Hepples v Federal Commissioner of Taxation

Re: PETER WILLIAM HEPPLES
And: COMMISSIONER OF TAXATION
No. G627 of 1989
FED No. 296
Taxation

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Gummow(2) and Hill(3) JJ.

CATCHWORDS

Taxation - Capital Gains Tax - Application of sub-ss. 160M(6) and 160M(7) of the Income Tax Assessment Act 1936 to a payment made for entry into a restrictive covenant - Definition of "asset" in s. 160A - Whether "any other right" in para. 160A(a) can encompass "human rights" or only rights of a proprietary nature - Meaning of "disposal" in Part IIIA - Whether s. 160M(6) can only apply to disposals of assets which have emerged from a previously existing asset - Whether the existing asset referred to in para. 160M(7)(a) must be owned by the taxpayer - Whether sub-s. 160ZA(4) is effective in preventing double taxation.

Capital Gains Tax Act 1979 (U.K.): s. 20

Finance Act 1965 (U.K.): s. 22

Income Tax Assessment Act 1936: Part IIIA, ss. 160A, 160M(6), 160M(7) and 160ZA(4).

HEARING

SYDNEY

#DATE 28:6:1990

Counsel and Solicitors Mr D H Bloom QC and
for Applicant: Mr B J Sullivan instructed by

Messrs Clayton Utz

Counsel and Solicitors Mr B J Shaw QC and Mr A H
for Respondent: Slater instructed by the

Australian Government Solicitor

ORDER

The Court answers the questions on the stated case as follows:

Question A

Was there, in consequence of the facts recited in the special case, included in the assessable income of the applicant for the year of income ended 30 June 1986:

(a) an amount of $40,000; or

(b) some other amount and if so, what amount,

pursuant to sub-s. 160ZO(1) of the Income Tax Assessment Act 1986?

Answer

(a) Yes

(b) This question does not arise for consideration.

Question B

Who should pay the costs of the proceedings?
Answer

This question does not arise because counsel for the parties informed us that it had been agreed by the parties that each party should pay his own costs of the proceeding before this Court.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This case raises for the first time the construction of Part IIIA of the Income Tax Assessment Act 1936 ("the Act") relating to capital gains and capital losses and in particular sub-ss. 160M(6) and (7) which concern the deemed disposal of assets.

The matter comes to this Full Court as a case stated by the President of the Administrative Appeals Tribunal under s. 45 of the Administrative Appeals Tribunal Act 1975 which states the following facts as agreed to by the parties:

"1. In or about late August or early September 1985 the Applicant was first employed by Hunter Douglas Limited ('Hunter Douglas'). He was employed as the Marketing Director/General Manager of the Window Furnishing Division of that company. On or about 1 September 1985 the Applicant and Hunter Douglas entered into a written agreement (`the Employment Agreement') governing the terms and conditions of the employment.

2. In the course of his employment with Hunter Douglas the Applicant was responsible for management of the operations of the Window Furnishing Division of Hunter Douglas. The business activities of that Division accounted for a very significant proportion (approximately two-thirds) of the total business activities of Hunter Douglas.

3. On or about 27 June 1986, the Applicant entered into a Deed with Hunter Douglas, the purpose of which was recited in the Deed as being 'to record the terms upon which Hepples has agreed, in consideration of the covenants of Hunter Douglas herein contained and from and after the date of his ceasing to be employed by Hunter Douglas, to be restrained from carrying on or being interested in any business or other undertaking or activity as more particularly herein referred to' (hereinafter referred to as 'the Restrictive Covenant Deed'). A true copy of the Restrictive Covenant Deed is annexed to this Stated Case and marked 'A'.

4. It was orally agreed between the Applicant and Hunter Douglas that the restraint of trade imposed by the Employment Agreement should cease to have any effect from the date of entry into the Restrictive Covenant Deed.

5. On or about 27 June 1986, and before 30 June 1986, Hunter Douglas paid to the Applicant an amount of $40,000, pursuant to the terms of the Restrictive Covenant Deed.

6. The taxpayer did not incur any capital loss during the year of income ended 30 June 1986."

The Deed, a copy of which is referred to as annexure "A" to the special case, is between Hunter Douglas Limited and the applicant and it reads as follows:

"WHEREAS : -

(a) Hepples is presently employed by and has acted as a Director and General Manager Window Covering Products of Hunter Douglas.

(b) Hepples and Hunter Douglas have agreed to enter into this Deed to record the terms upon which Hepples has agreed, consideration of the covenants of Hunter Douglas herein contained and from and after the date of his ceasing to be employed by Hunter Douglas, to be restrained from carrying on or being interested in any business or other undertaking or activity as more particularly herein referred to. NOW THIS DEED WITNESSETH as follows:-

1. In consideration of Hepples entering into this Deed and provided that he shall at all times observe and fulfil all of the terms covenants and conditions hereof Hunter Douglas shall pay Hepples the sum of FORTY THOUSAND DOLLARS

($40,000.00) upon signing of this Deed.

2. In consideration of Hunter Douglas entering into this Deed, Hepples covenants with Hunter Douglas or any successor, subsidiary or affiliate thereof (hereinafter called 'the Associated Companies') that for a period of TWO (2) years immediately following the moment of the termination of his employment by Hunter Douglas within the territorial limits of Australia, he will continue to be bound by the Clauses 2, 3, 4 and 5 of his Employment Agreement; copy of said Clauses are attached to this Deed as Schedule 'A'.

3. During the term hereof, Hepples shall be entitled to request Hunter Douglas' acknowledgement that the terms of this Deed shall no longer apply in relation to any products which Hunter Douglas and/or its Associated Companies has ceased to produce or license which acknowledgement shall not be unreasonably withheld.

4. Hepples acknowledges and agrees that this Deed has been entered into by him not only in favour of Hunter Douglas but in favour of each of the Associated Companies for their respective rights and interests the intent that each of the same shall be entitled to enforce the obligations of this Deed against him to the extent to which the protection of the business and assets may require.

5. Hunter Douglas covenants to pay all costs of and incidental to the preparation execution and stamping hereof and any stamp duty payable hereon. SCHEDULE 'A'

2. Special Processes and Trade Secrets

(1) The Employee covenants with the Employer and each of the Companies that during the continuance of his employment and for a period of ( ) years after termination thereof (from any cause whatsoever):

(a) he shall not (except in the proper course of his duties) divulge to any person, firm or corporation any information concerning the Special Processes,

(b) he shall not utilise or turn to his own account whether or not in association or co-operation with any other party any of the Special Processes.

(2) The Employee covenants with the Employer and each of the Companies that during the continuance of his employment and for a period of TWO (2) years after termination thereof (from any cause whatsoever):

(a) he shall not (except in the proper course of his duties) divulge to any person, firm or corporation any information concerning the Trade Secrets,

(b) he shall not utilise or turn to his own account whether or not in association or co-operation with any other party any of the Trade Secrets.

3. Non-Competition The Employee covenants with the Employer that upon the termination of his employment (from any cause whatsoever) and for the period described in Schedule VIII and within the territorial limits of Australia:

(1) he will not either on his own behalf or in partnership or as an employee directly or indirectly engage in any business or occupation in which he or his Employer will manufacture distribute or sell to any party any of the goods or perform any of the operations listed in Schedule II.

(2) . . .

an independent contractor or consultant or . . . or of assistance in such employment or engagement by any other party, of any person who at any time in the period of the two (2) years immediately prior to the termination of the Employee's employment has been an employee of the Employer.

(3) he will not by himself or any servant or agent canvass or solicit for himself or any other person or any firm or corporation any customer of the Employer, who was a customer or a prospective customer of the Employer during the term of the Employee's employment and with whom the Employee had during the course of his employment dealings or negotiations.

4. Inventions

(1) The Employee will treat as confidential and promptly disclose to the Employer in writing any inventions, formulae, special processes, techniques, know how and the like (hereinafter called 'the Inventions') which are discovered, conceived or developed by him, either alone or in conjunction with others:

(a) during the course of his employment,

(b) or at any time resulting from use or utilisation of the Special Processes, PROVIDED THAT the Inventions relate to or are useful in the business of the Employer.

(2) The Employee will assign and convey to the Employer or as it may direct all his interest in the Inventions and perform all such acts (at no expense to himself) which the Employer may consider necessary or helpful in obtaining or maintaining patent or like protection in the Commonwealth of Australia and foreign countries for all of the said Inventions.

(3) The Employee hereby irrevocably appoints the Employer to be his attorney in his name and on his behalf to execute and do any such instrument or thing and generally to use his name for the purpose of giving to the Employer or nominee the full benefit of the provisions of this Clause. A certificate in writing signed by any director or the secretary of the Employer that any instrument or act falls within the authority hereby conferred shall be conclusive evidence that such is the case.

5. Severability

. . .

THE SCHEDULES HEREINBEFORE MENTIONED SCHEDULE 1

. . ."

The learned President of the Administrative Appeals Tribunal stated the following questions of law to be determined by the Full Court:-

"(A) Was there, in consequence of the facts recited herein, included in the assessable income of the Applicant for the year of income ended 30 June 1986 -

(a) an amount of $40,000; or

(b) some other amount, and if so, what amount, pursuant to sub-section 160ZO(1) of the Income Tax Assessment Act, 1936?

(B) Who should pay the costs of these proceedings?"

The Act was amended by the inclusion of Part IIIA which introduces a tax on capital gains applying to assets acquired on or after 20 September 1985. In determining whether a gain has been made on the disposal of an asset that has been held for at least twelve months the asset's cost base is adjusted for inflation by reference to the Consumer Price Index. Hence, only gains in excess of the inflation rate on assets are subject to tax. Assets disposed of within twelve months of acquisition are subject to the tax if disposed of for more than the cost base of the asset.
Part IIIA commences with s. 160A and concludes with s. 160ZZS. Broadly speaking a liability to capital gains tax arises where:

. an asset which is not exempt was acquired on or after 20 September 1985;

. that asset was disposed of on or after 20 September 1985;

. the owner of the asset immediately before its disposal was a resident of Australia or the asset was a "taxable Australian asset"; and . the asset is not in the owner's hands trading stock or subject to s. 26AAA or other form of excluded asset.

Central to the operation of the capital gains tax provisions are the concepts of an "asset", "disposal" and "acquisition" of assets. Before turning to these concepts it is helpful to state in summary form the scheme of Part IIIA.
Division I of Part IIIA contains a number of definitions. The word "asset" is defined for the purposes of Part IIIA by s. 160A broadly to mean any form of property and includes

"(a) an option, a debt, a chose in action, any other right, goodwill or any other form of incorporeal property;

(b) currency of a foreign country; and

(c) any form of property created or constructed, or otherwise coming to be owned without being acquired, but does not include a motor vehicle of a kind mentioned in para. 82AF(2)(a)."

