Rotherwood Pty Ltd v Federal Commissiner of Taxation

[1996] HCATrans 232

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P12 of 1996

B e t w e e n -

ROTHERWOOD PTY LTD

Applicant

and

THE FEDERAL COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

TOOHEY J

McHUGH J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

FROM PERTH BY VIDEO LINK TO CANBERRA

ON FRIDAY, 9 AUGUST 1996, AT 11.39 AM

Copyright in the High Court of Australia

MR D.H. BLOOM, QC:   May it please the Court, I appear with my learned friend, MR R.F. EDMONDS, SC, for the applicant.  (instructed by Freehill Hollingdale & Page)

MR S. OWEN‑CONWAY, QC:   May it please the Court, I appear with my learned friend, MR P.R. MACLIVER, for the respondent.  (instructed by the Australian Government Solicitor)

TOOHEY J:   Yes, thank you.  Yes, Mr Bloom?

MR BLOOM:   If your Honours please, the distinction between capital and income remains critical under the Assessment Act.  The result of the decision below, in our respectful submission, is inconsistency and uncertainty in this critical area as well as inconsistency and uncertainty in relation to the question of the separateness of taxpayers in particular matters and who gets assessed and upon what basis by reference to those other taxpayers.  The direct tension on the first issue, your Honours, between the decision below and the decision of the Full Court of the Federal Court in Westfield and both courts relied upon this Court’s decision in Myer Emporium to get to their respective results.

TOOHEY J:   There is a difficulty though, is there not, Mr Bloom, that while you contend for these two fundamental propositions and say the judgment below is at odds with them, it is a case that turns very much on its particular facts and the scope of the arrangement and the parties who were participants in the arrangement, is it not?

MR BLOOM:   Your Honour, the facts in that respect could not have been more favourable to the taxpayer.  The facts, as found, and if I could take your Honours to page 11 of the application book ‑ ‑ ‑

GUMMOW J:   Is not the point in a way, Mr Bloom, that the principles were accepted.  No one disputes them.  When it came to apply them to these clear facts you say it went off the rails.

MR BLOOM:   Yes.

GUMMOW J:   But it does not yield any precedent of any value for later occasions because that will be clearly demonstrable.

MR BLOOM:   Well, that is not much satisfaction for my clients, if your Honour pleases, but notwithstanding that ‑ ‑ ‑

GUMMOW J:   Well, that may be so.

MR BLOOM:   Well, one might then have to rely upon section 35A(1)(b) in those circumstances, your Honour, but leaving that apart, what the court held in this case was that both the fact that the asset was a capital asset and the fact that it was not acquired with the intention of being resold for profit were irrelevant and yet both Westfield and Myer tell us that they are the most relevant facts.  The distinction between this case and, for instance, Myer is that in Myer the arrangement there was all by the one taxpayer.  The taxpayer there made the loan in question with the specific intention of thereafter assigning the income stream that it assigned and it was in those circumstances that this Court found that what it received was assessable income, at least under the so‑called first limb of the Myer decision.

A case on all fours with this, in our respectful submission, is the Hobart Bridge Case 82 CLR 372, a decision of his Honour Sir Frank Kitto, and your Honours see from the headnote that the appellant company was formed for the purpose of constructing a bridge over a river in Tasmania and the Derwent Company, the D Company, was formed as a subsidiary of the appellant for the purpose of dealing in land which it was anticipated would be enhanced in value by the existence of the bridge. The appellant held the majority of shares in the Derwent Company and it appeared from evidence that the appellant had acquired these shares, as in this case, solely for the purpose of holding them as a capital asset for the production of income.

Now, at page 384 Sir Frank Kitto says in the last full paragraph, the first sentence:

Plainly there was a general profit‑making scheme in which the appellant company and the Derwent Company were intended to play their respective parts.

