incurring?

MR BAINTON:  The agreeing with the whole of the option, to pay

the amount of the money. In effect, for him not to

exercise or to discharge or whatever the option.

BRENNAN J: When was that agreement reached?

MR BAINTON:  If Your Honour is asking me the day, I am sorry,

I cannot answer that question at the moment.

BRENNAN J: Well, what was the income year in which the agreement

was reached?

MR BAINTON:  The year of income in respect of which this question

arises, the year ended 30 June 1978. The money was actually

paid after the end of that year of income.

BRENNAN J: It was paid nearly at the end of the year of 1979.

MR BAINTON:  I am not sure of the precise date.

BRENNAN J: It was 28 June, if I remember correctly. But there

is nothing to suggest that there is any arrangement

made between the taxpayer and the holder of the option

in the income year 1978, is there?

MR BAINTON:  I can only answer that that I believe there is but at

th~moment I am not in a position to extract it from the

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evidence. The.proposition that Your Honour is now

putting to me was certainly not raised in the

Federal Court. The matter was argued there on the

basis that there was such an agreement. Now, where

that evidence is, I am sorry, right at the moment I

cannot assist by identifying - - -

MASON CJ: There was an assumption in the Federal Court, was

there not, that there was a concurrence between the

receipt of the revenue and the incurring of the

liability or the outgoing, that is, that they occurred

in the same year?

MR BAINTON:	Yes.
MASON CJ:	But there was, as it were, a storm signal raised.

There was the reference to FLOOD's case in the judgment.

MR BAINTON:  Yes, that was because the judgment recognized,

as is the fact, that the actual payment took place

in the following year.

MASON CJ:	Yes.
BRENNAN J:	I had understood the way in which it was being dealt

with was that there was a liability, if there was a

liability at all incurred, it was incurred to the

purchaser, in other words - - -

MR BAINTON:  No, Your Honour. I am sorry, that is not so.

The money was paid to the holder of the option.

BRENNAN J: Of course, but was that in discharge of a liability

incurred to the option holder or a liability

incurred to the purchaser?

MR BAINTON:  To the option holder. It could only have been to

the option holder who was, in effect, being paid

not to exercise the option. Now, non constat that

purchaser that the vendor had reached that agreement	there had not been an agreement between vendor and
with the option holder. That is, as I understand it,
the way it was done. I was certainly in the matter in
the Federal Court and I have no recollection of that being challenged by anybody there as being the fact.

MASON CJ: Maybe but the problem is, and this has been raised

with you before, the difficulty of establishing

that there was a liability to the option holder. One

can understand in these cases that when a vendor has

to get in an outstanding estate in order to convey the

totality of what he has agreed to transfer or convey,

that when he pays money to get in the outstanding

interest or estate, that is an outgoing or expenditure

that he incurs in order to put himself in the position

of receiving the revenue item. But here we are now

dis~ussing it on the footing of incurring a liability

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rather than treating it as an expenditure made or

an outgoing outlaidt

MR BAINTON:	The liability was the promise to make the payment. The promise was fulfilled by not in the year of income in
which the promise was made.  Now, if that is the factual
situation the outgoing is treated, for section 51(1)
purposes, as incurred when the promise is made. That
is, if I remember correctly, NEVILLE's case. It was
certainly decided when I was at school, whatever the
case was.  I can only say I am sorry, I cannot tell
Your Honour Mr Justice Brennan where the evidence as
to that is - just simply have to assume it is there
somewhere because it hasnot until this moment being
challenged.
BRENNAN J:	I cannot understand the notion of a promise being

made to the option holder, that is my difficulty.

MR BAINTON:  Your Honour, it is a contract between the granter

and the holder of the option but in consideration of
the payment by the granter of the option to the holder

of X dollars, the holder of the option will not exercise

it - will, in effect, surrender it.

BRENNAN J:  I could understand that there may be a contract in

those terms but nothing that I see in the findings or

in the judgments here would suggest that any such

contract was litigated.

MR BAINTON:  If there had not been any such matter, this

would have failed for that reason at first instance,

surely. It was step one.

BRENNAN J: Unless one took the promise as a promise to the

purchaser but you say that is not the promise you

rely on.