Section 160B defines the terms "personal-use asset", "listed personal-use asset" and "non listed personal-use asset" for the purposes of the Part. "Personal-use asset" is defined to include assets owned by a taxpayer and used or kept primarily for the personal use of enjoyment of the taxpayer or associates of the taxpayer. "Non listed personal-use asset" is an expression defined by sub-s. 160B(3) as meaning "a personal-use asset other than a listed personal-use asset".
Division 2 of Part IIIA states that that Part applies to the disposal of assets including what is said to constitute the disposal and acquisition of an asset, the treatment of composite assets, part disposal of assets and the treatment of deceased estates.
Sub-section 160L(1) ensures that Part IIIA applies to every disposal on or after 20 September 1985 of an asset wherever situate which immediately before the disposal was owned by an Australian resident or by a person in the capacity of a trustee of a resident trust estate or of a resident unit trust if the asset was acquired by that person on or after 20 September 1985. This equates the general position under the Act that Australian residents are subject to income tax on income both within and outside Australia.
Sub-section 160L(2) relates to the disposal of taxable Australian assets by non-residents and corresponds generally with the position under the Act that non-residents of Australia are subject to income tax on income from sources in Australia.
Sub-sections 160L(3)-(7) relate to certain disposals of assets to which Part IIIA will not apply.
Section 160M contains provisions to determine what will constitute a disposal and an acquisition of an asset for the purposes of Part IIIA. Broadly speaking, there is a disposal of an asset and an acquisition of asset when there is a change in the ownership of the asset (sub-s. 160M(1)). Where a change occurs in the ownership of an asset, the change is deemed for the purposes of Part IIIA to have effected the disposal of the asset by the person who owned it immediately before the change and an acquisition of an asset by the person who owned it immediately after the change (sub-s. 160M(1)). This is the general rule which is expressly made subject to other provisions of Part IIIA.
Sub-section 160M(2) provides that a reference in subsection (1) to a change in the ownership of an asset means a change that has occurred in any way including a change by:

"(a) the execution of an instrument;

(b) the entering into of a transaction;

(c) the transmission of the asset by operation of law;

(d) the delivery of the asset;

(e) the doing of any other act or thing;

(f) the occurrence of any event."

Sub-section 160M(3) provides that, without limiting the generality of subsection (2), there are four circumstances where a change shall be taken to have occurred in the ownership of an asset, namely:

"(a) by declaration of trust in relation to the asset under which the beneficiary is absolutely entitled to the asset as against the trustee;

(b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset;

(c) in the case of an asset being a share in or a debenture of a company - by the redemption in whole or in part, or the cancellation, of the share or debenture; or

(d) subject to sub-s. (4) where a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person.

Sub-section 160M(4) contains a proviso to the operation of para. 160M(3)(d) to the effect that if the period for which a person referred to in that paragraph had the use and enjoyment of an asset terminates without title in the asset passing to that person, no change of ownership will be taken to occur.
Sub-section 160M(5) provides for four situations in which, for the purposes of Part IIIA, assets are to be taken to have been acquired being:-

"(a) an issue or allotment of shares in a company constitutes an acquisition of those shares by the person to whom they were issued or allotted but does not constitute a disposal of the shares by the company;

(aa) an issue of shares in a unit trust by the trustee of the unit trust constitutes an acquisition of the units by the person to whom they were issued but does not constitute a disposal of units by the trustee of the unit trust;

(b) the construction of an asset by or for a person constitutes the acquisition of the asset by the person; and

(c) the creation of an asset by or for a person constitutes the acquisition of the asset by the person."

Sub-section 160M(6) and (7) are the crucial provisions for present purposes. Sub-section (6) is in the following terms:

"160M(6) A disposal of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal, constitutes a disposal of the asset for the purposes of this Part, but the person who so disposes of the asset shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset."

Sub-section 160M(7) also applies, but subject to the other provisions of Part IIIA, to situations where there is a disposal of an asset created by the disposal. It deems a disposal of an asset to have occurred where a taxpayer receives or becomes entitled to receive an amount of money or other consideration for the forfeiture or surrender of a right or for refraining from exercising the right or receives consideration for the use or exploitation of an asset. The sub-section is in the following terms:

"160M(7) Without limiting the generality of sub-section (2) but subject to the other provisions of this Part, where -

(a) an act or transaction has taken place in relation to an asset or an event affecting an asset has occurred; and

(b) a person has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration -

(i) in the case of an asset being a right - in return for forfeiture or surrender of the right or for refraining from exercising the right; or

(ii) for use or exploitation of the asset, the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal -

(c) the money or other consideration constitutes the consideration in respect of the disposal; and

(d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a),

(b), (c) or (d), (2)(a), (b), (c) or

(d) or (3)(a), (b), (c) or (d) in respect of the asset."

Sub-sections 160M(8), (9), (10) and (11) apply in cases where a resident taxpayer, resident trust estate, resident unit trust, or resident partnership ceases to be a resident of Australia. As mentioned earlier resident taxpayers are liable to tax on capital gains on the disposal of assets wherever situated whilst non-residents are liable to tax on capital gains of a disposal taxable Australian assets only. These provisions are inserted to ensure that tax on gains on assets other than taxable Australian assets that accrued while the owner was a resident of Australia cannot be avoided by the owner acquiring non-resident status. This objective is achieved by the sub-sections deeming there to have been a disposal of all the assets owned by the taxpayer (sub-s. (8)), resident trust estates (sub-s. (9)), resident unit trusts (sub-s. (10)) and resident partnerships (sub-s. (11)), other than taxable Australian assets or assets acquired before 20 September 1985 to which Part IIIA does not apply, at the time when the taxpayer, trust estate, unit trust or partnership ceases to be resident. Hence, where a resident taxpayer ceases to be a resident of Australia on or after 20 September 1985 para. 160M(8)(a) deems every asset owned by the taxpayer immediately before the relevant time, other than taxable Australian assets as defined in s. 160T, assets acquired by the taxpayer before 20 September 1985 and assets to which sub-ss. (9), (10) or (11) applies, to have been disposed of at the time when the taxpayer ceases to be a resident.
Paragraph 160M(8)(b) applies so that every asset deemed to have been disposed of by the operation of para. 160M(8)(a) is deemed to have been disposed of for consideration equal to the market value of the asset at the relevant time.
Sub-sections 160M(12), (13), (14) and (15) apply to cases where a non-resident taxpayer and certain other persons become residents of Australia. The sub-sections apply to deem every asset owned by the non-resident taxpayer to have been acquired by the taxpayer at the time of becoming resident.
Section 160N deals with the situation where assets are lost or destroyed in whole or in part; it deems the loss or destruction to constitute a disposal of the asset or the relevant part of the asset as the case may be.
Section 160R provides that for, the purposes of Part IIIA, a reference to a disposal of an asset includes, unless the contrary intention appears, a reference to a disposal of part of an asset.
Section 160U specifies the rules which govern the ascertainment of the time of acquisition or disposal of an asset for the purposes of Part IIIA. Sub-section 160U(6) applies in relation to the creation of assets and it provides:

"160U(6) Where the asset was created by a person otherwise than pursuant to a contract under which the person created the asset for another person, the asset shall be taken to have been acquired by the first-mentioned person -

(a) if the asset did not exist (either by itself or as part of another asset) before the disposal - immediately before the asset was disposed of; or

(b) in any other case - at the time of commencement of work on, or of work that resulted in, the creation of the asset."

Sub-section 160U(6) does not apply where an asset is created by a person pursuant to a contract for another person. In those circumstances the date of acquisition of the asset is determined in accordance with sub-s. 160U(3).
The final provision to which reference need be made is s. 160ZO which requires a net capital gain realised by a taxpayer in any year to be included in the taxpayer's assessable income for that year. It is s. 160ZC which determines whether there is a net capital gain in relation to the taxpayer in a year of income. Sub-section 160ZO(2) provides:

"160ZO(2) A net capital loss that was incurred by a taxpayer in respect of a year of income shall be taken into account in accordance with section 160ZC but is not otherwise allowable to the taxpayer as a deduction under this Act in respect of any year of income."

I turn to the definition of "asset" in s. 160A the terms of which are set out earlier. This definition was taken substantially from s. 19 of the Capital Gains Tax Act 1979 (U.K.). The reference to "any other right" in para. 160A(a) is in my opinion to be construed as a reference to other rights of a proprietary nature; c.f. The Commissioner of Stamp Duties (New South Wales) v. Yeend (1929) 43 CLR 235 with respect to the word "property" in s. 3 of the Stamp Duties Act 1920 (NSW); and McCaughey v The Commissioner of Stamp Duties (NSW) (1945) 46 SR NSW 192 which concerned s. 102(1)(a) of the Stamp Duties Act 1920 (NSW). Jordan C.J. said in McCaughey at 201:

"The word property is used in different senses. It may denote either objects of proprietary rights, such as pieces of land, domesticated animals and machines; or the proprietary rights themselves . . . In common parlance it is usually employed in the former sense but in the language of jurisprudence the latter."

See also McClure's Case (1947) SR NSW 93 and Commissioner of Stamp Duties v J.V. (Crows Nest) Pty. Ltd. (1986) 17 NSWLR 529. But in O'Brien v Bensons Hosiery (Holdings) Limited (1980) AC 562, which concerned the Capital Gains Tax Act 1979 (UK), the House of Lords, in overruling the Court of Appeal, held that the rights of an employer under a contract for personal services were "property" and "assets" for the purposes of the United Kingdom capital gains tax legislation.

An interesting question arises whether the expression "any other right" in para. 160A(a) can encompass a concept such as a "human right" or a "right to work". See "Income Taxation: an Institution in Decay" (1986) 3 Australian Tax Forum p 233, a paper presented by Professor Ross Parsons to the Australian Tax Forum Workshop in October 1986. Notwithstanding the wide definition given to the word "asset" in s. 160A in my opinion the expression "any other right" in para. 160A(a) is to be understood as encompassing rights of a proprietary nature and not a broader concept such as a right to work.
The notion of "disposal" is critical to the operation of Part IIIA but, curiously, the term is not defined in the Act. The word "disposal" in relation to an asset is of wide import and includes the act or process of transferring something to or providing something for another. It is a very comprehensive term.
The word "disposal" according to its ordinary meaning presupposes that there is some proprietary right vested in the disposer at the time of the disposal. Ordinarily the creation of an asset must precede its disposal and would not generally comprehend property which was created by the act of disposal. One talks of disposing of something that one has.
In Kirby (Inspector of Taxes) v Thorn E.M.I. plc (1988) 1 WLR 445 the taxpayer was a holding company which had a wholly owned subsidiary which in turn owned all the issued share capital in three companies that carried on business. A United States company sought to acquire all the issued shares in the capital of the three trading companies and an agreement was entered into between the taxpayer, its wholly owned subsidiary and the United States company whereby the taxpayer agreed to procure the sale of the shares in the three companies by its wholly owned subsidiary to the United States company and to enter into a covenant in favour of the United States company that none of the companies in the relevant group would compete with the three companies for a period of five years. The United States company agreed to pay to the taxpayer in consideration for this covenant the sum of $575,000 separately from the payment of the purchase price to the wholly owned subsidiary for its shares in the three trading companies.
The relevant statutory provision was s. 22 of the Finance Act 1965 (U.K.), now s. 20 of the Capital Gains Tax Act 1979 (U.K.), which provides that:

"(a) there is for the purposes of this Act a disposal of assets by their owner where any capital sum derived from assets notwithstanding that no asset is acquired by the person paying the capital sum and this sub-section applies in particular to . . .

