The Commissioner of Taxation of the Commonwealth of Australia v Merv Brown Pty Ltd

[1985] FCA 53

Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: MERV BROWN PTY. LTD. (1985) 7 FCR 1
No. VG 202 of 1984
Taxation - Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Bowen C.J.(1), Lockhart(2) and Jenkinson(3) JJ.

CATCHWORDS

Taxation - taxpayer carried on business of importing and selling clothing by wholesale - import quotas - sale and purchase by the taxpayer of previous import performance ("P.I.P.") consequent upon decision to restructure its business following introduction of government programme to rationalise industry - whether transactions in P.I.P. a normal incident of taxpayer's business or an essential part of its income earning mechanism - appropriate test to determine whether receipt is revenue or capital.

Income tax - Assessable income - Profits of business or realisation of capital assets - Clothing wholesaler - Sale of import quotas - Reorganisation of business - Income Tax Assessment Act 1936 (Cth), s 25(1).

HEADNOTE

Held, Per Bowen CJ and Lockhart J. (Jenkinson J. dissenting): That sales of import quotas by a clothing importer/wholesaler, following a substansial change in the tariff quota system relating to the importation of clothing resulting in a decision to concentrate on profitable lines and abandon or reduce unprofitable lines, were neither normal incidents of its trading activities nor a purpose for which it carried on business, and therefore the sales proceeds were capital receipts.

Californian Copper Syndicate v. Harris (1904) 5 TC 159; London Australia Investment Co Ltd v. Federal Commissioner of Taxation (1977) 138 CLR 106 per Barwick CJ at 111-112, applied.

HEARING

Melbourne, 1984, November 14-16; 1985, February 28. #DATE 28:2:1985
APPEAL

Appeal from a decision of the Supreme Court of Victoria.

R Merkel QC and N J Young, for the appellant.

B J Shaw QC and H Reicher, for the respondent.

Cur adv vult

Solicitor for the appellant: Australian Government Solicitor.

Solicitors for the respondent: Abbott Stillman & Wilson.

FPC

ORDER

1. The appeals be dismissed.

2. The appellant pay the respondent's costs of the appeals.

Appeal dismissed

JUDGE1

I have had the advantage of reading the reasons for judgment of Lockhart J. I agree with his conclusions and his reasons and will add only a brief comment of my own.

It may be said that every importing business conducted in Australia is carried on in a framework of legislation and administrative arrangements dealing with customs duties, import quotas and other matters; that changes in government policy reflected in changes to that legislative and administrative framework, necessarily bring about changes in the conduct of such a business; and, that every importing business operates within this framework with the consequence that adjustments in reaction to such changes are but an ordinary incident of carrying on such a business. Logically such an exposition has its attraction. But in my view, while some changes in the legislative or administrative framework may produce merely adjustments which are ordinary incidents in the carrying on of such a business, other changes of a more fundamental character may entail adjustments which are properly to be regarded as being of a capital nature.

What is difficult in a case such as the present is to determine on which side of the line the changes to the legislative or administrative framework and the adjustments occasioned by those changes, should be placed. Having regard to the findings of the trial Judge, I find myself in agreement with his view that the changes to the framework and the particular adjustments (re-organisation) which the taxpayer undertook as a result were of a capital nature. A mere change in product lines would ordinarily present itself as an incident of carrying on such a business. However, here, on the findings of the trial Judge, although that was part of what was done, more was involved and what was carried out was truly a re-organisation consequential upon the changes effected by the government.

I would dismiss the appeals with costs.

JUDGE2

These three appeals are concerned with the question whether certain sums received by Merv Brown Pty. Ltd. ("the taxpayer") during the years ending 30 June 1980, 1981 and 1982 belong to capital or to revenue. The taxpayer was assessed to income tax on the basis that the sums received were on revenue account and therefore should be included in the taxpayer's assessable income. The Supreme Court of Victoria (Kaye J.) held that the sums received were capital items and allowed the taxpayer's appeals against the assessments. The Commissioner appealed to this Court from the Supreme Court's judgment. By consent of the parties the appeals were heard together by the Supreme Court and by this Court since they involve the same questions of law and similar facts. Kaye J. heard evidence and came to various conclusions of fact. The result of this appeal, however, depends not so much on fact as on the emphasis and weight that should be given to indisputable facts or facts as found by his Honour and the inferences to be drawn therefrom.

Since its incorporation in 1964 the taxpayer has carried on the business of selling clothes by wholesale from premises in Melbourne. The clothes it sells are either imported by it or manufactured for it by local manufacturers. In 1980, for example, 55% of the garments sold by the taxpayer were made locally and 45% were imported from South-East Asian countries. The gross sales of the taxpayer were then approximately $22m. These appeals concern the importing activities of the taxpayer.