MR BAINTON:	If that is the situation this case would have failed for that reason at first instance. It did not. It
did not fail for that reason in the
Federal Court.
BRENNAN J:	Can I just put this hypothetical set of facts to

you, Mr Bainton? If there was an agreement between

the purchaser and the vendor that the vendor would
procure the discharge of the option and that took

place in the income year 1978, and in performance of

that promise the vendor then, in the following income

year, approached the option holder and entered into a

contract for the purchase or the discharge of that

option and that occurred in the income year, 1979,

what would be your position?

MR BAINTON:  That would satisfy the requirements of section 51(1).

BRENNAN J: And that would be because of the promise made to the

original purchaser?

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MR BAINTON:  Yes.

BRENNAN J: Well now, that was what I understood to be the

kind of case that you were mounting in the court

below. Is that not right?

MR BAINTON:  No, I do not think it is, Your Honour.

BRENNAN J: Well, I have misunderstood - - -

MR BAINTON:  I cannot answer for the matter at first instance. My knowledge

of that is confined to reading the appeal book of the

Federal Court. But whichever way it was, and I

recognize the possibility that it may well have been

the second, it would still give rise to a relevant

outgoing for the purpose of section 51(1) in the year

in which the agreement was made, and I suppose it must

be one or the other:  two types of agreement. Our

submission is, whichever it be, it falls within

section 51(1) because without it the full amount of

3.9 could never have been received as assessable income. The property would have to have been sold for something less unless you got rid of the option by some other

means.

I must confess, I am not conscious of the time

interval being quite as short as what Your Honour

has said to me but I cannot contradict that.evidence.

BRENNAN J:  I was looking for the promise, actually, in one form

or another and at · one time or another and I found no

clear finding of a promise.

MR BAINTON:	Your Honour will not find it in the terms we have been discussing in the judgment at first instance or
later. All I can really do is repeat what I said
before.  If there had not been one or the other it
would have terminated this case almost ab initio
without any need to go into all of these other matters
which leads me to think it could never have been
really seriously at all in dispute at the trial and
I repeat, I do not remember it being raised at all
before the Federal Court. So, I must, with respect,
start off this application on the basis that
subject to whether or not it is within section 51(1) and
subject to questions of whether you can describe it as
private, one must assume that the outgoing, be it in
one or other of the two possible descriptions, was
incurred in the relevant year of income. If it were, the rest, in our submission, follows. If it was not, this matter should have been over three or four years
ago. I can, I think, add nothing more. at all to that
aspect of the matter, save, perhaps, to say it would
be regrettable to go off on that issue at this stage,
it not having been raised earlier.

The question as I had believed it to be - perhaps

not correctly - why the matter was adjourned on the

last occasion was the possibility of section 260.

Glenfie d S1T2/ll{PLC 18 14/4/89

That question was dealt with in JOHN's case at

page 4,108, the right-hand column:

We turn now to sec. 260 -

and the final conclusion i~ at 4,109 of the second

column towards the top. This is the part of the

judgment being examined on the assumption that CURRAN
was correctly decided and that there, therefore,

was a cost. The Commissioner had wanted to apply

section 260 and the judgment goes on to point out

that no matter how he applies it he cannot bring it
within any of the relevant paragraphs of section 260(1)
save by an argument which would not do him any good

because it would have annihilated the whole of the

income as well. The Court then goes on to say:

It may be -

and, with respect, we would put it perhaps a little

higher than that -

deductibility under sect. 51 is always to be

answered by the ascertainment of a past event

(i.e. a loss or outgoing having been incurred).

If it has, then that fixes the tax situation and as the Court goes on to point out, there is nothing

for section 260 to operate on then. If I can overcome

the hurdle that His Honour Mr Justice Brennan has

raised for me this morning, the amount spent in order to enable the full value of the land rather than some

lesser amount because of an encumbrance by discharging

the encumbrance must be a section 51(1) deduction to

be taken into account in determining assessable income.

So that none of the paragraphs of section 260 can

be said to apply to it.

I should also point out that there is in JOHN's

case some discussion as to whether or not expenditure or

otherwise allowable under section 51(1) could be

described as being private as distinct from domestic

and there is a reference to either HANDLEY or FORSYTH

I think FORSYTH - where one has got home office study

expenditures which falls into a rather special situation

and one other case, the name of which eludes me at the

moment, which was a self-education case of a school

teacher - - -

MASON CJ:	FAICHNEY?
MR BAINTON:	We have got those two categories of self-education

which are easy to see can be described as "private".

