The Federal Coke Company Pty Limited v The Commissioner of Taxation of the Commonwealth of Australia

No judgment structure available for this case.

Income Tax ( T t h . ) - Assessabia kcome -

P~yir~c31~~ t rzcell led wlthout cznslderatim .- Whc.t-ht?r

conpensation f o r l o s t p r o f l t s - Whether received In

cmrse o f business - Whethar c a p i t a l o r incorm. TrLconc T ~ x

Assessment Act 1936, s.25(1).

Before Eowen C . J . , Nmmo and BrenKan JJ.
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BETVX:i : TIE FEDZ;?AI, COKE CCI"IPAIIY . ........ ........ ........ .......

........ ........ ........ ....... PTY. LIIKK!IX
O R D E R

.ed with ccs t s . :

Suprwne Court 6f New South Waies set aside mci I

111 lieL> shereof order that the s7peals to that Court be allowed.

vith costs the!-.cyfv!a

and that esch assessnenL he varied by excluding

i

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the sum of $499,567.00 as assessable income.

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T J c l k L t . red :
. .

C .

f”’ L
I N THE FEDER &L COUHT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGTSTRY
GENERAL EIVISION

CORAM: BOWEN C. J. NIPMO and BREIi€TAN JJ.

20th June, 1977
THE FEDERAL COKE COMPANY PTY. LIMITED and THE COiWiISSIONER OF TkXaTlOV OF TIiE CODIOPREALTH

CiF AUSTF(P.LIA -

BO’dZN C , J . : These a r e two appeals brou&t by The F e d z a l

!

Coke Compaxy Pty. Limited (heremafter cal led “Federalf1)

aga ins t a dec is ton o f t h e Supreme C @ w t of New South Wales :X

i t s Administrative D:’vlsj on upholding income tax assessments i

i s sued aga ins t the company by t h e Commlssioner of Taxation i l l

respec t of the income years ended 30th June 1972 and 30th June
1973.

In i t s r e t u r n f o r the .i_nccme year ended 7C:h J u m

1972, Fedei-ai ,-nowed a taxable incoae o f $7,677 a-i?.Lry fro:,:

i ts coke makir,g eLtivi . t ies. The C!o:nnii;sioncr i n nak.ing his

assessment added t o c h i s sam the mcunt cf $/.+99,56’7 which h e i !
described ill. an edJust!nerlt sheet Sorvrded . wl.th t n e assessmeflt

a s r o n o w s :

‘Port lcn of ne t cornpensat: on 011 terminetiori

of cantl-act m th S c c x t e E ~ ~ ) n y n ; e Lc IJickcl

which is apFlicaSlt! t.i tnt. year endxi 3‘,tn
June 7 972 .

... . .

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This had the effect of bringing the taxable income

to $507,244 and the income tax upon this w3.s $240,940.90.

Federal objected on various grounds, in substance,

claiming the receipt was not of an incorne nature or otherwise

assessable income and was a capital receipt. The Cornmissioner
disallowed the objection whereupon Federal requested that its

objectlon be forwarded to the Supreme Court of New South Wales.

In its return for the income year ended 30th June 1975,

Federzl showed a l o s s of $5,535. The Commissioner, in his

assessment, brought to account as income, an additional

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sum of $499,567 which he described in an adjustnent sheet

forwarded with that assessment as follows:

*Portion of net compensatlcn of

contract with Societe Ansnpe

Le Nickel. *

This had the effect of brlnging the taxable income to $494,032 !

and the income tax upon this was $234,665.20.

Federal objected as before and when its objectio?l

was disallowed, requested that-its objection be forwarded
to the Supreme Court of New South Wales.

!

These matters were hearc? by t h e Supreme Court

in its Administrative Division and judgment was given m

<l th Felx-u-ary 1977, upholding the Couunl ssioner's assessmnxz .

NoLicss of appeal to this Court were lodged on groimitrj cl-airnlng,

in substzncc, that the trial judge was in erro~- 1z hold izg the

respective amoun:ts were assessable lnccme and should h:ive held

they were rece>.pts of a capital nature.

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The question to be decided is what is the nature

of these receipts in the hands of the taxpayer, Federal.

In order to determine the answer to this question

it is necessary to consider the history of the matter and

the circumstances leading to the recelpt of the sums by Federal.

They represented two equal instalments of $500,000 less certain

adjustments paid m satisfaction of a total sum of $1 million.
It is common ground that for income tax purposes the same

considerations apply to each instalment. I

Federal is a company incorporated In New South Wales.

It had for many years carried on a coke making business upon i

].and situated less than 300 yards from Princes Highway end less

than 700 yards from Crown Street, the main street of Wollongong.

It was very close to the general busmess area of Wollongong

and extencive residential areas were well within a quarter of a

mile of it, the residential area on the south actually abutting
the coke works.

During the manufacture of coke, emissions of gases,

smoke, dust and steam occurred. Federal had almosx continuously i

since 1930 been engaged in disputes with various authorities

and persons complaining of its activlties. In Aprll 1’330 it i

was prosecuted by the Wollongong Council. In 1938 t h e Department

of Public Health and the Wollongong Cowxi1 both brought pressure

upon Federal to mitigate the smoke nuisance. In April 1955 the

Council arranged a conference betrreen Federal and the C0ur.c~ l‘s

Smoke and Dust Abatement Commttee. A succession of conferences

rxtending over some years took place, leading to the institulior,

by Federal of improved methods of control. After the Clean

A i r Act, 1961 came i n t o f o r c e , t h e coke works became "scheduled"

and Federal was requi red to ho ld a licence. Licences had a

currency of one year from the date of issue, but might be

renewed from time t o t ime for a fur ther per iod of one year.

Federal succeeded i n procuring a l i cence , but t h e Department

of Heal th ins i s ted on var ious works bemg undertaken to lessen

pol lut ion. In about 1968 s t rong pressure was brought to bear

by t h e Department on Federal , who claimed that the caplTal

works and d i s l o c a t i o n o f t r a d e r e q u i r e d t o f u l f l l t h e demands

of t h e Department would c o s t it i n excess of $1 mi l l ion .

I n August 1969 the Department gave directlona to I

Federa l , pursuant to s.17 of the Clean A l r Act. Federal advlsed

t h e Department that t h e c o s t t o meet t h e i n i t l a l r e q u i r e m e n t s

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would be n o t l e s s t h a n $420,000, with no assurance that thls

would be t h e end of the matter.

On 19th January 1968 the I l lawarra Planning SCheEle

Ordinance was proclaimed and under this, the l and , except for

a very mlnor area, was zoned a s r e s e m e d f o r Open Spaye (Wolic
t h a t

Parks and Recreation). The Ordinance a l s o provided/coke making

could be continued as an exis t ing use, so long as t h e r i g h t

was n o t l o s t by non-use.

Bellambi Coal Co. Limited (he re jna f t e r called

l:Bellambilt) is a cornparry incorporated i n New Somh Wales which

has , fo r many yea r s , c a r r i ed on the h i s ines s o f producing

coa l from South B u l l i mines on the soa the r3 coa l f i e lds of Nt-W

South Wales. It acquired a l l t he sha res in Federal on

21st June 1960. It also acquired as subs id i a r l e s t h ree o the r

companies: the M t . P leasant Coke Co. Pty. Llmited on 26th

January 1962; Corrimal Coke Pty. Llmited on 10th Mzrch 1370;

and the Austrslian Coal and Coke Co. Pty. Limited on 16th

October 1972. It was the practlce of Bellzmbi t o make X.

arrangemer,t with a coke-maklng subsidiary under wh~ch it would

supply coal and the subs td i a ry would produce the coke whlch

would then be sold by Bellambi. The arrangement between

Bellambi and Federal, which was en te red i n to on 26th June 1968,

provided that Bellambi would de l ive r i t s coa l from time tc; time

t o t h e coke works of Federal for conversion into coke. No

s t i p u l a t e d q u a n t i t i e s were se t . Federa l would convert Bel lanbi ts

c o a l t o coke and would then supply t h i s coke t o Bellembi who

would market it. Both the coal and the coke produced from i7;

were t o remain the property of Bellambl. Bellambi agreed to pay I

Federal f o r t h i s serv ice a f e e e q u a l t o t h e a c t u a l c o s t o f

conversion plus ten cents per ton of col:c produced or such o-cner
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amouzrt per ton as was mutually agreed uTon from time to t ime. i

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I n p r a c t i c e t h e s e r v i c e f e e which was pa id t o Fede ra l on top i

of the cost of conversion varied from year to year , be ing sometimes

more md sometlmes l e s s t h a n ten cents per ton. A t the 22nd I

March 1972, the seririce fee being paid was eqhty-n lne cen ts
per ton.

I

Similar arrangements were made by Rellarnbl with

M t . Pleastint Coke Co. Pty. Limited on 2nth Ju:e <%a and wlzh

Corrimal Coke Fty. Limlted on 26th March 1971 a f t e r t h a t company
became a wholly owned subsidiary.

Societe Anonyme Le Nickel (hereinaf ter cal led l.
’.

IfLe Kickelff) is a corporation incorporated accordir ,g to the laws I

of France and having i t s r eg i s t e red o f f i ce a t 1 The Eoulevarde

de Vaugirard, Paris, France. It has a s u b s i d i a r y i n Australia,

Le Nickel (Austral ia) Pty. Limited (hereinaf ter cal led "Le

Nickel (Austral ia)") . P r l o r to 24th April 1370, Le Nlckel

was a buyer from time to t ime of coke supplied frov Corrlmal,

M t . P leasant and Federal coke works and it was a t t ha t da te

in the course of a substantial expansion of i t s nickel t reatment

p l a n t i n New Caledonia. In the period October to December 1969,

Le Nickel (Austral ia) on behalf of i ts parent company became

Involved i n d i s c u s s i o n s with Bellambi and Corrirnal f o r the supply

I

of coke f c r u s e by Le Nickel i n New Caleaonia. Bellamhl

did n o t i n i t s then subsidiaries have adequate producticn

capac i ty t o supply its existing customers and to supply 11:

addi t ion 70,000 t o m p e r annum whlch was required by Le Nickel.

?he normel production capacity of M t . P leasant wlas approxmately

45,000 toris per annum and Federal 53,000 tons per annum.

