Glenfield Estates Pty Limited v The Commissioner of Taxation

[1988] HCATrans 316

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

WILSON J TOOHEY J

Glenfield

TRANSCRUT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 9 DECEMBER 1988, AT 9.40 AM

Copyright in the High Court of Australia

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MR R.J. BAINTON, QC: In this matter, 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

MR R.B. WILSON for cne respondent. (instructed by

the Australian Government Solicitor)

MR BAINTON:  Your Honour, we have taken the opportunity of

reducing the steps in the argument to writing. Might

I hand you that?

MASON CJ: Thank you.

MR BAINTON:  Your Honours, the paragraph num1::ered 1 endeavours

to isolate the relevant facts. Apart from those in

paragraph (h), the others could appropriately be

described as "common ground".

MASON CJ: Paragraph (h) is the only one as to - - -

MR BAINTON: Paragraph (h) was the subject, I understand, of

dispute at the trial but it is the subject of a

particular finding. The finding in the judgment of

the trial judge is at page 18 and it is reproduced

at page 53 in the judgment of the Federal Court.

The finding was accepted by the Federal Court, as it

had to be. It depended upon acceptance of witnesses.

It is the second paragraph on page 18 of the appeal book, Your Honours.

In essence, the situation is that in the year of

income in question, a contract was entered into to

sell a parcel of land that was already the subject of

an option. The sale price was the then market value
and it was a term of the contract that the option,

in effect, had to be got in just the same as
a mortgage would need to have been discharged had the

land been encumbered. The question became whether

or not, in the circumstances, the cost of, in effect,

buying back the option, was a deduction allowable

in the year of income first, by reason of the operation

of section 51(1) which means it was necessary to

determine whether that expenditure was incurred, in

effect, in earning the assessable income of that

year, that is, the gross sale price. We have

endeavoured to set out in paragraph numbered 2 what

are the relevant principles in so far as section 51(1)

is concerned.

The submission primarily is that the Federal

Court did not look to see what the effect of the expenditure was on the actual amount of assessable

income derived in the year which it should have done.

The actual amount was the gross sale price which

happened to be the market value at the time of the

parcel of land which was sold.

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Paragraphs nuni:>ered 2 seek to put the argument

with the assistance of an analogy and then to deal

with what is said in MAGNA ALLOYS which as we would

understand it has been accepted in this Court as

correctly setting out the relevant principles for

determining whether a deduction is allowable under

section 51(1).

MASON CJ: Your case involves no challenge to MAGNA ALLOYS.

MR BAINTON:  It accepts that MAGNA ALLOYS correctly sets out

the principle and asserts that that principle simply

was notapplied by the Federal Court in this matter.

Could I hand up some copies of MAGNA ALLOYS so that

I can simply refer the Court to the passages mentioned?

MASON CJ: Yes.

MR BAINTON:  By way of reminder, what was in issue in MAGNA ALLOYS,

of course, was whether some expenditure that could not
be related to any particular item or amount of
assessable income was allowable in the year in question
but in determining whether or not it was, the Court went
to some trouble to set out what it asserted to be the

appropriate principles. What they would relevantly

amount to, in our submission, is this: if the

expenditure can be directly related to a contract

which produces the amount of assessable income,

then one looks to see whether that relationship is

productive of the assessable income or of some part

of the assessable income. It iscnly when you get outside

of situations where there is such a direct relationship

between expenditure and income that you would need to

consider the matters of purpose, motive, whatever the

words is, which were considered at some length in

MAGNA ALLOYS.

But in the course of reaching the decisions that

were reached in that case, Mr Justice Brennan

dealt with the general principles. At page 215,

just below line 30, he begins to talk about matters

of purpose and motive and ends up by saying, just

over the page, before the reference to JOHN FAIRFAX,

that: 

The purpose mentioned in the second limb

is not a purpose imported by the phrase
"incurred in carrying on", but the purpose

of the business in the carrying on of

which the deductible expenditure is

incurred -

which is, in our respectful submission, the correct

princiRle and the very opposite of the principle

appliea in the judgment in the Federal Court from

which leave to appeal is sought.