We would submit it is very difficult to describe
"corporate expenditure" as "private" in any event and that

expenditure - - -

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MASON CJ:	But in any event, that matter does not seem to have played a significant part in the judgment of the
Full Court of the Federal Court. There is a deal of discussion of it but, really, after circling
around, it seems to come back and land at precisely
the point where the discussion started.
MR BAINTON:	I do not quite know what to make of that part

of the judgment, I have to confess. It is page 69.

It starts off by saying that the expenditures:

in any event, of a private nature, and

therefore expressly excluded -

and then over the page he concludes that because it

is private it is not within section 51(1). I have

to confess to being somewhat mystified by those two

pages.	I cannot really attempt to throw much light
on them.	I am left with the other question
which - - -

MASON CJ:  It does not seem to me the discussion of "a private

nature"forms such a part of the judgment that we would

consider granting special leave on that point,

Mr Bainton.

MR BAINTON:  I appreciate that. If it is within section 51(1)

it, in our submission, just could not be described
as private and even though the judge may have said it

could in that passage or may have appear to have said

so or may have intended to say so, whichever is the

right word, it does not take the matter very far.

Another question is the section 36A aspect of

the case. That is dealt with in another part of·

the judgment beginning at page 72.

(Continued on page 21)

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MR BAINTON (continuing): And the critical passage is at

page 74, just below line 20.

MASON CJ: In effect the section is confined in its operation

to the circumstances mentioned in (a) and (b) in

subsection (1).

MR BAINTON:  Yes. As to that, Your Honour - - -

MASON CJ: Adopting the view expressed by Professor Parsons.

MR BAINTON: Well, I am not quite sure that that is even

accurately adopted, but so be it.	As to that we want
to put two submissions.	The first is it is reasonably

plain on a perusal of the language of the section
itself that it is not so limited. It is quite clear,

on the reading of the judgment of this Court in the WESTRADERS case that it is not so limited. Perhaps

can I simply refer to the passages in WESTRADERS

which make that abundantly clear. The same argument

was raised in WESTRADERS and the decision in

WESTRADERS in this Court depended, essentially, upon

the rejection of the argument. There were copies of

the WESTRADERS case delivered.

Two of Your Honours at various stages were

involved in this matter; one of Your Honours was not.

Perhaps for the benefit of Your Honour Justice Gaudron,

what was involved was simply this: there was a
company which had carried on a share-trading business
which had on hand a quantity of share-trading stock.

A lot of it was worth a lot less than had been paid

for it because dividends had been declared on it to

the acquirer which was a public company and got a

rebate. It subsequently disposed of those shares to

a share-trading partnership that had been formed at

the real value of the shares but accompanied by an

election under section 36A that they be transferred
at the cost at which they stood in the books of the

original acquirer.	The ultimate disposal by the
share-trading company produced a commercial profit
with a substantial tax loss.	They were deemed to have

acquired them, let me say, for $1 million; they were

actually only worth $100,000; they sold them for

$110,000, made $10,000, but for tax purposes lost

$899,000. The question was whether that was an

allowable deduction.

That depended in this case entirely on the

operation of section 36A because - well .... about

depended entirely on 36A, there was no other question left when the matter got on appeal. The Commissioner

argued that for various reasons section 36A should not

be assumed to mean what it appears to have said. The

then Chief Justice deals with the question, beginning

on page 61. He sets out the history by saying,

"Section 36 (1) provides" and he says what it is;

SlT3/l/RB	21	14/4/89
Glenfield

refers to the decision of this Court in ROSE's case

in 1951 which was to the effect:

that s.36(1) was only applicable to the
disposal of the entirety of the ownership
in an article of trading stock and

inapplicable to the disposal of an

undivided fractional interest in such

an article.

Then the facts are given, and the Chief Justice

goes on:

In 1952 the Parliament inserted s.36A

into the Act, evidently to reverse the

consequences of s.36(1) -

then 36A is set out. Then there are a series of

submissions set out by the Chief Justice and rejected.