Corrimal had been producing coke a t ' t h e r a t e o f approximately

I

126,000 tons per annm. So t h a t when Bellambi acquired thc? sharPs

i n Corrlmal i t s t o t a l capacity, combining the production 31 i t s

th ree subs id i a r i e s , would be sufficient to enab le it to supply

t h e l o c a l market i n A u s t r a l i a and the 70,000 'cons per znnw t o

Le Nickel for use i n New Caledonia. i

It seems that the d i scuss ions w5th Le Nickel

(Australia) were broken of f on 9 t h December 1959. On 11 31

December 1969 t h e rranager of Eellembi preparwi a report for-

submissj oc t o a board meeting he16 m :3ti? Deceiriber 1969. I n

his r epor l , which was en t i t l ed "Future apera t ions 111 Coke

Manufacture and Dis t r ibu t ion by the Bellanbi Coal Co. J-.inltmi~l,

the peneral mvlager reviewed the various sl ternztives winch

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were open to Bellambi snd Its subsidiarl es. The two pri ncipal

alternatives were either to close each of the two coke works

then separately owned by the companyts subsidlaries, that is

Federal and Mt. Pleasant, or to spend $1.12 mllllon at those

plants to achieve compliance with the requirements of the Ciean

Air Act and further to spend $1.13 million on the acquislti.on

of Corrimal Coke Co. Pty. Limited and meke sone modification

of its works. In the report, reference was made to the

negotiations which had been proceeding with Le Nickel (Australia)
and it was noted 'These negotintlons have been remporarlly

suspended'. It was noted that coke was on offer to a nunber

of other overseas users and the general manager expressed tne

opinion that the surplus capacity of the industry could be

profitably exported over the next few years. H i s recornlendation
was in favour of the second of the alternatives referred to above.

At the board meeting on 1Stn Decenber 1959, it was resolved that

the recommendation by the general ~canager In hls report

dated 11th December 1969 relating to the expenditure of $l.*l2 million

on the coke works operated by Federal arld Mt. Pleasant to achieve
a compliance with the Clean Air Act and to obtain increased

capacity and grmter efficiency at the Mt. Pleasar,t works and
the expemhture of $1.13 million on the acquislticn and nodiflcation

of the coke works operated by Corrirnal be approved subject to

the signing of a memoranhn evidmcinc the willingness @f

another company, Kenbla Coal and Coke Pty. Limited, %o purchase
coke for supply for a period of seven y y a s commencing Jtinuary 7370.

It se?ms that negotiations were not long afterwards
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resumed with Le Nickel (Australia) and at a board meeting

held on 24th April 1979, the general manager tabled a proposed

contract between Bellambi and Le Nickel for approval Ly the board.
It was resolved that the contract be signed by Bellambl. Thls

was done and the contract was also signed by Le Nickal and
came into operation.
It should be mentioned that at the board meeting

of 24th April 1970, before the contract was approved, it was

resolvsd that approval be given to capital expendlture

totalling $339,729 and to the general manager's authorlsation

for certain expendlture, all of which was described m the minutes

as part of the capltal expenditure programme previously epproved
in principle for 1969/70 and 1970/71.

The agreement between Bellambi and Le hckel of

24th April 1970, provlded that Bellambl agreed to sell to Le

Nfckel and Le Nickel agreed to buy 350,000 long tons of coke

to be produced by subsidiary companies of Be1lLambJ.. Such coke

was to be delivered to Le Nickel at the ;-ate of 70,000 long t m s

Fer annum over five years computed from 1st Zmuary 1971. The

price which was to be pald by Le Nickel to Bellambi was specified,
together with certain adjustment provisions.

In the event and notwlthstanding thz provislons

in the agreement for delivery of 70,000 long t m s per annm

computed from 1st Jaxuary 1971, Le Nickel experienced dlflzculties

and had. accepted delivery of only 2.5,3'72 tons lip to 39th June
1971. There was a meeting in Sydney ori 2nd Ju1.y 1571 at which

Nonsiew Germenot, the managing director of Le h'lskel (Australia)
reqxsted cancelletion of the agreement. Dn 7th Jul;r ?5'71,

Bellambi sent a telex to the head office of Le Nickel in

Paris expressing concern about this request and pointmg out

that when the agreement was negotiated it was made clear to

executives of Le Nickel that Bellambi were purchasmg a coke

plant for the purposes of fulfilling thelr obligatlon to

supply the quantlty. Capltal expenditure on acquisition

and subsequen-r; modifications to achieve compliance with the

Clean Air Act had been very substartlal. It was suggested there

should be an exchange of views between the executives of the

parties. At a board meeting of Yellmbl held on 27th July 1971.

it was resolved that the chairman of the board, Mr. J.B. Massy-Greene,

and the general manager, Mr. Ryan, :be authorised to cegotlate
a settlement w1zh representatives of Societe Anonyme Le Nickel’.

Meetings were held in Paris on 12th, 13th and 18th October 1971,

the meeting on the last of these clap being attended by Mr.

Massy-Greene and KZ. Ryan. On this last day a negotlated

settlement was reached which was then recorded in minutes of
the meeting. These minutes contained various recitals,

including one that Le Nickel had informed Bellmbi that the

prevalent ecocomic recession had affected the demand for nizkel

and Le Nickel had been obliged to reduce production entailmg
loss of proflt and also other severe financizl hardship and this

situation l;ad reduced its requirscents fcr coke. It had

according’y asked Aellambi to vary the agreeneut between them.

The minutes also recorded thst Bellamtl had pointed out that

any reduction ir. Lhc contractual dellverics cf coke uader thF;

agreement would entail tr?ot ofiiy 138s of profit to Sellambi
>ut a l s o other severe financlal hzrfishlpr.
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The mlnutes then recorded that 'In consideration

of the foregoing the partles had declded to change certain

terms and conditions of the said agreement ard they agreed
on the following.P Then followed various numbered and

lettered paragraphs outlining negotiated variations to be

made to the principal agreement. Paragraph 1 stated:

'As total compensatlon for m y and all. alteratlor.
and changes to the said Agreement, hernunder

set forth, Le Nickel agrees to pay t o Sellambl

and Bellambl agrees to recelve from Le Nlckel

a lump sum of 1,000,000 Australian dollars
to be paid in two instalments:

- 500,000 Australian dollars on 31 December 3971
- 500,000 Australlan dollars on 31 December 1972

Those amounts wlll be paid to the accmnt of Be'-lamb1

at the Commercial Bank of Australia Head Of€lce,
Gecrge Street. Sydney, Australia.'
Paragraph 2 then set forth certain variations of

particular terms and conditions of tht agreement. The princigal

change which they effected was to substitute 132,000 lcng tons

for 350,000 long tons of coke to be Gupplled and the rate of

delivery was varied so as to be 52,000 1.ong tons for the calendar

year 1971 and 20,000 long tons for eqch of the calendar years

:

1972, 1973, 1974 and 1975. The final lettered paragxph of the
minutes provided as follows:

'The terms of the said Agrement are to i'emeln i

valid and binding and z1.e he~eby confirn:ed,

sm-e in se far ac they are varled by these
minutes. *
There was a board meeting of i2ellzmbi held on

28th October 1971 and it was then resolvpd that the settlement

i

negotiated by the chairman m d managjng dlrector in Paris be
approved. The baslc features of the settlement were stated in the minutes. Two further resolutlons should be noted.

The first was that the general manager cbtain the opinion

of Mr. D.L. Mahoney, Q.C. regarding taxatlon aspects

of the settlement and the second that the Federal roke works

be closed. Federal in fact ceased production on 19th November
1971 .

On 23rd December 1971 Bellambi, under caver of a

letter, forwarded to L r Nickel a form of deed varymg the

agreement between them which broadly em'cadied the settlement

arrived at in Paris but departed in some respects from

that settlement. On 29th December 1971, the SW OE $50C,OGG

was received by the Banque Nationale De Paris in Pjdney for
payment to Bellambi. On learning of this, Bellamb: refused

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to accept the money and on 39th December 1971 senr: a telex 1

message to Le Nickel expressing surprise at the transmisslon of
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this before the completion of the amendhg agreement. They

pointed out the amendmg agreement had been sent by airmail on l
l

23rd December and further polnted out that thas legal advisers l !

stated that if Bellambi was to accept payment from Le Nickel,

then Bellambi would certainly pay incone tsx on the full amcunt,

!

whereas if the mending contract under' which the money was !

to be paic! to Federal was accepted, then It wns poselble -';hat l

b'oth Bellamai and Federal would not pay tax an the moneys ~~seived.

Bellambi and Le Nlckel appear then to have entwed upor, a ~ W ~ G C ?

of negotlation. There were some cifferxce:: between tbLem, 1.e

Nickel at one poixt seeking to have the arr1er,d;.ny, agx,eement opwating

according to Frmch law and Eellamb1 refusing to accede to this

reques t and requl r ing it to opera te accord ing to New South Wales

law. Eventually, an amendme deed was en te red i n to on 22nd

March 1972 between Bellambi and Le Nicke l . F t r suant to th i s

deed, the sum of $499,134.23, being an instalment zf @OO,OGO

less bank and exchange adsustnents , was paid by Le I~Jickel t o

Federal on 29th March 1972. A fu r the r i n s t a lmen t o f l i ke anounz

was paid by Le Nickel to Federal pursuent t o t h e amending deed

on 16th January 1973 and. it i s these two sums which have

been assessed by t h e Cornmissloner of Taxation.

It remains t o recorc! t h a t t h e land of Federal was

resumed by Wollongong Council on 21 s t December 1973 f o r $150,000.

In t h e argument against l labi l i ty , considerable

reliance has been placed upon t h e terms of the deed. It i s

conven ien t t o s e t ou t ce r t am ma te r i a l po r t ions . Its r e c l t a l s
were as follows:-
'WdEFZAS

. A . By an Agreerrent rlated 24th Agril 1970

(he re ina f t e r ca l l ed " t i e Agreement") Bellambi !

and Le Nickel provided f o r t h e s a l e by B e l l a n x

t o Le Nickel over 'a per iod of f lve years

zpproximately o f coke manufactureci by c e r t a i n

subs id ia ry compan;es of B e l l m b i , including

Federpl Coke Works Pty. Llmited (heremafter

called l1Federall1).

B. Le Nickel has informed Bellznbi that , by

reason of an econonic recessjori a n d a f a l l

i n t h e demand fcr nickel , the requirements

of Le Nickel for coke have been greatly reduced.

C. Le Nickel has requestec! Sel lmbi to reduce

the emomt c? the cake produced by suhs id la ry

companies of BFllambl a5 re5er red to in Clause 1

of t h e Agreement 2nd t o reduce the qdant i ty of

coke t o be so ld by Rellamb~. t o Le Nlckel under

the Agreement.

D. Bellambi has informed Le Nickel that such

reduct ion as aforesaid can only be achieved i n

a p r a c t i c a l menner i f there is a discontinuance

of a l l production of coke by Federal and. t h e

closure of Federalts ceke works.