And then, if one goes to 386:

In truth, the attempt to assimilate, for the purpose of deciding their income or capital nature, profits which the appellant company derived from the realization of shares in a subsidiary land‑dealing company with profits which it would have derived if it had itself conducted operations of land‑dealing is an attempt which falls under the condemnation of the Duke of Westminister’s Case.  It invites the Court to blur distinctions which are real and significant; and it must be met by an insistence upon the necessity of deciding the case in hand upon its own facts.  The assessment which is challenged was an assessment made against the appellant company and not against anyone else.  Therefore it is necessary to decide what is the character of the profit which is sought to be taxed, in relation to the appellant company and in relation to it alone.  To this end it is necessary to consider the purpose for which the appellant company acquired and held the shares in the Derwent Company from the realization of which the profit arose and not to any purpose of the individuals behind the appellant company or to the purpose which the Derwent Company existed to effectuate.

Now, what has happened in the instant case is that their Honours in the Federal Court have said that because there were purposes of others, because there was a general profit-making scheme ‑ ‑ ‑

GUMMOW J:   You rely also on Federal Coke, I suppose, which was referred to earlier this week in another case?

MR BLOOM:   Yes, certainly, your Honour.  Very much so.  To say that because the disposal of the capital asset not acquired for resale at a profit was a part of somebody else’s wider scheme, that that converts what is clearly capital into income, is to actually lay down a principle.  Of course, Sir Frank Kitto’s judgment, although obviously persuasive, is not binding on the Full Court of the Federal Court.  The Full Court of the Federal Court then is at liberty to follow - and a single judge, indeed, in the future will be bound by the Full Court of this Court ,rather than the clear principles as applied and enunciated by Sir Frank Kitto.

TOOHEY J:   Except that there is an intermediate step, is there not, that the purpose, or the motives of others - the Full Court is not necessarily saying that that is the decisive factor.  It is not saying that, but rather that those considerations might throw some light upon the character of the payment in the hands of this particular taxpayer.

MR BLOOM:   No, your Honour, with respect, because they say that because this disposal of this capital asset was part of a profit‑making scheme of others, the fact that this was acquired without any intention of being resold at a profit, becomes irrelevant.

GUMMOW J:   Is there a particular passage that highlights that.

MR BLOOM:   Yes, certainly; it is at page 81.  One starts at the top of the page.

TOOHEY J:   The reference to “set of integrated steps”?

MR BLOOM:   Yes.

The surrender was one step in a set of integrated steps designed by Chancery Services, F.H.P. and Freehills to take advantage of extraordinary market conditions and provide to Chancery a sum described as a fee -

Pausing at that word, “describe”.  Any suggestion of sham, of course, was expressly disclaimed at both levels:

described as a fee payable for the surrender of the lease.  The sum so generated and received represented a gain to Chancery Services produced by the arrangement not a sum produced by mere realization of a capital asset.

Then the next paragraph:

In those circumstances neither the fact that the lease was a capital asset nor the fact that Chancery Services did not acquire the lease for resale at a profit had any bearing on whether the sum received by Chancery Services could be characterised as a revenue receipt.

TOOHEY J:   Yes, but is not a particular feature of this case the fact that the lease, itself, which was surrendered had no value?

MR BLOOM:   That is certainly a finding below.  It is a finding which, of course, we contested, because the man who gave evidence of value failed to take account of the fact that the company, Chancery, had actually sublet the premises and was deriving considerable income.  He had failed to look at the value from Chancery’s point of view.  Nonetheless, their Honours certainly found that it had no marketable value.  But, that does not mean that it was not surrendered for the sum in question.  Nor does it mean that there was no consideration for the sum.  There was consideration in a contractual sense, even if that consideration was not fully adequate.  It is not a question here of there being no consideration, rather that consideration was the surrender of the lease.

