Re Proctor and Commissioner of Taxation

[2005] AATA 389

CATCHWORDS – INCOME TAX – assessable income – payment by developer to firm as an incentive  to lease – whether lease incentive distributed to partners of firm assessable income – whether lease incentive received during the ordinary course of business – whether lease incentive income or capital – whether applicant bound by the actions of firm’s partners – decision affirmed.

PRACTICE AND PROCEDURE – issue estoppel – distinguished from res judicata – whether Tribunal’s decisions may give rise to issue estoppel – whether bound by findings of Federal Court – principles to be applied – whether legislation conferring  jurisdiction leads to the conclusion that court decision is intended to bind the Tribunal – Tribunal bound by Federal Court decision.

Administrative Appeals Tribunal Act 1975 ss. 33, 37, 44, 67, 68 and 83
Commonwealth of Australia Constitution Act s. 55
Compensation (Commonwealth Government Employees) Act 1971

Evidence Act 1995 ss. 4, 33, 76 and 77

Federal Court of Australia Act 1976 s. 24
Income Tax Act 1986
Income Tax Assessment Act ss. 25, 92, 160M and 170AA
Partnership Act 1892 (NSW) s. 6
Partnership Act 1958 (Vic) s. 10
Safety Rehabilitation and Compensation Act 1988
Taxation Administration Act 1953 s. 14ZZK

Blair v Curran (1939) 62 CLR 464

Bogaards v McMahon (1988) 80 ALR 342
Commonwealth v Sciacca (1988) 17 FCR 476; 78 ALR 279; 14 ALD 565

Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409; 24 ALR 577

Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42; 90 ATC 4472

Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639
Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199
Gilder v Federal Commissioner of Taxation (1991) 91 ATC 5062
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124
Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47
Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492

Hoystead v Federal Commissioner of Taxation (1925) 37 CLR 290; [1926] AC 155
Jackson v Goldsmith (1950) 81 CLR 446

Lighthouse Philatelics Pty Ltd v Federal Commissioner of Taxation (1991) 32 FCR 148; 91 ATC 4942

Minister for Immigration and Ethnic Affairs v Daniele (1981) 39 ALR 649

O’Connell v Commissioner of Taxation (2002) 121 FCR 562; 2002 ATC 4628; 50 ATR 331
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589

R v Palmer [1981] 1 NSWLR 209; 1 A Crim 458 (CCA)
Re Street Nation Pty Ltd and Australian Communications Authority [2004] AATA 1251
Reuter v Federal Commissioner of Taxation (1993) 111 ALR 716; 93 ATC 4037
Saffron v Federal Commissioner of Taxation (1991) 30 FCR 578; 91 ATC 4646

Scott v Federal Commissioner of Taxation (1966) 117 CLR 514
Selleck v Commissioner of Taxation (1997) 78 FCR 102; 97 ATC 4856

Smith v Caltex Australia Petroleum Pty Ltd (2004) 80 ALD 106

The State of South Australia & Anor v The Commonwealth of Australia & Anor (1992) 174 CLR 235; 92 ATC 4066

DECISION AND REASONS FOR DECISION [2005] AATA 389

ADMINISTRATIVE APPEALS TRIBUNAL     )          
  )          VT1997/126
TAXATION APPEALS DIVISION  )          

Re                ANTHONY EDWARD PROCTOR

Applicant

AndCOMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:                   Deputy President S A Forgie
Date:  2 May 2005
Place:  Melbourne

Decision:The Tribunal affirms the objection decision under review.

S A FORGIE
  Deputy President

REASONS FOR DECISION

Mr Anthony Edward Proctor was a partner in a chartered accounting practice of Peat Marwick Hungerfords (“PMH”), which incorporated Peat Marwick Mitchell & Co (“PMM & Co”).  PMH decided to leave its existing leased accommodation in Melbourne and to locate its operations in one building.  Consequently, it agreed to lease floor space in a building to be developed by Sweetvale Pty Ltd (“Sweetvale”), which is a member of the JGL Investment Pty Ltd (“JGL”) group of companies, at 147-165 Collins Street in Melbourne.  In return, Sweetvale agreed to pay a sum of $8,009,000.00 (“the lease incentive”) to PMH.  Sweetvale paid that amount to PMH in the taxation year ending 30 June 1989 (“1989 year”) and PMH distributed it among its partners in the same year.  PMH did not return it as assessable income in the 1989 year.  Mr Proctor received $190,042.00 as his share but did not return it as assessable income in that year.  In reviewing PMH’s business activities, the Commissioner of Taxation decided that the lease incentive was assessable income on the basis that relocation from leased premises to other leased premises is an integral part of the PMH’s business activities.  He issued an amended assessment to Mr Proctor on that basis.  I have decided that the Commissioner’s assessment was not excessive.

THE ISSUE

1. The issue in this case is whether Mr Proctor’s share of the lease incentive, or any part of it, is assessable income under s. 25(1) of the Income Tax Assessment Act (“Act”).  That requires me to consider whether PMH received the lease incentive during the ordinary course of business and its purpose in receiving it. 

THE WITNESSES

1. As a partner of PMM & Co since 1 July 1976, and later of PMH, Mr Proctor was responsible for the delivery of services to the banking and finance industry and to several major industrial and mining clients.  He advised on project and structured finance to clients such as the Chase-NBA Group Limited, National Australia Bank (“NAB”), Westpac Banking Corporation, Conzinc Riotinto, Hammersley Iron and Comalco.  Mr Proctor was a joint adviser to Costain Australia Ltd (“Costain”).  Costain built the State Bank of Victoria building on the corner of Elizabeth and Bourke Streets, Marland House in Bourke Street, National Bank House for Abbey Capital and others in the Central Business District (“CBD”) as well as being the lead developer of the South Bank facility.  In addition, Mr Proctor has worked closely with lawyers, bankers and clients in formulating the structure of a wide variety of projects relating to the construction of office buildings, port facilities, alumina refineries and iron ore mines.  He has gained an in depth understanding of the dynamics of project financing.

1. Mr Donald Clifford Wilkins holds a Bachelor of Commerce from the University of Melbourne and is a Fellow of the Chartered Institute of Accountants and a member of CPA Australia.  He retired in 1981 as a partner of PMM & Co after a long association with both it and one of its predecessors, Smith Johnson & Co.

1. Mr Ian Hugh Minchin is a banker and the Managing Director of Professional Services (A/Asia) Pty Ltd.  He is also a Fellow of the Australian Institute of Banking + Finance.  He has worked in banking for over 42 years beginning with the NAB, where he stayed for nearly 20 years.  He moved to Elders Finance where he established its lending operation from the beginning.  From 1985 until 1994, he was the General Manager, Victoria, of Barclays Bank Australia Limited (“Barclays Bank”).  After the bank’s acquisition by St George Bank Limited, he continued as the General Manager until 1996.  During that time, he was an active member of the Overseas Bankers’ Association and, for ten years, one of its Directors.  During his time as General Manager, Mr Minchin was responsible for the bank’s lending operations in Victoria and Tasmania.  He vetted funding lent for development projects of various sizes and has participated in syndicated property funding in some of the larger property developments in Melbourne.

BACKGROUND

A brief history of PMH

1. On the basis of Mr Wilkins’ evidence, I find that he joined Smith Johnson & Co in 1952 and became a partner in 1957 or 1958.  Smith Johnson & Co and Cook Tomlins & Mirams operated from separate offices located in Western House on the corner of Collins Street and William Street in Melbourne and at 360 Collins Street prior to its re-development.  In the financial year ending 30 June 1963, they merged. 

1. The partnership had an agreement with an international firm, Peat Marwick & Mitchell, and it affected the range of work that it could undertake.  At the same time, the agreement with Peat Marwick & Mitchell became more formal and they became part of that international accounting firm sharing all but their profits with it.  It was decided to incorporate its name and the amalgamated firm became PMM & Co.  Mr Wilkins remained as one of the partners in the amalgamated firm until 1981.  The number of partners and staff increased over time.  There were no more than ten partners and some 200 staff in the 1960s.  In 1976, when Mr Proctor became a partner, there were 16 partners and approximately 375 staff.  By the time of Mr Wilkin’s retirement in 1981, there were approximately 28 partners and almost 500 staff.

1. PMM & Co’s business was the provision of professional services in audit of both private and public companies, taxation, accounting and secretarial and share registry services.  Its business expanded in all areas and, in the 1970s was supplemented by providing consultancy services.

1. The newly formed PMM & Co leased space spread over two floors in the National Mutual Building at 447 Collins Street.  Eventually, it ran out of space in that building and, in 1977, it moved to leased premises at what is now known as National Bank House at 500 Bourke Street in Melbourne.  In the beginning, PMM & Co was the only tenant but it did not occupy the whole of the building.  That continued to be the case until the NAB bought the building and moved some of its staff into it.  Mr Wilkins was one of the partners who negotiated the leases for both of those premises.

1. Responsibility for the day to day management of PMM & Co rested with the Practice Management Committee (“PMC”), which was later known as the Local Executive Committee (“LEC”), and the Managing Partner.  From time to time, PMM & Co formed other committees to evaluate particular issues such as accommodation and space needs.  Those committees made recommendations to all of the partners and decisions were made by all of the partners.  The firm’s structure and style of management were adopted when PMM & Co merged with KMG Hungerfords and became PMH in October 1987.  The merger gave it a European presence but, at the same time, led to accommodation concerns.  KMG Hungerfords were then located in Nauru House but that was not a satisfactory arrangement. 

1. In early 1986, one of PMM & Co’s partners, Mr John Joseph O’Connnell, gave a report dated 26 July 1986 to the then Managing Partner, Mr Kenneth Hugh Spencer, regarding accommodation requirements.  The partners then decided to form a Space Committee to look at PMM & Co’s long term accommodation needs and to make recommendations to the PMC.  Mr O’Connell chaired that committee and it included several partners.  The firm was expanding and, by 1989, PMM & Co it was to have 68 partners of whom 60 were based in Melbourne and eight in either Albury or Launceston.  It engaged 882 personnel. 