The appellant first submitted that

a transaction would not fall within the

operation of s.36A(l) unless it did not

occur in the ordinary course of business .....

it was not enough that the transaction

satisfied the requirements of s.36A(l):

it must also satisfy all the requirements - and so forth. Then all of those submissions are

rejected and the Chief Justice goes on to another

matter which had arisen in the Federal Court and that

is disposed of. Then at page 64 the then Chief Justice

expresses his ultimate conclusion. In the paragraph

beginning, "The appellant, as a variant", he deals

with another matter raised by the Commissioner and

goes on to say that:

36A sets out particular conditions upon the

fulfilment of which s.36(1) is attracted. It

is unconcerned with the question whether or

not the transaction which satisfies the conditions

it specifies is a transaction in the ordinary
course of business.	I can see no warrant for

holding that ss.36(1) and 36A(l) are only
concerned with transactions which are not in the

ordinary course of business.

And he rejects the matter. Your Honour the present

Chief Justice deals with it commencing at page 72,

about the middle of the page and says:

Th~ next argument of the Commissioner was

that Jenspart -

which was the partnership -

was not a share trader ..... This is said to be

SlT3/2/RB	22	14/4/89
Glenfield

an essential condition of the application

of s.36A. The argument is that because

s.36 states that the value of the property

(shares) shall be included in the assessable

income of the transferor and because it also

states that the purchaser of the property shall

be deemed to have purchased it at a price

equal to that value, it is to be inferred that

both transferor and transferee are traders - and that is rejected. Your Honour said:

there are two distinct reasons for rejecting

this submission.

Then they are given. Then on page 73:

The fifth and final submission of the

Commissioner is that s.36 and s.36A should be

read together so that the requirement in
s.36(l)(c) that "the disposal was not in the

ordinary course of carrying on that business"

is imported into s.36A -

that is dismissed, and than a critical passage

begins towards the bottom:

The terms of s.36A are quite clear. The

section provides its own criteria for a

change in the ownership of property coming

within its scope. To come within s.36A(l),

there must be (a) a change in the ownership

of, or in the interests of persons in,

property, (b) the property must constitute

the whole or part of the assets of a business -

and then the other ..... were set out.

Once these three conditions are satisfied the legal consequences of s.36 attach to

the change in ownership, i.e.:  "The value

of that property shall be included in the
assessable income of the taxpayer, and the

person acquiring that property shall be

deemed to have purchased it at a price

equal to that value."

GAUDRON J:	You do not, Mr Bainton, have any decision in your favour that the granting of the option constituted
a change in the ownership of property, do you?
MR BAINTON:	It constituted a change in the interests of the holders of the property, that is the effect of the
decision of this Court in LAYBUTT V AMOCO, which is
referred to on page 6 of the written notes. That is
a - - -

S1T3/3/RB	23	14/4/89
Glenfield

GAUDRON J:  One could well understand - it may well depend on

the terms of the option - but in the courts below

you have not had a finding made in this case, have

you, relating to the alteration of interests?

MR BAINTON:  No, the Federal Court did not - disposed of it

in quite a different way. We have the option somewhere

in the documentary material. It is a very simple form

of option. If any option creates an equitable

interest, this one did.

GAUDRON J: Before exercise.

MR.BAINTON:  Yes, and after exercise, there is no question

about it. One of the matters at issue in LAYBUTT V

AMOCO was whether the holder of an option, unexercised,

had an interest in the land and certainly the view of

the then Chief Justice was that it did. I have to say

thac it is a question that cannot be said to be

completely resolved one way or the other but the view

which seems thus far to have found favour here is that

recorded in LAYBUTT that it does create an equitable

interest in the land, and that certainly is the

foundation of this argument. If it does not, 36A

cannot apply; if it does, then 36A must apply, in our

submission, in the way we put in the argument. The

argument cannot be got rid of by ignoring a substantial

slab of section 36A and saying it is confined to the

ROSE's case situation. WESTRADERS just plainly says

it is not.

But the question Your Honour Justice Gaudron

raised with me is certainly an anterior and necessary

condition. We have LAYBUTT here, if you want to

look at the passage. It is at pages 73 to 76. I

perhaps sufficiently content myself with saying~ with the

benefit of that passage, it is at least fairly

arguable. Perhaps the profession would be done a

service by having it determined - and the connnunity,

of course.	I was going to read down to the end of
page 75 of Your Honour Justice Mason.

MASON CJ: Yes, it is at the foot of 75, going over to 76.

MR BAINTON:  The ultimate conclusion - the reasoning of

Mr Justice Lockhart cannot stand with that passage

in Your Honour's judgment, completely at variance

with it.