At page 11 of the trial judge’s judgment, in a passage which was adopted by their Honours in the Full Court, at line 10:

By deed of surrender and a surrender of lease, both dated 31 January 1989, made between Colpenarm and Chancery Services, Chancery Services surrendered the Old Lease and the Old Licence -

That was the car parking licence:

in return for the payment of $6,000,000 which was made on or about that date by bank cheque paid to “Chancery Services Pty Ltd as trustee of the Chancery House Unit Trust.”  The deed of surrender attracted liability for Western Australian stamp duty of $250,525.00 which was duly paid.

There is absolutely no question sham has not been an aspect here.

TOOHEY J:   It is not a matter of sham.

MR BLOOM:   It certainly is not, your Honour.  But, the six million is paid for the surrender.  It may be that that six million exceeds greatly, in fact, totally, if one likes, the value of that which is the consideration for it.  It is not a question of comparative values, the question is what was the consideration which passed from this taxpayer to the person paying the money.  Nothing else, other than the surrender of the lease, is suggested or identified.  So that all that passes is a capital asset not acquired for resale at a profit, which if one is applying the principles in Myer as applied by Westfield, must lead of necessity to the result that what was received was a capital sum. 

That is why, your Honours, we say there is a tension between the decision in this case and the decision in Westfield.  Westfield says if you apply Myer, then if there is a sale of a capital asset or a disposal of a capital asset for a sum, and that capital asset was not acquired for resale at a profit, that is the critical factor.  But this case says if there is a disposal of a capital asset not acquired for resale at a profit as part of somebody else’s scheme, the taxpayer, however, having no other part than simply the sale of this particular asset, then the fact that it was not acquired for resale at a profit is irrelevant.  There could not be greater inconsistency, in our respectful submission, between ‑ ‑ ‑

GUMMOW J:   What do you say, Mr Bloom, the passage at page 80 lines 11 to 13, where there is a reference to Myer; do you have any complaint about that?

MR BLOOM:   Yes, your Honour, because if one goes to Myer, if I might take your Honours ‑ ‑ ‑

GUMMOW J:    That is to say the statement “it was sufficient”, et cetera.

MR BLOOM:   Yes.  It was sufficient, it was a profit making transaction; it is not.  If one goes to Myer 163 CLR, the relevant passage is at page 213, the first full paragraph:

The proposition that a mere realization or change of investment is not income requires some elaboration.  First, the emphasis is on the adjective “mere”:  Whitfords Beach.  Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising.....It is one thing if the decision to sell an asset is taken after its acquisition, -

as in this case -

there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale.  Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization.

So what we have here is a clearly capital, not revenue, asset which is sold in circumstances where it was not acquired for the purpose of being resold later at a profit.

TOOHEY J:   Yes, I understand that if you isolate that proposition and that fact from all other propositions and all other facts, but can you do so in this case if in fact the asset is applied towards a profit-making scheme?

MR BLOOM:   But it must be a profit-making scheme of the taxpayer, your Honour, and there was no profit-making scheme of the taxpayer.

TOOHEY J:   Well, or in which the taxpayer participates.

MR BLOOM:   No, that is not enough for the very reason Sir Frank Kitto gave, because somebody else may have a profit-making undertaking or scheme, a part of which consists in the taxpayer in question simply, as here, selling its capital asset for a lump sum.  Now, one has to look, as the present Chief Justice said in Federal Coke, at the consideration which flows from the taxpayer for the amount in question, not from somebody else.  The consideration which flows from the taxpayer here is a capital asset not acquired for resale at a profit and you cannot change that, with respect, by saying that it was desired, in the scheme of others, that this as a step in that overall scheme, take place, because at the end of the day, all you end up with with that taxpayer is a transfer by it of its capital asset not acquired for resale at a profit.

TOOHEY J:   All right.  If you isolate the taxpayer and consider a situation of a taxpayer who uses that asset, perhaps along with other assets in a profit‑making scheme, does the proposition still hold good?

MR BLOOM:   No.  In Whitfords Beach, for instance, there is an example.  A company which had held beach land for many many years suddenly was taken over, new shareholders, who then devised a business with respect to the subdivision and sale of that land.  That land then became from that point on a revenue asset, but there is nothing like that here.  This taxpayer simply sold the asset, it simply sold it for a very large sum.