TOOHEY J:  Mr Bainton, on the applicant's case, are there any

circumstances in which the question of purpose could

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become relevant either to advance or detract from

deductibility of this outgoing?

MR BAINTON: In our submission, no, unless one wanted to

consider section 260 which was not sought to be

applied in the Federal Court for obvious enough reasons;

it had determined otherwise at an earlier time.

But if one is simply looking to section 51(1)

the purpose, in our submission, is quite irrelevant.

All one looks to is to see whether the gross income,
that is the value of the land, was received because
there was an obligation undertaken in the contract

to discharge the option at whatever cost was

involved in doing that.

WILSON J:  Mr Bainton, I may have misunderstood. I had the

impression that the trial judge was affected by

considerations flowing from section 260.

MR BAINTON:  Yes, he was.

MASON CJ: And based his decision on it.

MR BAINTON:  He based his decision on it but, of course, when

it got to the Federal Court, the Federal Court had

determined JANMOOR NOMINEES and held that if a
deduction was otherwise allowable under section 51(1)

section 260 could not operate to deprive the taxpayer

of that deduction.

WILSON J: So, if you were successful in securing leave and

in exposing error in the Full Court's decision,

would you still be confronted with section 260?

MR BAINTON:	I am sorry, I am not sure that I - - -
WILSON J:	If you were successful in gaining leave and exposing

error in the manner in which the Full Court dealt with

it, would you still be confronted by section 260?

MASON CJ:	Mr Conti has got section 260 written all over his face.
WILSON J: Did the Full Court not say it was unnecessary

to -

MR BAINTON:  Yes, I imagine that if we get leave the respondent will

want to rely on section 260. That is a risk I guess we will

have to run but I would rather have hoped that that

question might have been decided by this Court in

another matter before this matter comes on for hearing.

But apart from section 260, the answer to Your Honour

Mr Justice Toohey's question, I think, is that

purpose is irrelevant.

MASON CJ: But, Mr Bainton, before I take up what your oblique

reference to "another matter", I was just going to
raise with you the significance in this case of the

last sentence in the paragraph of Mr Justice Brennan's

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judgment to which you have referred, that is the

last sentence in the paragraph ending at the top of

page 216. Now, the comment made in that sentence

is particularly appropriate to the second limb of

section 51(1). Is it appropriate to the first limb?

MR BAINTON:  No, it would be appropriate, Your Honour, to the

second limb because the first limb was a somewhat

narrow -

MASON CJ:  You say that is sufficient for your purposes because

the judgment seems to be, that you are attacking,

is directed, really, at the totality of subsection (l)?

MR BAINTON:  Yes, this company was carrying on at the relevant

time the business of developing land and subdivision,

that was common ground. So, it is in fact that particular limb that is, in our submission, the very matter that is referred to.

MASON CJ:  I was then going to mention to you the significance

of your oblique reference to JOHN's case. In a sense,

we are, as it were, tilting at unknown windmills

at the present time. It may be that this matter will

be clarified to some extent when the result in JOHN's

case is known.

MR BAINTON:  It is almost certain it will be clarified to some

extent, Your Honour, true.

MASON CJ: Yes, and that makes me wonder,and I am sure it

is a matter that would engage the attention of the

Court in considering this application, whether it

may not be advisable to stand this matter over until

the result in JOHN's case is known.

MR BAINTON:  Your Honour, that is one possibility that we would

consider. The other, perhaps, is to deal with it

now on the basis that section 260 was not relied on

in the Federal Court, bearing in mind that this Court

has always got power to revoke leave if it thinks

it necessary.