The principal part of the taxpayer's business has always been what was described in the evidence as "bread-and-butter lines", not subject to the vagaries of fashion - children's wear and some adult wear. In 1980 the taxpayer's business also included some areas of adultwear which were fashion garments and in which the taxpayer traded either at a loss or unprofitably. In 1980 the taxpayer's business activities were static. In 1981 the taxpayer changed its activities significantly by increasing its business in its principal areas of non-fashion garments and by withdrawing from the non profitable trading areas of fashion garments. The purpose of that change is central to this case; to understand it involves some analysis of the Australian Government's tariff quota system as it relates to the importation of clothing.

Tariff quotas are a method of controlling imports to levels determined by the Australian Government. Where goods are allocated a particular quota they may be imported at a rate of duty that is generally lower than the rate applicable if goods are imported beyond the quota levels or are not otherwise the subject of a quota. There is no prohibition on the importation of goods outside the quota arrangement; but where such goods are imported, what are in substance additional or penalty rates of duty are applied so as to discourage imports.

On 15 August 1980 the Minister for Business and Consumer Affairs and the Minister for Industry and Commerce announced new assistance arrangements to be operative from 1 January 1982 which were to provide for a seven year programme of tariff quotas for the textile, clothing and footwear industries.

It is necessary to consider the tariff systems applicable to the importation of clothing for local consumption in force immediately before and after 1 January 1982. I rely considerably upon the learned trial Judge's findings for this purpose.

Under the old system there were numerous categories for clothing quotas. An annual quota to import goods in a particular category at concessional rates of tariff was granted to an importer based on his importation of the goods in the particular category entered for home consumption in the previous twelve months. This was called by various names, but the term I will use is "the base performance". If he did not use the whole of his quota his base performance was proportionately reduced in the following year. Hence his annual quota allotted for a particular year depended upon the volume of imports made by him during the preceding year. This was referred to as "the moving base" since it was difficult for importers to plan and carry on their businesses due to uncertainties produced by the system. Importers frequently sold their annual quotas to other importers under the old system thus enabling them to achieve some flexibility in their marketing of products.

In August 1977 the Australian Government announced that the Industries Assistance Commission would enquire into and make recommendations for the fixing of tariff quotas for the textile, clothing and footwear industries in Australia.

In 1980 the taxpayer's annual quotas included a quota for a category (known as category 101) of adult knitted coats, jumpers and cardigans. The taxpayer devoted considerable effort and money to the promotion of sales of those kinds of garments and employed additional staff for that purpose, but without achieving any real success. Its largest customer was Target Australia Pty. Limited ("Target"), a national retailer. At that time Target was endeavouring to expand its trade in adult knitwear, but its quota for those goods was insufficient to meet its requirements. A representative of the taxpayer and Target discussed what the trial Judge described as "their respective predicaments" concerning those goods. In the result, on 6 June 1980 the taxpayer sold to Target the whole of its base performance of category 101, comprising 121,078 units, for $257,401 receiving as an initial payment $157,401. It was the inclusion of the latter sum as assessable income which gave rise to the taxpayer's objection to the assessment for the 1980 year, the subject of the first appeal. The balance of $100,000 was paid to the taxpayer by Target during the ensuing financial year.

The new system which came into operation on 1 January 1982 was substantially different from the old system. Instead of a moving base, the importer's previous import performance (known as "P.I.P.") for the two years ended 30 June 1980 ("the base performance period") became the basis for calculating the allocation of annual quotas. The P.I.P. was fixed for the entire seven year period of the system. The Government fixed a "ceiling quota" each year most of which was allocated to importers based on their P.I.P. during the base performance period. The units undisposed of by the allocation of P.I.P. were available for purchase by tender and they were known as "tender quota".

One significant difference between the old and new systems was that, whereas under the old system annual quota unused during the relevant period was lost with the consequence that the base performance applicable for determination of the quota allocation for the following year was reduced, under the new system allocation of quota was made on the basis of P.I.P. fixed for the seven year period commencing 1 January 1982. In the result, an importer knew the base upon which his allocation would be made for the ensuing seven years, thus enabling him to plan his future import activities with some certainty.

The number of clothing quota categories was reduced and imports of New Zealand origin which qualified for New Zealand preference were included in the P.I.P.. Both P.I.P. and unused annual quota were transferable subject to Government approval. The Government discouraged the transfer of P.I.P.'s and annual quotas other than to genuine importers. If they were bought and sold for speculative purposes they might be withdrawn. Under the old system it appears that there also existed a market for an importer's base performance, but the evidence is not very clear about this. It seems, however, that under the old system sales of base performance were for figures of about two to three times the value of annual quota sales for which there also existed a very active market.

The true legal nature of these rights is indeterminate for they are a hybrid derived from Government policy, notices issued by the Bureau of Customs, departmental practice and the general understanding of the clothing industry. Their eclecticism and intellectual elusiveness strikes no responsive chord, however, in the practical world of the importation of garments. Perhaps it is as well that this is so; otherwise the brisk and substantial trade which this disembodied creature enjoys today might evaporate leaving the dry dust of the law as its milieu and destiny.