McHUGH J:   But that was not the view of the facts that the Full Court took, rightly or wrongly?

MR BLOOM:   With respect it was, your Honour, but the ‑ ‑ ‑

McHUGH J:   They took the view that there was a profit-making arrangement going on and that your client had lent its asset to it; that was part of the overall scheme.  Now, that may be wrong or right, but it is only a question of fact, is it not?

MR BLOOM:   No, because the question is:  how did it lend the asset?  What did it do with the asset?  What did it do for the money that it got?  And the answer to that is, nothing more or less than selling the asset.  The question must be:  what is the nature of the sum received by the taxpayer in its hands?

McHUGH J:   But there was a finding that it was part of the business of Chancery Services to dispose of the profit according to its utility as determined by Freehills.

MR BLOOM:   Yes, your Honour, but it still leads back to the question of whether, when it disposed of that property, it was disposing of something it acquired for resale at a profit.  Now, there is nothing to suggest that this was an amount paid to it by Freehills.  This was an amount paid to it by the disponee.  It disposed of the asset, a capital asset which, as I have said too many times, was not acquired for resale at a profit.  That is the critical thing.  When one taxes a taxpayer as a separate entity, a discrete entity, one must look and ask:  what is the nature of the receipt in its hands having regard to what it has given as consideration for the sum?  And all it has given here - its only part in the arrangement, as their Honours say - is to dispose of its capital asset.

Your Honour, on the authorities, that must lead to the result that what is received is capital and yet the decision here is that it is income.  The decision here is that if it is part of somebody else’s scheme, the disposition of a capital asset so acquired can give rise to income.  Now that, with respect, is ‑ ‑ ‑

GUMMOW J:   Is it really someone else’s scheme?

MR BLOOM:   Yes, your Honour, exactly as was the case in the Hobart Bridge Case.  I mean, in the Hobart Bridge Case everybody was related, the same directors of each company.  The parent company was the one that sold the shares in the profit dealing company, the land dealing company, but, as his Honour said, you could not look at that, you could not ignore the separateness of the entities.  If I might finish with the passage from the judgment of Sir Nigel Bowen in Federal Coke 34 FLR, and the relevant passage is at page 386, about halfway down the page, the first full paragraph:

The approach taken by the learned trial judge was to decide the case on what he regarded as the substance of the matter.  He thought that the statements in the deed did not affect the nature of the receipt and that the $1 million was “a sum acceptable to Bellambi as compensation for the loss of part of a profitable contract”.  He did not overlook the fact that payment was in fact made by Le Nickel to Federal.  He said:  “How and why payment was made to Federal and not to Bellambi is here easy to ascertain.  This is simply a case of a commercial arrangement designed to have the money received by the Bellambi group to the best commercial advantage, that is to say, without having to pay tax on it. 

And that if one goes to the bottom of the page:

His Honour appears to have considered that he could approach the characterization of the receipts in the hands of the taxpayer by treating them as if they were received by Bellambi or the Bellambi group.  On the other hand, if they were treated as received by Federal, his Honour thought that they were received by Federal just as much as compensation for the contraction of the contract to supply coke as if the payee had been the parent rather than the subsidiary.  One may have some sympathy with an approach of this kind. 

However, in taxation matters, the court is obliged to have regard to the actual facts and not to their equivalents.  In cases where it is appropriate the court may apply a statutory provision such as section 260 to get rid of a contract, agreement or arrangement - - -

GUMMOW J:   We all know that, Mr Bloom, but, what about the passage at 402 in Justice Brennan’s judgment at about point 8, the reference to sharing of motive which is picked up by the Full Court in the instant case?

MR BLOOM:   There was no question that in this case, Federal Coke, there were shared motives.  I mean, your Honours recall the facts.

GUMMOW J:   No, in this present appeal here, at page 79 of the appeal book?