E. Beliambi has informed Le N i c ~ e l that

discontinuance of production a t Federalzs

coke woFks w i l l involve the c losure of thcse works

and that thereby the value of the land and a s se t ?

owned by Federal comprlsinp such coke works Will

be clirectly and imedla te ly reduced by resson,

i n t e r a l i a , o f a c t i o n l l k e l y t o b e k k e n by

a u t h o n t i e s of the S ta te o f New S s u t h V d e s and

c e r t a i n l o c a l government au tho r i t i e s zga lns t t he

coke works i n a non-operatmg condition which

would no t be t aken agans t them whlle operatine:

and by reason of other detrlments to Federal . '

Of the opera t ive p rovis ions , it i s s u f f i c i e n t t o record clm:,e 1

which i s as follows:-

* I n t h e circumstances a foresa id Le Nickel
hereby agrees t o pay t o Federal t h e sum of

one m i l l i o n d o l l a r s ($1,000,000) t o cmppensate

Federal (and consequently Bellanbl) f o r

such l o s s i n t h e v a l u e of the l and and asset ,s

of Federal as aforesald (mri consequently i

i n the value of the assets of Bel lambi) and

it i s agreed that such sum shall. be paid by

two equal instalments of f i v e hundred thousvld

d o l l a r s ($500,000) each on t h e 3lst day of I

March 1972 and t h e 3.1 s t day of December 1972. * l

Had Bel lmbi accepted the sum of $5OO,COO forwarded

by Le Nickel on 29th December 1971 and been assessed f o r incone
tax upon it, -the quest ion would have a r i s en whethel- 1 t was income

or c a p i t a l i n t h e har,ds of Bellambi. On t h e m e hand lt might

have been argued t h a t t h e payment simply constituied compcnsction

f o r l o s s of prof i t s under an agreemerit mzde i n t h e c o u r s e of i t s

business. whirl: Eelianbi woul*d otherwise expect t o have mzde, and,

being a payment r t c j fill a h c l e i n p r c f l t s t , it was income i E

the hands of Eo l l ambi . If this arfpccflt was a c c e p k d , t i e r ece ip t

would presumably have been assessable income i n t h e hands

of Bellambl (Californlan O i l Products Llmlted v. - Federal

- Comnissloner of Taxatlon (1934) 52 C.L.R. 28; Heaw Mmerals -

Pty. Limited_ v. Federal Commlssioner of Tzxatiorl (1966) 115 C.L.K.

512; Glenboig Union Fi rec lav Co. Limited Commissioners (1922) S.C. (H.L.) 112;

v.

Inland

ticvenue
12 T a x Cas. 427;

Eumah Steamship Co. Limitec! v. Inlacd Revenue Commssloners

(1931) S.C. 156; 16 Tax Cas. 67; Van dnn Berphs Llmited v.
Clark (1935) A.C. 431).

On the other hand, it might have been argued t h a t

t h e payment consti tuted compensation not only for l o s s of

p r o f i t s but a l so for ' o ther severe f inanc ia l hardship ' to use

The lamguage of the Taris mlnutes of 18th October 1971. It
might then have been argued that the facts suggested th&

t h e f i n x x x a l h w d s h i p r e f e r r e d t o t h e e f f e c t o f the a l t c r a t i o n

of t i e agreement of 24th July 1970 upon the buslness of Bellam31

End t h e b x i n e s s of i ts subs ld i a r i e s r enu l t ing . . a s even t s showed,

i n t he c los ing down of coke production a t one of the subs id ia r les

w i t k l a l l the consequences which tha t in ro lved . It might f c r t h e r

then have been argued that the instalmerrt of $509,000 was Lot

d i s t i n L t l y a l l o c a t e d t o e i t h e r t h e inccjme or cap i ta l e lements

bu t r a the r was ha l f of a conglomerate ail!n cjf $I,OOO,OGO t o w h c h

those elements contrlbated without dis t .nctlor?. if t h l s argument

war, accepied, the posi t ion might be tii?.t t he i n s t a lnen t w?.s no t

t axab le i n t he hands of Bellambi (McLaG-ln v. Fcdr.r.al C c j m n i z : ; i o ~ ~

of Taxation (1961) 104 C.L.R. 381; g l s o p v. --- Federai Comwssloner

- of Taxatlon (-11365; 113 C.L.R. 341.

But Bellambi refused to accept the slim cf $500 ,COO.

i

E-Jentually a l i k e sum with adjustments vas paid bp Le Nickel P

to Federal in accordance with the deed of 22nd March 1972.

Had an assessment then been ralsed against Bellambi, it might

perhaps have been argued that the $500,000 had accrued due

to Bellambi as income and had been pald by Le Nickel to

a subsldizry of Bellambi in accordance with the order and
directlons of Sellambi. Bellambi would then no doribt have

argued that the money had not in fact accrued due to it and

that, if it had, it was a conglomerate sum made up of indistingulshable

income and capital elements and should be held not to be taxable.

In the result, none of these bases of assessment

were adopted by the Commlssioner. He assessed Federal upon the

receipts so that the question for determination by the Court is

J

not what would have been the character of the recelpts in the

hmds of Bellambi, but what, for the purposes of incorn.. tax, is

the characzer of the receipts in the hw.ds of Federal.
Counsel f o r Federal argued that the payments were

paid by Le Nickel to Federal under and m accordance with the

amending deed of 22nd March 1972; that the dsed wac not attacked

as a sham; that the deed was not attacked as being annihilated
by s.260 of the Income T a x AsEessment Act; and, finally, tnat

the Court should turn to the terms of the deed and glve full

effect t o them. As has been noted, the recitals in the deed

cheracterised the payments bro&dly as compensation to Federal

In resprct of loss of value in l m d and assets. If one simply
accepted the statements in t h e recitals l u x 1 the operative portlons
of the deed, including Clause 1, it wou;tI. senm the concluslori

would be inevitable that the receipts shoulci be held to be

capital ip the hands of Federal.
- I 6 -

Cer ta in ly t he deed was not a t tacked as a sham o r

by r e fe rence t o s.260. Undoubtedly t h e payments were made

p u s u a n t t o t h e deed. But Counsel f o r t h e Cornmissloner c l idlenged

the correctness of the X-ecitals and submitted that the Court should

look t o t he whole of the circumstances. I agree that the Court

i s not bound t o r e s t r i c t i t s e l f t o t h e deed and i s rlot bound by

t h e t e r n s of t h e deed in cha rac t e r i s ing t he payme~t s t o Fede ra l

( c f . Ridge Securlties Llmited v. Inland Revenue Ccmiss ioncrs

(1964) 1 W.L.R. 479).

The learned t r l a l Judge was not imprecseri wiYf t h e

r e c i t a l s . He took the view t h a t t h e y d ld not accord with the

f a c t s . While t h e r e c i t a l s may operate by way of estoppel Setween

the pa r t i e s t o t he deed , Fede ra l was not a par ty . Furthernore,

t h e r e c i t a l s i n no way consti tute conclusive proof o f t h e !

f a c t s which they a s se r t . I th ink tnc Cour t , o r a Judge, i s

obl iged to come t o a conclusion as to what the t rue facts are

and i s not precluded f rom doing so by the terms o f the deed.

The t rue f ac t s t ha t appca r a r e t ha t Fede ra l vas

engaged i n a coke prcducing business, although a t the t lme t'ne

first payment was received by it, Federal had ceased t o car ry

on tha t bus iness . In the negot ia t ion of the round SW of

$1 mi l l ion , which was agreed between Bellmbi and Le Nickel, no

p r e c i s e f a c t o r s were used i n t h e c a l c u l a t i o n so f a r as ap,-Jears

from the evidence. It i s p l a i n from t,he order o f ?vents and

t h e wording of the mlnutes of the Par-ls ccnfcrence of 18th

October 197:, t h a t Nh2t was I n t h e mind3 of the negot iz tors was,

on t h e one hand, the effect cf the 1.essenlrlg I n denand f o r n icke l

and the consequent necessity of reduclng productlon and the l o s s

of profit and other financial hardship entailed for Le Nlckel

making it necessary for that company to secure a reduction m its

obligatlons to take coke from Bellambi, and on the olher hand,

thc? loss of profit to Bcllambi and other fmaricial hardshp

which would be suffered by that company If the quact~.ties of
coke were to be reduced. 'Other flnancjal hardship' referred

to Gay well have involved some assessment of what Bellambi

would suffer by reason of consequentlal loss of profit o r

capital loss suffered by all o r any of its three subsidiaries

includmg Federal. In the latter respect, what appears to have

been under consideration was Bellambl's l o s s an& not the loss of

any partlcular subsidlary. When the arrangements between Seilsnbi

and Le Nickel were altered, as appears from the deed of 2 n d

March 1972, the decision that the papent should be nade to F d e r a l

seems to have been made largely for the purpose of avoidmk

income tax. It is true 'chat between the tine of the Psrls

conference and the amending deed o? 22nd March 1972, a decislor,

had been xaken by Bellambi to close down the business of Federal

ar.d it had m fact been closed down. It had then become evident

that, of the subsidiaries, it was Pedei-sl which wou1.d suffer

loss of profit by loss of the service charge which it would have

received Prom Bellambi for producing tpe coke from Bellantifs cctal.

It had :LSD become evident that it was Pcdersl whlch wotiki s u f f e r

capital. lcss by reason of having to close dow. its coke -:forks.

In the case of Fed-eral, its capital pro3lem was particularly

aclfce because its land, once the existsns us? terrninsted, wcuid

have value only as land zoned under the Il.lawarra Flannlng Scheme

*S Open Space (Publlc Parks and Recreation) and its plant a:ld

equipment could no longer be sold on a going concern basls.

The approach taken by t h e l e a r n e d t r l a l Judge

was to dec lde the case on what he regarded as the substance

of the mat ter . He thought that the s ta tements in the deed

d id not a f fec t the na ture o f the rece ip t and t h a t t h e $1 mill lori

was ra sum acceptable to Bellambi as compensation fer the

l o s s of par t of a p ro f i t ab le con t r ac t . ' He d id not overlook

t h e f a c t t h a t payment was i n f a c t made by Le Nickel to Federal .

He sa id :

'How and why payment was made to Fede ra l and

n o t t o B e l l m b l 1 s here easy t c a s c e r t a l n .

This 1s s m p l y a C B S ~ r,f a commerclal arrangemerit

designed to have the money recelved by the Bellambi

group t o t h e b e s t commerclal advantage, t h a t 1s

to say , wi thout having t o pay t a x on It. To my

mind, tha t does n o t a l t e r t h e charac te r of t h e

r e c e i p t o r the reason why t h e money was paid and

received. 1 th ink It i s slmply a r ece lp t by

one hand instead of another, and it 1s received !

i n t o t h a t hand j u s t as much a s compensation f o r

the contraction of the contract to supply coke as

i f t h e payee had been the parent rather, than the

subsidiary. The f a c t t h a t t 5 e deed which was

eventually brought i n t o being was between Bellambl

and Le Nlckel and t h a t Federal was not a p a r t y t o

it lends force to th i s conc lus lon . I do not
cons ider the s i tua t ion as be iag in subs tance d i f fe ren t

from there being a payment of t h l s sum of money

t o Bellambi accompanied by a deed whlch c a l l s

it payment Tor something which lt i n f a c t i s
no t . I n my view it' f a l l s t o be considered f o r

taxatlon purposes as a payment representmg

compensation fo r ccn t r ac t lon o f the c o n t r a c t t o
s e l l coke'.