The lease incentive

1. Sweetvale was the registered proprietor and developer of premises at 147-165 Collins Street in Melbourne.  Before the floors were built at Collins Street, PMM & Co and Sweetvale agreed that PMH would lease floors 1 to 6 and conduct its practice from those premises.  In return, Sweetvale agreed to pay PMM & Co the lease incentive.  Sweetvale paid that sum to PMH on 27 October 1988 and PMH credited it to its capital reserve account.  In returning its income for the 1989 year, PMH disclosed its receipt of the lease incentive amount as non-assessable income[1]. 

   [1] T documents at 37-108

1. Sweetvale and PMH signed an agreement dated 23 November 1988 to the effect that, in consideration of Sweetvale’s paying the lease incentive to PMH, PMH would immediately enter the Agreement for Lease thereby:

   “(a)   relieving Sweetvale of the need to find a prestigious major tenant to six floors in the Building;

   (b)securing for Sweetvale a major tenant of a substantial part of the Building;

   (c)enabling Sweetvale to advise other prospective tenants that PMH has committed to take a lease of a substantial part of the Building;

   (d)assisting Sweetvale to attract prospective tenants to the Building; and

   (e)assisting Sweetvale to finance the overall Project at lower financing cost.”[2]

Clause 2 of the agreement noted that the lease incentive was paid:

“… by Sweetvale to PMH as a direct inducement to PMH to enter into the Agreement for Lease long before the Building is constructed so as to obtain for Sweetvale the advantages mentioned above.”[3]

[2] T documents at 66

[3] T documents at 67

1. On 23 November 1988, PMH distributed the lease incentive among its partners and their assignees in proportion to their interests in PMH.  PMH paid Mr Proctor the sum of $190,042.00 as his share of the lease incentive.  Mr Proctor did not include that amount in his assessable income when he lodged his income tax return for the year ending 30 June 1989[4].  The Commissioner issued an assessment on the basis of that return on 20 February 1990[5] but issued an amended assessment on 5 January 1993 including the sum of $190,042.00 as part of Mr Proctor’s assessable income (“amended assessment”)[6].  He did so on the basis that the amount is assessable income pursuant to s. 25(1) of the Act.  The Commissioner also imposed interest under s. 170AA of the Act.

   [4] T documents lodged pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 (“T documents”) at 17-25

   [5] T documents at 26

   [6] T documents at 27

Mr Proctor’s objection

1. Mr Proctor objected against the assessment in a letter dated 3 March 1993[7].  In essence, he did so on the basis that the receipt of a lease incentive is not an ordinary incident of PMH’s business activity.  He drew a distinction between the facts and circumstances surrounding the payment of the lease incentive to PMH and those considered in the cases of Federal Commissioner of Taxation v Cooling[8].  The lease incentive is a receipt of capital or a receipt of a capital nature, he said.  It was not received as part of a profit-making undertaking or scheme but to enable the Melbourne office of PMH to be located in one building designed for its needs.  In return for the advantage of locating the firm in one building, having the option to take additional space over the years, naming rights, 24 hour access and the likelihood of attracting prestigious tenants, PMH assumed considerable liability and risk.  Its liability was in the form of its paying substantial rent over an extended period of time.  Its risks included its putting all of its eggs into one basket in relation to a building that was yet to be constructed.  The factors affecting PMH were peculiarly structural in nature and clearly isolated from its ordinary business activities.  The transaction was not entered as part of any profit-making undertaking or scheme.

   [7] T documents at 28-30

   [8] (1990) 22 FCR 42; 90 ATC 4472

1. Even if it were regarded as a profit, the Commissioner had paid no regard to the liabilities and costs associated with the transaction.  If the lease incentive were properly regarded as assessable income, it was not derived during the 1989 year but, wholly or in part, in a later year of income.

1. Part IIIA of the Act does not require its inclusion as assessable income.  Part IIIA is, in any event, void ab initio or otherwise of no effect as it has been held by the High Court to be a tax on property.  Mr Proctor relied on The State of South Australia & Anor v The Commonwealth of Australia & Anor[9].  Section 55 of the Commonwealth of Australia Constitution Act states that a taxing Act shall deal with one subject of tax only.  As the Act and the Income Tax Act 1986 operate to tax income, that part of the Act that taxes property is void or ineffective.

   [9] (1992) 174 CLR 235; 92 ATC 4066

1. Neither PMH nor any of its partners disposed of an asset or was deemed to dispose of any asset at the relevant time.  Furthermore, as construction had not yet started and no lease had been entered, s. 160M(7) of the Act had no application.  Mr Proctor relied on the majority in Hepples v Federal Commissioner of Taxation[10].  Further, or alternatively, there was either no relevant nexus, or an insufficient nexus, between the asset and the lease incentive: Reuter v Federal Commissioner of Taxation[11]. 

   [10] (1992) 173 CLR 492

   [11] (1993) 111 ALR 716; 93 ATC 4037

The objection decision

1. On 21 April 1997, the Commissioner disallowed Mr Proctor’s objection in full[12].

   [12] T documents at 31-36

THE EVIDENCE

The arrangements made when PMM & Co moved  from the National Mutual Building to National Bank House

1. As to the furniture and fit out of the leased premises, Mr Wilkins said that he could not recall clearly whether PMM & Co bought or leased them.  His memory was that they were leased as it had not been the firm’s responsibility to sell them when it left the National Mutual Building.  PMM & Co had been required to restore the premises to their original condition but that was a normal term of a lease agreement. 

Relative advantages of owned and leased premises

1. Mr Wilkins said that professional partnerships need a site from which to conduct their businesses.  They may choose to own their sites but, with the increasing size of professional partnerships, it is now common for them to lease sites.  Those sites may be leased from one or more of the partners but, more usually, from third parties.  Long term leasing effectively provides the same level of “economic ownership” as ownership of the freehold, he said.  Both provide security of tenure.  Like ownership, a long term lease, particularly one with an option, is firm and fixed with firm and fixed monetary outlays.  The costs of the two are not greatly different.  Long term leasing has an advantage in that it removes the difficulties that attend an assessment of whether the value of the freehold has increased or decreased in value when partners leave or are admitted to the partnership.  Ownership of the building can also be a problem if the needs for space change.  A building may have to be sold if it becomes too small for a business’s needs.  It is always difficult to predict what will happen in the future.  Mr Wilkins said that PMM & Co’s own economic ownership needs were met with its long term leases of premises in the National Mutual Building and later in National Bank House.

The dynamics of project financing

1. Mr Proctor said that his work had led him to have a deep understanding of the dynamics of project financing.  The main factors to be taken into account are certainty of cash flows over an extended period (as these drive the value of investment properties such as commercial office buildings), the funding options available and the commercial and financial risks associated with the project.  Uncertainty that the project will not succeed is also a major factor to be taken into account.  The factor of uncertainty is dependent on factors such as the availability of funding, changes in planning laws or ability to acquire an appropriate building site.

1. In the case of PMM & Co, Mr Proctor said, its large size and projected future growth restricted the options it had for accommodation.  Very few buildings were designed to accommodate such large numbers.  There would be major financial and operational consequences if a developer failed to give PMM & Co occupancy on an agreed date when it was required to leave its existing accommodation.  The project of finding accommodation for PMM & Co when it outgrew National Bank House was, for Mr Proctor, a project of managing a diverse array of commercial, business and financial risks.

The Space Committee

1. Mr Wilkins said that he was a member of the Space Committee that was formed to establish PMM & Co’s needs relating to matters such as location, space standards, projected space requirements and the quality of the building required when it moved to the National Mutual Building and then to National Bank House.  It would have been unwieldy to have the whole of the partnership engaged in the negotiations.  That committee negotiated the leases.  Mr Wilkins said that the committee had responsibility to act on behalf of the partners but not to bind them.  The committee would make and maintain contacts and undertake discussions but would then report back to the partners at their monthly meetings.  All of the partners would make the decision.  If decisions had to be made between the monthly meetings, those decisions would be made according to directions given at the monthly meetings.  All of the partners would agree on the terms of any contract to be entered and would authorise one partner to sign that contract.  The Space Committee was advised by Colliers International Property Consultants (“Colliers”) and Metier III Pty Ltd (“Metier”) in evaluating the various options and in testing the market.  The committee’s activities were generally known amongst the rest of the partners.

PMM & Co’s searches for additional or alternative space in 1986

1. On 27 March 1986, Mr Spencer wrote to NAB seeking an indication of the space that would be available in the National Bank Building[13].  He received a reply in a letter dated 10 April 1986 indicating that additional space was unlikely to become available in the near future[14].

   [13] Exhibit 2, Document 1

   [14] Exhibit 2, Document 2

1. In or about April 1986, Mr Andrew Norbury of Metier, PMM 7 Co’s architects, and Mr Bill McHarg and Mr William Carew of Colliers met with Mr O’Connell of PMM & Co.  The topics discussed at the meeting were summarised in Mr Carew’s letter to Mr Norbury dated 22 April 1986[15].  Among those topics were PMM & Co’s ongoing space needs and its having an option to vacate the National Bank Building at the end of 1989.  The partnership saw long term disadvantages in owning its own building given the escalation rents and the uncertainty of long term tenure.  PMM & Co wished to gain some measure of control over, or hedge against, excessive rental increases.  Colliers recommended that PMM & Co’s:

   “… approach to relocation should be entrepreneural [sic] and not passive.

   The size and desirability of the tenancy insures [sic] that the property development and investment market will regard them highly.  They effectively control an asset on which they can capitalise.  It should not be assigned without the Partnership sharing in the value created.

   …

   They should be aware that they have the potential to create a development profit of $8-10 Million by making a long term commitment of 80,000 – 1000,000 sq. ft. in a City office building.

   …

   The degree to which they share in that profit will be determined by the structure decided upon and the degree of risk they wish to bear.”[16].