MR BLOOM:   There were shared motives in Federal Coke, as well.

GUMMOW J:   Yes.

MR BLOOM:   Because in Federal Coke a cheque had actually arrived in Australia payable to the other company, Bellambi, and, on the advice of learned senior counsel, as he then was, it was sent back and a cheque came out to Federal Coke and the question was, what is the nature of the payment made to Federal Coke in its hands?  And, his Honour Justice Brennan accepted, yes, there were shared motives, but that could not change the fact that in the hands of Federal Coke the receipt was a capital receipt.  If your Honours please.

TOOHEY J:   Yes, Mr Owen‑Conway?

MR OWEN‑CONWAY:   If the Court pleases.  Mr Bloom has repeatedly submitted today that the profit arose as a result of a profit-making scheme of others.  He said it is somebody else’s scheme.  Now, the fact of the matter is, and it is plain, with respect, that there were three parties to this scheme.  Those parties were the firm, Freehills, Chancery Services and FHP Services, and if I might invite your Honours’ attention to page 43 of the application book his Honour Justice Carr set out clearly and simply the essence of the scheme.  His Honour said:

In essence, the transaction or scheme was to exploit a market situation in which Freehills’ preparedness to commit itself to long‑term occupancy of office space (whether by lease or sub‑lease) was something of value which could be turned to good account.  Freehills’ part in the scheme was to make the commitment by way of guaranteeing the performance by FHP Services of its obligations under the New Lease and the New Licence and also by taking the new sub‑lease and sub‑licence.  It was of no concern to Colpenarm whether there was a direct commitment of this type by Freehills to it or whether, instead, there was a commitment by FHP Services, guaranteed by Freehills.  FHP Services’ part in the scheme was to take the New Lease and New Licence and grant the sub‑lease and sub‑licence to Freehills.  Chancery Services’ part in the scheme was to surrender the Old Lease and Licence and it did so, not as an independent transaction, but as part of the scheme.  In my view, when it received the $6 million that money was income in its hands:

and his Honour referred to Myer -

This conclusion is not dependent on any finding that Chancery Services acquired the Old Lease with the intention or purpose of realising it subsequently at a profit.  There is no evidence of that.  However, the absence of such evidence does not require a holding in this case that the receipt was a capital receipt.  The land in Whitfords Beach, when originally purchased by the taxpayer, was not acquired with the intention or purpose of realising it at a profit.

Then at line 11:

In my view Chancery Services derived a profit or gain from an extraordinary but profit‑making transaction undertaken in the course of its business.  The profit or gain can be ascertained by comparing the position before and after the transaction.  Before the transaction was entered into, Chancery Services had a lease which either had no value or was a liability.  Upon carrying out its role in the scheme in conjunction with the steps taken by the other parties, as described above, a net figure of nearly $6 million was realised.  In my view, the present case falls within what is usually referred to as “the first strand” of the reasoning in Myer.

And it is my respectful submission that the case does fall within that first strand of reasoning in Myer and it is quite clear on the evidence in this case that the finding of his Honour Justice Carr that the old lease had no marketable or surrender value was correct.  There can be no doubt about that.  One only has to have regard to illustrate the point to page 29 and 30 of the application book.  At page 29 of the application book reference is made to an exhibit - it was exhibit 5 - which was:

a written proposal dated 20 October 1988 from the owner of the new QV1 building in St George’s Terrace, Perth, offering Freehills three floors in that building on a fifteen year initial term with two five‑year options.

Now, the incentives which were offered in the market at the time included:

the discharge of Freehills’ remaining current debt in relation to the fit‑out at 15‑17 William Street -

and an offer to indemnify:

Freehills for the cost of all rentals, outgoings and charges in relation to the Old Lease until 31 October 1992 -

and that was a period then of some three and three‑quarter years hence and there was evidence that the annual outgoings under the old lease were in the order of $1 million.  So that offer to indemnify was worth $3.75 million when it was made.  In addition, the owners of that building offered to pay Freehills the sum of $3 million on certain conditions.  Over the page, at the top of page 30, his Honour referred to:

a memo dated 12 July 1988 to Freehills’ Management Committee which foreshadowed this offer, Mr T.H. Reinold of Freehills described this as “some arrangement (presumably financial) for what we were stuck with here in terms of the residue of our lease”. 