(c) capital sums received in return for forfeiture or surrender of rights or for refraining of exercising rights; and

(d) capital sums received as consideration for the use or exportation of assets."

The learned primary Judge (Knox J. (1986) 1 WLR 851) held that s. 22(c) applied only to assets which existed at the time of disposal and did not apply to disposals of assets which consisted of an act of creation of the assets. As the covenant did not exist before the making of the contract it could not be an asset for the purposes of the U.K. Capital Gains Tax Act. His Lordship said at 859:

"The freedom of commercial activity of a person or a company is not in my judgment such an asset as is contemplated by (s. 22). There is no discernible chose in action in such a freedom. Nor is there any other right capable of being directly enforced against any other legal person."

On appeal to the Court of Appeal Nicholls L.J. said at 450:

"Thus the basic structure of the tax is of a charge on gains accruing to a person on disposal of an asset by him. There is no statutory definition of disposal but, having regard to the context, what is envisaged by that expression is a transfer of an asset (i.e. of ownership of an asset) as widely defined, by one person to another. The act presupposes that, immediately prior to the disposal, there was an asset and that the disponor owned it. Section 22(2)(a) then deals with the case where only part of an asset is disposed of, and section 22(2)(b) covers the case where, although the disponor owned an asset before the disposal, what he did by the disposal was not to transfer that asset but to carve or create out of it a right in favour of another. The grant of an easement over land is an obvious example. That also is stated to be a part-disposal. In that instance also the disponor owned a relevant asset prior to the disposal. Consistently with this basic structure of an existing asset owned by the disponor, section 22(3) provides that, where a capital sum is derived from assets, there is a disposal of assets 'by their owner'."

As to the view that disposal ordinarily assumes or involves the notion of a dealing with property remaining in existence and is used in the sense of alienation see Re Levin (Earl) (Deceased) Inland Revenue Commissioners v William Deacon's Bank Limited (1954) 3 All ER 81.
Part IIIA contains a number of provisions that deem a disposal to have taken place. The general provisions are found in s. 160M, predominantly subsections (1), (2), (3), (6), (7) and (8) mentioned earlier. There are also a number of specific provisions which deem a disposal to have occurred in relation to particular types of assets, for example, s. 160ZS which applies to leases, s. 160ZZC(3) (options), s. 160ZZD(3) (industrial property) and s. 160ZZI(4) (life assurance policies).
I turn to sub-ss. 160M(6) and (7).
Subsection 160M(6) is a very obscure statutory provision; but I will do the best I can with it. Read literally, the subsection is concerned with the disposal of an asset that did not exist, either by itself or as part of another asset, before the disposal. The asset is created by the disposal. An asset thus created then falls within the definition of "asset" in para. 160A(c) as "any form of property created or constructed, or otherwise coming to be owned without being acquired". There is then a deemed disposal of such an asset for the purposes of the capital gains tax provisions of the Act. The asset is deemed to have a nil cost because sub-s. 160M(6) excludes from s. 160ZH all the acquisition costs to the taxpayer of the disposal of the asset.
The essential difficulty with subsection (6) is that the word "disposal" where first used cannot be literally construed in the same sense as it is last used. It must bear either its ordinary meaning or one which can be derived from other provisions of the Act.
Doubtless the draftsman of sub-s. (6) sought to overcome the problem to which reference was made by Whiteman and Wheatcroft on Capital Gains Tax 3rd ed para. 6-50 where the learned authors said:

"Where, however, the asset did not exist (either by itself or as part of another asset) before the disposal but is created by the disposal, it is submitted in the absence of special provisions that there is no disposal for capital gains tax. The word 'disposal' must, it is suggested, involve there being some proprietary or beneficial right in the disposer at the time. Hence there will be a distinction between the creation of a contractual right in B's favour, which will not involve a disposal by A, and the creation in favour of B of a right in or over an asset owned by A, which will be a part disposal of that asset. . . . "

See also the 4th edition at para. 7-07 to 7.10.

It is possible that the draftsman of subsection (6) intended to say that the creation of an asset that did not exist is deemed to be a disposal of that asset by its creator. But this is not what the subsection says.
There are certain provisions in the Act which deem certain acts or events to be deemed disposals even though there are no pre-existing assets. For example, s. 160ZS deems the grant of a lease to constitute the disposal by the lessor to the lessee of an asset, namely, the lease. An asset did not exist before the disposal but is created by the disposal.
Section 160ZZC deals with options and provides that the grant of an option shall be deemed to have constituted a disposal of the option at the time when the grant took effect and the option shall be deemed to have been owned by the grantor immediately before the disposal took place (sub-s. 160ZZ(C)(3)).
There is something to be said for the view that sub-s. 160(M)(6) will apply only if another provision of the Act deems there to be a disposal of an asset that did not exist before the disposal but is created by the disposal. That work is not done by sub-s. 160M(6) itself or any other provision of the Act (including in my view s. 160R and s. 160U) save those provisions mentioned relating to leases and options. Since, apart from leases and options, the word "disposal" where first read in the subsection must bear its ordinary meaning it cannot mean the creation of anything; it can only refer to the disposal of something which already exists.
The explanatory memorandum accompanying the bill which became Part IIIA sheds little light on this question, though it does say that sub-section (6)

"would apply for example, to deem there to be a disposal of an asset by a person granting a lease, or giving an option to another person to buy an asset at a future date. The lease or option is an asset created by such a transaction. . . . "

These are the only two examples given in the memorandum, and, so far as my study of the Act reveals, are the only two examples of provisions of the Act that deem there to be a disposal of an asset that did not exist before the disposal, but were created by the disposal. I should say that I find no assistance in resolving this question by sub-s. 160M(5) which deals with the deemed creation of assets, not their disposal.
I have sympathy with the view that sub-section (6) is incomprehensible. Certainly it is not for the courts to redraft sections of Acts. But as Lord Reid said in Amp Incorporated v Utilux Pty. Limited (1972) RPC 103 at 109, of a definition in the Registered Designs Act 1949 (U.K.):

"It seems improbable that the framers of this definition could have intended to insert a provision which has virtually no practical effect, so I look to see whether any other meaning produces a more reasonable result."

Approaching sub-section (6) with these remarks in mind and reading the sub-section in the context of Part IIIA as a whole it seems to me that the draftsman of the sub-section was endeavouring to provide principally that, where the same act or event both creates and disposes of an asset which emerges from a larger asset previously in existence, there is a notional disposal of the new born asset for the purpose of Part IIIA. But there must be an asset in existence before the occurrence of the act or event which gave birth to the new asset. So far as I can see this is the principal work which sub-section (6) can perform. Thus, to mention one example, the grant of an easement may perhaps fall within the sub-section.
Sub-section (6) cannot apply in this case because the covenants given by the applicant did not emerge from any previously existing asset.
In my opinion sub-s. 160M(6) does not support the inclusion in the assessable income of the applicant of the sum of $40,000 or any other sum pursuant to sub-s. 160ZO(1) of the Act.
Although this is the first case to consider these provisions they have attracted the attention of learned writers, including "Capital Gains Tax - The Framework" by Mr. K.J. Burgess, Taxation in Australia, May 1987 651; "Capital Gains Tax" by D.G. Cominos, Taxation in Australia, November 1986; "Capital Gains Tax Review" by G. Leahmann, Taxation in Australia, April 1987 601; Taxation of Capital Gains in Australia by M.P. Dominic assisted by N. Russell; Australian Capital Gains Tax by G.S. Cooper and M.W. Inglis 1986; and see generally with respect to the United Kingdom Act 1979 Whiteman and Wheatcroft on Capital Gains Tax, 4th edition.
I turn to sub-s. 160M(7), the terms of which appear earlier.
Like sub-s. 160M(6), sub-s. 160M(7) excludes from s. 160ZH all the acquisition cost of the relevant asset and allows to be claimed as a cost only the incidental cost to the taxpayer of the disposal of the assets, reduced or indexed as appropriate.
For sub-s. 160M(7) to apply there must be:

. an existing asset; . an act or transaction in relation to that asset or an event effecting that asset; . a person receiving or being entitled to receive money or other consideration by reason of the act, transaction or event.

If these conditions are satisfied, the act, transaction or event constitutes a disposal by the person who received or is entitled to receive the money or other consideration.