   [15] Exhibit 2, Document 3

   [16] Exhibit 2, Document 3 at 2-3

1. Mr O’Connell wrote to Mr Spencer on 24 July 1986 referring to the discussions he had previously had with Colliers and Metier.  He summarised PMM & Co’s projected space requirements and canvassed various options such as remaining at National Bank House, pre-committing to a developer or taking an entrepreneurial role.  Mr O’Connell canvassed the pros and cons of each.  His memorandum was discussed at a partners’ meeting on 5 September 1986[17].

   [17] Exhibit 2, Document 4

PMM & Co’s searches for additional or alternative space in 1987

1. Colliers subsequently advertised in January 1987[18] for office space and sought proposals by 27 February 1987.  The advertisement read in part:

   [18] Exhibit 2, Document 6

   “A leading International and National Professional organisation is outgrowing its current office accommodation in Melbourne and will require new premises to be available no later than 1991.  Our client is interested in considering innovative proposals whereby they could:

   Participate as joint venturers in a major development

   Acquire all or part of an existing building

   Purchase a development site

   Lease the required area or take a Head Lease or an entire building

   The required area is the Melbourne CBD, preferably the western end.  Area required is 18,000 square metres, with on site parking for 150 cars.  Preferred floor size is 1,400 square metres.”[19]

Mr Proctor recalled suggesting the addition of participation as joint venturers in order to protect PMH’s identity.  He had no reason for his suggestion other than that.  There was no suggestion that PMH would even entertain a joint venture even though it was high in Mr Carew’s mind. 

[19] Exhibit 2, Document 5

1. Mr Brett Jones, the Managing Director of Dayton Hazama Pty Ltd (“Dayton”) wrote to Mr Carew on 25 March 1987 following their earlier discussions[20].  Dayton proposed that it and PMM & Co enter a joint development of the T&G site at 147-165 Collins Street in Melbourne (“T&G site”), for which Dayton had submitted a tender to purchase.  PMM & Co would receive a 25% equity in the development company and Dayton would undertake the development and then either hold the building on completion for a period of time with PMM & Co or sell it.  PMM & Co’s equity would be guaranteed on a no-cost basis.  Dayton revised its offer on 13 April 1987 when PMM & Co revised its space requirements[21].  On the basis of a reduced floor level required, Dayton offered PMM & Co an 18% share of the profit.  The Space Committee summarised the position and sent a copy of Dayton’s proposal to the PMC on 14 April 1987[22].

   [20] Exhibit 2, Document 7

   [21] Exhibit 2, Document 7(N)

   [22] Exhibit 2, Document 8(B)

1. Mr Spencer first presented the partners with a formal record of the Space Committee’s activities in a memorandum dated 24 April 1987[23].  It addressed Dayton’s offer and noted that the Space Committee had decided to consider the proposal seriously.  Mr Proctor said that he did not recall being appraised of Dayton’s offer but there is no reason why he should have been.  The memorandum was addressed to “All Partners” but did not specify their names.

   [23] Exhibit 2, Document 7(C)

1. Mr O’Connell wrote to Mr Spencer on 12 August 1987 providing a short summary of PMM & Co’s long term space needs for a forthcoming meeting of the LEC[24].  By this time, it had become known that Dayton’s tender for the T&G site had been unsuccessful.  Instead, JGL had acquired the T&G site.  The Space Committee was investigating JGL’s development of the T&G site, a development of 120 Collins Street owned by Grollo and Essington, an expected proposal from Dayton to redevelop the Westpac site in Collins Street and the possible development of the AFT site on the corner of Collins and King Streets.

   [24] Exhibit 2, Document 7(D)

1. Mr Proctor said that¸ at about this time. there was heated debate regarding the appropriate locations of PMM & Co and KMG Hungerford.  Once amalgamated, should they be located in the CBD and, if so, in which part?  Their options were steadily closing in the meantime.

Negotiations with JGL regarding the T&G site

1. Mr Proctor said that Colliers then put to PMM & Co the concept of its becoming a lead tenant at the old T&G site that had been purchased by JGL rather than by Dayton.  On 6 October 1987, Colliers wrote to JGL[25].  He advised that Mr Spencer and Mr O’Connell had agreed to recommend to the LEC that a full meeting of the partners of PMH be called to consider a move to the T&G site.  That move would be based on JGL’s offer that, in summary, PMH lease the lowest four floors on the terms specified in the letter. 

   [25] Exhibit 2, Document 10(E)

1. At a meeting of the LEC held on 9 September 1987[26], it was agreed that it should enter into serious negotiations with JGL.  At the same time, it should continue to pursue other practical and possible alternatives in order to be satisfied as far as possible that PMM & Co could achieve its objects in the most cost efficient manner.  Mr Proctor said that there was concern that PMM & Co might overestimate its space requirements and be left with unoccupied space at a time when it was predicted that the Australian economy would overheat. 

   [26] The meeting was noted in Mr O’Connell’s minute to Mr Spencer dated 12 October 1987: Exhibit 2, Document 7(F)

1. Mr Proctor said that JGL’s offer was not very specific.  As a consequence, the PMC asked Colliers to write to JGL.  That was the letter dated 6 October 1987, he said.  That letter was written by Mr Carew of Colliers.  In it, he advised that Mr Spencer and Mr O’Connell had agreed to recommend to PMM & Co’s LEC that a meeting of all the partners be called to consider the proposal to move to the T&G site[27].  The letter asked JGL to confirm the terms of its offer to PMM & Co regarding such matters as the head lease, the building and building services and consultants.  Those terms were set out in Colliers’ letter.  JGL would:

   “… pay to Peats [PMM & Co] an agreed sum of compensation in return for Peat’s terminating its tenancy at National Bank House, provide assistance with the fit out of the tenancy in a manner to be agreed and grant to Peats a right to acquire an interest in the building.”[28]

Even though a sum of compensation had been modelled in discussions, PMM & Co was still testing the market.  Timing was still a high priority.

[27] Exhibit 2, Document 10(E)

[28] Exhibit 2, Document 10(E) at 8

1. On 12 October 1987, Mr O’Connell wrote to Mr Spencer reporting the Space Committee’s progress to that time.  Mr O’Connell recommended that the LEC agree to JGL’s proposal being put to the partners’ meeting to be held before 31 October 1987.  The next day, Colliers wrote to Mr O’Connell drawing his attention to sites located in fringe areas to the CBD even though he recognised that PMM & Co had decided that it should be located in the CBD[29].

   [29] Exhibit 2, Document 10(G)

1. This was followed by Mr O’Connell’s memorandum to partners dated 22 October 1987 indicating that they would be asked to approve JGL’s offer at the next partners’ meeting scheduled for 28 October 1987[30].  The memorandum attached a copy of a letter from Colliers to JGL dated 6 October 1987.  Under the heading of “Financial Incentive $30M”, Mr O’Connell wrote:

   “The JGL Group have agreed verbally to offer us a sum of up to $30m which is represented by a guaranteed sum of $25m payable on completion of the building (estimated 1/7/91) and an additional sum dependent on the profit of the development which sum can be up to a maximum of $5m if taken on completion of the building (1/7/91) or a maximum of $6.612m if taken at end of year 2 (1/7/93) or $8.745m if taken at the end of 4 years after completion of the building (1/7/95).  The additional sum is dependant on the profit performance of the building and is determined on an agreed formula and the step ups are calculated at 15% p.a.”[31]

   [30] Exhibit 2, Document 10(H)

   [31] Exhibit 2, Document 10(H) at 6

1. Mr Proctor said that Mr O’Connell’s memorandum was based on the assumption that the partners would prefer that the two firms comprising PMH were located in the one building and not in two as was then the case.  Mr Proctor said that he was concerned that the memorandum did not address PMH’s competitive needs for the following reasons:

   PMH had been losing senior and middle level staff to competitors which were able to offer far more congenial working conditions in the sense of larger offices and personal secretarial assistance as well as highly competitive salary packages and overseas’ secondments.  At that stage, the future growth of the firm was uncertain.  Economic forecasters were predicting a slow down in Australia’s economic growth over the following few years and the supply of experienced accountants and recently qualified tertiary graduates and consultants was very tight.  If PMH were to commit itself to a large floorspace of 4,500 square metres and if its projected growth were not realised, there would be a significant cost in the form of unused or underutilised space.

   He was not convinced that the financial evaluation fully resolved the issues related to fringe area offices for small businesses and consulting staff who did not have, or had few, city based clients.

   JGL had only offered the financial incentive verbally and it was not clear when the additional sum of $5M would be paid.  There was also a risk inherent in the calculation of the building’s profit performance. 

   Given Colliers’ assessment of market rents, Mr Proctor was sceptical about JGL’s guarantee of $25M and was concerned about the effect it would have on PMH’s negotiating strength with JGL regarding lease terms.

   Mr O’Connell’s memorandum did not model the financial outcome if the incentive payment were not received because, for example, there were conditions attached to the verbal offer or the additional amounts were not realised.

   Mr Proctor considered that insufficient work had been done regarding the fit out of the new premises.  The existing fit out in the National Bank Building, although portable, would be unacceptable in a new purpose built building.  That meant that one of the major costs of the project was uncertain.

   Mr Proctor also considered that further work needed to be done on the alternative proposal that PMH purchase its own building despite the difficulties attending ownership.

1. Mr Proctor said that Mr Spencer, Mr O’Connell and Mr Carew gave a presentation at the partners’ meeting addressing matters such as PMH’s objectives, its needs, the pros and cons of purchasing and developing a site, available sites and JGL’s proposal[32].  The slide entitled “Tax Implications” stated:

   “Project assessments made on the basis of incentive being assessable in our hands.  However, RHB and JJO’C are looking at different alternatives. 

   Some of these are that JGL could pay:-

   -Make good and removal expenses of existing tenancies.

   -Fit out costs

   -Acquisition of pre capital gains tax assets such as NAB lease, fixtures and fittings.

   It is too early at (sic) provide any further details at this stage.”[33]

   [32] Exhibit 2, Document 18

   [33] Exhibit 2, Document 18 at Slide 10

1. Another slide suggested that the partners resolve to authorise the LEC to enter an agreement to lease the office space at the building to be built by JGL at the

old T&G site in the terms of the memorandum dated 22 October 1987[34].  A further slide stated:

“1.     It is recognised that tax and the distribution of the incentive between partners is of paramount importance.  This needs to be considered within the framework of the stated objective of ‘minimising our long term rental costs within certain parameters’.