The new system has resulted in some rationalisation of the clothing industry in this country; indeed, this was one of the purposes of the introduction of the new system. Some importers decided to go out of the industry altogether and sold their P.I.P.'s; others entered the industry and bought P.I.P.'s. Some importers have diversified their business activities by changing their product lines in whole or in part, or by expanding certain lines and reducing others. This has been possible due to the greater certainty permitted under the new seven year programme. These changes are reflected in the sale and purchase by importers of P.I.P.'s. Since 1 January 1982, when the new system commenced, numerous importers have transferred their P.I.P. in whole or in part. The principal purchasers of P.I.P. in recent years have been large retailers who decided to import clothing to meet their own requirements rather than to buy it from importers. Those importers in turn have sought to fill the gap thereby created either by finding other buyers for the garments in question or leaving that product line altogether. Again, these decisions and changes are reflected in the sale and purchase of P.I.P.

There is a flourishing traffic in the purchase and sale of annual quotas and tender quotas as importers seek to meet anticipated changes in the fashion industry. Since they are but annual creatures, such quotas are not bought or sold to fulfil long-term planning requirements of people in the clothing industry. However, P.I.P. transactions generally reflect and give effect to longer term planning requirements. There is also a substantial business in the buying and selling of P.I.P. The sale of P.I.P. generally returns three or four times the amount returned by the sale of annual quota because of the very nature of P.I.P. For example, if a particular importer has P.I.P. of 250,000 units he is likely to have an annual allocation of about 100,000 units - it is assessed on the basis of the P.I.P., which has a two year base, but the annual allocation of quotas is in fact a little under 50% of the two year base. Hence some deduction must be made on that account.

Tender quotas are not appropriate for long term planning for more than one reason, including the fact that there is no guarantee that a successful tenderer one year will be successful the next year. Tender prices vary considerably from year to year. An advantage of acquiring P.I.P. is that it not only assists longer term planning but the unused annual quota goes with it. After the introduction of the new system there was substantial activity in the sale and purchase of P.I.P. as people sought to rationalise their businesses.

Towards the end of 1980 the taxpayer began to review its business. It sent its sales manager of mens wear overseas to investigate different categories of garments and styles. As I said earlier, in about May 1981, after months of discussion between senior officers and directors of the taxpayer, it decided to withdraw from the non-profitable areas associated with recurring changes of fashion, to confine its business to its principal areas of children's and adult's non-fashion garments in which it possessed particular expertise and to expand that business. The trial Judge found that, as part of that decision, the taxpayer planned to increase its business in woven coats and jackets, shorts and male swimwear. Implementation of the new policy of the taxpayer necessitated a reorganisation of its entitlement to quotas by disposal of its P.I.P. in categories which it no longer required and the increase of its holding of P.I.P. in categories in which it sought to increase its business. In particular, because of what is known as "the 86 centimetre rule" it became necessary for the taxpayer to acquire additional P.I.P. in category 113 to enable it to offer to its clients a range of children's wear of all sizes including those exceeding 86 centimetres chest measurements. The "86 centimetre rule" was derived from the departmental requirement under the new system that top garments having a chest measurement of 86 centimetres or more were required to be imported under category 113 (being adult outer wear including tracksuits, knitted pyjamas, female slack suits and woven pyjamas). Under the old system the taxpayer was able to import some outer wear having chest measurements exceeding 86 centimetres as children's garments under category 111 (being children's wear) because the Government did not enforce the 86 centimetre rule.

The details of relevant sales and purchases of P.I.P. during the 1981 and 1982 years appear sufficiently from the reasons for judgment of the trial Judge and need not be repeated. The sales in the 1981 year occurred on three days in May 1981 and the total proceeds of sale were $916,487. That sum, together with the $100,000 paid by Target (being the balance owing under the sale made on 6 June 1980) namely, $1,016,487, is the subject of the appeal for the 1981 year.

During the 1982 year the taxpayer made three sales of P.I.P. and the total revenue from those sales was $682,262 which is the subject of the third appeal. During the same year the taxpayer made purchases of P.I.P. For business reasons the taxpayer was required to purchase from two sellers P.I.P. in category 113 in excess of its requirements because, those amounts were offered as part of a package deal. To reduce the excess quantity and to meet its requirements the taxpayer sold 120,000 units in category 113 to Target in August 1981, this being of one of the three sales of P.I.P. made during the 1982 year.

The trial Judge found that after the end of the 1982 tax year the taxpayer purchased further P.I.P. in certain categories, but he found that the taxpayer disposed of P.I.P. categories which it had held in small numbers and which were no longer required and acquired P.I.P. categories which it needed.

The trial Judge found that from time to time after the introduction of the new system the taxpayer applied for allocations of tender quota in several categories, some of which it had sold between June 1980 and July 1981. It also purchased annual base quotas in those categories. Its reasons for applying for tender quotas and for buying annual quotas were principally to meet immediate or anticipated trading requirements. The taxpayer tended, however, not to favour the purchase of tender quota.