Although there must be an existing asset before sub-section (7) can operate, it is not the asset in respect of which the act or transaction took place which is treated by the sub-section as having been disposed of. An asset is deemed to have been created by the disposal and it is that asset which is treated as having been disposed of. The sub-section thus constitutes a deemed disposal and a deemed creation at the same time that it deems the created asset to have been immediately disposed of and to have no base cost.
Sub-section 160M(7) has excited much interest amongst the writers of learned articles including those to which I referred earlier and the paper by J.W. de Wijn's on "Capital Gains Taxation in Australia", editor R. Krever, Law Press, Monash University.
Sub-section (7) is similar to s. 20 of the United Kingdom Capital Gains Tax Act. I need not refer to the similarities and differences. They are discussed in Taxation of Capital Gains in Australia by Dominic and Russell at pp 34-36. I do not see any useful purpose in discussing all the possible sets of facts that could be encompassed by sub-section (7). They will fall to be determined from time to time as various cases arise. The explanatory memorandum gives a number of examples of the acts, transactions or events which it says will be affected by sub-s. (7) including "an amateur sportsman who receives a payment on becoming a professional, the receipt of consideration for entering into exclusive trade tie agreements or restrictive covenants or in connection with the variation, cancellation or breach of business contracts or agency agreements". I do not propose to discuss whether these beliefs of the draftsman correctly reflect the legislation as properly construed and shall confine my observations to the facts of the present case.
I cannot accept the submission of counsel for the applicant that the existing asset on which sub-s (7) operates, as distinct from the deemed asset which emerges at the end of the operation of the deeming provisions, eo instantur with its own disposition, must be the asset of the person who receives or is entitled to receive the money or other consideration. The sub-section itself does not state that this is a requirement. On the contrary, the words used are perfectly general and on their face are intended to encompass the situation of an asset owned by someone other than the person receiving the money subject to taxation. The only indication on the face of the subsection pointing to this restriction is the fact that the examples provided in paras. 160M(7)(i) and (ii) are circumstances in which the asset may be owned by the taxpayer. Plainly these examples are not intended to be exhaustive. If the section was intended to be confined in the manner suggested it would have been simple for the legislature to have said so.
To read into the section a restriction that the asset must be owned by the taxpayer can only be justified if, without it, the section is unworkable, leads to absurd results or otherwise offends what must be the clear intention of the legislature. In my opinion there is not sufficient reason to imply this restriction.
It was argued on behalf of the appellant that one consequence which would be avoided by reading into sub-s. 160M(7) the suggested restriction is the possibility that sub-s. 160ZA(4) would be ineffective in ensuring that the taxpayer is not subjected to double taxation.
Generally sub-s. 160ZA(4) operates to ensure that amounts which are taxable under a section of the Act other than Part IIIA are not also subject to capital gains tax. However, the wording of sub-s. 160ZA(4) is such that the section only comes into play if the amount included in assessable income under a provision of the Act other than Part IIIA was so included "as a result of the disposal of the asset". The argument seems to turn on the possibility that sub-s. 160M(7) could, if interpreted without the restriction, subject to capital gains tax amounts which are also assessable income under ordinary concepts but which cannot properly be said to have arisen as a result of the disposal of the asset.
Once it is recognised that the word "disposal" as used in sub-s. 160ZA(4) must have the same meaning as it does in other sections of Part IIIA the substance of this submission falls away. The act, transaction or event which creates a liability to taxation both under sub-s. 160M(7) and some other section is deemed by sub-s. 160M(7) to constitute a disposal. Thus the pre-condition for the operation of sub-s. 160ZA(4) is satisfied and there is no real threat of double taxation sufficient to support the adoption of a restricted interpretation of sub-s. 160M(7).
Sub-section (7) assumes the existence of an asset, whether it be owned by the person who receives or is entitled to receive the money or other consideration or any other person.
I do not find it necessary to discuss in detail whether a relevant asset is an asset of proprietary nature or may be a human right or a right to work or a right to trade. I am satisfied that, like sub-section (6) that precedes it, sub-section (7) is talking about rights of a proprietary nature: see Kirby v Thorn E.M.I. above and see also Forbes v N.S.W Trotting Club Limited (1979) 143 CLR 242 at 260.
In the present case Hunter Douglas employed the applicant as the Marketing Director/General Manager of its Window Furnishings Division. There was a written contract of employment made on or about 1 September 1985; and on or about 27 June 1986 the applicant and Hunter Douglas entered into the deed by which Hunter Douglas agreed to pay the applicant $40,000 in consideration of his covenant to observe certain restrictive covenants contained in his earlier written employment contract for the period of two years after the cessation of his employment with Hunter Douglas.
The asset of which para. 160M(7)(a) speaks (i.e. the asset in relation to which the relevant asset or transaction is said to have taken place) consists of the trade secrets and trade connections and the goodwill attaching to the business of Hunter Douglas. These were not the assets of the applicant. In my opinion that does not prevent the operation of the sub-section for the reasons already given. The special case does not refer to the existence of goodwill in Hunter Douglas or any of its subsidiaries but it is obvious that goodwill in fact exists and this Court may draw inferences both of fact and of law (Order 50 rule 3 of this Court's Rules).
The grant of the restrictive covenant by the applicant to Hunter Douglas under the deed constitutes an act or transaction that took place in relation to an asset of Hunter Douglas and was also an event that occurred affecting that asset.
The applicant received and was entitled to receive $40,000 under the deed in consideration for his giving the restrictive covenants. The deeming provisions of sub-s. 160M(7) then operate so as to constitute the giving of the restrictive covenant a disposal by the applicant of an asset created by the disposal. The $40,000 is therefore to be treated as the base cost from which only the incidental cost to the applicant of the disposal of the asset, reduced or indexed as the case may be, may be taken into account.
For these reasons the applicant succeeds with respect to the argument before the Court on sub-s. 160M(6) but the respondent succeeds with respect to sub-s. 160M(7).
I would answer the questions submitted to this Full Court as follows:
Question A
Was there, in consequence of the facts recited in the special case, included in the assessable income of the applicant for the year of income ended 30 June 1986:

(a) an amount of $40,000; or

(b) some other amount and if so, what amount,

pursuant to sub-s. 160ZO(1) of the Income Tax Assessment Act 1986?

Answer

(a) Yes

(b) This question does not arise for consideration.

Question B

Who should pay the costs of the proceedings?
Answer
This question does not arise because counsel for the parties informed us that it had been agreed by the parties that each party should pay his own costs of the proceeding before this Court.

JUDGE2

Section 45 of the Administrative Appeals Tribunal Act 1975 ("the AAT Act") provides that the Administrative Appeals Tribunal ("the Tribunal") may refer a question of law arising in a proceeding before the Tribunal to this Court, which shall exercise its jurisdiction sitting as a Full Court. Order 50 of the Federal Court Rules provides that questions referred by the Tribunal under s. 45 of the AAT Act shall be in the form of a special case. The Court may draw from the facts stated and the documents annexed in the special case any inference, whether of fact or law, which might have been drawn from them if proved at a trial: Order 50 Rule 1 (3).

The question of law referred to the Full Court in these proceedings is whether, in consequence of the facts recited in the special case, the sum of $40,000 or some other, and if so what amount, was included in the assessable income of the applicant for the year of income ended 30 June 1986, pursuant to sub-s. 160ZO (1) of the Income Tax Assessment Act 1936 ("the Act").
Section 160ZO appears in Division 4 of Part IIIA of the Act. Part IIIA is headed "Capital Gains and Capital Losses" and provides for what has become popularly known as the capital gains tax. Division 4 is headed "Treatment of Gains and Losses" and s. 160ZO provides:

"160ZO (1) Where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income includes that net capital gain.

(2) A net capital loss that was incurred by a taxpayer in respect of a year of income shall be taken into account in accordance with section 160ZC but is not otherwise allowable to the taxpayer as a deduction under this Act in respect of any year of income."

As will be apparent, s. 160ZO is to be read with a number of other provisions of Part IIIA, but it is sufficient for immediate purposes to refer to sub-s. 160Z (1). This provides:

"160Z (1) Subject to this Part, where an asset other than a personal-use asset has been disposed of during the year of income -

(a) if the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of the asset - a capital gain equal to the excess shall be deemed for the purposes of this Part to have accrued to the taxpayer during the year of income; or

(b) if the reduced cost base to the taxpayer in respect of the asset exceeds the consideration in respect of the disposal - a capital loss equal to the excess shall be deemed for the purposes of this Part to have been incurred by the taxpayer during the year of income."

The expression "personal-use asset" is defined in s. 160B; nothing turns upon it for the purposes of this case. Central to the operation of s. 160Z, and thus to s. 160ZO, is the disposition or disposal of an "asset" during the relevant year of income. Put broadly, the issue that arises in the present proceedings is whether in the year of income ended 30 June 1986, a capital gain accrued to the applicant by reason of a relevant disposition of an asset within the meaning of the Act.

The Hunter Douglas Agreements

In late August or early September 1985, the applicant was first employed by Hunter Douglas Limited ("Hunter Douglas") as the Marketing Director/General Manager of Hunter Douglas' Window Furnishings Division. The business activities of that Division amounted to a very significant proportion (approximately two-thirds) of the total business activities of Hunter Douglas. The applicant was responsible for the management of the operations of that Division.
On or about 1 September 1985, the applicant and Hunter Douglas entered into a written agreement governing the terms and conditions of his employment. That document ("the 1985 Agreement") was not attached to the special case, so its precise terms remain undisclosed. However, on or about 27 June 1986, the applicant and Hunter Douglas entered into a deed ("the 1986 Deed") which recited the applicant's existing employment and an agreement between the parties to record the terms upon which he had agreed to be restrained from carrying on or being interested in any business or other undertaking or activity from and after the date of his ceasing to be employed by Hunter Douglas.
It appears that the 1985 Agreement imposed upon the applicant what in the special case is described as a "restraint of trade" and that it was agreed orally between the parties that that restraint should cease to have any effect from the date of entry into the 1986 Deed. On or about 27 June 1986, that is to say before 30 June 1986, Hunter Douglas paid to the applicant $40,000 pursuant to the terms of the 1986 Deed. The applicant did not incur any capital loss during that year of income.
Clauses 1, 2, 3 and 4 of the 1986 Deed were in the following terms:

"1. In consideration of (the applicant) entering into this Deed and provided that he shall at all times observe and fulfil all of the terms covenants and conditions hereof Hunter Douglas shall pay (the applicant) the sum of FORTY THOUSAND DOLLARS ($40,000.00) upon signing of this Deed.

2. In consideration of Hunter Douglas entering into this Deed, (the applicant) covenants with Hunter Douglas or any successor, subsidiary or affiliate thereof (hereinafter called 'the Associated Companies') that for a period of Two (2) years immediately following the moment of the termination of his employment by Hunter Douglas within the territorial limits of Australia, he will continue to be bound by the Clauses 2, 3, 4 and 5 of (the 1985 Agreement); copy of said Clauses are attached to this Deed as Schedule 'A'.

3. During the term hereof (the applicant) shall be entitled to request Hunter Douglas' acknowledgment that the terms of this Deed shall no longer apply in relation to any products which Hunter Douglas and/or its Associated Companies has (sic) ceased to produce or license which acknowledgment shall not be unreasonably withheld.

4. (The applicant) acknowledges and agrees that this Deed has been entered into by him not only in favour of Hunter Douglas but in favour of each of the Associated Companies for their respective rights and interests to the intent that each of the same shall be entitled to enforce the obligations of this Deed against him to the extent to which the protection of the business and assets may require."