2.The partners agree that, in relation to the proposed incentive:

(A)steps to be taken to maximise the after tax benefit of the incentive,

(B)partners not to be worse off ‘after tax’ as a result of that portion of the incentive which is taxable,

(C)the balance of the incentive after paying such amounts as fit-out costs and other firm expenditures relative to the building be distributed having regard to the objective stated in 1. above and that a paper dealing with the proposed allocation of the balance of the incentive be put to partners for consideration at a future partners’ meeting.”[35]

[34] Exhibit 2, Document 18 at Slide 11

[35] Exhibit 2, Document 18 at Slide 12

1. At the time of the partners’ meeting on 28 October 1987, Mr Proctor said that he had a number of concerns.  He set them out in his statement:

   “(a)   the terms of the lease were what I would normally have expected to be put forward in a first round of discussions on a prospective lease; and that they were all commercially based and pertinent to space and accommodation requirements of PMH;

   (b)     The section entitled ‘ASSISTANCE BY LESSOR’ gave me real concerns.

   1The phrase “The lessor will pay to Peats an agreed sum of compensation in return for Peats terminating its tenancy at National Bank House,” was intended to deal with the “incentive” which was discussed at the meeting as being $25 million plus the “up to” $5m additional amounts as described in detail in Mr. O’Connell’s memorandum of 22 October 1987.

   There was no agreed sum mentioned and the Partners were aware that JGL had only made a verbal offer.  The risk was that on the basis of this offer the Firm could embark on a course of action which, if it was retracted, or reduced significantly, could have left the Firm in a precarious position…

   2)The issue of fit out of the future premises clearly required more work as there were conflicts in the Collier’s letter which needed to be resolved.

   In one paragraph there is a statement that “The lessor will fit-out the tenancy in a manner and to a standard approved by Peats…” and later under the heading of there is the statement that JGL will “Provide assistance with the fit-out of the tenancy in a manner to be agreed…”;  This conflict was not capable of being readily resolved at the Partners meeting, and

   3)I had a real objection to the reference in Collier’s letter that JGL “grants Peats a right to acquire an interest in the building”.  Whether this statement was made on the authority of Mr. Spencer or Mr. O’Connell, or simply by Collier without instruction I do not know, but it was an offer that from my perspective was totally untenable.  It opened up further risks areas for the firm to consider and manage if JGL readily agreed to grant such a right.  For example-

   what percentage would the Firm be offered?

   what would be the cost?

   how would the partnership finance the cost or I finance my share?

   how would the firm deal with the rights of partners being admitted or retiring from the firm over a period of years in the future;

   what would be the stamp duty consequences of incoming and outgoing partners?

   what would be the capital gains tax consequence?

   how to deal with future growth once the building failed to meet the firms needs;

   what would be the consequence of a retraction in the business of the Firm? Etc.”[36]

   [36] Exhibit C at [13]

1. Other partners raised similar concerns to his own.  Management risks were discussed for the first time.  At the end of the meeting, Mr Proctor said, the partners resolved to authorise the LEC to enter an agreement to lease the office space at a building to be developed by JGL on the T&G site in the terms set out in the memorandum to partners dated 22 October 1987.  Other proposals that had been considered were no longer followed.  Managing the risks of the contractual agreement pending finalisation of the documentation remained a risk, Mr Proctor said.  Those risks needed to be managed over the ensuing months.

1. In his oral evidence, Mr Proctor said that he was prepared to vote for the proposal tabled in the slides because of the commercial pressures on them at the time.  He recognised that many of the potential risks had not been addressed and he was unconvinced that they had correctly estimated their space requirements.  There had been no formal offer and acceptance and rental rates had not been agreed but he felt that he had no choice but to move forward with a great deal of faith and manage the risk issues.

Giving effect to PMH’s decision to enter an agreement with JGL

1. On 20 April 1988, Mr O’Connell wrote to Mr Spencer regarding the “PMH House Incentive Payment from JGL”[37].  Mr O’Connell began by reminding Mr Spencer of the agreement with JGL providing for the payment of $25M plus, depending on the project’s profitability, an additional $5M.  For every dollar of profit above $25M for PMH and $41M for JGL, PMH was to share 36% (JGL: 64%) up to a maximum entitlement of $5M.  That agreement was based on the PMH’s committing itself to 17,000 square metres with options.

   [37] Exhibit 2, Document 18(I) at 1

1. Mr O’Connell went on to review PMH’s space requirements and the amount that JGL was prepared to pay if it leased increased space.  If PMH were to commit to 21,338 square metres with certain options to take further space in subsequent years, JGL would “… firm-up the conditional amount (in Deal 1) of $5M and pay an additional $2M.  Accordingly, PMH will receive $32M on commencement without any amount being subject to ‘profitability criteria’.”[38]  If PMH committed itself to 19,235 square metres with options to take further space in subsequent years, JGL would pay $27.5M unconditionally and the remaining $2.5M depending on profitability.  Mr O’Connell did not recommend the first option as PMH would have insufficient space.  He analysed the other two options against PMH’s space needs and on the assumption that it could not let any space that was excess to its needs.  He recommended the second option. 

   [38] Exhibit 2, Document 18(I) at 2

1. The LEC discussed Mr O’Connell’s analysis and he reported its discussions to the Space Committee in a memorandum of 29 April 1988[39].  Grocon was about to enter a contract with JGL to build the building at a fixed price and in a fixed time.  The plans and specifications approved by the LEC would be attached to the contract and form the basis of the detailed works.  Provided PMH gave Grocon its fit out plans in a specified time, it would fit those plans into the building works.  PMH would be able to realise a benefit of approximately $4M to $5M.  The Space Committee agreed that PMH should proceed with the second option provided it could have satellite offices if required and it was recognised that it could sub-let space surplus to immediate requirements[40].

   [39] Exhibit 2, Document 11

   [40] Exhibit 2, Document 12

1. Ultimately, the building contract was signed on 17 May 1988 after PMH decided to take 21,000 square metres of space with the previously agreed incentive.  That was discussed at a meeting of the LEC on 18 May 1988 as were the tax implications[41].  It was discussed by a meeting of all the partners on 27 and 28 May 1988.  Mr Proctor did not attend the meeting.  Discussion concerned the timing of the building and the proposed incentive deal.  The meeting “overwhelmingly” agreed that Mr Spencer, Mr O’Connell and Mr Barnett would consider the precise amounts and timing of the incentive payments and report to the next meeting[42].

   [41] Exhibit 2, Document 12(J)

   [42] Exhibit 2, Document 12(K)

1. On his return to the office, Mr Proctor said, he enquired about the meeting.  He was pleased to learn that the second option had been adopted as that reduced some of the risks that were of concern to him.  Those risks primarily concerned future space requirements.  Risks associated with the profitability formula had fallen away with JGL’s firm offer of a further $2M bringing the total to $32M.  Mr Proctor was also pleased that the building contract had been signed as that eliminated a number of planning and heritage issues which he thought could delay the project.

1. Mr O’Connell wrote to the members of the LEC on 17 October 1988 regarding a range of matters including the incentive payment.  A special meeting of the LEC was held on the same day.  It was resolved that Mr Spencer and Mr Buchanan would resolve the wording of the incentive payment paper[43].

   [43] Exhibit 2, Document 14

1. In a memorandum dated 21 October 1988, Mr O’Connell wrote:

   “… JGL intends making a payment to the firm of an amount of $8.0M as an inducement for PMH to enter into the Agreement to Lease.  JGL have also agreed to pay for the fit out of our tenancy up to $20M measured in dollars at 1/6/91. …”[44]

Mr Proctor said that he reviewed final draft documents attached to Mr O’Connell’s memorandum.  He also signed the Power of Attorney to assist the settlement of the agreement.

[44] Exhibit 2, Document 14(M) at 1

1. Mr Spencer wrote to PMH’s partners  on 24 October 1988 regarding the lease incentive[45].  The lease incentive comprised two elements: a fit out contribution by JGL of up to $20M and a cash inducement of approximately $8M if received by 15 November 1988.  Mr Spencer canvassed a number of issues regarding the way in which PMH’s partners should deal with the lease incentive.  He recommended that it be divided among PMH’s then partners.  As to tax, he wrote that PMH had received advice from senior counsel:

   “… that the cash inducement should not attract either capital gains tax or income tax, but obviously no guarantee can be given and partners must recognise that it is possible for tax to be levied.  We have arranged for a second QC’s opinion to be obtained because the size of the inducement is such that the Australian Taxation Office may not accept that the sum is not taxable.  Each partner should order his affairs to ensure that if tax is levied he has the cash available to pay it.  Providing proper disclosure is made, any late payment and other penalties should not exceed 14.026%.”[46]

   [45] Exhibit 2, Document 15

   [46] Exhibit 2, Document 15 at 10

1. Mr Proctor was absent from the partners’ meeting on 27 October 1988 but gave his proxy to Mr Spencer[47].  The meeting unanimously agreed to enter the lease and authorised four partners to sign the lease agreement.  Mr Buchanan addressed the taxation implications of the agreements and Mr Spencer presented a paper on the allocation of the lease incentive among the partners. 

   [47] Exhibit 2, Document 16

1. Mr Proctor said that he attended that meeting.  He saw the allocation of the lease incentive as representing a high degree of commercial logic.  At the same time, he would have been equally content to have the amount contributed as capital to PMH.  He continued:

   “At the time I was quite mystified as to why JGL and PMH’s legal advisors had drafted the Incentive Agreement the way they did.  In my view it was very much in favour of Sweetvale.  However, the signing of the agreement and the payment of the incentive resolved in substance the risk issues with the project that were of major concern to me particularly over the previous 12 months since Partners resolved to accept the JGL offer.”[48]

The agreement was signed on 23 November 1988[49].