Xis Hcnour appears to have cocsidered that he could

approach the characterisation sf +,!le r e c e i p t s i n t h e hands of

t h e taxpaySr. by t r e a t i n g them as i f ?hey were received by Bel.laa~bi

o r the Bsilambl grvilp. On t h e o t k r hand, i f they \ ;ere treated

as received by Fede ra l , h i s Honoar thought tha t they were racaived

by Federal Sust as n w h as com?ensatlon for the cont rac t ion of

the contract to supply coke as if the payee had been the
parent rather than the subsldiary. One may have some sympathy

with an approach of this kind. However, in tawatioL1 matters,

the Court is obllged 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 s.260 to get rid

of a contract, agreement or arrangement and dsal with the cnse

In disregard of that element, but, where there l a no statutory

warrant for doing s o , the Court cannot disregard certain of

the facts or rearrange the facts or decide the case accordhg to

its view of the substence of the matter. It is not legitimste

to disregzrd the separateness of different corporat? entitles

or to decide liability to tax upon the basis of the sulJstantla1

economic or business character of what was done (Slutzkln v.

Federal Commssioner of Taxatlon (1976) 12 A.L.R. 321 at p-374;

Inland Revenue Commissioners v. Europa 011 (N.Z.) Zimlted (1971)

A.C. 760 at p.771; cf. Littlewood's Mail Order Stores L m i t e a -.-

v. Inland Reventle Commissioners (1969) l W.L.R. 1241 at 7.1255).

Counsel for the Cbmmissi~ner contended that on a

proper view of the facta. the payments to Federal were t o fill

'the hole in prafits for the four years lost as a result

of the arrangement under the deed to redme the quantities to be

supplied to Le Nickel. Some support for this conkn t? -on can

be found m the evidence that the dzys of Feders1:s coke works

were numbered because of their enisslon of pollilC,Ioil, and thall;

even If the works had contlnued for the balance of the term l

of the original agrccmenk with Le Nickel, Federal would havs had

to close them d o w when that agreement ran out. The submission

..
- 20 -

however, falls far short of being an adequate description

of the payments. Even if loss of profits was used as a measure

for calculating the amount of the payment$, this would not

necessarily mean thFy were of an income nature (Californian -- Oil -

Products v. Federal Commssloner of Taxation, supre, at p.115;

Van Den Rerghs Limited v. Clark, supra at p . 4 4 2 ) . But In thls

case, the facts do not sliow that loss of proflts which would be

suffered by Federal was used at all in arriving at the sums in

question. Even if one might speculate that the payments had been

calculated with reference to Federal's posltion, t!le evidence

suggests that Federal's profits past and prospective wcre ve,y

small. On any view of the evidence, four years profit 0:

Federal could account for only a small fractlon of the total
sum of $1 million.

Counsel for the Comussloner further sLll?mltted That

the payments were to compensate Bellambl for J o s s of profits
and for thls reason acquired an income character and that

they retained thls character and did not lose it when the deed

was interpssed whereby the arrangement was altered and the

paymeats were made to Federal. Ncthing had Seer, done, so it was
argued, which would indicate that the character of the paymeyta

was altered. !

It may be possible to envisage a case where, for

examrle, the subjec5 of a gift would be seen to halre In Lis

origin, the essential character of income and to retain that

character in the hands or' a donee. The case of a transfer $?l thokt

consideration of a payment o f fu tu re i n t e re s t on debentures

might be regarded as such a case. But t he re t he e s sen t i a l

income charac te r o f the rece ip t , which would l i e I n i t s belng

the produce of a capi ta l investment coming forward i n a s e r i e s

of periodic payments. would remain unchanged i n t h e hands of

the donee, In the present case, the suggested lncome charac te r

of the rece ip ts having regard to the or ig lna l a r rangemmt,

would be pa r t ly i n t he fo rmula t i c r , o f them as compensation f o r

l o s s o f p r c f i t s and par t ly in the. i r being recelved by B e l l m b i

in the course o f i ts bus iness t o ' f i l l t h e h o l e i n its p r o f i t s ' .

But under the deed of 22nd March 1972, they werc not received

by Bellambi. A consequence of t h i s is tht one of t h e f a c t o r s ,

which would have impressed then with the cha rac t e r o f income, !

dlsappesrs. 9ne i s l e f t o n l y with the method of formulatton and

the or iginal purpose of Bellzmbi a d Le Iqlckei. It appears to

me that this 1s i n s u f f i c i e n t t o impress upon the sum an e s sen t i a l

and unchangeable character of Fncme. Illdeed, it appears to me

that t h e s t a r t i n g p o i n t of t h i s argument f o t h e Commissiocer 1s ~

wrong. When one is considerixk the character of an amount

received by a taxpayer, the enquiry must start with the quest ion:

what i s the cha rac t e r of t h e r e c e i p t i n the hands of the taxpayer?

It appears t o me t o be wrong t o ask: what wsuld have been t h e

charac te r of' t h e amounts hed t h ~ y been rereived by Be l lmbl? 2nd

t n e n t o puss the quest ion: hzs tkiclr charac-cer been changed

hy t h e f a c t t h e y weFe pa:.d to Federa l? One must, I think, po?e

the e s sen t i a l ques t lon 3-15 start frr :m that qu?stlor, : what is the

na ture of I;he r e c e i n t s i n Lhr hands of Federal?
It then becomes less than decislve to observe
and

that, in their origin,/if they had been recelved by Beliambi,

they may have been of an ir:come character. Each receipt In
the hands& Federal 1s brozdly In the nature of a gift, being
a sum recelved without considerctlon. Certainly Federal, although
it suffered economic detriment as one of the consequences

of the compromise arrived at between Bellanbl and Le Nlckel, was

not a party to the amending deed and gave no consideration

either to Bellanbl o r to Le Nickel. Le Nickel, bjr reason Qf

the amendlng deed entered into with Bellambi, was no doubt

obliged to make the payment and Bellambi could have enforced it

!

(Beswick v. Beswick (1968) A.C. 5 8 ) . But so far as Federal was

concerned, each payment was received by that company on a 6
voluntary basis.
In my view, for purposes of income tax, the s m ?

principles apply in determining whether an amount recelved

without consideration is income as apply in determinmg that
question in relation to a glft proper.

i

A mere gift or receipt without consideration, If >

nothing more appears, is prima faci? not income in the hands

of the recipient (Haves v. Federal Comirsloner of Taxation f

(1956) 96 C.L.R. 47 at p.54). Further facts may apprzr whlch i

show that it was so related to income-earnirBg activities L'f the

recipient as tG be, in truth, a pi-o-jcct of those activities.

Thus gifts by employers to employees related t o tl?E?-r services

have been held to be assessabie incsme. Gifts to perscms who d:'e

not employees but which are r e l a t ed tc services which they have

!i

..

- 23 -

rendered such as tlps to a walter, a rallway porter or a tax1
cab driver, or a jockey, have bpen held to be lncomR (See cases

cited In Whiteman and Wheatcroft on Inzome 3rd Surtax (1971)

peras. 14.10 et seq. and, Challoner and Grcenwood 'Cncome Tax Law

and Practice, 2nd Edn. p.212).

The same prlnclple applies in the case of persons

or corporations engaged in som3 profession o r business. Thus

an additiocal payment made by the Government to a wool grower,

who had previously submitted wool for appraisal and been pald

for it, the additional payment by the Government bexg

dlscretionsry bvt related to the amount of wool suppl.ied, VIES

held ts be In a real sense a product of the busmess cf wcol

growing carried on by the reclpient and to be lncme in its hands

(Federal Ccmmissioner of Taxation v. Samttlng Invzstment Co. Lt?.

(1954) 88 C.L.R. 413). On the other hand, a payment made to 2

solicitor by a woman client for whom he had acted, which was

held on the evidence to be not a product of his professloml

activities but a payment made by way of bcunty, was held i1at

to be income in his hands (Scott v. Federal Comclissioner of
Taxation (1966) 117 C.L.R. 514).

In the present case, and regarding the matter f rom

Federal's point of view, it is seen that the two recelpts werl?

p m t of cne large and unprecedented sm; thst theqT were received
wlthout any consideration passing from That company; and that

they nlere in no sense the product of any bdslnesc or lnconx

prorllx;ing activities which it carrl?d on. Federal' R busirress

was the production of coke and even this nad ceased by the t u n e
.

..
- 24 -

t h e payments were received. Federal d id not car ry on any

business of receivin& payments o r ac t ing as banker or f l n a n c i a l

repos i tory on behalf of Rellambl o r the Rellambi group. Furthennore,

t he r ece ip t s d id not cons t i tu te a compensatcry Equivalent for

any loss suf fered by F e d e r a l i n i t s busmess . They were t r e a t e d

i n its accoun t s a s cap i t a l r ece ip t s . h e l d t h a t i n t h e i r o r i g i n i n t h e a r r m g e i n e n t s

Even

i f

It

should

be

made between

Bellambi and Le Nlckel the receipts should be regarded as

somehow impressed with the character of income, it dces not

appear to me, having regard to the Circumstances of Federal, that

they should be held to have re ta ined this or lglnsl charscter

when received by Feclersl. On the contrary, having r e g m a I;o

a l l the circumstances, it appears to me t h a t i n the hands of

Federal they bore the character , not of ~mcorne, but of c sp r t a l .

It would seem from the evldence that a p r inc ipa l

motive cf Bellambi i n con t r ac t ing fo r t he payments t o b e

made to Fede ra l was t c avoid income.tax. In sdai t ion, it may be

!

observed -chat Federal wa5 a wholly owned subsldlzry of Bell-amh.

The importance of the motive of a donor i n determining the

character isat lon of a r ece ip t was expressed by hul lagar J. i n

Hayes v. Federal Commlssioner o f Taxatlon -- (19.56) 96 C.L.R. 47 a t
p.55 as follows:
Whi le T would not say that the not1-w of the donor In making t h e payment o r t ranafec 2 S ,

i n cases o f t h i s t ype , l r r e l evam, motlve as

such w i l l seldom, i f ever, i n my op?'nion, be 3

deciszve consideration. 711 : ~ n y casz;, p c ~ h a p s

i n most, a mixture o f no t ives m11 b.? d: scern lb le .

3n thc one hand, perzonai p o o d w i l nay p 1 . z ~ B

dominant p a r t i n motlvz+,1;~; a vclun=ary Faymen-L,

and y e t t h e payment may be W 1-elai-ed t o an

employment o r a busmess t h a t It IS income I n the !

haRds of the r cc ip i en t . On the other hand, tnc

I .