Clause 2 of the 1985 Agreement is headed "Special Processes and Trade Secrets". The term "Special Processes" apparently was defined elsewhere in a portion of the document not before the Court. The same is true of the term "Trade Secrets". Clause 2 was expressed as a covenant between the applicant, Hunter douglas and each of six named companies and of various unnamed "Subsidiary Companies" of Hunter Douglas and of Hunter Douglas Holdings Limited. I infer that all these corporations were included in the expression "the Associated Companies" in clause 2 of the 1986 Deed.
Clause 2 of the 1985 Agreement placed several obligations upon the applicant. During the continuance of his employment, he was not, except in the proper course of his duties, to divulge any information concerning the Special Processes; nor was he to utilise or turn to his own account any of the Special Processes. Further, during the continuance of his employment and also for a period of two years after the termination thereof, from any cause, he was not, except in the proper course of his duties, to divulge any information concerning the Trade Secrets, nor was he to utilise or turn to his own account any of the Trade Secrets.
Clause 3 was headed "Non-Competition". It was a covenant between the applicant and Hunter Douglas imposing obligations effective upon the termination of the applicant's employment, from any cause whatsoever, and effective within the territorial limits of Australia and for a period which does not appear from the materials before us. He was obliged not to engage in any business or occupation in which he or his employer manufactured, distributed or sold to any party any of certain goods or performed any of certain operations. (The identity of the goods and operations again does not appear from the materials before the Court.) Nor was the applicant to canvas or solicit for himself or any other person any customer of Hunter Douglas who was a customer or prospective customer of Hunter Douglas during the term of employment of the applicant, and with whom the applicant had dealings or negotiations during the course of that employment.
Clause 4 was headed "Inventions". It operated in respect of any "inventions, formulae, special processes, techniques, know how and the like" which together were defined as "the Inventions", provided that they related to or were useful in the business of Hunter Douglas and provided that they were discovered, conceived or developed by the applicant alone or in conjunction with others either during the course of his employment or at any time if, in the latter case, the Inventions resulted from use or utilisation of the "Special Processes". The applicant was obliged to assign and convey to Hunter Douglas, or as it might direct, all his interest in the Inventions, and to perform all such acts, at no expense to himself, which Hunter Douglas might consider necessary or helpful in obtaining or maintaining patent or like protection for the Inventions in this country and foreign countries. In aid of these obligations, the applicant appointed Hunter Douglas his attorney.
Clause 5 was a severability clause designed to save as much of the restrictions and limitations imposed upon the applicant by the Deed from the ravages of any invalidity.
Putting to one side any issues arising concerning unpatentable know-how, it may be observed that clause 4, as regards future inventions, puts Hunter Douglas irrevocably and for value in the position of the assignee of the actual inventor, giving it standing to apply for grant of a standard patent or petty patent pursuant to the provisions of the Patents Act 1952 ("the Patents Act"); see paras. (b), (fa) of sub-s. 34 (1) of the Patents Act, and George C. Warner Laboratories Pty Ltd v Chemspray Pty Ltd (1967) 41 ALJR 75. Further, even if, in a given case, the application were made by the applicant rather than Hunter Douglas, s. 64 of the Patents Act would produce the result that the patent should be granted to Hunter Douglas because, within the terms of that section, the applicant apparently had agreed in writing to assign the patent when granted.
It does not appear from the materials before the Court whether during his employment and before 30 June 1986, the applicant had made any invention upon which clause 4 of the 1985 Agreement operated so as to vest forthwith in Hunter Douglas the right to make an application for a grant to it of a patent under the provisions of the Patents Act. As is illustrated by George C. Warner Laboratories Pty Ltd v Chemspray Pty Ltd (supra), the right to apply given by para. (b) of sub-s. 34 (1) extends to an assignee from an assignee of the actual inventor. The result is that upon the hypothesis presently under consideration, Hunter Douglas would have acquired assignable rights to apply for an obtain a patent. The rights of a patentee are personal property capable of assignment and of devolution by operation of law (sub-s. 152 (1) of the Patents Act). If such invention had been made before 30 June 1986, the result of the operation of clause 4 of the 1985 Agreement would have been to vest in Hunter Douglas what in my view would properly have been described as presently existing proprietary rights, namely the right, to the exclusion of the applicant, to apply for and obtain a patent grant.

But this is not suggested by either side to have been the fact, and clause 4 was drawn into the 1986 Deed, the crucial instrument in this litigation, by clause 2 thereof. The result of the 1986 Deed was that clause 4 of the 1985 Agreement was to be read, as at 30 June 1986, as operating only in respect of the future, namely from two years following the termination of the applicant's employment by Hunter Douglas. Thus, at best, clause 4 would be described as effecting what is generally described as an assignment of future property, such that as and when an invention was made thereafter, it would be effective to vest the necessary title in Hunter Douglas. In the meantime, and in particular as at 30 June 1986, there was no presently effective assurance of any property. The effect given in equity to an agreement for value to assign property to be acquired by the assignor in the future is discussed by Windeyer J. in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 24-25, and more recently by Mason C.J. in Booth v The Commissioner of Taxation of the Commonwealth of Australia (1987) 164 CLR 159 at 165-166.
The other obligations imposed by the 1986 Deed would not ordinarily be described as the disposition by the applicant of any asset. In general terms, the 1986 Deed would not appear to disclose the disposal, in the relevant year of income, of an asset other than the $40,000 paid by Hunter Douglas to the taxpayer.
Nevertheless, counsel for the Commissioner submitted that, pursuant to sub-s. 160ZO (1), the sum of $40,000 should be included in the assessable income of the applicant for the year ended 30 June 1986. Counsel for the Commissioner prayed in aid sub-s. 160M (6) and sub-s. 160M (7) as providing alternative or cumulative support for this conclusion. The term "asset" is central to the operation of both provisions, and it is to this that one should first turn.
Section 160A
Section 160A provides:

"160A In this Part, unless the contrary intention appears, 'asset' means any form of property and includes -

(a) an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property;

(b) currency of a foreign country; and

(c) any form of property created or constructed, or otherwise coming to be owned without being acquired, but does not include a motor vehicle of a kind mentioned in paragraph 82AF (2) (a)."

The term "assets" is frequently used to identify that which may be turned to account in order to discharge liabilities; an example of such use is found in sub-s. 215 (3) of the Act; see also Page v The International Agency and Industrial Trust (Limited) (1893) 62 LJ Ch 610 at 612-613. When used in that sense, "assets" readily may be seen as encompassing both proprietary and personal rights.

However, s. 160A proceeds in a different fashion by stating that, in the absence of a contrary intention, "'asset' means any form of property" and includes the subject matter of paras. (a), (b) and (c). The expression "any form of property" is central to the definition. There are various classifications of the forms of property which have had, and have, currency. Real and personal property, movable and immovable property, corporeal and incorporeal property, are but three such classifications. See Salmond, "Jurisprudence", 12th Ed., 1966, 411-424; Paton, "Jurisprudence", 4th Ed., 1972, 505-516, 531-538; Dias, "Jurisprudence", 5th Ed., 1985, 293-298. All of these forms of property are "assets" for the purposes of s. 160A.
Section 160A uses the expression "means. . . and includes" rather than simply "means", or "includes". As a general proposition, the use of the expression "means and includes" indicates an exhaustive explanation of the meaning which for the purposes of the statute must be attached to the term the subject of the definition, and conveys both the idea of enlargement and exclusion: Dilworth v The Commissioner of Stamps (1899) AC 99 at 105-106; Y.Z. Finance Company Pty Limited v Cummings (1964) 109 CLR 395 at 398-399, 401-402, 405. But, in a given context, the draftsman may have used "include" not so much to extend the ordinary meaning of the defined term as to specify as falling within the definition that which might otherwise have been in doubt: Lillyman v Pinkerton (No. 2) (1982) 71 FLR 135 at 138.
This, in my view, is the function served by paras. (a), (b) and (c) of s. 160A. Paragraph (c) makes it clear that the assets with which Part IIIA is concerned extends to those which were created or constructed rather than acquired from another. The reference to currency of a foreign country removes any doubts that might arise from the circumstance that where Australian currency was the money of payment for a transaction, foreign currency would not be proper tender; cf. Re Ikin; Ex parte Same and Lamborghini Tractors of Australia Pty Ltd (1985) 4 FCR 582 at 584, and sub-s. 160K (5) of the Act. Paragraph (a) serves to emphasise that all forms of incorporeal property, that being one form of property, are included within the definition of "asset".
I would not read the expression "any other right" in para. (a) as drawing within the definition merely personal rights, still less "rights" in some popular non-technical sense. One may speak of "the right to work" (Nagle v Feilden (1966) 2 QB 633 at 644-647) or "the right to know" (British Steel Corporation v Granada Television Ltd (1981) AC 1096 at 1168). Constitutional or statutory guarantees may be couched in such terms and a breach of them may give rise to individual rights of action, as in Bivens v Six Unknown Named Agents of Federal Bureau of Narcotics 403 US 388 (1971) (which is qualified by United States v Stanley 97 L Ed 2d 550 (1987). But such terms otherwise have significance in the legal system principally to assist identification of the objects or purposes sought to be served by particular detailed statutory provisions or particular causes of action under the general law.
Thus, in Nokes v Doncaster Amalgamated Collieries Limited (1940) AC 1014 at 1020, Viscount Simon L.C. approached the construction of s. 154 of the Companies Act 1929 (U.K.) by asking whether it provided a statutory exception to "a fundamental principle of our common law - the principle, namely, that a free citizen, in the exercise of his freedom, is entitled to choose the employer whom he promises to serve, so that the right to his services cannot be transferred from one employer to another without his assent". See also the remarks of Lord Atkin, supra at 1026. On the other hand, in Victoria Park Racing and Recreation Grounds Company Limited v Taylor (1937) 58 CLR 479 at 496, Latham C.J., when considering the law of torts as it then stood, said that no "general right of privacy exists"; cf. Privacy Act 1988, Part III.
The point was made in Kirby (Inspector of Taxes) v Thorn EMI plc (1988) 2 All ER 947 at 953 by Nicholls L.J., when dealing with the predecessor to the Capital Gains Tax Act 1979 (U.K.):

"I agree that the liberty or freedom to trade, enjoyed by everyone, is not a form of 'property' within the meaning of s 22. This liberty, or freedom, is a 'right' if that word is given a very wide meaning, as when we speak of a person's 'rights' in a free society. But in s 22 the words used are 'assets' and 'property'. 'Property' is not a term of art, but takes its meaning from its context and from its collocation in the document or Act of Parliament in which it is found and from the mischief with which that Act or document is intended to deal. . . The context in the instant case is a taxing Act which is concerned with assets and with disposals and acquisitions, gains and losses. I can see no reason to doubt that in s 22 'property' bears the meaning of that which is capable of being owned, in the normal legal sense, and that it does not bear the extended meaning that would be needed if it were to include a person's freedom to trade."

See further, Stone, "Legal System And Lawyers' Reasonings", 1964, pp 138-139.