[48] Exhibit C at [22]

[49] Exhibit 2, Document 17 and see also [13] above

The value of a tenant

1. Mr Wilkins said that PMM & Co would have been regarded as one of the “big 8” accountancy firms in Australia when he left it in 1981.  Among them, the “big 8” assumed the “big work” in Australia being the work for the larger manufacturing industry.  PMM & Co, which had a very good reputation, would always have been in the top three; sometimes it was first and sometimes second or third.  Mr Wilkins believed that it enjoyed a very good reputation at the time.  The manner in which it functioned, the quality of its service, its size and the number and quality of its clients would have appealed to a potential lessor as well as its reputation.  It would have been regarded as a suitable tenant that would not lapse or default in its obligations.  Mr Wilkins did not believe that PMM & Co was a drawcard for the NAB when it purchased the National Bank Building.

Whether negotiating a lease regarded as part of business activities

1. Mr Wilkins said that he did not regard lease negotiations as part of PMM & Co’s business activities.  The decision to change premises and the necessary negotiations that ensued were consequences of the firm’s growth.  The firm had to move from the National Mutual Building to National Bank House to conduct its business but its doing so was not part of its business.

The practice of paying incentive payments

1. Mr Wilkins said that he could not recall whether any incentive payment at all was received when PMM & Co moved to National Mutual House.  He had not long been a partner then and, although he was part of the decision-making process, was not aware of details such as that.  At the same time, he was not aware of any substantial amount of money coming to the firm.  Mr Wilkins said that he could not recall any incentive payment’s being made when the firm moved to the National Bank Building.

1. Mr Minchin said that he was aware of issues confronting the property market both because of his day to day activities and through the Overseas Bankers’ Association.  He said in his statement:

   “4.     In the Bank’s own business we examined proposals in detail for development funding.  Our examination included detailed examination of proposed building/construction contracts, the timeframes under which buildings were to be constructed, and the proposed commitments to rentals by prospective tenants and the future cash flows of the project.  Economic issues were a major feature in our considerations, including, the supply/demand equation, the direction of government policies, the volatility of the property market, the viability of tenants, construction companies and developers, the constraints on the level of property lending, Reserve Bank guidelines and other external economic issues.

   5.In the mid to the end of the eighties, the emerging practice of property developers making payments described as “Lease Incentives” to encourage prospective tenants to commit to a development project, became more prevalent.  The securing of a head tenant was, in most cases, one of the deciding issues in a financing arrangement being considered by financiers.

   6.From a banker’s prospective, “Lease Incentive” payments were a useful mechanism to reduce the overall project risk and flowed through to such areas as interest rate considerations and ensured the viability of the project depending on the financial strength of the intended lessee and the lessor.

   7.From my experience as a Banker, while Lease Incentives were being used to attract and secure future tenants, the practice was not as wide spread as generally believed in the industry.  There were many cases of finance being provided by lenders to well established (and in some cases not so well established) construction groups and investors, to either erect new buildings or to renovate old buildings for new tenancies without any pre-established incentives.  [In late 1986 or early 1987][50] Barclays Bank signed an agreement to move its Melbourne Head Office to a building at 410 Collins Street during renovation of the entire building.  No lead tenant had been secured prior to construction commencing.  Incentives were offered when construction was near completion, but not as part of the financing package in this case.  I am aware of some high profile buildings in Melbourne, which were constructed without a lead tenant and in some cases the owners of those buildings encountered financial difficulty.  A further branch office of Barclays Bank was established in 1986 in a building at 21 Victoria Street, which had also been funded without a lead tenant.  The Chief executive of an overseas bank, based in Sydney, which specialised in property/construction finance was not aware of up front cash payments being made as part of a financing proposal at that time.

   8.In most cases Lease Incentive payments were used to attract tenants to buildings, which had already been constructed or were under construction and which were to a large or lesser extent untenanted.  This was particularly the case when in the period up to 1986/1990 there was surplus space in city and city fringe developments and demand for tenancies in such new buildings was slow.  Developers/Owners used the Lease Incentive mechanism as a way of not only securing tenants but also to mitigate their high holding cost on development funding.

   9.Further, in my experience, the quantum of Lease Incentives was generally not large.  In economic terms the real beneficiary of the Lease Incentive was the Developer/Owner of the building in securing a long-term tenancy.

   10.In the case of incentives offered to tenants, where developments had not commenced, I took the view that there was a sharing of benefits or a transfer of the developers equity to secure a quality tenant.  The primary beneficiary was the prospective tenant as such payments to some degree mitigated the risk to the tenant that the building would not go ahead or would be completed behind schedule but the developer also benefited as explained above (Para 8).”[51]

   [50] Corrected in giving oral evidence.

   [51] Exhibit B

1. Mr Minchin said that evaluation of the business plan was a key element of the process of deciding whether to lend funds for a development project.  Other key elements included the construction team, the quality of the building to be built, cash flow, the property’s value and the quality of interest in the building.  Barclays Bank was very conservative and concerned itself with almost every aspect of the project.  It also made sure that the tenant to be placed in the building was the right tenant.  The cash flow generated by the tenant had to match the cash flow of the project so that it was viable and would stand on its own.  That entailed checking the credit worthiness of the tenant.  There was no way that he would have signed off on a project that did not have a commitment from a lead tenant or if the lead tenant were not credit worthy.

1. Mr Minchin said that the developer and the construction group as well as the character of the development determined whether Barclays Bank insisted on the payment of interest or permitted interest to be capitalised.  Generally, interest had to be paid from the developer’s own resources.  The property is used to secure the loan and ultimately, there is a cash flow from the building.  There are only a few instances where banks have participated in consortium development.  It they have done so, they have done so as a syndicate member and the syndicate’s leader has ensured that security is taken over the building and cash flow.  If the building is of a considerable size, banks are much more comfortable if a company of long standing is involved with the project.  They would not be comfortable going into large projects without a lead tenant.

1. Mr Minchin said that he was aware of the practice of paying inducements to tenants during the 1980s.  Barclays Bank itself had moved during that time and had received a lease inducement in the form of rent relief for three months and payment of the last six months of its then existing lease.  It took five floors and the basement of a building that was undergoing a redevelopment without a lead tenant.  Those sorts of inducements became quite prevalent when occupancy rates were low but buildings were being completed at a great rate.  Financiers become very nervous during such times.  Mr Minchin could not recall when the practice of incentives began.  Rent holidays occurred on occasion in the early 1980s but they were not enormous in the mid 1980s.  Incentives appeared again in the 1990s when there were difficulties in filling 333 Collins Street, Melbourne.  Solicitors were tenants but there was a lot of empty space and the inducements were significant.  The Rialto Building was completed in 1985.  The Education Department had agreed to be a tenant before the building was completed.  Inducements were offered to others and tenants were found but the project was never based on full occupancy.  Mr Minchin said that he had no knowledge of inducements offered to tenants in buildings other than 333 Collins Street.  He was not aware if rentals increased after the expiration of rent free periods offered as inducement.  Rent free periods were taken into account in meeting ongoing commitments.  He was aware that there were often free fit outs offered to tenants.  Cash payments were made at times to pay out existing leases.  Tenants were hard to find in the later part of the 1980s.

CONSIDERATION

May I consider all of Mr Proctor’s submissions?

1. Mr Proctor submitted that some of the risks that attended the proposal to enter a lease agreement with Sweetvale were factors he took into account in considering whether or not he should vote to accept the lease incentive.  Ms Davies submitted that Mr Proctor’s subjective views were of little, if any, relevance.  In any event, she continued, Mr Proctor did not raise that ground in his objection. 

1. I agree with Ms Davies that Mr Proctor did not rely on this ground in his objection.  Section 14ZZK(1)(a) of the Taxation Administration Act 1953 (“TA Act”) provides that:

   “the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates”.

1. Whether Mr Proctor is permitted to amend the grounds of his objection depends, as the Full Court of the Federal Court said in Lighthouse Philatelics Pty Ltd v Federal Commissioner of Taxation[52], upon “… the same considerations of justice upon which such decisions are regularly made in litigation”[53].  In Gilder v Federal Commissioner of Taxation[54], Davies J referred to the Full Court’s judgment and said that it had:

   “… held that the discretion to amend is at large. …

   …

   The discretion is unfettered.  But that is not to say that regard should not be had to the time limits imposed by the Act.  The Act gives effect to a policy that taxation affairs should be dealt with efficiently and promptly. …”[55].

   [52] (1991) 32 FCR 148; 91 ATC 4942 (Lockhart, Burchett and Hill JJ)

   [53] (1991) 32 FCR 148; 91 ATC 4942 at 156; 4,949

   [54] (1991) 91 ATC 5062

   [55] (1991) 91 ATC 5062 at 5,072

1. For the reasons I give below[56], Mr Proctor is bound by the acts of the partnership.  He cannot be heard to say that his intentions were different from those of his partners so that the lease incentive has a different character when his share of it is being considered from the character it has when his partners’ shares of it are being considered.  In view of that, to amend his objection to take account of Mr Proctor’s reasons for accepting JGL’s proposal and so the lease incentive would be of no consequence. 

   [56] [85] below

1. There is another reason why I have decided not to permit Mr Proctor to amend his objection.  Even if I did not feel bound by Goldberg J’s judgment in the case of O’Connell v Commissioner of Taxation[57], I would still need to look at the intention of the partnership.  Mr Proctor’s understandings and views would be part of the evidence but there would be no need to amend his objection to have regard to them.  That can be done without any amendment of Mr Proctor’s objection.

   [57] (2002) 121 FCR 562; 2002 ATC 4628; 50 ATR 331

May I have regard to all of the evidence produced by Mr Proctor?

1. Ms Davis challenged the admissibility of several segments of evidence on the basis that they represented opinion.  An example appears in Mr Wilkin’s statement:

   “14.   Throughout my professional life with PMM&Co, in the course of advising clients on taxation matters, as defined by appropriate tax legislation, I was required to determine the distinction between “income” and capital”.  The example of the “fruit” and the “tree” was often debated.  In the case of seeking out suitable premises and negotiating a long term lease, usually of some 15 years, to give economic ownership of premises to a partnership I would have regarded that activity as being the “tree”, the (capital) environment or setting in which the “fruit”, being the professional fees of the firm and its income, is derived.