I think before his Honour I described this as an albatross around the neck of Freehills.  If Chancery had not been in a position where it was locked in to a term of three and three‑quarter years under the old lease, there is no doubt that the amount of the incentive payment which would have been offered would have been increased, certainly in the order of 3 to $4 million. 

Now, Mr Bloom has referred to the Hobart Bridge Case.  In that case the profit arose as a result of a compulsory acquisition of shares.  On the evidence it was found that the appellant company never had a business of or including dealing in shares, nor did it acquire the shares for the purpose of profit‑making by sale and, most importantly, the profit did not arise from the carrying out of any profit‑making undertaking or scheme.  If I might refer to the judgment of Justice Kitto at page 382 point 8 in the report.  His Honour said:

On the evidence, however, I have no hesitation in finding that the appellant company never had a business of or including dealing in these or any shares, that it did not acquire these shares for the purpose of profit‑making by sale, and that the profit in question did not arise from the carrying on or carrying out of any profit‑making undertaking or scheme on the part of the appellant company.  I am satisfied that the appellant company acquired the shares wholly and solely for the purpose of holding them as a capital asset for the production of dividends.

So the facts in the Hobart Bridge Case were entirely distinguishable and, as your Honours have already pointed out, this is a case which turns on its own facts. 

Your Honours, might I put three submissions at this point.  The first is this.  If the acceptance by Colpenarm of the surrender of the old lease by Chancery and the payment of $6 million to Chancery to obtain that surrender had been unrelated to and independent of the promise by the parties associated with Chancery to enter into a new long‑term lease at an increased rental with like obligations undertaken by Freehills as sublessee, then the argument that the surrender of the old lease amounted to no more than a realisation of a capital asset may have had more force, but even then the argument would still not prevail because the surrender of the old lease was nevertheless a transaction by Chancery in the ordinary course of its business or, alternatively, a transaction in the course of Chancery’s business entered into with the intention or purpose of making a profit and, even if the transaction was not in the course of Chancery’s business, it was nonetheless a business operation or commercial transaction entered into with a purpose of making a profit or gain.

And, accordingly, the profit or gain so made is income in ordinary concepts, even if no scheme comprising interdependent transactions existed  But as noted by the Full Court at page 78 of the application book, there was ample evidence to support the finding of Justice Carr that Chancery, Freehills and F.H.P. participated in a mutual arrangement to organise their affairs to deliver a gain to Chancery.  And, as I said - - -

GUMMOW J:   Well, that is a separate - - -

MR OWEN-CONWAY:    - - -Chancery’s part in that arrangement was to execute the surrender to obtain the gain on offer by reason of the arrangement.  And, as the Full Court found at page 81, the surrender was one step in a set of integrated steps designed by Chancery, F.H.P. and Freehills to take advantage of what were extraordinary marketing conditions and to provide Chancery a sum described as a “fee payable” for the surrender of the lease.  The sum so generated, and received, represented a gain to Chancery produced by the arrangement, and not a sum produced by the mere realisation of a capital asset.  The surrender of the old lease was not independent of the other elements of the arrangement, and would not have taken place but for the agreement by F.H.P. to take the new lease, with Freehills guaranteeing performance, and taking the sublease and the sublicence.