The trial Judge also found that the acquisitions and disposals of P.I.P. made by the taxpayer constituted a very small percentage of its total holdings of P.I.P., never exceeding more than 3% thereof. It appears that this finding is subject to the qualification that at one time, only briefly, about 7% of the total P.I.P. holdings of the taxpayer represented its purchases and sales of P.I.P. The trial Judge found that as a result of the implementation of its policy to reorganise its business the turnover of the taxpayer increased from $22,000,000 in 1980 to $47,000,000 in 1983; and that this was brought about substantially by confining its imports mainly to childrens' and adult men's non-fashion wear and woven fabrics. Over that same period the number of the taxpayer's customers was reduced from 1,500 to 700 enabling it to provide more efficient and economical service than it had previously provided when importing a larger variety of goods. His Honour found also that at present the imports of the taxpayer constitute approximately 40% of its trade.

The trial Judge stated the question arising in the appeals as whether the sales and purchases of P.I.P. were normal incidents of the taxpayer's trading activities or a purpose for which it carried on business and would thus be on revenue account, or whether they were an essential part of the taxpayer's income earning mechanism or apparatus and would thus be on capital account.

His Honour concluded that buying and selling P.I.P. was not part of the business activities of the taxpayer and in particular that it did not and does not speculate in P.I.P. His Honour analysed the relevant sales and purchases of P.I.P. made by the taxpayer during the three years in question and concluded that the sales were part of the implementation of the taxpayer's decision to reorganise its business - a decision brought about by the Government's new tariff policy. His Honour found that the taxpayer's purchases of several categories of P.I.P., both during the relevant three years and thereafter, were for the purpose of expanding its trade in the clothing included in those items and were part of its decision to reorganise the business. He concluded that the taxpayer's sales and purchases of P.I.P. were incidental to the conduct of the business only in so far as the new Government policy and changed market conditions rendered it necessary for the taxpayer to sell particular categories and to purchase others. He found that in all the circumstances the payments received by the taxpayer from the sales of P.I.P. during the three years were capital items and allowed the appeals.

Counsel for the Commissioner submitted before this Court that, although the taxpayer did not trade in P.I.P., nevertheless its sales and purchases of P.I.P. involved more than the mere realisation or acquisition of assets. It was submitted that the purchases and sales were acts "done in what is truly the carrying on, or carrying out, of a business" (Californian Copper Syndicate v. Harris (1904) 5 T.C. 159 at p. 166).

It was submitted on behalf of the Commissioner that the taxpayer's transactions in P.I.P. were occasioned by the exigencies of trading, that those exigencies were in the ordinary course of the taxpayer's business and that the transactions had no effect upon the nature or fundamental structure of its business.

The relevant principles in this area are well known. We were referred in argument to many cases which were said to assist by analogy with this case, but I do not think that any good purpose would be served by reviewing them. Argument from analogy is rarely productive of certainty or clarity; indeed it often obscures the real point in a case.

Obviously no definite rule of general application can be formulated by which it may be determined under what circumstances receipts by a taxpayer are of a revenue or capital nature, although I am conscious of the cautionary note sounded by Sir Owen Dixon in Hallstroms Pty. Limited v. Federal Commissioner of Taxation (1946) 72 C.L.R. 634 at p. 646 as to the dangers of courts saying that the distinction between matters of income or capital is only a question of fact and leaving the field void of the formulation of legal principle.

Both parties accepted as the appropriate test whether a receipt is on revenue or capital account, the following passage, which has been often cited with approval, in the Californian Copper Case from the judgment of Lord Justice Clerk at p. 166:-

"But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business . . . Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?"

Certain of the cases in which this passage has been cited with approval are collected by Gibbs J. in London Australia Investment Co. Limited v. The Commissioner of Taxation of the Commonwealth of Australia (1977) 138 C.L.R. 106 at pp. 115 and 116. See also the judgment of a Full Court of this Court in The Chamber of Manufacturers Insurance Limited v. Federal Commissioner of Taxation (1984) A.T.C. 4315 at pp. 4317-8.

Notwithstanding the numerous references with approval to these statements of Lord Justice Clerk in the Californian Copper Case I share the views of Barwick C.J. about them which he expressed in the London Australia Investment Case in these terms at pp. 111-112:

"Discussion of the subject usually begins with a citation of the remarks of the Lord Justice Clerk in Californian Copper Syndicate (Limited and Reduced) v. Harris. The oft citation of the truism there expressed has given it a delphic significance. Of course, what is produced by a business will in general be income. But whether it is or not must depend on the nature of the business, precisely defined, and the relationship of the source of the profit or gain to that business. Everything received by a taxpayer who conducts a business will not necessary (sic) be income. As I have said, it must depend on the essential nature of his business and the relationship of the gain to that business and its conduct."