   15.As stated in clause 11 above throughout my professional life as a partner with Smith Johnson and Co and PMM&Co the firms derived their income from fees for the services rendered for audit, taxation, accounting/secretarial, share registry and consulting services.  From my ongoing relationship with my former partners in PMM&Co and later in Peat Marwick Hungerfords and now KPMG I understand that that is still the case, as I would expect.

   16.Based on my experience in these two leasing arrangements I see a clear distinction between the activities of seeking out and negotiating new leases every 15 years or so to give long term economic ownership of premises to create the setting or environment from which a practice is carried on (of a capital nature) and the day-to-day activities of the firm from which it derives it assessable income.”[58]

   [58] Exhibit A

1. As Ms Davis submitted, s. 76 of the Evidence Act 1995 (“Evidence Act”) provides that “Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed”.  This rule, known as the opinion rule, does not apply to opinion evidence admitted for a reason other than to prove the existence of a fact[59]. It does not, however, bind the Tribunal for the Evidence Act does not affect s. 33(1)(c) that provides that it is not bound by the rules of evidence.  That is the effect of s. 4 and the definition of “federal court” in Part I of the Dictionary to the Evidence Act.

   [59] Evidence Act 1995, s. 77

1. I have considered whether the evidence given by Mr Wilkins raises another issue explained in R v Palmer[60] where Glass JA said:

   “… The true rule, in my opinion, is that no evidence can be received upon any question, the answer to which involves the application of a legal standard.  It is not possible, for example, to tender evidence that a defendant was negligent, that a deceased lacked testamentary capacity or that the accused was provoked.  …”[61]

It seems to me that the evidence that Mr Wilkins gave in his statement is directed to the ultimate issue that I must resolve i.e. whether the lease incentive was in the nature of income or capital.  While it is true that the Tribunal is not bound by the rules of evidence, it seems to me that evidence that is directed to the ultimate issue that I must decide is of little assistance.  I must make my decision on the basis of the facts that I find from evidence as to what transpired and on the basis of the law that I can ascertain.  While I would like to draw comfort from another’s view of what I should conclude, I do not consider that I can take that evidence into account in making my decision.

[60] [1981] 1 NSWLR 209; 1 A Crim 458 (CCA)

[61] [1981] 1 NSWLR 209; 1 A Crim 458 (CCA) at 214; 464

To what extent am I bound, if at all, by the findings of fact in O’Connell’s case?

1. In her written submissions, Ms Davies submitted that Mr Proctor, and alternatively, the Tribunal, is bound by the findings of fact made by Goldberg J in O’Connell v Commissioner of Taxation.  In her oral submissions, Ms Davies said that she did not go so far as to say that the Tribunal is estopped from considering the matter.  Rather, as Mr Proctor has failed to produce any admissible evidence contradicting Goldberg J’s findings of fact and as the documents on which he relied were the documents on which Goldberg J relied, he is bound by those findings. 

1. I have considered the matter on the basis of estoppel because, if I am not estopped, I consider that I am obliged to consider the evidence and make my own findings of fact in reaching what I consider to be the “correct or preferable” decision[62].  The notion of estoppel or issue estoppel, has been explained by Dixon J in Blair v Curran[63]:

   “       A judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies.  The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion, whether that conclusion is that a money sum be recovered or that the doing of an act be commanded or be restrained or that rights be declared”.

   [62] Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409; 24 ALR 577 at 419; 589 per Bowen CJ and Deane J and Smithers at 429-430; 607

   [63] (1939) 62 CLR 464 at 531-532 and approved in cases such as Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 597-599

1. Dixon J went on to distinguish between res judicata[64] and issue estoppel:

   “… in the first the very right or cause of action claimed or put in suit has in former proceedings passed into judgment, so that it is merged and has no longer an independent existence, while in the second, for the purpose of some other claim or cause of action, a state of fact of law is alleged or denied the existence of which is a matter necessarily decided by prior judgment, decree or order.”[65]

“It is a broad rule of public policy”, Fullagar J said in Jackson v Goldsmith[66].  In a later case of Port of Melbourne Authority v Anshun Pty Ltd[67], Gibbs CJ, Mason and Aickin JJ said:

“       The rule as to res judicata comes into operation whenever a party attempts in a second proceeding to litigate a cause of action which has merged into judgment in a prior proceeding.”[68]

[64] Res judicata pro veritate accipitur

[65] (1939) 62 CLR 464 at 532

[66] (1950) 81 CLR 446 at 466

[67] (1981) 147 CLR 589

[68] (1981) 147 CLR 589 at 597

1. Although the Commissioner was the respondent in O’Connell and the case concerned the activities of PMH and the very same lease incentive with which I am concerned, res judicata cannot apply in this case.  That follows from the fact that the parties are not identical for I am concerned with Mr Proctor’s application and not that of Mr O’Connell.

1. Returning to issue estoppel, Dixon J explained its limits:

   “Nothing but what is legally indispensable to the conclusion is thus finally closed or precluded.  In matters of fact the issue-estoppel is confined to those ultimate facts which form the ingredients in the cause of action, that is, the title to the right established.  Where the conclusion is against the existence of a right or claim which in point of law depends on a number of ingredients or ultimate facts the absence of any one of which would be enough to defeat the claim, the estoppel covers only the actual ground upon which the existence of the right was negatived.  In the phraseology of Coleridge J in R v Inhabitants of the Township of Hartington Middle Quarter (1)[69] the judicial determination concludes, not merely as to the point actually decided, but as to a matter which it was necessary to decide and which was actually decided as the groundwork of the decision itself, though not then directly the point at issue.  Matters cardinal to the latter claim or contention cannot be raised if to raise them is necessarily to assert that the former decision was erroneous.

   In the phraseology of Lord Shaw ‘a fact fundamental to the decision arrived at’ in the former proceedings and the ‘legal quality of the fact’ must be taken as finally and conclusively established (Hoystead v Commissioner of Taxation (2))[70].  But matters of law or fact which are subsidiary or collateral are not covered by the estoppel.  Findings, however deliberate and formal, which concern only evidentiary facts and not ultimate facts forming the very title to rights give rise to no preclusion.  Decisions upon matters of law which amount to no more than steps in a process of reasoning tend to establish or support the proposition upon which the rights depend do not estop the parties if the same matters of law arise in subsequent litigation.”[71]

   [69] (1855) 4 E & B 780 at 794 [119 ER 288 at 293]

   [70] (1926) AC 155

   [71] (1939) 62 CLR 464 at 532-533

2. In Hoystead v Federal Commissioner of Taxation[72], the Privy Council explained the same principle in a different way by setting out what has been settled:

   “       … first, that the admission of a fact fundamental to the decision arrived at cannot be withdrawn and a fresh litigation started, with a view of obtaining another judgment upon a different assumption of fact; secondly, the same principle applies not only to an erroneous admission of a fundamental fact, but to an erroneous assumption as to the legal quality of that fact.  Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the Court of the legal result either of the construction of the documents or the weight of certain circumstances.  If this were permitted litigation would have no end, except when legal ingenuity is exhausted.  It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle.  Thirdly, the same principle-namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed.  In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.  The same principle of setting parties’ rights to rest applies and estoppel occurs.”[73]

   [72] (1925) 37 CLR 290; [1926] AC 155

   [73] (1925) 37 CLR 290; [1926] AC 155 at 299; 165-166

1. It may be relatively easy to state the principle but, as Dixon J said:

   “The difficulty in the actual application of these conceptions is to distinguish the matters fundamental or cardinal to the prior decision or judgment, decree or order or necessarily involved in its legal justification or foundation from matters which even though actually raised and decided as being in the circumstances of the case the determining considerations, yet are not in point of law the essential foundation or groundwork of the judgment, decree or order. …”[74]

   [74] Blair v Curran (1939) 62 CLR 464 at 533

1. The Privy Council in Hoystead v Federal Commissioner of Taxation gave an illustration of the application of issue estoppel:

   “In Outram v Morewood[75], an action of trespass over a certain vein of coals lying under the close of the plaintiff, it was held that if a verdict be found on any fact or title, distinctly put in issue in an action of trespass, such verdict may be pleaded by way of estoppel in another action between the same parties or their privies, in respect of the same fact or title.

   In a previous action an issue was found for the plaintiff and against the wife, one of the two subsequent defendants, her husband being the other defendant with her in the action under decision.  Lord Ellenborough C.J. said(2)[76]:  ‘The operation and effect of this finding, if it operate at all as a conclusive bar, must be by way of estoppel.  If the wife were bound by this finding, as an estoppel and precluded from averring the contrary of what was then so found, the husband, in respect of his privity, either in estate, or in law, would be equally bound.’  And in subsequent portions of his judgement (3)[77] he spoke as follows:  ‘A finding upon title in trespass not only operates as a bar to the future recovery of damages for a trespass founded on the same injury, but also operates by way of estoppel to any action for an injury to the same supposed right of possession. . . . . . And it is not the recovery, but the matter alleged by the party, and upon which the recovery proceeds, which creates the estoppel.  The recovery of itself in an action of trespass is only a bar to the future recovery of damages for the same injury:  but the estoppel precludes parties and privies from contending to the contrary of that point, or matter of fact, which having been once distinctly put in issue by them, or by those to whom they are privy in estate or law, has been, on such issue joined, solemnly found against them.”[78]

   [75] 3 East 346

   [76] 3 East 346 at 353

   [77] 3 East 346 at 355

   [78] [1926] AC 155 at 166-167

1. There are various cases considering whether the Tribunal’s decisions may give rise to issue estoppel[79].  I am not concerned with that issue in this case.  There are also cases considering the extent to which the Tribunal must have regard to a criminal conviction and the facts underpinning that conviction.  I summarised the principles underpinning those cases in Re Street Nation Pty Ltd and Australian Communications Authority[80].  I would add to them a further example arising in the Tribunal’s taxation jurisdiction.  In Saffron v Federal Commissioner of Taxation[81], Davies J distinguished between those cases in which the Tribunal’s power is founded on a conviction and those where it is not.  His Honour explained:

   “       The rationale for the distinction between the two categories is, or course, that in the first of the categories the exercise of the power arises out of, and is founded on, the conviction.  The power conferred is not a power to reconsider that matter or the essential facts on which the conviction was based but a power to consider matters of discretion and like consequential matters which flow from the established fact of conviction.  When the power is not so founded, then all relevant matters, including the facts on which the conviction was based, are open.”[82]

   [79] e.g. Bogaards v McMahon (1988) 80 ALR 342 but, whether or not it applies, it may also be relevant to consider whether a proceeding should be dismissed as frivolous or vexatious under s.42B of the AAT Act.