.4 - 25 -
element of personal goodwlll may be absent --

the doninant motlve may have been of the

most purely selflsh and commercial character --
and yet it may be lmposslble to flnd any
connexlon with anythlng that can make lt
imome. Thp questlon In each partlcu?ar case

is as to the character of the receipt m the

hands of the reclpient: Moorehouse- v. Dooiarid

(1955) Ch. 284. . - - - . The test tc be k o c i l d 1 s

an objectlve, not a subjectlve, te'st. 8

It does not appear to me that the mot~.ve of

Bellambl of avoiding tax, whatever n e w one may take or' that
motive, when taken into consideration with all the circunstances

of the case can alter the position so as to lead t s a conclusion

that the receipts in the hands of Fcderal bore the character

of income and not of capital. !

In the result I conclude tha-c the recelpts were

of a capltal nature in the hands of Federal. It follcws, in my
view, that Federal was i-ncorrectly assessed and that the appeals
shuuld be allowed.

.

I
THE FEDERAL C'OlCE COMPANY PTY. LIMITED and THE CO.bU41SSIONER OF TAXATION OF THE COMMONWEALTH

OF AUSTRALIA

JUDGMENT

I l

XIMMO, J. : This IS an appeal from a dcclslon made in the Supreme Court of New South Wales Admlnlstratlve Law D ~ v ~ s l o n

dlsmlsslng

appeals brought by the Appellant, The Federal Coke Company Pty.

Llmlted (Federal), agalnst the sallowdnce by the Respondent, The
Commlssloner of Taxatlon of The Commonwealth of Australia (The

Comrniss*Ioner), of ohject1ons by It to assessments of Lhe t'lsatlr:

income derived by 11- 111 the years or I I I C O I I I ~ e n d ~ n ~ : 3 0 1m1e 1972
.

nml l'l7'j a1111 o f the tax paynt)lc t l l r rcol l .

Dellaebl Coal (:ompanb L l m I tf.,I ( B e l l n ! r l l , ~ ) , a coal

produclnt: company, WRS at g11 InaLerldl Clnles the h n l d ~ n ~ compan. 0 1

three c o k e - p r ~ ~ r h l c l ~ : compnn1 e s t n d r w 4 y , Federal, Mount P1 fxasanr

Coke Company Pty. L'imltecl (Mount 1'1a;isnnt) and Corr-lmal Cokp P r u .

Limited (Corrlmal). It has wholly owned Federal t ' r o m 21 June 19j0, .'

Mount Pleasant from 26 January 1962 and C o r r m a l from 10 March 1970.
By an agreement dated 2h Aprll 1970 and made betvecn

I

f

I

..

c

' document r e a d a s f o l l o w s :

2

' It w a s r e c a l l e d t h a t t h e B e l l a m b l Coal Company Llmlted n.

("Bellambi") and Le Nickel S .A . ( "Le Nlcke l" ) had en tered in to

an agreement dated 24th April 1970 (" the sald Agreemenr") for

I

the supply by Bellambi to Le Nlckel of 350,000 lone tons of

Austral lan me ta l lu rg lca l coke ove r a per lod o f 5 yea r s .. c

cornmenclrig 1st January 1971 a t a r a t e of 70,OOO tons per annum '

upon terms more p a r t l c u l a r l y s e t o u t I n t h e s a l d Agreement. W
-

'Le

Nickel r e c e s s l o n

has

Informed

Bellarnbl

that

the

prevalent

economic

has a f f e c t e d t h e demand for nlckel and 111 p a r t i c u l a r '

th.e demand for nlckel produced by Le Nlckel f r o m 1's p lan t in

New-Caledonla. In these c i rcumstances Le S l c k e l 110s been

oblqqed t o reduce product ion a t t h e s a ~ r l planL such s l t u h t l o n

e n t a l l l n g l o s s o f prof ' l i and a lso. 0 1 her severe f ~ 1 1 , 1 1 1 ~ l a l

harcl3hlp for Le Ulcke l and th l s S I l u i t t ~ o n has In l u r l l rcducscl

L r Nicke l ' s requi rements f o r coke.
I
!

, I

i

I .
i

' It was reso lved that -

"The Federa l Coke Works be closed.". I

-

The Federa l Coke Works were closed on 19 November 1971.

Iht. r r p 1 1 1 1 ( r l 1 ( ~ f NI-. Y a h u ~ l r ! , O.i., % < I S , D I > ~ ~ I L I I ~ - I ~ I I I I (.,I

7:j l J t ~ c ~ l l l l w 1 l 0 7 1 t l le GrnerLiI \Iana:yr o f IIC~~LLIIIIII f t ) l k .~~c l t>d I , 1 1 1 4 .

. D l r e c t e u r de I '1~d111111LsIrat~on of T,e hLc.he1 a l r l t e r . kt l11-11 lead+ :t,

I ' f I l l O W S :

'Yell w ~ l l r e c a l l 1 h t ~ I I ~ I I I L : our I m : t , t r n L L ~ I P C t r ~ 5 III N n v r r n l , e r ,

whirl1 w a s f o r the purpose o f dert~r1111n111;: r r r t n l n ~ l t c r a t l o ~ ? +

to the coke co l l t rac l h'lllch ~ ~ 1 between our txo companies. s t ~

I t was n c r e e d t h a t t h l d cornpally woulrl prepare the a~ncnrllng

I t 1 0 you f o r y u u r cons ldc ra t lon .

documelll. apd Fubmlt

'I r e g r e t t h e d e l a y , i n n o t s u b m l t t l n g t l i l s document t o you

e a r l l e r . However, upon my r e t u r n L o Sydney from P a r l s , it

w a s necessa ry for me t o l e a v e l o r .lapan almost lmmedlately and

I have been there for nearly the whole of the last fou r weeks.

' I now enc lose a copy of t he document whlch i s des lgned to gjve

effect to the agreement reached between us durlng ollr meetinq

I n P a r l s . It has been complled a f t e r due d l scuss lon w l th Y r .

Polnton, of Herbert Smith & Co., and w l t h Cooper Brothers , the

company's audl tors who a r e a l s o r e p r e s e n t e d i n Par l s , and In

i t s p r e s e n t form I understand that payments made under the

I document wlll be deduc t ib l e by you f o r taxat lon purposes .

.i

' I have sent a copy of thls document t o ?h-, Germenot of )-our

' Sydney o f f l c e for h l s m f o r m a t l o n . O u r s o l l c l t o r s I n

Aus t ra l l a . A l l en A l l en & Hemsley, have sent a copy 10 M r .

. Poln ton and have expla ined to hun In de ta l l , the reasons why

ce r t a ln ph raseo logy 1 s used. Accordln,+y, lr y011 d e s l r e

fu r the r l n fo rma t lon on t h l s m a t t e r , may I sugges t t ha t

l n l t l a l l y you con tac t M r . Polnton.

'From January 27 to February 4 next year Y r . Malloney, Queen*s

Counsel, who has been adv l s lnc t h l s company on the t axa t ion

aspects of monles recelved by PellamhL ander the agreement,

w ~ l l be i n London and 1s d ~ l l l n g , a t Flrl lambI'5 expense, to

CO t o Parls t o f u r t h e r e s p l a m t o , you, I f y-ou shoulrl so

r r q u l r e , why the documrnt 1 s 1 1 1 r h r Torn1 t h a t 1 t 14. E l r .

Mahoney'.c. funcLlon will be s o l e l y to provlcle an explanat1m).
Arrangements t o meet hlm can be lnade through Yr. P o i n t o n , bho

w l l l a t t e n d to a l l the necessary d e t a l l s .

' l i ' t h e document L S accep tab le t o )IOU 111 the f o r m . iuhmlt te~l ,

would y o u p lease a r r ange t o p rocess ~t l'or s l g n a r u r c throu:h

Yr. Polnton. ' I f ~t 1 s no t acccp tah lc , 1 would n ~ , p ~ ' e c ~ n t e

recrlvrng yuur comn~elits .
-

On 30 December 1971 Bellnnlbl sent the i o l l o w l ~ ~ g r c l e x

t o Le Nickel :

,
( J .

I .

' A l l expenses assoc ia ted w l t h such AT( arrangement t o br t o the

account of Federa l .

' I a p p r e c l a t e t h a r t h l s 1s a l m o s t New Year's Eve and you may

n o t be able to process the mat ter lnl lnedlately, t he re ro re I have

advlsed ?l. Germenot and the Frenqh Hank t h a t we haie l e l e \ r d

you 0 1 1 I h l s amat t e r and have r e q l u + ? L c r l J v u to t 3 1 , ~ Lhe

nhovementlonrd ar t lons. .

On t h e s m e d a y a teley11~111c c o n v r l %atlot1 1 < J O L ],;ace

between an ot ' f l cer of the Sydney Branch of Hnnqile SallonalP de Pari%

and the Secre tory of Rellambl. The fo l loh ' l n t~ - 1 5 the h , ~ r i k o i f l c P r ' *

r e r o r d of the conversa t lon :
-

'Phoned Mr. Foley , Sec re t a ry .

'He a d v l s e e t h a t t h e $A.500,000 rrcelved f rom P L i r L s should, In

e f f e c t , b e p a y a b l e t o t h e F e d e r a l Coke norlib, and thus Bellam',1 :

are unab le t o accep t them as t o do so, e v e n I n t r a n s i t , w o u l d 1

cause a tax problem.
I .

I .

i

'We a d v l s e t h t In vlew of Bel l ambl r e fusa l t o accep t t he funds ,

we would be -2bliged t o eo back t o l h e order e lver9 to ob ta l r l l

t h e i r new 1nstruct ; lor ls regardlng the d l s p o s a l o f the funds ,

3 and t ha t t h l s l l np l l ed exchange r l sk and o ther charges . H r .

Fo ley s t a t ed he re t ha t he supposed t ha t S L N would hold

Bel lambi respons ib le for a l l t h l s .

'When w e asked Mr. Foley to confirm the above i n w r i t i n g t o us . .

I h e s a i d t h a t t h l s w a s lmposslble a s , although he had w r i t t e n

t o M r . Germenot e x p l a l n l n g b r l e f t h e r e a s o n for t h e r e f u s a l ,

i I

he did not want t o recognize I n a n y way t h a t the funds had

t been recelved and were payable to Bellambi through the BNP.

We then po ln t ed ou t t o hlm that we would be o b l l a e d t o w r l t e

t o him outlining the above , t o wh lch he r ep l l ed t ha t i n v i ew

o f th i s , he would see l f . l t were posslble t o w r i t e t o u s .

3

H e would r l n g u s l a t e r I n t h e d a y i n t h l s connec t lon .

'Mr. Foley a lso added that he supposed that SLY France wlsh to

have these funds paid out before the end of the year , to be

a b l e t o r e g i s t e r them as a lOS5 f o r tax purposes .

'We await f u r t h e r news.

1

The Secretary of Bellarnbl wrole to the bank on t h e

same day, stating : - .

. . I
H.

.

I U.
C.

l

t h e Agreement . I 4

D. Bellambl has informed Le Nickel that such reduction a9

aforesa ld can on ly be ach leved In a practical mdnner if

t h e r e i s a d lscont inuance of a l l product lon of coke by

Federal and the c losure of Federal ' s coke works.