In determining whether monies received by a taxpayer are of an income or capital nature one looks to the nature of the taxpayer's business and activities, the character of the assets realised and the relationship between the two. It is necessary "to make both a wide survey and an exact scrutiny of the taxpayer's activities": Western Gold Mines N.L. v. The Commissioner of Taxation (W.A.) (1937-1938) 59 C.L.R. 729 per Dixon and Evatt JJ. at p. 740. If, having regard to these matters, the conclusion is reached that the particular realisation was a normal incident in the carrying on of the profit earning operations of the taxpayer's business, the receipt will be of a revenue nature.

There are certain aspects of the evidence which support the view that the sales of P.I.P. in this case were of a revenue nature. I shall mention some of them. The taxpayer engaged in twelve transactions of sale and fourteen of purchase of P.I.P. during the three years of income. Some additional purchases of P.I.P. thereafter were mentioned by the trial Judge. The sales of P.I.P. were not reflected in or accompanied by the sale or purchase of plant or equipment or changes in staff of the taxpayer. There is some suggestion in the evidence that the services of one member of staff were terminated due to the restructuring of the taxpayer's business, but the taxpayer did not press that suggestion before the trial Judge or before this Court.

The changes in the taxpayer's business were essentially in its product lines: some kinds of garments were substituted for others or increased in volume and others were reduced.

However, I have come to the conclusion that the trial Judge correctly held that the taxpayer's sales of P.I.P. were neither normal incidents of its trading activities nor a purpose for which it carried on business; that P.I.P. was an essential part of the taxpayer's income earning mechanism and that the sums received by the taxpayer from sales of P.I.P. during the three years of income are capital items.

P.I.P. can, of course, be bought and sold as part of the carrying on of a particular business. Indeed, it may be the subject of speculative activity; but by its nature P.I.P. tends to have more of a capital than a revenue flavour. It is the creature of government policy designed to remove the former uncertainty from the planning and conduct of an importer's business which attended "the moving base" by substituting a firm base determinative of his quota allocation for the seven year period commencing 1 January 1982. Inherent in P.I.P. is the annual entitlement to quota allocation. The annual quota or tender quota, both of which are bought and sold extensively, have more of the attributes of revenue than does P.I.P. because, by their nature, they lend themselves more readily to satisfying annual or other short-term requirements for stock in the clothing industry. It is P.I.P. that fixes for the whole seven year period an importer's percentage of the annual quota allotted by the Australian Government excluding the percentage reserved for tender quota.

The taxpayer considered for months what effect the new system would have on its business and the course it should take to restructure it. Finally, in May 1981 the taxpayer decided to concentrate its business on the merchandise in which it had traded profitably and to abandon or reduce its business in unprofitable areas where it lacked expertise. This policy was implemented by the sale and purchase of the P.I.P. in question in this case. But the taxpayer's concern was with the future structure of its business, in the sense of the particular product lines which would form the basis of its future operations. The sale or purchase of P.I.P. was only incidental to this primary concern of the taxpayer; it was the instrument to give effect to the decision to restructure. The taxpayer's business was importing and selling both imported and locally made garments. Sale or purchase of P.I.P. was not a normal incident of that business. The sales and purchases of P.I.P. in which the taxpayer engaged were not large in number and represented a very small percentage of the total holding of the taxpayer's P.I.P.. The taxpayer's transactions in P.I.P. were almost all the consequence of its decision to restructure or reorganise its business following the Government's introduction of the new seven year programme designed to rationalise the industry. The sale of P.I.P. to Target in the year ended 30 June 1980 was for a special purpose. It enabled the taxpayer to reduce its business in some unprofitable lines that it no longer wished to continue in the future by selling P.I.P. to its largest customer (Target) who wanted to expand its trade in those lines.

The sales of P.I.P. the subject of these appeals were of a capital nature. I would dismiss the appeals with costs.

JUDGE3

Appeal pursuant to s.200(a) of the Income and Assessment Act 1936 against an order of the Supreme Court Victoria (Kaye J.) allowing the respondent's appeals and the appellant's disallowance of objections and assessments of income tax in respect of the years of ended 30 June 1980, 1981 and 1982.

In each assessment the appellant Commissions included in the respondent's assessable income several amounts paid to the respondent in consideration its enabling the payer to have the benefit, which the respondent would have had, of a concessional rate of customs duty upon the importation of a number of items of clothing of a particular description. The respondent's objection, which the learned judge upheld, was that each of those amounts was a capital receipt.