Could I just say something to Your Honour

Justice Brennan that I have been reminded of. I am

told that at the trial two accountants were called

who said that the way the amount of money that we

are arguing about was treated in the books - that is

to say carrying it to a suspense account until it

was actually paid - was the appropriate way of dealing
with the liability that had been incurred. That does not quite answer the question as to what it was - - -

SlT3/4/RB 24 14/4/89

Glenfield

BRENNAN J: There is a large factual question that arises

because of the relationship of all the parties

concerned in the transaction, is to see whether or

not - I mean, the inference one might draw from an
arm's length ..... of the transaction is one thing;
but here where you have got the parties closely
associated and where the documentation - and I do

not wish to sound captious about it - is perhaps

somewhat exiguous, is whether one can make the

necessary findings to get your argument on its feet.

That is the difficulty I would see, Mr Bainton.

MR BAINTON:  I do not for one moment dispute that one has to

look carefully at something that is done, that it

will ..... for a purpose which is promotive, I suppose,

to use accurate language, is reasonably plain. I can

only say what I said before: if there had been an
argument about it, one would have expected that (a) it

would be raised perhaps with those expert accountants,

(b) it would have been raised at the trial, (c) it
would have been raised in the Federal Court. Yet so
far as I am aware, it was not at the earlier stage and
I am sure it was not before the Federal Court. At the
moment - I am only repeating myself, I know - I can

add nothing more to that, I am afraid.

But if I can make good the proposition that

LAYBUTT is authority for the proposition that the holder of an option has an equitable interest, at least that

it is fairly arguable, in our submission what we have

set out as the argument, depending on section 36A

necessarily follows, unless 36A can be read down in

the way Mr Justice Lockhart reads it down- - -

GAUDRON J: What follows, that the income should be treated as

the- - -

MR BAINTON:  The lesser amount.

GAUDRON J: As the lesser amount of what?

MR BAINTON:  There was a piece of property worth, to take a

round figure, let me say $4 million.	Two people have
an interest in it.	The interest of one is worth

2 million, the interest of the other is worth

2 million. It is sold. You treat each co-owner as

having sold his interest in those circumstances for

its value.

GAUDRON J: By applying section 36A?

MR BAINTON:  By applying section 36A and then going back to the operation of 36 upon it. So that you end up - - -

GAUDRON J:  Sorry; you say -you still have to apply 36 according

to its terms, do you not?

MR BAINTON:  Yes, but to - - -

SlT3/5/RB 14/4/89

Glenfield	25
GAUDRON J:	So there still has to be a sale other than in the ordinary course of business.

MR BAINTON: Oh, I am sorry, no. That is the WESTRADERS

question.

GAUDRON J: Yes, I know that is what was said in WESTRADERS

in terms of the application of 36A.

MR BAINTON:  There are two ways you can get to it. It may

depend upon whether the ultimate sale is in the
usual course of business or it is not. Section 36A,

if the argument we are putting is correct, has the

effect that you have got two people each, for tax

purposes, beine treated as partial owners of property

and having acquired their respective interests at

market value. You then have a disposal of the

entirety. If that is in the ordinary course of

business you look at the actual price received and

then apportion it between the owners which would bring

you, in our submission in this case, back to the net

amount that we say is the taxable income, rather than

of business, you may not take the actual sale price,

the assessable less deductible amount returned by

36(8) may say you are to be treated as selling it at

value. Then you apportion that amount in the same way.

Now, it does not matter which, in this case,

because the parties were agreed that the actual sale

price was the market value of the land at the time of

the sale.

GAUDRON J:	Why do we not then go back to the granting of the option and treat the taxpayer as having received
income at that time under 36(1) equivalent to the
market value of the property?
MR BAINTON:	You would. That is why it is then - -
GAUDRON J: So we would be doing two sums.	It would not simply

result in the difference?

MR BAINTON:  Not in this case because the two were different

years of income. It would not make any difference

to the end result. The option was granted some years before the year of income with which we are concerned

and I agree it may have- - -

GAUDRON J: And you escape the operation of section 36(1) at

that time.

MR BAINTON:  Yes, I think we must have. What operation it would

have had at that time is another question.	I do not
know.	I have not - - -

GAUDRON J: This seems to raise issues that seem to point out

that 36 was very much a last thought in this case.

SlT3/6/RB	26	14/4/89
Glenfield

MR BAINTON:  It arose because of some submissions that were

put against us in the Federal Court. It did arise.