The second submission is this; it is the applicant’s submission that the fact that the old lease was acquired without the intention of profit making is fatal to the proposition that its disposal generated income.  Mr Bloom relies upon Myer Emporium.  Now, the respondent’s answer to that submission is set out at paragraph 23 of the respondent’s summary of argument.  I will not repeat that, but I would like to elaborate to this extent; at first blush, some support may be found for the applicant’s submission in the judgment of Justice Hill in Westfield at pages  342 point 5 and 344 point 3.  But the passage in Myer at pages 209 and 210 - might I invite your Honours’ attention to that well-known passage in Myer.  I will read the relevant part now, but first to say that this passage does not expound principles of general application.  At the bottom of page 209 - - -

GUMMOW J:   If I can ask you a question?  If you are right on your first proposition, do you need the second?

MR OWEN-CONWAY:   No.

TOOHEY J:   Mr Owen‑Conway, you need not read the passage from Myer, if you just tell us where we find it.  At the foot of page 209, is it?

MR OWEN-CONWAY:   Yes, and the top of page 210.  Your Honours will see that the sentence commencing on page 210, I think it is line 6:

The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit‑making by the means giving rise to the profit.

Now, Mr Bloom has argued consistently, at first instance, on appeal and again today, that that is a passage of general application.  Now, as Justice Carr said at appeal book page 21, when his Honour referred to this passage, the High Court was there expounding the principles applicable to a profit or gain made as a result of a one-off transaction, not in the ordinary course of a taxpayer’s business.  And the words so made, in line 7 on page 210, it is clear that they refer to an isolated or one-off transaction.

And, whilst the High Court is saying that a profit or gain made from such a venture or transaction will be income if the property was acquired in a business operation or commercial transaction for the purpose of profit‑making by the means giving rise to the profit - whilst the High Court is clearly saying that, it is not saying that this is the only situation in which a profit made from a one-off transaction is income.  Such is clear from the Court’s reference to Whitfords Beach in lines 5 and 6 on page 210.  In Whitfords Beach land was acquired in 1954 and, at the time of its acquisition, it had not been purchased by the taxpayer with the intention of resale at a profit. 

But the High Court held that the profits from the subsequent sale were nonetheless income because they were received in the course of carrying on a business of developing, subdividing and selling the land, which purpose the company adopted for the first time in 1967, some 13 years after it first had acquired the land.

That occurred after a change in its shareholding and in those circumstances the High Court held that what the company did amounted to more than realisation of an asset.  What it did constituted the carrying on of a business of land and development and, accordingly, the income was assessable according to ordinary concepts and in Whitfords Beach the profits would have been assessable under the second limb of section 26A as profit from a profit‑making undertaking or scheme had it not been found that it was assessable under section 25(1) and, further, the disposal of an asset by a transaction which is part of an interdependent transaction in a wider profit‑making scheme is not a mere realisation of the asset.  Nothing could be clearer than that from passages in Myer at page 213 point 2 where the Court said:

However, over the years this Court, as well as the Privy Council, has accepted that profits derived in a business operation or commercial transaction carrying out any profit‑making scheme are income, whereas the proceeds of a mere realization or change of investment or from an enhancement of capital are not income -

And then at page 214 point 9 where the High Court distinguished the facts in Phillips and Paget and noted that:

in Paget, no question of a profit‑making scheme arose.

Then at 215 point 8, after referring to the 1986 Wilfred Fullagar Memorial Lecture the High Court said at point 6 on the page, if I can just pick up the line:

when the receipt in question is generated in the course of carrying on a business, especially if it should transpire that the receipt is generated as a profit component of a profit‑making scheme.  If the profit be made in the course of carrying on a business that in itself is a fact of telling significance.

And this was a profit which was made in the course of carrying on Chancery’s business as found by the Full Court.  It does not detract from its significance that the particular transaction is unusual or extraordinary judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer’s business and if it appears that there is a specific profit‑making scheme it is pointless to say that it is unusual or extraordinary in the sense discussed.  Then, most importantly on page 216 point 5 the High Court said this:

If the two transactions, namely the loan agreement and the assignment, are considered as separate and independent transactions, Myer’s argument that no relevant profit arose from the assignment has compelling force.  The consideration payable for the assignment reflected the true value of the chose in action which Myer assigned.  But once the two transactions are seen as integral elements in one profit‑making scheme it is apparent that  Myer made a relevant profit, that profit being the amount payable on assignment.