At material times powers conferred by Part XVI of the Customs Act 1901 were so exercised as to limit the number of a particular description of goods which might in a specified period be imported at the lower of two rates of Customs duty. Goods upon which duty at the higher rate was paid could not be utilised in commercial competition with similar goods upon which duty at the lower rate was paid or with similar goods manufactured in this country. That system of control of commercial importation is called a tarriff quota system. Each description of goods subject to quota is called a category, to which is assigned a number. Reference to the category by its number is common in commerce and in the evidence. The number of goods in each category which the Executive Government has decided may be imported at the lower rate of duty during a specified period (normally one year) is called the quota for that category. The quota is divided among those who desire to import goods in that category during that period and whose claims to a share of the quota are recognised by the administrative authority. The method of apportioning the quota among the members of that class of persons has not remained unchanged during the period with which the Court is concerned in this appeal. A person who had been importing, on a commercial scale, goods in a particular category before the year ended 30 June 1980 was recognised as entitled to a share of the quota for that category proportioned to the relative magnitude of his importation of goods in that category during the year preceding that period in respect of which the quota applied. The scheme accorded recognition to an arrangement between two persons whereby any number of the garments in a category imported by one of them in a year was to be treated, for the purposes of calculating entitlement to a share of the quota, as having been imported by the other. Such arrangements were ordinarily made for valuable consideration; they were common; thery facilitated the commencement of a business involving commercial importation; and they enabled established importers to vary the volumes of their importations in one or more categories. Whatever may be the correct legal description of these arrangements, they were commonly described as though they constituted, or at least involved, sales, or occasionally exchanges, of chattel interests. Thus it is said that on 6 June 1980 the respondent "sold" to Target Australia Pty. Ltd., for $257,401, 121,078 units, in a clothing category numbered 101, which would, but for the "sale", have been taken into account in the calculation of the respondent's share of the next quota for that category, but which would, in consequence of the "sale", be taken into account in the calculation of the buyer's share of that quota, as if the buyer had been the importer of 121,078 units of clothing in that category in the year preceding the period for which the quota was to be fixed. In August 1980 the Executive Government announced changes in the method of apportioning the quota, as well as changes in categorisation of clothing and clothing materials. For the seven successive quota periods, each of one calendar year, which would commence on 1 January 1982 the quota in each category was to be divided into two parts. One part, 15 per centum of the whole for the first of those periods and a progressively increasing percentage thereafter, was to be allocated among importers at a price to be determined by tender. The other part, to be known as base quota, was to be apportioned, as before, in proportion to the relative magnitude of each importer's previous importation of goods in the category, but the period by reference to which his previous import performance, as it was called (and so, in abbreviation, P.I.P.) was to be measured was changed from the twelve months immediately preceding the period to which the quota related to the twenty four months ended 30 June 1980. As before, "sale" of the whole or a part of an importer's P.I.P., expressed as a number of the units in a category imported by him during that period of twenty four months, was to be recognised and given effect in the administration of the scheme. Recognition and effect were also to be given, as they had been given previously, to similar transactions, also conceived as "sales", with respect to parts or the whole of an importer's share of the base quota of a particular year.

During the last forty years the respondent has conducted a business of selling clothing by wholesale. Its trading stock was obtained from Australian manufacturers and, since 1968, by importing garments and clothing fabrics. In 1980 55 per centum of the garments sold were manufactured in Australia and 45 per centum thereof were imported. The following findings by Kaye J. were not challenged by the appellant:

"In 1980 the taxpayer's trade in imported merchandise was principally children's wear and jeans, with some adult wear, all of which were of non-fashion quality, commonly described as 'bread and butter lines'. In those areas, the taxpayer traded profitably. On the other hand, there were some areas of adult wear, including fashion garments, in which the taxpayer was either trading at a loss or unprofitably. Overall, its business operations were static."

"In 1980 the taxpayer's annual quotas included a quota for a category of adult knitted coats, jumpers and cardigans, which was then known as category 101. The taxpayer devoted considerable effort and money to promote sales of those types of goods and employed additional staff for that purpose, but without achieving an acceptable degree of success. Its largest customer was Target Australia Pty. Ltd., a national retailer. At that time Target was endeavouring to expand its trade in adult knitwear but its quota for those goods was insufficient to meet its requirements. Representatives of the two companies discussed their respective predicaments concerning those types of goods. As a result of their discussions, on 6th June, 1980 the taxpayer sold to Target the whole of its base performance of category 101, comprising 121,078 units, for $257,401, receiving as an initial payment $157,401. It was the inclusion of the latter sum as assessable income which gave rise to the taxpayer's objection to the assessment for the 1980 tax year, the subject of the first appeal."

"In about May 1981, after months of discussion, the decision was reached . . . . . . (by the respondent) . . . . . . to confine but increase the taxpayer's tradings in its principal areas of children's and adults' non-fashion wear in which it possessed particular expertise, and to withdraw from non-profitable trading areas . . . . . . Implementation of its new policy necessitated reorganisation of the taxpayer's entitlement to quotas by the disposal of some P.I.P. in categories already held by it and the acquisition of P.I.P. for other categories."

"Resulting from the implementation of the policy to reorganise its business, the taxpayer's turnover increased from $22 million in 1980 to $47 million in 1983. This was brought about substantially by confining its imports to mainly children's and adult men's non-fashion wear and woven fabrics. During the same period, the number of its customers was reduced from 1,500 to 700, enabling it to provide more efficient and economical services than when it imported a larger variety of goods. At present, its imports constitute approximately 40 per cent of its trade."