The reason why it probably at the time of disposal

would not have had much tax effect is that the land

was held for quite a number of years. It did not

really become valuable until after it was rezoned and

the option was granted before it was rezoned. So the

earlier grant of the option would not have attracted

anything more than at the most a small amount of

income in that year. But it certainly was not, as

far as I am aware anyway, returned as income in that

year.

GAUDRON J: It does, however, show a problem about the

application of options to 36(1) and 36A.

MR BAINTON:  It may reveal a problem. But it would not be the

first time that problems have emerged from

amendments to this particular Act which may be

thought not to have been anticipated by the draftsmen

of the amendment, let alone Parliament when it has

passed it.

GAUDRON J: The problem may be such, though, that the question

whether or not an option changes interests in land

is not as easily answered as you would suggest.

MR BAINTON:  I am not suggesting it is conclusively determined;

I am suggesting that this Court has said that it

thought it was the better view. If that correctly

states the law, then what we are putting as to 36A

follows inevitably, in our submission. It may not

be palatable but that is not the question, in our

submission.

MASON CJ: Thank you, Mr Bainton. Yes, Mr Conti.

MR CONTI: Your Honours, can I do the section 36 point first.

In our submission, the section is necessarily founded

upon the existence in the first place of undivided

fractional interests and a change in those interests.

That is the first point we make. The second point we

make is this: this section appears in the concept of

trading stock provisions of the Act and a fundamental

concept of trading stock and trading stock accounting

is the notion of stock on hand at a balance date.

To speak of an option holder - an option holder

and trading stock having stock on hand in some way
contemporaneously with the legal owner of that trading

stock, in our respectful submission, is a bizarre

result and one that would be beyond ingenuity of

accountants to deal with. Let me come to the first

point.

My learned friend has drawn attention to the

passage in the judgment of the Chief Justice in

S1T3/7/RB	27	14/4/89
Glenfield

WESTRADERS referring to the function of the section

as dealing with a change in undivided fractional

interests.

MASON CJ: And there, of course, it was applied to a

partnership where the kind of question that arises

in this case did not arise at all.

MR CONTI:  That is so. And, Your Honour, for this section to

apply to interests that you cannot describe as

undivided fractional interests will cause the whole

of the section not to work. Let me explain why.

MASON CJ: Yes. Now, before you do, can you give us

illustrations of the application of the section to

undivided fractional interests outside the field of

partnership. Can you give, as it were, any examples

that would give effect to the words "or any other

reason"?

MR CONTI:  Only co-ownership not amounting to partnership.

That would be a rare species. Professor Parsons

does not put it as an absolute but he is at a loss

to understand and to provide an illustration. That

is the only one we can see, but Your Honours, the

whole notion of section 36A is that it in effect

creates,what one might say at first, a harsh regime

on the disposition occurring or a change of interests

occurring in the course of,what we say, co-ownership
or partnership. Then subsection (2) seeks to relieve

against that via provisions relating to notice.

Now, Your Honours, if a circumstance is

postulated about a change of interests that cannot

readily then accommodate - is not readily accommodated

by the relieving provisions of subsection (2), then

one is legitimately entitled to ask, "Was that really

the kind of change of interest that subsection (1)

is talking about?" because it will be outside the

scope of the relief subsection (2) envisages should

be available to all of these situations.

MASON CJf~: Yes. Yes. Take the case of a trustee carrying on

a business or residuary legatees. You would then

get, would you not, a situation in which, if there

was a change of interest it would be a change of

interest in relation to undivided fractional interests?

MR CONTI: That is so. Co-owners in equity.

MASON CJ: Yes.

MR CONTI:  Your Honours, what one has to be able to find, to

make subsection (2) operate, is the ongoing holder

having an interest which is of a value of not less

than one-quarter of the value of the property. Now,

S1T3/8/RB	28	14/4/89
Glenfield

for practical purposes, how are you going to

measure a one-quarter value unless you are dealing

with undivided fractional interests; interests

directly akin to co-ownership or partnership? Where

one has this circumstance where what exists is a

legal ownership in the property and an equitable

ownership in the property, how can they be described

as undivided fractional interests, and how can

paragraph (b) of subsection (2) be made to work? And

if paragraph (b) cannot be made to work, then

subsection (2) cannot work. And if subsection (2)

cannot work, then one has a situation where

subsection (1) operates without any relief that the

Parliament intended should be available so that

ongoing partners are not subject to the harshness of

the regime every time they lose a partner; every time

a partner withdraws or there is a change.