Your Honours, finally, if I might just say, the respondent has distinguished the facts in Westfield at paragraph 24 of its submissions and it is our principal submission that Justice Hill’s statement in Westfield was not intended to be of general application and, in any event, it does not apply in circumstances of interdependent transactions comprising a single profit‑making scheme.  If our submission is incorrect, if we are incorrect in submitting that there is no difference of opinion between the judgment of the High Court in Myer and that of Justice Hill in Westfield, then the respondent submits that Justice Hill was in error and if his statement in Westfield was intended to be of general application then no support for such a proposition is found in Myer.  Your Honour, those are my submissions.

TOOHEY J:   Yes, thank you Mr Owen‑Conway, Mr Bloom?

MR BLOOM:   Your Honours, the statement by Sir Frank Kitto in Hobart Bridge about the facts in that case, at page 384 he said:

Plainly there was a general profit‑making scheme in which the appellant company and the Derwent Company were intended to play their respective parts.

He went on to hold that since the part of the appellant company in that scheme was to dispose of its capital asset not applied for resale of profit, what it received was capital.  When one puts that together with the facts as found here at page 43 of the application book at line 23:

Chancery Services’ part in the scheme was to surrender the Old Lease and Licence.

Now, it is not suggested that it was done as an independent transaction, but the question remains, as it was in Federal Coke, what is the consideration given by this taxpayer for the sum which it received and where that consideration is the transfer of an asset which is both a capital asset and was not acquired for resale to profit, then the consideration received in its hands is capital.

My learned friend relies upon, I think as his first point, the fact that acceptance of the surrender and payment of the six million was not unrelated to and independent of the promise by someone else, another one of the parties, to enter into a new lease, but that promise is not consideration flowing from the taxpayer, and as Federal Coke tells us, we must look at the consideration which flows from the taxpayer and tax it accordingly, not by reference to the nature of the amount had it been paid in fact to somebody else.

Your Honours, the passage in Myer, to which my learned friend took you, is a passage about general principle, but their Honours qualified that at page 213 in the passage to which I took your Honours, where their Honours said that if it is a case of sale of an asset then, if the asset was not acquired for resale to profit, the profit will not be assessable.  If your Honours please, there is a clear tension between Westfield and this case acknowledged at the end of his submissions by my learned friend.  The result is both Federal Courts applying Myer to get to an inconsistent and unsatisfactory situation.

A single judge of the Federal Court coming now to a situation involving this sort of situation, namely, a sale of an asset as part of some wider scheme but where all that the taxpayer does is to sell the asset not acquired for resale to profit, will not know which of those two is correct.  On Westfield, there ought to be, in our respectful submission, only one result and yet, on this case, there will be the contrary.  If your Honours please.

TOOHEY J:   Yes, thank you, Mr Bloom. 

The applicant contends that the decision of the Full Court of the Federal Court is at odds with two fundamental propositions of income tax law.  The reasons for judgment of the Full Court accept both principles and the decision turns on the view of the courts below that the surrender of the lease by Chancery Services was part of a wider profit-making scheme in which Chancery Services was a participant and under which it received the sum of $6 million.

This Court has said more than once that the Full Court of the Federal Court is to be regarded as a court of final resort in tax matters unless some question of fundamental principle and of general application is involved.  The argument of the applicant is essentially one of misapplication of principle and does not call for the attention of this Court.  Special leave to appeal is refused.

MR BLOOM:   If the Court pleases.

MR OWEN-CONWAY:   Would the Court grant an order of costs in favour of the respondent?

TOOHEY J:   You will need to ask for it, Mr Owen-Conway.  Is that your application?

MR OWEN-CONWAY:   That is my application, your Honour, thank you.

TOOHEY J:   Any reason why costs should not follow?  Special leave is refused with costs.

AT 12.20 PM THE MATTER WAS CONCLUDED