"It might be concluded that because of the total number of sales - twelve - during three tax years, a sale of P.I.P. was a normal and natural incident of the business. Such a conclusion would ignore many considerations, including the circumstances which gave rise to the sales and the purpose of the sales. Thus the disposal of category 101 in June, 1980 was the first sale of P.I.P. made by the taxpayer in approximately five years. It was brought about by the taxpayer's decision to discontinue trading in imported adult woollen wear because it was unable to continue doing so profitably and because a valued customer required the taxpayer's quota for those goods. Its sales of several categories of P.I.P. in 1981 and 1982 tax years were part of the implementation of the taxpayer's decision to reorganise its business, which decision was brought about by the Government's new tariff policy. Its purchases of several categories of P.I.P., both during the same period and thereafter, were for the purpose of expanding its trading in those items which was also part of the same decision to reorganise.

In my opinion, the taxpayer's sales of P.I.P., notwithstanding their number, were neither normal incidents of its trading activities nor a purpose for which it carried on business. I am satisfied that the sales and purchases of P.I.P. were incidental to the conduct of the business only insofar as the new Government policy and changed market conditions rendered it necessary for the taxpayer to sell particular categories and to purchase other categories. The use of P.I.P. made by the taxpayer was not by itself directed to producing income; but it provided the means by which the taxpayer could import goods at concessional rates of tariff and thereby trade competitively and profitably. Thus, from its possession and use of P.I.P., the taxpayer derived advantages for its trading operations."

"The acquisitions and disposals of P.I.P. made by the taxpayer constituted a very small percentage of its total P.I.P. holdings, never exceeding more than three per cent thereof."

The aggregate receipts by the respondent during the year ended 30 June 1981 in respect of the transactions under consideration were $1,016,487, and during the year ended 30 June 1982 $682,262. Only in the latter year did the respondent "buy" P.I.P., expending on those transactions amounts aggregating $837,279.

It was not in dispute that the difference between the two rates of import duty did not result merely in a competitive advantage : it precluded competition in any Australian market between goods imported at the lower rate and similar goods imported at the higher rate. Without the entitlement which P.I.P. conferred to share in the quota of a category of goods admitted at the lower rate commercial importation of goods in that category during the three years ended 30 June 1982 was not in a practical sense possible. That circumstance suggests that the advantage which P.I.P. conferred might be of a lasting character which would enure for the benefit of the respondent's business entity. The suggestion was strengthened by the attribution, under the new system announced in August 1980, of effect throughout a period of seven years to the importations of the two years ended 30 June 1980. What was given up by the respondent, and conferred on the "buyer", in exchange for the payments received by the respondent under the transactions effected in the years ended 30 June 1981 and 1982 were shares, proportioned to the number of units "sold", in base quotas for each of the seven successive years commencing on 1 January 1982.

Until the introduction of the changes announced in August 1980 it was a consequence of the operation of the legislative and administrative system of controlling the trade in which the respondent was engaged by differential tariff rates and quotas that in the conduct of a business of importing clothing and clothing materials there was involved an accrual, upon and in consequence of the importation at the lower rate of duty of each unit of trading stock of a particular category, of a capacity to obtain by importation at that rate further trading stock of that category. Each importation resulted in both accrual of that capacity and utilisation of a capacity previously acquired to obtain trading stock by importation at the lower rate. Each of that accrual and that utilisation was an incident of the process by which the respondent's business entity operated to obtain regular returns by means of regular outlay. But the alteration of the system which was announced in August 1980 produced the result that the respondent's capacity to obtain trading stock by importation at the lower rate no longer accrued as an incident of each importation, but was conferred at one time by legislative and administrative fiat, and was measured by reference to the magnitude of the respondent's importations in each category during the two years ended 30 June 1980, and related no longer only to the year following the year of accrual, but to each of seven successive years.

On a larger view it may in my opinion truly be said that the entitlement which P.I.P. conferred was, both before and after the alteration of the system, necessarily incident to the conduct of a business which involved the commercial importation of clothing and clothing material. One could not carry on such a business in Australia without deriving that entitlement in the very process of importing trading stock. The alteration of the system which was announced in August 1980 resulted in a correlation between past importation and entitlement to share in a base quota for a future period that was no longer derived from the immediate past, but there is no reason to suppose that the correlation will continue, after the expiration of the seven years from 1 January 1982, to be based on the importations of the two years ended 30 June 1980. I do not consider that the entitlement which, by reason of the alterations announced in August 1980, derived from those importations should be regarded as an asset or advantage for the enduring benefit of the respondent's trade. The entitlement is enjoyed, or spent, upon the importation of each item of trading stock, notwithstanding that it will be exhausted not in one year, but over seven successive years. So much of the entitlement as is found not to be required, because fewer items of clothing in a particular category are required for the purposes of the business than the owner of the business is entitled to import at the lower rate of duty, may be "sold" to others whose businesses involve importation of clothing in that category. If the normal exigencies of the conduct of such a business as the respondent was conducting provided the occasion for turning P.I.P. to financial advantage otherwise than by utilising the entitlement it conferred to import trading stock, the proceeds of such a sale would in my opinion be income in the respondents hands in accordance with ordinary concepts. (Cf. Austrotel Corporation Pty. Ltd. v. Commissioner of Taxation (1976) 51 A.L.J.R. 51 at 56-57, per Stephen J.)