Your Honours, we would submit that the

fundamental - even granted, for the purpose of the

argument, an option creates an interest in the land -

let us assume that - it does not create an undivided

fractional interest. Unless it does that, then the

regime of subsection (2) will not work or it would

be very difficult to make it work. Subsection (1)

would therefore apply with total force and one would

have, really, the unreal situation where every time a

person enters into an option for the sale of his

business, where the business contains trading stock,

there might be successive options because the purchaser

does an exercise or the opt4on ..... an exercise. Each

time that sort of circumstance may occur then one is
triggering the creation of undivided fractional

interests. How does one deal with those, we have said,

at the balance date?

Your Honours, it is for that reason, we

respectfully submit, that Mr Justice Lockhart clearly·

took the view that the section just could not apply

to this kind of circumstance. And that is not to

say that there may be circumstances beyond partnership,

but not this kind of circumstance.

Can we then turn to deal with the question of

section 51. May I say firstly that it is true that

there was no submission, certainly that I can recall,

put below that 51(1) did not apply because there was

no incurring of the liability at the time the sale

was resolved upon in November 1977 in favour of the

holder of the option. And, of course, at that
particular period of time, the option was not held by

the option holder who ultimately received the money. ··

The company Minniconju did not receive the transfer

of the option until 1979 and clearly that is an argunent

that passed us by. If I may say by way of

explanation, of course, when one was dealing right

throughout with none arm's length situations, that

S1T3/9/RB	29	14/4/89
Glenfield

particular circumstance was one that we missed.

We certainly put the JAMES FLOOD argument and I have

looked at my written submissions to the Full Court

below and the JAMES FLOOD argument was put under

section 51 below but not directly in the way in which

the issue has come up today.

Your Honours, we would submit my learned friend

cannot put the submission that the circumstances in

this - the finding in this case under section 51(1)

cannot stand with JOHN. JOHN was concerned about

a clear situation of a purchase price of trading stock.
The dividend was the cost of purchase of the bonus

shares. We are not talking here about a purchase price for the land; we are not talking about here a

development cost; a subdivision cost; it is not a

cost in any way connected with the acquisition,

maintenance or improvement of this trading stock, as certain kinds of charges that one can imagine where

land is trading stock where the cost of getting it in

would be deductible.

One thinks, for example, of a land tax charge or

a council rate charge. That sort of thing one can

understand. Not a mortgage charge, for a vendor to

discharge the proceeds of his mortgage over his land,

on the sale of the land being trading stock. That

does not become a cost of sale, obviously. My

leamed friend does not gain anything by saying this

is in the nature of an encumbrance as such and therefore

it must be part of the cost of, as it were, earning

the assessable income; you have got to get it in

beforehand.

In this particular circumstance, what one had

was an option which necessarily was never going to be

exercised because to have exercised that option would

have defeated the whole of the scheme. It defeated

..	,,,:z~ the notion of bringing in this company Ehkuk as a	5 is;,trustee for discretionary trusts and that particular
'"

aspect of the planning. Ehkuk started to sell lots

t:!-n subdivision in June 1977, even before the

./.transaction of sale was documented in October 1977.

·· It was inconceivable that all of those arm's length

transactions would have to be brought undone so that

Minniconju could exercise the option and somehow or

other take over the ownership of the land. It was

beyond reality that the option was going to be

exercised. That is the basis upon which Their Honours

below held that there was no connection, no real

connection with assessable income, and that involved

no new principles of law. It was just an application

of existing principles to facts and we submit,

therefore, that there was no question of general

importance arise.

SlT3/10/RB	30	14/4/89
Glenfield

MASON CJ:  I do not quite understand that at the moment,

Mr Conti. You say that the Full Court of the

Federal Court took the view the option was never going to be exercised?

MR CONTI:	Yes.
MASON CJ:	One treated it as if it did not exist.
MR CONTI:	No, it was put on this basis.  To get rid of the

option by an expense under section 51(1) it had to

be shown that a liability was being, as it were,

incurred in relation to that expenditure.

MASON CJ: That there was a liability to incur that expenditure?

MR CONTI: Well, certainly - I do not know whether it can be

fairly said that the Full Court made an distinction

between incurring a liability - contractual liability

and incurring expenditure.	We put the JAMES FLOOD
argument below on the basis that	expenditure was
not being incurred.	The approach of the Full - - -

MASON CJ: Well, expenditure was incurred, was it not? I mean,

money was paid out.