MASON CJ: Yes, but it is better, if there is any doubt about

whether leave is ultimately going, not only to be

granted but to be maintained, to defer the grant

of special leave in the first instance.

MR BAINTON:  Your Honour, we would prefer, I think, to put it

the other way if we can.

MASON CJ: For obvious reasons. Then you would oppose any

revocation of the grant.

MR BAINTON: Yes, I understand what Your Honour is putting. It

is really a matter for the Court to determine.

We are here; we have some arguments; we would prefer

to put them.

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MASON CJ: Yes, I realize that but your argument is preserved

in writing.	It will be maintained in the Court's
records;	the pearls are not lost.

MR BAINTON:  Your Honour, as I say, I am in Your Honour's

hands. The second basis on which leave is sought,

namely, the argument of section 36 and 36A

is probably independent of section 260.

MASON CJ: Yes, it may well be, that is quite true but it looks

to me as if that argument is, at the moment, a
subsidiary argument. It is the first argument that

looks to me to be the argument that has, perhaps,

more importance of statute.

MR BAINTON:  It has got more general importance than the second

one but the second one is perhaps, if I may be so bold

to suggest, a little clearer.

MASON CJ: Well, it may be. It is only degrees of clarity or•

obscurity, is it noti We might hear from Mr Conti,

I think, at this stage, Mr Bainton, and see what he says.

Mr Conti, what is your attitude about this

matter standing down until the decision in JOHN is

delivered?

MR CONTI:  We would not oppose that course because, in fact,

before the Federal Court we did, in our written

submissions, pursue the section 260 issue but we

pursued it as a matter of secondary importance.

Our primary case was section 51(1) and if leave
was granted we would certainly be wanting to argue

section 260 on appeal. So, we have got no objection

to that course being taken.

MASON CJ:  Is there anything you want to say in response to

what Mr Bainton has already said as to his first point?

MR CONTI:  Your Honours, only this: that firstly, it is not

correct to say that this, as it were, subsisting or

extant option was analogous to a mortgage because as

the trial judge found below everyone of the option

holders was compliant to the wishes of the applicant,

Glenfield, itself. So that Glenfield was, in reality,

to determine whether the option was going to be

exercised or not. It did not have to leave it

outstanding and then treat it, as it were, as a

kind of encumbrance.

The second matter we wish to say is this, that

when His Honour Mr Justice Lockhart below analysed

the section 51(1) cases, he did so by adopting all of

the traditional statements of principle. In so far

as we read what he said, he referred to purpose and

even referred, perhaps, to subjective purpose - I

do not recall him using the word "motive" - he accepted

that that was not a test but, as it were, one's purpose

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can assist to characterize the payment and

determine whether it has sufficient nexus or
connection to the gaining of assessable income

and, in so doing, we submit that he travelled

along traditional paths. It was a similar path

he took as Your Honour Mr Justice Toohey took when
you were a member in the Federal Court in ILBURY's

cast - you may recall the PREPAID INTEREST case -

and the question, as it were, of the tax purpose

was there analysed.

That is all we would wish to say about that.

We would submit that section 51(1) was applied,

according to traditional principle, albeit to

unique circumstances, and that therefore

no question of general importance arises.

MASON CJ: Yes, thank you, Mr Conti.

Mr Bainton, the Court is minded to stand this

motion over to a motion day in the future after

the judgment in JOHN is handed down. We think

that is a more appropriate way of dealing with the

matter than granting leave now and revoking it. In saying that, I am not implying that we would

necessarily grant leave in any event on a full

argument.

One question I might ask you, however, is what

about ILBURY? Will you be challenging ILBURY in

any way if special leave is granted?

MR BAINTON:  That may depend upon what reliance is put on it.

We would see this as a different case from ILBURY.

MASON CJ: Very well. In the circumstances,we will stand

this matter over to a date to be fixed.

AT 9.58 AM THE MATTER WAS ADJOURNED

TO A DATE TO BE FIXED

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