E . Bellambl ha9 Informed Le Nlcke l tha t d l scont lnuance o f

product ion a t Federal 's coke works w l l l I nvo lve t he c losu re

of those

works

and

that

thereby

the

value such coke works

of

the

land

and

l

a s s e t s owned by Federal comprislne; w i l l be

d i r e c t l y and lmmedlately reduced by reason, Inter a l l a , r ~ f

a c t i o n l i k e l y t o b e baken by a u t h o r i t l e s o f t h e S t a t e of

New South Wales and cer ta ln loca l government au thor i t les

aga ins t the coke works In a non-operat lng condl t lon whlch ,

would not be taken against them whi le opera t lng and by

reason of d e t r l m e n t s o t h e r to Federa l . ' ,-

provides The deed then as fo l lows : ;
:

' 1 . I n the c i rcumstances a foresa ld Le Nickel hereby agrees t o

pay t o F e d e r a l t h e sum of o n e m l l l l o n d o l l a r s ( $ l , O o O , O O O ) .

t o c0mpensat.e Fede ra l (and conseqllently Bellamb3) for such

l o s s In the va lue of the l and and asse ts o f Federa l as ~

aforesaid (and conseqdently 1 1 1 the va lue o f r h e a s s e t s of '

R e l l a m b ~ ) and I t 1s agreed that such s u m sllnlJ be paid by

two equal l n s t a l m e ~ ~ t s of f1x-e hulldwd thousaltd nullars

(SjO0,OOO) each 011 t he 3 l s t day o f March 1972 a r l d (he : 3 l q 1
day o f December l'j7L1. I

The'deed then proceeds t o vary the agreement of 2:4

-

April 1970 on the ldnes s e t forth 1 1 1 t he ae t t l e rne l~ t o f 18 October

1971. The d e t a i l s o f the var3a t ioI l s a re n n t ma te r l a1 I'or presen t
.

purposes.

I

I n keeping wi th the provisions of the deed, Federal

I

. I .
Y.

I .

fo rmed pa r t o f t he a s ses sab le i ncome o f that company for t h e y e a r s

o f Income concerned. 1 a g r e e w i t h HIS Honour's conclusion.

It w a s argueU by Counsel f o r the Plppel lant th3t t h e

. _ .

s e t t l e m e n t of l @ October 1971 was IiothInL: more than a comnlerclal

arrangement and w a s n o t lnter ided t o be' a l c ~ a l l y tJindI11:: a ~ r c e m r r l t

but w a s l n t e n d e d t o be on ly a basls for a i ' u t l l r e c o n t r a r t . I re,j,.c

t h l s a r g u m e n t f o r . s e v e r a l r e a s o n s . F i r s t , t h e a u t h o r l L y g i r + n t o

Messrs. Massy-Green? and Ityan or1 2; J u l y 1971 was i n n e g u r ~ a r e a
.

n e t t l e m e n t w i t h Le Nickel and that 15 precisely what i h e y d i d nrr lI(
.

October 1971. T h e i r a u t h o r i t y w e n t b e y o n d n e g o t l a t ~ n g ' f o r ' or

' w i t h a view' to a s e t t l e m e n t . S e c o n d l y , t he wording and terms of ,
. X

, the settlemont m i n u t r 8 , r r e i n c o n s l a t e n t w l t h I t b e i n g o t h e r t h a n a '

l ega l ly b ind ing ag reemen t . Fo r example , t he concluding paragraph

n11d p r o v l ( l e d t l iL i t i l w v w e r e t o renlalll \-<l1 1 t 1 :lnd I J I ~ ~ ~ I I { J 11, - U

. far as they were vnr lec l hv those n n n u t e s . T h l r c l l y , the I ~ I I I I I ~ C -

I

corltaln no p r v v l s ~ v n for the p reparn t lon a I I I i exrcut1un o r a n n t h ( . r

document nor I S there anythlnt: In them whlch Irnplleq t h a t any 511(~h .

document w a s contemplated. Follrthly, the board of directors of

r

Bel lambi in- the f l rs t of the resolutions of 28 October 1971 by

I .

approving ' the . ... se t t l emen t negotiated by the Chalrman and

Managlng Director i n P a r i s ' o n 18 October 1971 acknowledged that a

sett lement between Bellambi and Le Nickel had been effected.

F i f t h l y , on 29 December 1971, Le Nlckel sent to the Sydney Branch of

, Banque Nat ionale de Parls t h e f lrst sum of $500,000 which was t o be
I

pald to Bel lambi on 31 December 1971 under the se t t lement of 18

I

October 1971. F l n a l l y , i t w a s n o t u n t i l a f t e r t h e o p m l o n of Mr. 5

Mahoney, Q.C., ' r e g a r d m g t a x a t l o n a s p e c t s of t he s e t t l emen t ' had

been obtained that t h e f irst mention w a s made of ano the r document ,a

and then It and a l l subsequent re fe rences t o such a document up t o I
':

t he execution o f the deed on 22 March 1972 were made only by

B e l l a m b j . . !
i

The document of 78 October 1'171 s t a l e s 111 Clause 1 01'

Its o p e r a t i v e p a r t t h a t Le Nlcke l agrees to Tay t he sum of $1,000,90(

~n t w o i n s t a lmen t s o f S~00,000 each 'as t o t a l c o m p e n u ~ ~ ~ o n f o r a n y

and a l l a l t e r a t l o n and chnnges' to the aereement of' 24 A p r l J 1970.
,.

A s the agreement of- 24 April 1970 wac. one fvr t he sale and purchd5c.

o f coke In t he quan t l t l e s and on the terms s ipec~f1ad I n ~ t and , i h e
*

a l te ra t ion and changes p rovidod for I n t h e document of 18 October

Income o f Fede ra l for the two years of income concerned. Counsel

fo r t he Appe l l an t a rgued tha t t h i s w a s n o t so. He contended that ,

the source of the payments to Federal w a s the deed of 2 2 March 1972

. and t h a t r e c e i p t by Fede ra l of: each Instalment w a s , as s t a t e d In t h e 1

b

deed, part compensat lon for the loss i n v a l u e of I t s l and and asset8

I

a r i s i n g from discont inuance of product lon a t and c losure o f its l

works and w a s t h e r e f o r e of a c a p l t a l n a t u r e . I cannot accept this f

content ion, Al though the payments were made pu r sxan t t o t he deed ! t

Of 22 M v c h 1972 i t i s an Incomplete statement of t h e pos3t1on t o

s a y t h a t t h e d e e d was the sol1rc.e of the payment t o Federal . It was

Be l l ambi t ha t gave t he cons lde ra t lon and a rmnged and d~ l - ec t ed that

the payments be made t o Federa l . The deed, t o whlcll h'ederal 1 s not

4

a p a r t y , came i n t a belng a t the i n s t l g a t 1 o n of Belldmbi because

Eellamb+ deslred tomavoid Income tax o n the t w o In s t a lmen t s of
.

$.500,000 each which I t had been lnfcJrlned hy Y r . Mahoney, Q.C.. i t
.

would have been obllged to pay i f i t had rece ived the two payments .

1

from Le Nickel . This i s c l e a r f rom the t e lex Bel la lnbz sen t to La 2
3 T~

- .. , - I .

,-- -*

, .,-* , 'Nickel on 30 Deaember 1971. To Bellambbi the vay out of ltb

. ' , . * S '

taxation d i f f i c u l t y vas t o persuade Le Nickel to pay the two SUM m

a

I

1os.s In value of Fedcrnl's lnticl atld a s s e t 5 n r ~ s i i l f . C 1 ( ? m t l w clt,srrr<

of i t - works. I\cllatnh~ 011 77 T)ccernhrr l c l T l 5rnt to I r h ~ c k e l CI

. l

I

document designed t o achieve that end and 1 1 1 the accomp'myln~ 11.tl er

I

Informed Le Nlckel that payments by It to Federal would be

- I '

deductlble by I t for taxation purposes. Rellambl's persuaslon waa

successful for Le Nlckel executed the document on 22 March 1972

notwlthstanding that there never had been privlty of contract l
between it and Federal and that it w a 8 not obllged to pay Federal 1

anything by way of compensation o r otherwise. The alleged

compensation of $1,000,000 vas not based o n any valuatlon of i

Federal's alleged l o s s , it was sunply the equlvalent o f what

i

Bellambi was entitled to receive from Le Nlckel. Nor was Le Nickel,

responsible f o r the closure of Federal. That was Lhe result of a L
F

declslon made by Bellambl whlch had It chosen could have kept ;
4

Federal operative and closed one of its other suhsldlarles, i . e .

c

Mount Pleasant or Corrlmal or it could have kept all three

subsldiaries actlve by reduclng the output of all 01' one o r two o f

them. When asked durlng the hearlng 'befor$ the learned t r l a l .y~d,:e,
why it was decided to close the coke works u f Federal and 110% th0sn
of Mount Pleasant. o r Corrunal, Mr. Ryan, the General Yanager of

i

hllambi, replied .
.

'There were numerous reasons, but undoubtedly t he maJor one was '

the Clean A i r Act. Mt. Pleasant was much more advantageoualy
plaoed than Federal as far as the Clenn Alr Act was concerned.
In the. oese of Federal there were only 7f acres of land and in

, . , the case of Mt. Pleasant there were 30. Federal war, zoned 4 ,

8 - - .. . open space, Mt. Pleasant was zoned light industrial. In t b

'xi.- .L . .' . on- of W e r a 1 thsm worm buildings on the south and west end -4

F*.->'* . ; . - tennil courts and playins fields in the north. In the eau- of^
i ? m ? a k - L

' W t . Pl0aBant there W 0 8 residential area on the south, but ~ o y .

-S&:"

.

f t l - , t . inre troll t h P cnkr WOTks, : i l l d ~ . l ~ p ~ l I ~ ~ l ~ l ~ tJy 2 , 1 J I l c , , > f l r ' * ~ r * - , . ~

111 add I t 1011 the Yt. Plpayant work5 was a 1 1 1 u c h I I I O I ,? c r o ,OI;I I e : l

pl'xrl l t o operate t h m ~ thr. Ftadel..Il p l L l l l t , . 1 1 1 d l ~ ~ - . I t . * r ~ ~ a l l > - 1 1

had hpen silb,iect to less l1lrl11sLrlal trouble LIa. t71 F r d r r r t l .

. The reason why r c l r r l r l l a l w a s not closed was thc c.tp.1clty o f I

C o r r l m n l was 128,000 tons a vear, dilrl WC w r r c o n l y scrkLrl{-: t u ~

achlcve a sax-lng u f j U , 000 to,]+ ii year, . t l lr l I 1 w e h . l r l r h n r

anything a t Corrlmal h-e would have 1 1 d 1 to c l o 3 e ha1 f thr. [ ' I , j r l t ,

whlch rould have t1ee11 a most UI~CCOIIOIIIJC r ~ ( . t i o r ~ 1 1 ) t a k e . '

.