MR CONTI:  Yes, but in the following fiscal year, that is so,

Your Honour.

MASON CJ:  So your submission was, expenditure incurred, but not

in the relevant income year.

MR CONTI: That was the FLOOD argument. The other argument

is, this is not in truth or in substance or in reality

expenditure to get rid of a charge or to get in

something which was necessary in order to effect a

sale because it was an option, at that time held by

persons who were compliant, to use the finding of

the judge below, with the wishes of the Glenfield

company; that it was something which was allowed to,

as it were, continue to exist for no purpose other

than - to serve no connnercial purpose, serve no
purpose related to the maintenance or improvement of

trading stock. It was allowed to continue only for

this collateral purpose of possibly producing a tax

advantage in the events which happened.

In those circumstances, the view of the Full

Court was that expenditure, if it was incurred in the

relevant fiscal year, was not expenditure incurred in
relation to a cost of trading stock and a cost of
trading stock can, of course, be in some circumstances
a cost which is involved with the sale of the trading
stock such as connnission and so on, but it was not a

true cost because existence of the option never

served a purpose relevant to the business of land

development of Glenfield.

SlT3/ll/RB	31	14/4/89
Glenfield

That was the way it was put. That was a

finding open, according to ordinary principles, and

therefore the case does not involve any new issues
of principle involv±ng section 51(1) or its

application.

Your Honours, so far as the section 260 point

is concerned, my learned friend does not get to the
section 260 point unless he can show the 51

expenditure was truly deductible. If the finding below

is plainly right, then the section 260 issue which my

learned friend would submit is open still for

consideration will not arise in connection with the

appeal.

Your Honours, they are·essentially the submissions

which we would seek to put in support of the rejection,

in our submission, of the application for special leave.

MASON CJ: Thank you, Mr Conti.	Yes, Mr Bainton.
MR BAINTON:	Your Honour, the need to get round what appears to

be the plain words of section 36A by the type of

argument that was put to Your Honour would seem rather

to be perhaps a reason for granting leave than

rejecting it because that is a question that will have

to be disposed of at some stage in some case.

When my friend came to the section 51(1) argument

he said that there was really no difference between

this situation and the principle in paying off a

mortgage to enable you to get the full purchase price

on the sale of land. There is a very considerable

difference. The receipt from the discharge of a

mortgage would almost always be a receipt on a
capital account. It is not deductible for that reason,
but logic dictates that if you do not discharge the

mortgage, you do not get the full value for the land.

You can sell it subject to the mortgage but for a lesser amount.

The next submission was that this option was

intended to be exercised. Well, if one looks

at any of the judgments, the retention of the option

was necessary as an exercisable option if what I

described earlier as the motivation of the transfer

was to .be implemented. It must have been intended to

remain as something that would, if necessary, be

exercised.

If an agreement of either of the descriptions

that was canvassed by His Honour Mr Justice Brennan was entered into in the year of income, JAMES FLOOD

has got nothing to do with that. It deals with
accruals of expenses that have not yet been incurred
but one recognizes is going to be incurred in the

future. If there was an agreement of the nature

SlT3/12/RB	32	14/4/89
Glenfield

the outgotng was incurred - and I think it is

NEVILLE's case - in the year of income in which the

agreement was made, it is irrelevant to that that it

was not actually met until a future time.

MASON CJ:  Thank you, Mr Bainton.

The applicant seeks special leave to appeal

on the ground that important questions concerning

the interpretation and application of sections 36A

and 51 of the INCOME TAX ASSESSMENT ACT will arise

for decision. To the extent to which the decision

of the Full Court of the Federal Court rests on a

rejection of the applicant's argument based on

section 36A, we do not consider that the decision

is attended with sufficient doubt to warrant the

grant of special leave.

As for the section 51 point, we consider that

the unusual and complex facts of this case,

including the peculiar and uncertain character of

the transactions which were involved, make it an

unsuitable vehicle for the determination by this

Court of the question sought to be raised.

The appliiation for special leave is therefore

refused.

MR CONTI:  We ask for an order for costs, Your Honour.

MASON CJ: Yes. You do not resist costs, Mr Bainton? The

application is refused with costs.

AT 11.26 AM THE MATTER WAS ADJOURNED SINE DIE

S1T3/13/RB	33	14/4/89
Glenfield