The learned trial judge's unchallenged finding that sales of P.I.P. were not "normal incidents" of the respondent's trading activities I understand to express compendiously findings that the respondent had not during the five years preceding the year of income ended 30 June 1980 sold P.I.P., and that there was no reason to prophesy that the respondent would in the future engage in selling P.I.P. after it had completed the changes in its business which the learned judge characterised as a reorganisation. It seems also that Kaye J. found those changes to be not normal, both in the sense that changes of that kind had not previously occurred and were likely to occur only rarely, if at all, and in the sense that the circumstances, or at least some of the circumstances, which induced the respondent to make the changes were of a kind which occur quite infrequently.

That the sale, and the purchase, of P.I.P. by the respondent were uncommon events does not afford any reliable indication that the sales were affairs of capital. The evidence was that others engaged in similar business activities had bought and sold P.I.P. before the year ended 30 June 1980.

The changes in the respondent's business activities which the learned trial judge characterised as reorganisation amounted to this : the respondent stopped trading in certain kinds of clothing commerce in which its directors decided would be unprofitable or less profitable than commerce in certain other kinds of clothing, and strove to sell more of those other kinds of clothing than it had been selling. The respondent's only commercial activities were buying and selling clothing and clothing materials and moving what it bought and sold between those who sold and those who bought and itself. The changes resulted in no alteration, which the evidence revealed, of the respondent's "profit-yielding subject", unless it were the alteration effected by sale and purchase of P.I.P., and the dismissal of two or perhaps three persons from the respondent's employment, who had been engaged to deal with a class of garment which the respondent stopped selling. All that happened was that the respondent bought and sold fewer kinds of clothing, in consequence of which it sold to fewer customers and its turnover increased.

The circumstances which induced the respondent's directors thus to alter its commercial activities were of two kinds. First, over a substantial period trading in certain descriptions of clothing had proved to be relatively unprofitable and the directors' perceptions of those circumstances moved them to consider withdrawal from trading in those kinds of clothing. Second, the directors, like others engaged in importing clothing and clothing materials, had been for several years awaiting a decision by the Executive Government as to what kind and degree of tariff protection should be accorded Australian clothing manufacturers. The changes announced in August 1980 were perceived by the directors as the expression of such a governmental decision as might be expected to endure for some years. That perception moved the directors to resolve upon the withdrawal they had been considering and to put the withdrawal in train in 1981.

Before the alteration of the quota system announced in August 1980 there were about 40 quota categories of clothing and 2 fabric quota categories. The respondent traded in 27 of those 42 categories. The alteration of the quota system involved the reduction of the number of quota categories to about 29, in 9 of which the respondent traded after it had made its "reorganisation". Less than 5 per centum of the aggregate number of garment units for which the respondent held P.I.P. before that reorganisation was instituted were in quota categories from which the respondent withdrew.

The changes in the respondent's commercial activities which occasioned the sales and purchases of P.I.P. were, as I would find, of a kind and of a magnitude likely to attend the conduct of such a business as the respondent was conducting. He who buys and sells various types of clothing by wholesale in a large and very competitive market, as the evidence showed that the respondent did, is likely to find occasion to stop dealing in some types and to sell more of other types because the profits to be had by him from the former are less than the profits from the latter. If such occasions have been, and will be, few for the respondent, that may be because the respondent is skilful, or fortunate, in the market. Whether frequent or infrequent, the changes which the respondent effected were in my opinion incidents of the process of carrying on the business, not an alteration of the profit-yielding subject, and they were made in response to normal exigencies of that process. Relative unprofitableness of trade in one or more types of a wide class of merchandise in which a merchant trades may be expected to occur. And in this country changes in tariff protection policy and in the legal mechanisms by which policy is given effect are also to be expected.

The sales and purchases of P.I.P. were in turn but incidents of the process of carrying on the business, in my opinion. The changes which the learned trial judge characterised as reorganisation provided the occasion for monetary gain by disposal of what had been, but would no longer be, required for use in the process of acquiring trading stock, and also made necessary, or at least advisable, expenditure to acquire what it was expected would be required for use in that process. What was done in effecting what was called the reorganisation of the respondent's business was in my opinion part of the process of carrying on the business. The money received by the respondent as consideration payable in respect of the transactions concerning what was called its P.I.P. was in my opinion assessable income of the respondent. I would allow the appeal, set aside the orders of the Supreme Court and order that each assessment be confirmed. I think that the appellant should have an order that the respondent pay his costs in this Court and in the Supreme Court.