Whilst if the terms of a statute plainly impose a tax they should be given effect, liability should not be inferred from ambiguous words if there is revealed no clear intention to impose the tax: Western Australian Trustee Executor and Agency Company Limited v Commissioner of State Taxation of the State of Western Australia (1980) 147 CLR 119 at 126-127 per Gibbs J., with whom Mason, Aickin and Wilson JJ. agreed; cf. Cooper Brookes (Wollongong) Proprietary Limited v The Commissioner of Taxation (1981) 147 CLR 297 at 323 per Mason, Wilson JJ. The terms which appear in s. 160A of the Act, "option", "debt", "chose in action", "goodwill" and "incorporeal property" are technical and legal terms and must have their legal effect unless the contrary is made clear: Brett v Barr Smith (1919) 26 CLR 87 at 93 per Isaacs J., speaking of s. 54 of the Income Tax Assessment Act 1915 (Cth), the forerunner of s. 261 of the Act.
The present case requires construction of provisions of taxation legislation wherein the term "property" is used; a different approach might well be required if what fell for interpretation was the expression "(t)he acquisition of property on just terms" in s. 51 (xxxi) of the Constitution because this extends to innominate and anomalous interests not recognised as proprietary either at law or in equity, so that the concept of "property" here is not narrowly confined: Bank of New South Wales v The Commonwealth (1948) 76 CLR 1 at 349-350; The Commonwealth v Tasmania (1983) 158 CLR 1 at 246-247.
In my view, the words "any other right" appearing in para. (a) of s. 160A are not to be understood as referable to "rights" in some popular and non-technical sense.
Nor is it sufficient to attract para. (a) of s. 160A that there is a legal right, but one which is personal rather than answering the description of a "form of incorporeal property". Nor should the term "a chose in action" in para. (a) be understood as referring to rights of action which are personal in character in the sense that they are not assignable or transmissible.
In Bailey v The Uniting Church in Australia Property Trust (Qld) (1984) 1 Qd R 42 at 58, McPherson J. referred to definitions of the word "right" as meaning a capacity residing in one to control the actions of others, with the assent and assistance of the state. This is apt to deal with both proprietary and personal rights, but it is perhaps defective in that it does not allow for the vindication of rights in the legal system by defensive rather than offensive action.
In that case, a statute which defined the term "property" as including (not as "meaning", or as "meaning and including"), inter alia, "any other right or interest", was construed as including the right, given pursuant to statute, to the General Assembly of The Presbyterian Church in Queensland to appoint five members to the Council of Emmanuel College within the University of Queensland. On the other hand, in Nokes v Doncaster Amalgamated Collieries Limited (supra), a definition (in sub-s. 154 (4) of the Companies Act 1929 (U.K.)), that "property" included "rights and powers of every description", was read by Viscount Simon L.C. (at 1024) as not including contractual rights which could not be bought, sold, or given away, and by Lord Atkin as adding nothing to the word "property" standing by itself (at 1033). More recently, Gibbs C.J. has warned against confounding ownership with obligation: Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371 at 379.
In my view, the content of para. (a) of sub-s. 160A is all forms of incorporeal property, not personal rights which do not answer that description. Further, "incorporeal property" plainly is a technical term and that consideration supports the conclusion that it is not attached to the expression "any form of property" in s. 160A so as to stretch the reach of that expression to personal rights.
Thus, an equity to have the Court rectify a written contract of personal services would not ordinarily be understood to be a form of incorporeal property. Nor would the right to maintain an action for recovery of unliquidated damages in tort for personal injury. Nor property which by virtue of statute cannot be effectively assigned; see the list in Starke, "Assignments of Choses in Action in Australia" (1972), p 61. Nor the benefit of a contractual obligation where the identity of the person in whose favour the obligation is to be discharged is a matter of importance to the party on whom the obligation rests, as in a contract for personal services; see Tolhurst v The Associated Portland Cement Manufacturers (1900) Limited (1902) 2 KB 660 at 668-669; Bruce v Tyley (1916) 21 CLR 277 at 285, 289-292; Nokes v Doncaster Amalgamated Collieries Limited, supra at 1018-1019.
In the case of a contract for the provision of personal services the person for whom the services were to be tendered might, in the case of breach, have a right to damages or, in a particular case, seek an injunction to restrain breach of a negative covenant (even though the contract was not properly the subject of an order requiring specific performance in any direct sense). But one would treat the plaintiff in such a case as pursuing legal and equitable rights which fell short of any form of incorporeal property and fell outside para. (a) of s. 160A, and thus outside the definition of "asset". Cf. Rapistan Canada Ltd v Minister of National Revenue 48 DLR (3d) 613 at 616-617 (1974); The Federal Commissioner of Taxation v United Aircraft Corporation (1943) 68 CLR 525 at 534-537, 539, 546-548.
I should add that in Bailey v The Uniting Church in Australia Property Trust (Qld), supra at 57-58, McPherson J. treated the decision of the High Court in The Commissioner of Stamp Duties (New South Wales) v Yeend (1929) 43 CLR 235, a case concerned with the interpretation of the Stamp Duties Act 1920 (N.S.W.), as not simply involving the proposition that the word "right" was to be read as confined to a right in the nature of property as ordinarily understood, but as depending upon the interpretation of the expression "conveyances of any property", viewed as a composite whole. In my view, what was said by McPherson J. is consistent with the proposition in this case that whilst the expression "any other right" is susceptible of meaning personal or proprietary right, in its particular setting in the definition in s. 160A, it is concerned only with proprietary rights. Further, those rights must exist at the time at which one asks, in applying the provisions of Part IIIA, whether there was an "asset". So called "future property" not yet acquired or in existence would not then be "assets", nor would purely contingent interests which had not yet vested (whether in interest or in possession); cf. Commissioner of Stamp Duties (N.S.W.) v Bryan (1989) 89 ATC 4529 at 4532-4533.
"Any Form of Property"
What then is the content of the expression in s. 160A "any form of property", and, in a given case, how is one to ascertain whether the statutory description is answered?
In discussions in the authorities of what is meant by "property" when used in a statute, reference is often made to the statement by Lord Langdale M.R. in Jones v Skinner (1835) 5 LJ Ch 87 at 90; see, e.g. Bailey v The Uniting Church in Australia Property Trust (Qld) (supra at 58); The Commissioner of Stamp Duties (Queensland) v Donaldson (1927) 39 CLR 539 at 550. The Master of the Rolls said that the word "property" was the most comprehensive of all the terms that might be used by a testator, as it was indicative of every possible interest which the testator could have. So it was that a devise of "all property which I am possessed of, which is not settled by either of my marriage settlements", passed a reversion in fee of an estate limited to the testator by one of his marriage settlements; the debate had been as to whether the general form of words in the devise was sufficient to pass the reversion. Nothing can be imagined less supportive of a proposition that when used in a statute, "property" is readily to be understood as embracing legal rights which are non-proprietary in character. This must be so when what is used is a phrase, indicative of fundamental legal concepts, such as "form of property".
In some judgments, the term "property" is treated as if it identified only rights which were "good against the world". Two examples, dealing with know-how and secret processes, are provided by De Beer v Graham (1891) 12 NSWR(E) 144 at 146, per Owen C.J. in Eq., and The Commissioner of Taxation v Sherritt Gordon Mines Limited (1977) 137 CLR 612 at 630, per Jacobs J. But a distinguishing feature of equitable proprietary rights is that they are not good against all the world, given the division between legal and equitable titles and the well known rules as to priorities: DKLR Holding Co. (No. 2) Pty Ltd v Commissioner of Stamp Duties (1980) 1 NSWLR 510 at 518, per Hope J.A.
In McCaughey v The Commissioner of Stamp Duties (1945) 46 SR (N.S.W.) 192 at 201, Jordan C.J. said:

"The word 'property' is used in different senses. It may denote either objects of proprietary rights, such as pieces of land, domesticated animals, and machines; or the proprietary rights themselves . . . In common parlance it is usually employed in the former sense, but in the language of jurisprudence in the latter . . . Property, in the sense of proprietary rights, may exist in relation to physical objects, or to intangible things such as debts or patent rights. Each separate piece of property consists of a bundle of proprietary rights relating to a particular object, including rights of administration and rights of enjoyment, the totality of which may be vested in a single person, or may be divided amongst a number of persons, as for example when they are shared by several who together own them all, jointly or in common. It is common also in English law to find the rights of administration divorced from the rights of enjoyment, the former being vested in an executor or administrator who holds in auter droit or in a trustee who holds in trust, and the latter being vested in beneficiaries. Where such a division exists, the personal representative or trustee is, for most purposes, treated as the absolute owner by a court of common law engaged in enforcing common law rights, whilst, in the contemplation of a court of equity, the beneficiaries are regarded as entitled to the beneficial rights and to the enjoyment of so much of them as is for the time being available."

See to much the same effect the paper by Professor Honore, "Ownership" in Oxford Essays in Jurisprudence, (Ed. Guest), 1961, p 108ff. More prosaic, but illustrative of the distinction drawn by Jordan C.J. in the opening passage of the above quotation, was the submission by Bagnall QC (as he then was) in In re Holmden's Settlement Trusts (1966) Ch 511 at 526, "It is a fallacy to talk of an interest as if it were a piece of cheese".

In the capital gains tax provisions of the Act, the term "asset" is used in both senses of the word "property" to which Jordan C.J. referred. The collection of chattels which are "listed personal-use assets" within the meaning of para. 160B (2) (a) provides simple examples of the use of the term "assets" to denote objects of proprietary rights. Likewise, the reference in s. 160R to disposal of part of an asset, a provision to which I will return. On the other hand, s. 160V, dealing with assets held on bare trust and by way of security, proceeds on the footing that any such "asset" is a bundle of proprietary rights, not all of which may be in the same ownership.
In modern times, the pervasive effect of statute law has meant that the content of the term "property" frequently involves consideration of rights derived, not from the general law, but from statute. A recent example is provided by the decision of this Court in Sonenco (No. 77) Pty Ltd v Silvia (1989) 89 ALR 437 at 446-447, 454-458. This was the context in which the High Court decided The Queen v Toohey; Ex parte Meneling Station Proprietary Limited (1982) 158 CLR 327. The question was whether the holder of a grazing licence under the Crown Lands Act 1931 (N.T.) had "an estate or interest" in the land within the meaning of the definition of "unalienated Crown land" in sub-s. 3 (1) of the Aboriginal Land Rights (Northern Territory) Act 1976. The High Court held that the holder of such a licence did not have an estate or interest in the land the subject of the licence, so that such land was "unalienated Crown land" within the meaning of the definition in the federal statute. Mason J. (supra at 342-343) approved the dictum of Lord Wilberforce in National Provincial Bank Ltd v Ainsworth (1965) AC 1175 at 1247-1248:

See also Drake Personnel Ltd v Beddison (1979) VR 13 at 19, another employer-employee case.