   [80] [2004] AATA 1251 at [13] to [15]

   [81] (1991) 30 FCR 578; 91 ATC 4646

   [82] (1991) 30 FCR 578; 91 ATC 4646 at 582; 4,648

1. These cases lead to the conclusion that, where the fact that a conviction has been recorded is essential to found the Tribunal’s jurisdiction, the Tribunal is bound by that conviction and the essential facts on which it is based.  That principle would extend beyond a conviction to a determination, judgment or order that has been made by a court and which is an essential element in founding the decision-maker’s ability to make a decision and so the Tribunal’s jurisdiction to review it.  It is not a principle that is applicable in this case as Goldberg J’s judgment is not a pre-requisite to found the Tribunal’s jurisdiction.

1. Whether a court’s determination binds the Tribunal beyond such cases founding the Tribunal’s jurisdiction is another matter.  The question was raised in Commonwealth v Sciacca[83].  It was argued that there is no room for issue estoppel as the Tribunal is not bound by the rules of evidence[84].  The Court thought that the more likely view was that issue estoppel is a rule of law[85] but left open the question as it was not necessary to decide the case.  The findings of fact previously made by a court relating to issues of causation in a damages claim had not been facts fundamental to, or necessarily established as the legal foundation of, the court’s conclusion that the Commonwealth had breached its duty of care.  Even if issue estoppel were relevant, those findings could not bind the Tribunal in considering a claim for compensation under the Compensation (Commonwealth Government Employees) Act 1971. 

   [83] Commonwealth v Sciacca (1988) 17 FCR 476; 78 ALR 279; 14 ALD 565 at 480; 283-284; 566

   [84] AAT Act, s. 33(1)(c)

   [85] In Minister for Immigration and Ethnic Affairs v Daniele (1981) 39 ALR 649 at 654, Fisher and Lockhart JJ had thought that it was “… generally but not universally seen as a rule of evidence …”.

1. Issue estoppel was also considered by Whitlam J in Smith v Caltex Australia Petroleum Pty Ltd[86].  The Tribunal had considered that it was not estopped from accepting evidence contradicting findings made by the District Court as the claim for compensation it was considering under the Safety Rehabilitation and Compensation Act 1988 (“SRC Act”) related to a period different from that considered by the District Court.  Whitlam J analysed the issue to be considered by the Tribunal and that which had been decided by the District Court.  He found that the District Court’s findings were not made in respect of any issue that had to be decided by the Tribunal.  His Honour concluded that, even if he was wrong about the findings of the District Court being incapable of binding the Tribunal, he was:

   “… instructed by the decision of the majority in Sande v Registrar, Supreme Court of Queensland (1996) 64 FCR 123 at 127, 145; 134 ALR 560 at 564; 40 ALD 1 at 4 that the tribunal would not only be free, but bound, to arrive at its own findings of fact in order to determine any issue relating to the applicant’s incapacity. The doctrine of issue estoppel thus has no application to a proceeding under s 88(1) of the Act. …”[87]

He had taken into account the fact that the SRC Act had not varied the respondent’s obligations under s. 37 of the AAT Act to give Mr Smith documents relevant to the review of the decision as well as the requirement that information given under ss. 67, 68 and 83 may be used by the Tribunal on its review.

[86] (2004) 80 ALD 106

[87] (2004) 80 ALD 106 at 113

1. Although the principles are not necessarily yet settled, it seems to me that there is a common thread amongst them.  If a court decision, and so the essential findings on which it is based, is to bind the Tribunal it must be a case:

   ·where the fact that a judgment, however described, has been recorded is essential to found the Tribunal’s jurisdiction, the Tribunal is bound by that conviction and the essential facts on which it is based; or

   ·where the Tribunal is required to consider the same issue as the court and a reading of the AAT Act and the legislation conferring jurisdiction lead to the conclusion that it is intended to bind the Tribunal.

1. In this case, the first principle I have identified is not relevant. The second may be. Unlike its other jurisdictions, the Tribunal is not alone in being able to review the Commissioner’s decisions. An appeal may be lodged against the objection decision to the Federal Court or an application for review may be made to the Tribunal or, if the sum in dispute is less than $5,000.00, to the Small Tax Claims Tribunal (“STCT”)[88].  The forms of the appeal and of the review differ slightly.  The AAT is not bound by the rules of evidence and a hearing is less formal than in a court.  It can exercise all of the Commissioner’s powers and discretions and consider the matter afresh.  The Federal Court can only interfere with the way in which a discretion has been exercised if the Commissioner has not exercised the discretion lawfully.  Unlike the Tribunal, it cannot interfere simply because it would have exercised the discretion differently.  Unlike the Federal Court, the Tribunal cannot stay recovery proceedings taken by the Commissioner.  In short, the Federal Court conducts a de novo hearing on appeal, makes findings of fact, decides questions of law[89] and reaches its decision without exercising any relevant discretion.  The Tribunal conducts a de novo hearing on review, makes findings of fact, ascertains the answers to any questions of law and, exercising any relevant discretion, makes the decision it considers to be correct or preferable.

   [88] Taxation Administration Act 1953 s. 14ZZ

   [89] Including questions whether any discretion has been exercised lawfully.

1. Parliament has clearly decided that persons affected by the Commissioner’s objection decisions may choose the forum for review.  Each forum has its limitations but each is intended to “settle” the matter in the sense that the decision of the Federal Court and of the Tribunal may only be upset on appeal[90].  There is no suggestion in the Act that a person may apply to the Tribunal and appeal to the Federal Court in respect of the one objection decision.  Section 14ZZ is quite clear that the person affected by the objection decision must choose one path or another.  Having chosen a path, the person must, short of withdrawing the application in one and lodging another, stay with the chosen path. 

   [90] AAT Act, s, 44(1) and Federal Court of Australia Act 1976, s. 24. An appeal from the Tribunal is limited to a question of law but that from the Federal Court is not so limited: Annand & Thompson Pty Ltd v Trad Practices Commission (1979) 40 FLR 165; 25 ALR 91 at 184-185; 110 per Northrop J.

1. In this case, it was not Mr Proctor who chose to go to the Federal Court but Mr O’Connell.  Had it been, I would have had no hesitation in saying that I am bound by Goldberg J’s judgment.  He was required to determine whether the portion of the lease incentive paid to Mr O’Connell was assessable as income in his hands.  That necessarily required his making findings of fact regarding PMH’s purpose, and Mr O’Connell’s, in receiving the lease incentive.  I too must determine the same issue.  It is underpinned by the same factual issues.

1. Even though I am concerned with Mr Proctor’s case and not with Mr O’Connell’s case, I consider that I am equally bound to follow Goldberg J’s judgment.  Although the processes that his Honour followed in hearing and determining the appeal from the objection decision and that I am required to follow in reviewing the decision are, for all practical purposes, identical, his Honour’s judgment determines rights and liabilities according to law based on the findings of fact he has made whereas my decision does not.  In determining Mr O’Connell’s rights and liabilities, he has as a fundamental and necessary step to his decision, determined those of PMH.  If I am to review the objection decision affecting Mr Proctor, the characterisation of the receipt of $8,009,000.00 in the hands of PMH is again a fundamental issue that I must determine.  Its characterisation must, as it did with Mr O’Connell, determine the outcome for Mr Proctor.  That follows from the fact that they are or were, together with others, partners in PMH and, as a consequence, their assessable incomes include:

   “so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was a resident”[91]

There was nothing to suggest that the partners negotiating the lease and so the lease incentive acted without authority or that JGL knew that they had no authority or did not know or believe them to be partners.  I am satisfied that they had the necessary authority to make decisions on behalf of PMH in relation to those matters.  As a result, PMH was bound as were all of its partners[92].

[91] Act, s. 92(1)(a)

[92] Partnership Act 1958 (Vic), s. 10; Partnership Act 1892 (NSW), s. 6

1. Having reached that conclusion, I consider that I have no option other than to affirm the decision under review.  In case I am incorrect in my conclusion, I will deal briefly with the substantive issues.

Is Mr Proctor’s share of the lease incentive income?

1. The word “income” is not defined in s. 25 of the Act.  “The question in each particular case is as to the character of the receipt in the hands of the recipient. … The test to be applied is an objective, not a subjective, test. …”[93].  Furthermore, “It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make.  … The motives of the donor do not determine the answer.  They are, however, a relevant circumstance. …”[94].  What is income is not determined by reference to the nature of the expenditure that JGL made[95]. 