As the learned tr lal Judge found Lhe der151on t .1 c l o y c

I

i Federal was made after the settlement of l8 October 1971 whlch

- I '

stated that the two payments were total compensatlon f o r any and all

1 ' alteration and changes to the agreement of 211 Aprll 1970. It was

not a' term of the Settlement that Bellambl o r Federal was to be

compensated for the closure of Federal or any other subsidiary of ,

Y

Bellambi. The deed of 22 March 1972 was a far cry from the

i
settlement of 18 October 1971 and In my oplnlon was origlnated for

, . the sole purpose of diverting from Bellambl to Federal the receipt l

of the two lnstalments of $500,000 each, whlch Le Nlckel was

4

obliged to pay Bellarnbi under the settlement, so that those SUB6 #

). ,

would not be taxable in the hands of Bellambl. It was not conten-

that the deed was a sham for the partlea to it Intended that it be 1
!

effective to achieve the purpose for whlch it was brought into !

~ L .

existence. In m y opinlon It pot Only had the efrect of provldlng ,
Le Nlckel with an alternative metllod o'f payment by whlch It could dlschnrge Its obligatlons to Bellambl but I t also 1 1 d the eft'ect of the making of a gift by Bellambi to Federal of the two mstalwnte.

rhave reached this conclusion because f irst there ir no evldence

that Federal recei;ed the instalment; as agent of or trustee for
.

Bellanbi and secondly because under its arrangement wlth Federal,

_-

y<? I . I

, 'Bellmbi va#--&der no Qbligation to daliver coal to Federal for .

. . \ *

r _I - * ' . , : ,,I 4
+*

7 -&Poce.m& &S v* i*,&$ Iny oblLgation t o compensate F & h L .

I I -

1 4 .

entitlenlent whatever on elther Le N ~ c k e l or ijellanlb1 t o ih- two I

Instalments I t recelved I'ronl Le Nlckel at the 1nk.tl~at1on o f

.

Bellambi. It does not follow, however, that a gift o f what WJtdd

have been income in the hands of Bellambl must necessarily be Income

\ . I .

in the hands of Federal. As stated by Kitto J. in The Squatting

Investment Companv Limited v Federal Commlssloner of Taxation

1

(1952-.1953] 86 C.L.R. 570 at p.627

.. - I

'It must be observed at once; however, that even if it were 1

correct to deacribe the payment as a glft In the strlct sense ,

of the word, the question we have to consider would still

await an answer; for it is a commonplace that a glft may or i
may n o t possess en income charactor In the hands of the
recipient.'

t

. ->

. , What then was the. character In the hands of Federal of

- _ i
Y

each'of tb indialmenta recei;ed from Le Nickel? It was not a .

paymqnt 'received in the course of Federal's buslness for Its -i r ..

busine'ss of -a cokg .producer had ceased when the payment was made nori.

was it a payment which arose out of the functloning of Its buslnass T
It was not a payment nor dld It purport to t i

1

when- i-c was Operating.

be a payment by way of compensatlon for a n y loss of proflt Federal

-1

suvtalned by reason of Le Nickel's fallure io carry out the term6 of
its initial agreement with Bellambl or by reasun of Rellarnbl's

decision to close' down its works. . I v
- -,..

It fo:llows that unless- there are some sprc~al

consideratlone whlJl demand a view to the contrary, it has not

!

1 5 .
relazlolishlp t ,cxtwectl Rc l la lnb1 and Federal, VJI.. that u r a parer11

company and Its rholly-ol;ned r n b s ~ r l ~ a r y . 111 support he qllote,l

. - from the JudfqneIlt of L o r d nenrllng Y . I i . 111 Llttlewoods Mail r>rde<

I I

S t n r e s v 1r~1anc1 Rrvenue Comnnss1oner+ (13b9) 1 W.L.R. 12'11 ~~1 IJ. 1 2 5 2

where His Lordshlp declmed to treat a wholly-owned silbsldlary I

company as a legal entity separate from and independent of 1rs !

I

parent company, a fourse of which Sachs L.J. at p.1355 clearly

i

indicated he was not prepared to approve. He then

went on to

l !

claim that because the direction given by Eiellambl to Le Nickel t o I

- ' i

pay the t w o instalments, which would have been Income in the hands I

of Bellambi, to Federal, its wholly-owned subsidiary, was given not i ,
I..
only to benefit Federal but indirectly to benefit Bellambi as well, ;

. .'L L

i ' I ' as was'acknowledged in the deed of 22 March'1972, It gave to the I
I .
. P
&

instalmehts in Federal's hands an income character. I cannot l-

accept this argument. As the law stands in Australia today, X

A .

Federal is a separate and independent entity - Slutzkin- v Federal - j

, . .- . Commissioner of Taxation ( 1 9 7 6 ) 10 A.L.R. 321 at p . 3 2 4 . - and for K
ii

'thet riaaon the fact that it i3 a wholly-owned subsldxary of -bi

~ r
t'

Be1l-l cannot operate to give the payments It received from Le *
L'

Klckel a character they would riot otherwise have. 1 a m therefore

satisfled that the two payments recelved frmn Le Wickel were I I D L

income in Federal's hands. -
As the Commissioner elected t o tax Federal and not

*. . r .

Bellarnbi in respect'of the two instalments, possible applicarion of .
the provisions of sections 19 and 260 of the Income Tax Assessnent :. .
-

I N THE FEDERAL -_ COURT __ - OF AUSTRALIA -_ )
) No. G23 of 1977

NEW SOUTH WALES DISTRICT REGISTRY ) No. G24 of 1977
1

GENERAL DIVISION -

CORAM: BOWEN C . J . , NIMMO and BRENNAN JJ.
1977

THE FEDERAL COKE COMPANY PTY. LIMITED V;

THE COMllISSIONER O F TAXATIFN OF THE

COMMONWEALTH OF AUSTRALIA

- JUDGMENT

BRENNAN,J . : The f ac t s which gave rise t o t h e d e e d of

22nd March, 1972 between The Bellambl Coal Company L lml t ed

(which I s h a l l c a l l Be l l ambi ) and Soc ie t e Anonyme Le Nicke l

(which I s h a l l c a l l Le N i c k e l ) are set o u t i n t h e j u d g m e n t s

of the Ch le f Judge and of Nimmo, J . , and i t 1s unnecessary

t o r epea t t hem. Pu r suan t t o t h e d e e d , Le N i c k e l p a i d t o

t h e a p p e l l a n t ( w h i c h I s h a l l c a l l F e d e r a l ) two amounts,

each of $499,567. The f irst amount was paid i n t h e income

y e a r e n d e d 3 0 t h J u n e , 1 9 7 2 , a n d t h e s e c o n d i n t h e i n c o m e

yea r ended 30 th June , 1973. The rcspondent asscssed

F e d e r a l t o t a x i n r e s p e c t of e a c h r e c e i p t , a n d t h e q u e s t i o n

i n t h e s e p r o c e e d l n g s is w h e t h e r t h e s s s c s s m e n t s s h o u l d be

upheld or \rhcAther t h c nsscssmcnts be Lar led by Cxcludlng

t h e r e f r o m t h e r e s p c c t l v e a m o u n t s of $499,567.

Le N i c k e l p a i d t h e r c s p c c t i v e a m o u n t s t o F e d e r a l

because t he deed bound it t o do so . T h e c .ons ldcra t lon fo r

t h e promise t o make the payments was provlded by Bcl lambi .

Bellambi s e c u r e d Le N i c k e l ' s p r o m i s e t o pay the amounts

t o F e d e r a l i n c o n s i d e r a t i o n of t h e variation o f t h e c o k e

supp ly con t r ac t be tween Bellambi and L e Nickel. As b c t w e n

Le Nicke l and Federa l the payment has g r a t n i t o u s : t h e

payment dld not discharge any an tecedent liability owed t o

. . . . / 2 .
Federal and its recelpt dld not Impose any obligation upon Federal.

Federal was, at all materlal times, a wholly

owned subsldiary of Bellambi, but it did not receive the

amounts paid to it as agent or trustee for Bellambi. It
received these amounts for itself. When recelved, each
amount increased Federal's nett assets and the value of its
sGares was thereby enhanced. That was the benefit which

flowed, and which was intended to flow, to Federal's
shareholder, Bellambi. Federal may, in a sense, be said

to have received the payments as a glft, but such a
description does not detcrmine the character of the receipt. As Kitto J. said in The Squatting Investment Co.

- Ltd. v. Federal Commlssioner of Taxation (1953) 86 C.L.R.
570 at pp. 621, 628:
"It must be observed at once, however, that even
jf It were correct to describe the payment as a
gift In the strict sense of the word, the
questlon we have to consider would stlll aaalt

an answer; for It is a commonplace that a gift

may or may not possess an income character In the
hands of the recipient. The question whether a

receipt comes In as Income must alnays depend f o r
Its answer upon a consideration of the whole of the clrcumstances; and even in respect of a true gift it is necessary to inquire how and why It

came about that the glft was made."

Whether a payment be made by \!ay of glft or not,

the prlnclple 1s that moneys received from any source,
representing Items of a revenue account must be regarded

as recelved by nay of revenue (Federal Conunissloncr ~ of

Taxation v. __ Wade (1951) 84 C.L.R. 105 at p. 112).

When a recipicnt of moneys provides conslderation

for the palment, the conslderation wlll ordjnarlly supply

the touchstone fo r ascertalning urhether the receipt is on

revenue account or not. The character of an asset whlch

1s sold f o r a prlce, or the character of a cause of actlon
.

-. . . ./3.
n a .

discharged by a payment will ordlnarily determine, unless
It be a sham transaction, the character of the receipt of

the price or payment. The consideration cstablishes the
matter In respect of which the moneys are received. The

character of the receipt may then be determined by the
character, in the recipient's hands, of the matter in respect
of which the moneys are received. Thus, when moneys are

received in consideration of surrendering a benefit to

which the recipient 1s entitled under a contract, it is

relevant to enquire whether or not that beneflt was a capital
asset in his hands. To adapt the words of Lord Macmillan in Van Den Bergs Ltd. v. Clark (1935) A.C. at p. 443, and of Williams J. inBennett v. Federal Commissioner of Taxation

(1947) 75 C.L.R. 480 at p . 485, the enquiry is whether

the congeries of the rights which the recipient enjoyed

under the contract and which €or a prlce he surrendered was
a capital asset.
When a recipient gives no consideration for a

receipt, it is not possible to Identify the matter in respect

of which the moneys are received by reference to rights
whlch the recipient surrenders. Nevertheless, an enquiry

into the "how and why" of the receipt may rcveal the mattcr

in respect of which the payment is recelved. I € there be

a consensus betwcen the payer and the payee, their conunon

understanding may identify the relevant matter. The

intention or understandlng of the payer alone 1s insufficient

for "it would plainly be unsound to allow a dcterminatlon

of the character of a recelpt in t h e hands of the

rccip~ent to be affected by a cnnsiderat~on of the

uncommunicated reasoning which led the payer to agree to

pay it" (McT,aurin - v. -- Fedcral Cummissloner ~- of Taxatlon

. . . . / 4 .