The rights of Hunter Douglas (and, as to clause 2, certain other related corporations) pursuant to the 1985 Agreement, were, in my view, essentially non-proprietary in character. Contrary to the Commissioner's third submission, I would not regard the rights of Hunter Douglas under the 1985 Agreement as constituting an "asset" for the purposes of the definition in s. 160A. Further, I would not regard the operation of sub-s. 160M (7), in identifying the asset in relation to which the act or transaction has taken place or which was affected by an event, as involving a use of the term "asset" in other than the sense specified in s. 160A.
Clause 2 of the 1985 Agreement imposed prohibitions upon the divulging of information concerning the Special Processes and the Trade Secrets. Clause 3 imposed a restraint upon competition. I have set out the substance of these clauses earlier in these reasons. Clause 4 had a potential operation in relation to property by providing for the assignment of future inventions which related to or were useful in the business of Hunter Douglas. But, as I have indicated, as at the end of the relevant year of income on 30 June 1986, there had been no presently effective assurance of any proprietary rights, pursuant to this provision.
The Commissioner submitted, inter alia, that the assumption of obligations by the applicant in the 1986 Deed in exchange for the payment of $40,000, was a transaction in relation to an asset or an event affecting an asset, namely (i) the Hunter Douglas' goodwill and (ii) the trade connections and trade secrets of Hunter Douglas. Further, as I have indicated, the goodwill, trade secrets and trade connections of Hunter Douglas were of a proprietary character and therefore "assets" within the meaning of the definition in s. 160A. I also have expressed my view that, contrary to the applicant's submission, the asset in relation to which the act or transaction takes place or which is affected by an event, within the sense of sub-s. 160M (7), need not be an asset which is owned by the applicant before the act or transaction takes place or the event occurs. I should add that I agree with what is said by Lockhart J. in his judgment in dealing with the applicant's submission as to apprehended double taxation, if his submission as to the construction of sub-s. 160M (7) were not accepted.
No doubt the applicant received money by reason of the act, transaction or event in question, namely the entry by him into the 1986 Deed. The question then becomes one whether that act or transaction took place "in relation to" the assets I have described, or whether there was an event "affecting" those assets.
In the 1986 Deed, the applicant covenanted with Hunter Douglas and "the Associated Companies" that for a period of two years immediately following the termination of his employment by Hunter Douglas, he would continue to be bound by clauses 2, 3, 4 and 5 of the 1985 Agreement. Clause 2 was concerned with protection of "Special Processes" and "Trade Secrets". The obligations of the taxpayer not to divulge information concerning that subject matter "related to" that subject matter and also, in my view, "affected it" within the meaning of sub-s. 160M (7). I would read the expression "affecting an asset" as touching or concerning the asset, but without necessarily altering its nature or character; cf. Shanks v Shanks (1942) 65 CLR 334 at 336; Ford v Ford (1947) 73 CLR 524 at 527, 533, 539, 541-542.
Clause 3, inter alia, obliged the taxpayer not to canvass or solicit any person who was a customer of Hunter Douglas or prospective customer of Hunter Douglas during the term of his employment, and with whom the taxpayer had had dealings or negotiations during the course of his employment. Clause 3 thus was designed as protective of the goodwill and trade connections of Hunter Douglas. For this reason also one might accurately describe the entry into the 1986 Deed, as the taking place of an act or transaction in relation to an asset or as an event affecting an asset, within the sense of s. 160M (7).
Finally, clause 4 operated upon inventions discovered, conceived or developed by the applicant either during the course of his employment or at any time if, in the latter case, they resulted from use or utilisation of the Special Processes. Clause 4 thus operated in relation to the Special Processes of Hunter Douglas and affected them. Throughout the 1985 Agreement and the 1986 Deed, a distinction is drawn between Trade Secrets and Secret Processes. I would infer, however, that taken together, both concepts were treated by the parties as "trade secrets" in the sense in which that term was used by Lord Parker and in the other authorities to which I earlier referred. This then is another footing on which sub-s. 160M (7) applies.
The result is that the act, transaction or event is treated as having constituted a disposal, by the applicant who received the $40,000, of an asset created by the disposal, and for the purposes of the application of Part IIIA, the $40,000 constitutes the consideration in respect of the disposal. The applicant is deemed not to have paid or given any consideration or incurred any costs or expenditure in the sense of the cost base provisions in s. 160ZH. It follows that I would answer in the affirmative the question of law referred to the Full Court by saying that the sum of $40,000 was included in the assessable income of the applicant for the year of income ended 30 June 1986, pursuant to sub-s. 160ZO (1) of the Act.
This conclusion makes it unnecessary to decide whether an alternative or further basis of assessability is to be found in sub-s. 160M (6). But in the light of the detailed submissions that were made, I should express my views on the matter.
Sub-section 160M (6)
This sub-section provides as follows:

"160M (6) A disposal of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal, constitutes a disposal of the asset for the purposes of this Part, but the person who so disposes of the asset shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH (1)

(a), (b), (c) or (d), (2) (a), (b),

(c) or (d) or (3) (a), (b), (c) or

(d) in respect of the asset."

The reference to existence of part of another asset is to s. 160R. This provides that reference to disposal of an asset includes, unless the contrary intention appears, a reference to a disposal of part of an asset. As I have earlier indicated, in my view, the term "asset" here is being used to denote the objects of proprietary rights, a "piece of property", rather than the bundle of proprietary rights relating to a particular object; the "part" of the asset is part of that "piece of property" which is the object of proprietary rights, and does not identify a sub-classification or division of a bundle of proprietary rights, as a legal abstraction.

The difficulties in construction of sub-s. 160M (6) are discussed by Hill J. in his judgment in Commissioner of Taxation v Cooling, and by Lockhart J. in his judgment in this case. I accept that the sub-section should be read as confined in its operation to those cases where proprietary rights are created out of or over existing assets, in circumstances where the asset affected by the rights created continues to exist. One begins with the proposition that an asset, within the meaning I have given the definition in s. 160A, may be created by a "disposal". There are various instances of property (corporeal or incorporeal) which has no prior existence but which is the product of a dealing with a pre-existing asset. Examples are given by Hill J. in his judgment in Cooling's Case. In that sense, it is apt to speak of an asset as having been created by a disposition. This creative activity is then, by dint of s. 160M (6), itself treated, ipso facto, as a disposition of that which has just been created.
to construe sub-s. 160M (6) in this way is to remove a lacuna which might be thought otherwise to be found in s. 160M. Sub-sections (1) and (2) explain what amounts to the change in ownership of an asset; sub-s. (3) deems a change to have occurred in ownership of an asset by the taking of certain steps such as the declaration of a trust, and the cancellation, release, discharge or abondonment of an asset. Paragraphs (b) and (c) of sub-s. (5) deal with construction and creation of assets, in my view, in a physical sense. None of these provisions deals with the creation of a fresh set of proprietary rights out of a greater bundle of pre-existing proprietary rights, so as to leave a residue of such rights but to treat what has happened as the creation of a new asset. Sub-section (6) then goes further by deeming the asset so created as having been ipso facto disposed of, without payment of consideration by the disponor and with the same position as to cost base as is set up under sub-s. (7).
It was submitted for the Commissioner that the entry into the 1986 Deed vested in Hunter Douglas rights, including the right to restrain the applicant from the conduct specified therein, and that these rights were an "asset" within the meaning of s. 160A, and thus for the purposes of s. 160M (6). It follows from what I have said that I do not accept that proposition. The result is that the submission for the Commissioner breaks down at this point.
I should state that the submission continued by asserting that the rights in question were not before in existence, that they were created by entry into the 1986 Deed, that the creation of the rights was deemed to be a disposal thereof, and that by virtue of sub-s. 160M (6) the asset so disposed of is deemed to have been acquired at no cost. The final step in the argument was that a net capital gain had accrued to the applicant which was included in his assessable income pursuant to s. 160ZO. It follows from what I have said that I reject this argument.
However, as I have indicated, the Commissioner has succeeded on other grounds. I would answer the questions referred to this Full Court in the manner set out by Lockhart J. in his Reasons for Judgment.

JUDGE3

On 6 September 1989 Hartigan J., sitting as President of the Administrative Appeals Tribunal at the request of both the applicant, Peter William Hepples and the respondent, Commissioner of Taxation, referred two questions of law arising in proceedings before that Tribunal to the Full Court of this Court for decision. In accordance with O.50 r.1 of the Federal Court Rules the questions for consideration of the Court took the form of a special case in which the learned President set out the facts agreed to by the parties as being relevant to the questions of law. Accordingly the facts hereafter set out are a summary of the facts set out in the special case.

The applicant commenced employment with Hunter Douglas Limited ("Hunter Douglas") in around late August or early September 1985, having been employed as the Marketing Director/General Manager of the Window Furnishings Division of that company. He entered into a written employment agreement with Hunter Douglas on or about 1 September 1985, the whole terms of which were not before the Court but it seems clear that the employment was still continuing when on or about 27 June 1986 the applicant entered into a deed with Hunter Douglas pursuant to which he became entitled to receive the sum of $40,000 upon the deed being signed.
The deed recited the employment of the applicant as a Director and General Manager (window covering products) of Hunter Douglas and the agreement of the applicant with Hunter Douglas to enter into a deed to record the terms upon which the applicant had agreed from and after the date of his ceasing to be employed by Hunter Douglas to be restrained from carrying or being interested in any business or other undertaking or activity of a kind referred to in the deed. The operative clause of the deed provided as follows:

"1. In consideration of Hepples entering into this Deed and provided that he shall at all times observe and fulfil all of the terms covenants and conditions hereof Hunter Douglas shall pay Hepples the sum of FORTY THOUSAND DOLLARS

($40,000) upon signing of this Deed.

2. In consideration of Hunter Douglas entering into this Deed, Hepples covenants with Hunter Douglas or any successor, subsidiary or affiliate thereof (hereinafter called "the Associated Companies") that for a period of two (2) years immediately following the moment of the termination of his employment by Hunter Douglas within the territorial limits of Australia, he will continue to be bound by the Clauses 2, 3, 4 and 5 of his Employment Agreement; copy of said Clauses are attached to this Deed as Schedule "A". . . .

4. Hepples acknowledges and agrees that this Deed has been entered into by him not only in favour of Hunter Douglas but in favour of each of the Associated Companies for their respective rights and interests to the intent that each of the same shall be entitled to enforce the obligations of this Deed against him to the extent to which the protection of the business and assets may require."

There was scheduled to the Deed the provisions said to be contained in clauses 2, 3, 4 and 5 of the Employment Agreement; clause 2 dealt with trade secrets and special processes. Clause 3 was a covenant in wide terms against competition with Hunter Douglas. Clause 4 required the applicant to treat as confidential formulae, know how etc obtained by him during the course of his employment. Clause 5 contained a severability clause, no doubt in case the restrictions upon the applicant were too wide and contrary to the public interest.
Pursuant to this Deed the applicant was paid by Hunter Douglas on or about 27 June 1986 an amount of $40,000. He did not incur any capital loss during the year of income ended 30 June 1986.
The questions referred to the Court for determination were as follows:

(A) Was there, in consequence of the facts recited herein, included in the assessable income of the applicant for the year of income ended 30 June 1986 -

(a) an amount of $40,000; or

(b) some other amount, and if so, what amount, pursuant to sub-section 160ZO(1) of the Income Tax Assessment Act 1936?

(B) Who should pay the costs of these proceedings?