   [93] Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 55 per Fullagar J

   [94] Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526 per Windeyer J

   [95] GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136 per Brennan, Dawson, Toohey, Gaudron and McHugh JJ

1. There is no question that PMH was carrying on a business.  Its business was the provision of professional services in audit of both private and public companies, taxation, accounting and secretarial and share registry services.  Later on, its business activities extended to the provision of consultancy services.  If the lease incentive can:

   “… be said to have been entered by the firm  in the course of carrying on its business and if it can be said that the arrangement is a profit-making scheme in the sense that those words are used by the High Court in Myer[96] then it will follow that the amount received by the parties will be income and it will matter not that vis a vis the firm, the transaction was extraordinary.”[97]

   [96] Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199

   [97] Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 56

1. A gain that is made otherwise than in the ordinary course of business may also be income if it arises from a transaction entered with the intention or purpose of making a profit or gain.  Whether or not it does, depends on the circumstances of the case.  Provided that intention or purpose is present, it matters not whether the transaction was extraordinary when judged by reference to what is the normal course of business or that the profit or gain is made as a result of a one-off transaction or venture.[98] 

   [98] Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199

1. The majority of the High Court in Federal Commissioner of Taxation v Myer Emporium Limited made it clear that, whether an amount is received as income:

   “… depends very much on the circumstances of the case.  Generally speaking, however, it may be said that the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the taxpayer’s business.  Nor does the fact that a profit or gain is made as the result if as an isolated venture or a ‘one-off’ transaction preclude it from being properly characterized as income …”[99]

   [99] Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199 at 210

1. Regard may be had to the “… whole factual matrix”[100].  Certain aspects of a transaction may require closer scrutiny.  So, for example, an extraordinary transaction may lead to the generation of income but the “… singularity of a transaction may suggest that there is a mere realisation of a capital asset or change of investment rather than a transaction on revenue account….”[101]  At the same time, it is apparent from the judgment of Gaudron, Gummow, Kirby and Hayne JJ in Federal Commissioner of Taxation v Montgomery that it is relevant to consider if:

   “… There was … ‘not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and  coming in, being “derived,” that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal’.”[102]

   [100] Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 53 per Hill J

   [101] Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 676 per Gaudron, Gummow, Kirby and Hayne JJ

   [102] Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 677-678 per Gaudron, Gummow, Kirby and Hayne JJ

1. As Hill J said in Commissioner of Taxation v Cooling[103], “A scheme may be a profit making scheme notwithstanding that neither the sole nor the dominant purpose of entering into it was the making of the profit”.  It is clear from the judgments of the Full Court of the Federal Court in Selleck v Commissioner of Taxation[104] that it must be a purpose.  The fact that a lessor contributes to the fit out of premises when the lessee did not have any intention to make a profit does not transform the acquisition of new leased premises from a “… capital occasion … into a revenue occasion …”[105].

   [103] (1990) 22 FCR 42 at 56

   [104] (1997) 78 FCR 102; 97 ATC 4856

   [105] (1997) 78 FCR 102; 97 ATC 4856 at 106; 4,859 per Lockhart J

1. In so far as leased premises are concerned, Hill J said in Federal Commissioner of Taxation v Cooling:

   “       Where a taxpayer operates from leased premises, the move from one premises to another and the leasing of the premises occupied are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer’s assessable income.  Once this is accepted, the evidence established that in Queensland in 1985 it was an ordinary incident of leasing premises in a new city building, at least where the premises occupied were of substantial size, to receive incentive payments of the kind in question.  Why then should a profit received during the course of business where the making of such a profit was an ordinary incident of part of the business activity of the firm not be seen to be income in ordinary concepts?

   Another way of analysing the facts of the present case is to consider whether the transaction giving rise to the incentive payment can properly be characterised as a profit making scheme.”[106]

   [106] (1990) 22 FCR 42 at 56

1. Turning to the facts of this case, I am satisfied that at least from 1986 PMM & Co was concerned about how it should accommodate itself.  It had been expanding steadily over the years and had by then 60 partners based in Melbourne and 882 staff, of whom the majority would have been based in Melbourne.  It had outgrown its accommodation in the National Bank Building even though it had taken advantage of its options to lease further space in that building.  In an exchange of letters with NAB in April 1986, Mr Spencer had explored the possibility of leasing further space but effectively been told that there was none to be had in the short term.  I also accept that the partners of PMM & Co had considered the pros and cons of owning their own premises as opposed to leasing them.  They had done so at various times and I am satisfied that they had concluded that the advantages of leasing them outweighed both the advantages of owning them and the disadvantages of leasing them.  Long term leases, PMM & Co concluded, had the advantages of stability and did not present the same difficulties as ownership in relation to the retirement and admission of partners.

1. Although PMM & Co could remain in the National Bank Building until the end of 1989, I find that it began to look for alternative leased accommodation.  I consider that I can take, in effect, judicial notice of the lengthy time that may be required to find leased accommodation, especially of the size sought by PMM & Co and, later, the larger firm of PMH.  It began to look at what was available to lease outside National Bank House in April 1986 when it approached Colliers to assist it. 

1. Taking into account Colliers’ letter to PMM & Co of 22 April 1986, Mr O’Connell’s summary of the firm’s needs and options available to it in his letter to Mr Spencer of 24 July 1986 and Colliers’ advertisement of 27 February 1987, I find that PMM & Co did not necessarily see the exercise as limited to its seeking, finding, furbishing or refurbishing leased premises and moving to them.  It was open at that stage to all ideas and all suggestions.  That was in keeping with Colliers’ observation that it had an asset that had the potential to create a development profit of $8 to $10M and its suggestion that the firm adopt an entrepreneurial approach.  The advertisement was cleared by unspecified partners but I am satisfied that Mr Proctor was among them.  It was at his suggestion, I accept, that mention was made in the advertisement of a joint venture.  His motive, he said, was to protect PMM & Co’s identity.  I accept that it was his motive but, taking into account the correspondence pre-dating the advertisement, I am not satisfied that it was Mr O’Connell’s motive or that it could be taken to be PMM & Co’s motive.  PMM & Co was open to all ideas and clearly interested in gaining benefits, if they were available, beyond re-locating the firm to other premises.

1. Based on Mr Minchin’s evidence, I find that lease incentives were a feature of commercial lease agreements in the CBD during the mid 1980s when PMM & Co began its search for suitable accommodation.  Earlier lease incentives took the form of rent holidays but later free fit outs were offered together with cash incentives.  Mr Minchin was not precise as to the nature of the lease incentives offered or their timing because, as he readily acknowledged, he only had detailed knowledge of 333 Collins Street.

1. I accept that Mr Proctor was always primarily concerned with the suitability of any leased premises for the needs of the firm.  He was concerned that the firm was losing good people to competitors who could offer better accommodation and better support.  He was concerned about the needs of those who were not based in PMH’s central office in the CBD.  Alternative proposals such as the purchase of their own building should have been explored further in his view.  The terms of the lease had not been agreed.

1. These concerns continued throughout the negotiations with JGL.  Mr Proctor, however, also had concerns about the lease incentive that was being offered by JGL.  He had those concerns during the negotiations that continued through October 1987.  I am not satisfied that they were just passing concerns and peripheral to his main concerns regarding the suitability of the space.  On the basis of his own evidence, I find that he was concerned whether the lease incentive would be paid and the fact that Mr O’Connell’s memorandum of 22 October 1987 did not model the financial outcome if the lease incentive payment were not made. 

1. As far as PMH was concerned in October 1987, it is clear that the offer of the lease incentive was not only an integral part of PMH’s accepting JGL’s offer, it was an essential feature.  Mr O’Connell’s briefing to partners dated 22 October 1987 included it as one of the features of JGL’s proposal before concluding that JGL’s proposal was the most cost effective of the alternatives examined in the CBD.  The slide presentation described the tax and distribution of the lease incentive as being “of paramount importance”.  Those issues were to be explored further but that did not lessen their importance.  That the lease incentive was of paramount importance to Mr O’Connell at least was underlined by his subsequent correspondence with Mr Spencer in April 1988.  That maximising the lease incentive was of importance to the LEC was clear from the minutes of its meeting held on 18 May 1988.  That it was of considerable importance to the partners was clear from the minutes of the partners’ meeting held on 27 May 1988 and from Mr O’Connell’s subsequent correspondence and advice to the partners.  The lease incentive was clearly seen as a benefit to the partners.  Certainly there was a further sum that was to be used for the fit out of the new premises.  That was used to improve their capital investment as found by the Full Court in Selleck v Commissioner of Taxation.  The lease incentive with which I am concerned was seen quite differently.  It was seen as a sum that was to be distributed among the partners.  They were concerned as to how it was to be distributed amongst them when they had different entitlements as partners and they were concerned that their tax on that benefit should be minimised.  Their concerns were consistent with their seeing the lease incentive as something that was a gain to them.  It was also consistent with PMM & Co’s initial wish to take an entrepreneurial approach to its finding new accommodation and wish to benefit from the asset that its need represented.  It was not consistent with their regarding the lease incentive as a gain accruing to capital. 

1. On the basis of Hill J’s statement in Federal Commissioner of Taxation v Cooling that “… the move from one premises to another and that leasing of the premises occupied are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer’s assessable income …”, I find that PMH’s move to new premises was part of its business activities.  It makes no difference that it was a once in 15 year move or that it was only made after due consideration had been given to the relative benefits and disadvantages of buying and leasing premises.

1. I accept Mr Proctor’s evidence when he says that he did not care whether the lease incentive was treated by PMH as income or capital.  His attention was directed to the quality of the fit out and the suitability of the premises.  On my view of the evidence, his view was not shared by his partners in PMH and is not consistent with the manner in which they regarded or dealt with the lease incentive.  For the reasons I have already given, he is bound by the actions of his partners.  Therefore, I consider that PMH’s purpose, and it was a significant purpose, was to make a gain from its entering a lease agreement with JGL the lease incentive.  The lease incentive was received in the course of PMH’s business and was received as part of a transaction from which PMH intended to gain a benefit as a result of its being an “asset” to JGL as a tenant.  It was, in Mr Proctor’s hands, income within the meaning of s. 25 of the Act.  As it was distributed on or about 23 November 1988 and certainly in the 1989 year, it is assessable in that year.

1. For the reasons I have given, I do not consider that Mr Proctor has shown that the Commissioner’s amended assessment is excessive and I affirm the objection decision under review.

   I certify that the one hundred and three preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President S A Forgie,

Signed:           ...............................................................

Nathaniel Wills  Associate

Date of Hearing  9, 10 and 12 March 2004

Date of Decision  2 May 2005
For the Applicant  self represented
Counsel for the Respondent         Ms J. Davies
Solicitor for the Respondent         Australian Government Solicitor