The case was heard immediately following the argument in the case of Cooling v. Federal Commissioner of Taxation, the judgment in which was given immediately preceding the present judgment. In these circumstances I am relieved of the need to discuss in great detail the provisions of Part IIIA of the Income Tax Assessment Act 1936 as amended ("the Act") which include in assessable income a net capital gain made by a taxpayer. Accordingly, this judgment should be read together with my reasons in Cooling.
As in the case of Cooling so too in the present case the Commissioner relied upon the provisions of s.160M(6) and s.160M(7) to submit that on the present facts the applicant had, within the meaning of Part IIIA, disposed of property for a consideration of $40,000 with the consequence that the whole of the $40,000 was to be included in his assessable income pursuant to the provisions of s.160ZO(1) of the Act.
For the reasons which I have outlined in some detail in my judgment in Cooling I am of the view that s.160M(6) has no application on the facts of the present circumstances, that sub-section being limited to the class of case where there is created out of existing property of the taxpayer a right in respect of that property and in circumstances where the property otherwise continues to be owned by the taxpayer. That is not the present case and in my view s.160M(6) has no application.
The Commissioner submitted that the asset to which the opening words of s.160M(7) referred was, in the present circumstances, either the goodwill of Hunter Douglas and perhaps its associated companies, their trade connections and trade secrets or the pre-existing employment contract. Although the stated case does not deal specifically with the existence of goodwill in Hunter Douglas or for that matter in its subsidiaries, it may be readily inferred from the special case that such goodwill did in fact exist and it is clear that the Court is entitled by virtue of O.50 r.3 of the Federal Court Rules to draw inferences both of fact and law.
Reliance was placed by the applicant upon the decision of the Court of Appeal in the United Kingdom in Kirby (Inspector of Taxes) v. Thorn EMI Plc (1988) 1 WLR 445. In that case the taxpayer company was a holding company which owned, through its holding of the share capital of a subsidiary, all the share capital in three companies that carried on a business of repairing electrical motors and manufacturing industrial lifting magnets. In 1977 as a consequence of an American company wishing to acquire the entire share capital of the three companies, a tripartite agreement was entered into between the taxpayer, its immediate subsidiary and the American company under which the taxpayer agreed to procure the sale of the three companies by its subsidiary to the American company and to covenant in favour of the American company that no company in its group of companies would compete with the three companies for a period of five years. In consideration of this restrictive covenant the American company subsequently paid to the taxpayer the sum of $575,000 in addition to the purchase price for the shares in the company. The taxpayer was assessed to tax on the basis that a chargeable gain had arisen to it by virtue of s.22 of the then Finance Act 1965 (UK). It was held that the relevant provisions of the Finance Act applied only to assets in existence at the time of their disposal with the consequence that s.22(1)(c) of that Act did not operate to make the creation of the rights in the American company a disposal for capital gains tax purposes. It was further held that the "right" or "freedom" to carry on business in the market place was not an asset within the scope of s.22 of that Act and could thus not be the subject matter of any disposal by the taxpayer company so as to bring the capital sum received by it into the charged tax. However, it was held that the property to which s.22 of that Act referred did include goodwill and that the covenant given by the taxpayer to the American company whereby it agreed to restrict its own future trading activities together with those of its subsidiaries amounted to a disposal of goodwill and the amount received was accordingly within the charge for tax.
The relevant statutory provision which is set out in the judgment of Nicholls L.J. at p 450 was in the following terms:

"'(1) All forms of property shall be assets for the purposes of this Part of this Act, whether situated in the United Kingdom or not, including -

(a) options, debts and incorporeal property generally. . . and (c) any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired. (2) For the purposes of this Part of this Act - (a) references to a disposal of an asset include, except where the context otherwise requires, references to a part disposal of an asset, and (b) there is a part disposal of an asset where an interest or right in or over the asset is created by the disposal, as well as where it subsists before the disposal, and generally, there is a part disposal of an asset where, on a person making a disposal, any description of property derived from the asset remains undisposed of. (3). . . there is for the purposes of this Part of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this sub-section applies in particular to -. . .

(c) capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights.'"

The basic scheme of the English legislation, and in my opinion the same can be said of the Australian legislation, was described by Nicholls L.J. at p 450 as follows:

"Thus the basic structure of the tax is of a charge on gains accruing to a person on disposal of an asset by him. There is no statutory definition of disposal but, having regard to the context, what is envisaged by that expression is a transfer of an asset (i.e. of ownership of an asset) as widely defined, by one person to another. The Act presupposes that, immediately prior to the disposal, there was an asset and that the disponor owned it. Section 22(2)(a) then deals with the case where only part of an asset is disposed of, and section 22(2)(b) covers the case where, although the disponor owned an asset before the disposal, what he did by the disposal was not to transfer that asset but to carve or create out of it a right in favour of another. The grant of an easement over land is an obvious example. That also is stated to be a part-disposal. In that instance also the disponor owned a relevant asset prior to the disposal. Consistently with this basic structure of an existing asset owned by the disponor, section 22(3) provides that, where a capital sum is derived from assets, there is a disposal of assets 'by their owner'".

The judgment then refers to certain exceptions to the basic structure not presently relevant.
It will be observed that s.22(2)(b) of the United Kingdom legislation broadly corresponds to s.160M(6) and s.22(3) broadly corresponds to s.160M(7).
It may be noted that in the course of the judgment Nicholls L.J. expressed the view that the liberty or freedom to trade enjoyed by everyone is not a form of property within the meaning of s.22. That presumably may explain the reason why the Commissioner did not seek to argue that in s.160M(7) the relevant asset was the taxpayer's right to trade after the expiration of his employment. Hence it does not become necessary to determine for the purposes of the present case whether the example given in the Explanatory Memorandum of a restrictive covenant could possibly fall within the words of s.160M(7).
The decision of the Thorn EMI case was ultimately that the sum of $575,000 was derived from the taxpayer company's goodwill. The taxpayer had turned to account its goodwill by giving the covenant which it did and accordingly the provisions of the Act applied to it. I have no doubt that such a case would also fall within the provisions of s.160M(7) of the Australian Act.
However, the difficulty involved in the Commissioner's submission on s.160M(7) so far as he relies upon the goodwill of Hunter Douglas and its subsidiaries and its trade secrets and the like, is that which was also involved in the Cooling case, namely that the asset upon which the Commissioner relies to found a submission under s.160M(7) is not an asset of the taxpayer but is an asset of the payer of the money. But even if I were wrong in my view that the asset referred to in s.160M(7) must be an asset of the taxpayer it would not follow that the questions of law referred to this Court should be answered in favour of the Commissioner.
The difficulty seems to me to be that para.(a) of s.160M(7) requires either that there be a real relationship between the act or transaction on the one hand and the asset on the other or that the event affect, in the sense of adversely affect, the asset. In my view it would be a strange characterisation of a grant by an employee of a covenant in restraint of trading after the termination of his employment to describe that transaction as one that takes place in relation to his employer's goodwill. It rather is a transaction which takes place in relation to the right of the employee to trade. Similarly it is difficult to see how the transaction in any way affects the employer's asset. Rather the employer's goodwill remains perfectly intact and unaffected by the transaction except perhaps in a monetary sense that the goodwill may become more valuable as a result of the transaction.
In the alternative the Commissioner relied upon the employment contract as the relevant asset for the purposes of s.160M(7). It was not entirely clear whether he regarded the employment contract as an asset of Hunter Douglas or as an asset of the applicant or both. To the extent that he regarded it as an asset of Hunter Douglas the argument fails because on the view I have taken the relevant asset must be an asset of the taxpayer.
There is a difficulty in regarding the personal rights and obligations under a contract of employment as an asset of the employee, even if it may be possible to regard such an employment contract as an asset of the employer. In O'Brien (Inspector of Taxes) v. Benson's Hosiery (Holdings) Ltd (1980) AC 562, a case arising under the provisions of the Finance Act 1965, s.22, an employer was paid a sum of money by an employee to be released from the obligations under the service contract. A question arose as to whether the contract was an asset of the employer which had been disposed of.
Lord Russell of Killowen delivering the judgment of the House of Lords said at 573:

"it was contended for the taxpayer that the rights of an employer under a contract of service were not 'property' nor an 'asset' of the employer because they cannot be turned to account by transfer or assignment to another. But in my opinion this contention supposes a restricted view of the scheme of the imposition of the capital gains tax which the statutory language does not permit. If, as here, the employer is able to exact from the employee a substantial sum as a term of releasing him from his obligations to serve, the rights of the employer appear to me to bear quite sufficiently the mark of an asset of the employer, something which he can turn to account, notwithstanding that his ability to turn it to account is by a type of disposal limited by the nature of the asset. In this connection I would also refer to the provisions of section 22(3)(a) which appear to me apt to cover a case where damages are recovered by an employer from a third party for wrongful procurement of breach by the employee of his contract of service."

It may be remarked that in the paragraph immediately preceding the one I have quoted, his Lordship referred to the wide generality of language of s.19 and s.23 of the Finance Act 1965. The former section was the charging section. It imposed the tax in respect of "chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets".
O'Brien's case was subsequently considered in the Chancery Division in Zim Properties Ltd v. Proctor (H M Inspector of Taxes) (1984) 58 Tax Cas 371. In that case the taxpayer sued its solicitor for damages for negligently preparing a contract as a result of which the prospective purchaser had repudiated the contract. The claim in negligence was compromised and the taxpayer received the sum of 69,000 pounds in instalments of 60,000 pounds and 9,000 pounds as a result of the settlement. It was held that the receipt was an asset that was disposed of. In so deciding Warner J regarded as the ratio decidendi of O'Brien the proposition that "those rights (i.e. the rights under the employment agreement) were an asset for capital gains tax purposes because they were something that could be turned to account". This language echoes the opening words of s.22(3) of the Finance Act namely that:

"Subject to subsection (6) of this section, and to the exceptions in this Part of this Act, there is for the purposes of this Part of this Act a disposal of assets by their owner where any capital sum is derived from assets. . ." (emphasis added)

The judgment of Warner J. continued at 390:

"Thus the House of Lords treated as virtually irrelevant the use by s.22(1) of the word 'property'. It held to be dominant in ss.19 and 22 the words 'asset' and 'disposal'. There are, it seems to me, two possible ways in which their Lordships may have reached that result. One was to take the view that s.22(1) was not intended to provide an exhaustive definition of 'assets' but merely to enact that, whatever else might be comprised in that concept, it included 'all forms of property'. On that view 'assets' was a wider concept than 'property' and included any right that could be turned to account, even though a lawyer might not regard it as 'property'. The other possibility is that their Lordships agreed with the approach of Fox J. whose decision at first instance they were restoring. His view was that the word 'property' was not a precise term but one of which the meaning might vary with the context (see page 251 of the report). That of course is true of almost any word, and it is interesting that, as was pointed out to me, there are passages in the judgment of Oliver L.J. (with which Bridge L.J. agreed) in Trendtex Trading Corporation v. Credit Suisse

(1980) 3 All ER 721, in which he used the phrases 'right of property' and 'property right' in relation to a right to litigate in a context such that he clearly regarded it as irrelevant whether litigation embarked upon in exercise of that right would succeed.

Either way it would in my view be inconsistent with the decision in O'Brien v. Benson's Hosiery

(Holdings) Ltd 53 TC 241 to hold that a right to bring an action to seek to enforce a claim that was not frivolous or vexatious, which right could be turned to account by negotiating a compromise yielding a substantial capital sum, could not be an 'asset' within the meaning of that term in the capital gains tax legislation. I propose, for the sake of convenience, to refer to the right that Zim had, in that sense, to bring an action against Austin and Co as its 'right to sue' Austin and Co."

Whether such a wide interpretation of the word "asset" should be adopted in respect of the Australian legislation having regard to the general context of that legislation need not be decided in this case. For even if it be correct to describe an employment contract as being an asset of an employee (and it would not ordinarily be so described, particularly as it imposes obligations as well as benefits) it is hard to see, as a matter of fact that the entry into the restrictive covenant was an act or transaction which took place in relation to the employment contract. It is not suggested in the special case that the employment contract was to be amended or indeed that there was any connection at all between the restrictive covenant and the employment contract save that the latter preceded the former. No such inference can be drawn from the facts of the case. Nor can it be suggested that the service contract was in any way affected by the entry into of the restrictive covenant.
In my opinion it is torturing the language of s.160M(7) to bring the present transaction within it.
Accordingly I would answer the questions referred to the Court as follows:

(A) No.

(B) In accordance with the agreement of the parties, there should be no order as to costs.

[1990] FCA 296

28 JUNE 1990