. r (1961) 104 C . L . R . 381 a t p . 3 9 1 ) . I n t h e p r e s e n t c a s e

there is a consensus be tween Bcl lambi and Fcdera l -

b e t w e e n t h e company w h i c h d i r e c t e d t h e payment t o b e made

a n d t h e company which received t h e payment . Each of the

companies had common d i r e c t o r s who a c t e d s l m u l t a n e o u s l y

as t h e b o a r d s o f b o t h . F e d e r a l may t h u s b e t a k e n t o h a v e

s h a r e d B e l l a m b i ' s m o t i v e i n c a u s i n g t h e p a y m e n t s t o be

made t o F e d e r a l a n d " B e 1 l a m b i ' s s e l e c t i o n of t h e matter i n

respec t o f which the payments were made.

I n c a s t i n g t h e t r a n s a c t i o n i n t h e form which

Be l l ambi chose , Be l l ambi and Fede ra l were no doubt mot iva ted

t o a v o l d t h e p o s s i b l e t ax l l a b l l l t y I n Bellambi which may

have arisen i f Be l l ambi had r ece ived t he paymen t s f rom

Le Nlckel. There was a s u f f i c i e n t s i m l l a r i t y between

B e l l a m b i ' s p o s i t l o n a n d t h a t o f t h e a p p e l l a n t company

l n Heavy Minerals P t y . L t d . v. Federal Commissloner of

Taxat ion (1966) 115 C . L . R . 512 t o warrant t h e d e v l s i n g o f

a scheme whlch would d iver t the p roposed payments by

Le N i c k e l t o a r e c i p i e n t who mlgh t t ake t he paymen t s

w i thou t incurring a t a x l l a b l l i t y . The m o t i v e f o r

d e v i s i n g t h e s cheme , however , s ays no th ing a s t o i ts s u c c e s s .

'!/hen a r e c i p i e n t g i v e s no c o n s l d e r a t i o n f o r

a r e c e i p t , t h e motlve of the paye r IS n o t I r r e l e v a n t

( a l b e i t n o t c o n c l u s i v e ) i n d e t e r m i n i n g t h e c h a r a c t e r of

t h e r e c e l p t ( H a y e s v . Federa l Commlss loner o f Taxat ion

- -__ -

(1956) 96 C . L . R . 47 a t p . 56). The motlvc may either
t e n d t o i d e n t ~ f y t h e m a t t e r j n respec t o f which a payment is made, or ~t may show that t h e r e i s a mcre g1 f t , which

js u n r e l a t e d t o a n y m a t t e r b y r e f e r e n c e t o w h i c h t h e

c h a r a c t e r of t h e r e c e i p t may b e a s c e r t a l n c d . The significance

of the motive depcnds upon t h e circumstances.

. . . . / 5 .

F e d e r a l ' s b u s i n e s s o f p r o c e s s i n g c o a l i n t o coke

f o r Bellambi w a s , of course, dependent upon Bellambi's

a b i l i t y t o se l l t h e c o k e t o i t s cus tomers . So l o n g a s

Bellambi had sales for the coke wh ich Fcde ra l cou ld p roduce ,

F e d e r a l was a s s u r e d of a p r o f i t a b l e b u s i n e s s . B e l l a m b i

had agreed p r o c e s s i n g

on

28th

June,

1968

t o pay

Fede ra l

a

f e e f o r

i t s c o a l a t a r a t e p e r t o n w h i c h w o u l d c o v e r

F e d e r a l ' s c o s t s o f p r o c e s s i n g p l u s a sum which 'would p rovide

F e d e r a l w i t h a p r o f i t . I n 1 9 7 1 , t h e p r o f i t ra te s t o o d a t

7 0.4$ per l o n g t o n . Bellambi h a d n o t b o u n d i t s e l f , h o w e v e r ,

t o p rov ide any minimum q u a n t i t y o f c o a l f o r p r o c e s s i n g .

When B e l l a m b i ' s sales t o Le N i c k e l p a r t l y f e l l away,

t h e d i r e c t o r s d e c i d e d t o c l o s e F e d e r a l ' s w o r k s t o a v o i d

t h e h i g h c a p i t a l o u t l a y a n d o t h e r d i s a d v a n t a g e s t h a t urere

i nvo lved i n c o n t i n u i n g p r o d u c t i o n t h e r e . W h e t h e r t h e w o r k s

o f a n o t h e r s u b s i d i a r y may h a v e b e e n c l o s e d i n s t e a d o f t h e

Federa l works is immaterial. The f a c t is t h a t , on 19 th November,

1 9 7 1 , F e d e r a l c e a s e d p r o d u c t i o n a n d t h e r e a f t e r Its works

were c losed and its c o k e p r o c e s s i n g b u s i n e s s c e a s e d . I t

was n o l o n g e r e n t i t l e d t o u s e i t s l a n d f o r the purpose of

making coke and its p l a n t was d i s m a n t l e d . The r e s u l t was

a d iminu t ion i n t h e v a l u e o f its c a p i t a l assets. Bel lnmbi

was n o t o b l l g e d t o compensa te Fede ra l f o r t h a t d l m l n u t i o n .

But t h e a p p e l l a n t ' s c a s e is t h a t Bellambi c h o s e t o do so ,

and t h a t t h e paymen t s were d l r ec t cd t o and accep lcd b y

F e d e r a l i n compensat ion f o r t h a t d m l n u t i o n .

I f there were any mot ive ,o ther than t h e mere

avoidance of a p o s s i b l e t a x l i a b ~ l i t y , i n d ~ r w t l n g I h e

payments t o F c d c r a l , t h e l i k e l y motive was t o cornpensate

F e d e r a l f o r loss i n t h e va lue o f i t s c a p i t a l a s s e t s .

F e d e r a l h a d , a t the d a t e of t h e d e e d , s u s t a l n e d a n a c t u a l

. . / 6 .

.

- 6.
A & '

l o s s I n t h e v a l u e o f Its assets, and a c a u s e o f t h a t l o s s

was t h e c o n t r a c t l o n o f Le N i c k e l ' s r e q u i r e m e n t s f o r coke.

Le Nicke l was t o pay $1,000,000 i n o r d e r t o p r o c u r e Its

release from a n o b l l g a t i o n t o t a k e more coke t han it

r e q u i r e d . By t h e deed of 22nd March, 1972, Bellambi d l r e c t e d

Le Nicke l t o make the payments t o F e d e r a l " to compensate

F e d e r a l ( a n d c o n s e q u e n t l y Bellambi) for such loss i n t h e

v a l u e of t h e l a n d a n d assets o f F e d e r a l as aforesaid",

t h a t IS, t h e loss i n t h e v a l u e of t h e l and and assets

"compr is ing the coke works" . I d o n o t see why t h e c o n t e n t s

of t h e d e e d s h o u l d n o t b e admissible t o e x p l a i n t h e

contemporaneous

motive t h e r e i n c o n t a i n e d ,

and purpose

of

Bellambl

i n g i v i n g

L e N i c k e l t h e d i r e c t l o n , t o make t h e

payments t o F e d e r a l . The ev idence t ends t o i d e n t i f y t h e

matter i n r e s p e c t of which the payments were r e c e l v e d , b u t

t h e c o n c l u s i o n t o whlch i t tends mus t be t e s t e d b y r e f e r e n c e

t o o t h e r r e l e v a n t e v l d e n c e .

The d i s p a r i t y b e t w e e n t h e a m o u n t s r e c e i v e d by

Federa l and any reasonable estimate o f t h e v a l u e of i t s

e x p e c t e d p r o f i t s I n t h e f u t u r e is a fac tor wh ich suppor t s

t h e c o n c l u s i o n t h a t t h e a m o u n t s were r e c e l v e d as

compensat lon f o r loss I n the v a l u e of assets of a c a p i t a l

k i n d . What o t h e r e x p l a n a t ~ o n c a n t h e r e be f o r 13ellambl 's

d i r e c t i o n t o pay the amounts t o Federa l? The recelpts

c o u l d n o t h a v e r e p r e s e n t e d t h e t e m p o r a r y l o s s of p r o r l t s

w h i c h t h e c a r r y i n g o n o f F e d e r a l ' s b u s l n e s s acre expec ted

t o y i e l d , d l r c c t i o n was

f o r

F e d e r a l ' s b u s i n e s s u a s c l o s e d b e f o r e t h e

g ~ b e n , and the mngnl t~ lc le oC t h e r e c e ~ p t s

a p p e a r s ~ n c o n s l s t c n t w l t h a n e x p l a n a t l o n o f t h i s k i n d . The

ev ldence shows t ha t Be l l ambl d i r ec t ed t h e payments t o b e

made , and Fede ra l r ece ivcd t he pa )men t s , as cvmpcnsatlon

. . . ./7.

. 7.

. f o r t h e l o s s i n v a l u e of c a p l t a l assets. The consequence

of t h i s f i n d i n g is t h a t t h e r e c e l p t s bear t h e c h a r a c t e r

of receipts on cap i ta l account and do no t form par t

o f F e d e r a l ' s assessable i n c o m e ( c f . C a l i f o r n i a n O i l P r o d u c t s

L td . ( I n l l q u i d a t i o n ) v . Federal Commissioner of Taxa t ion

(1934) 52 C .L .R . 28) .

If it be sa id t h a t F e d e r a l d i d n o t r e c e i v e t h e

amounts i n r e s p e c t of any l o s s s u s t a i n e d b y i t , b u t m e r e l y

t o p r o v i d e a tax- f ree s a n c t u a r y f o r t h e f u n d s , t h e

r e s p o n d e n t ' s case is no t t he reby advanced . A money sum is

amenable t o c h a r a c t e r i z a t i o n o n l y i n t h e h a n d s of a r e c i p i e n t

( S c o t t v. Federa l Commiss ioner o f Taxat ion (1966) 117 C . L . R .

514 a t p. 526) , a n d i f i t be l m p o s s l b l e t o re la te t h e

r e c e i p t t o a n y i n c o m e - p r o d u c i n g a c t i v i t y o n t h e p a r t of

t h e r e c l p l e n t , t h a t fact is dec l s ive (Hayes v. F e d e r a l

Commlssioner of T a x a t i o n (1956) 96 C . L . R . 47 a t p . 56) .

F e d e r a l d i d n o t c o n d u c t a b u s l n e s s of r e c e i v i n g

moneys whlch were earned by or p a y a b l e t o o t h e r mcmbers of

t h e Bellambl g roup , no r d l d Its b u s i n e s s e x t e n d t o t h e

r e c e i p t of moneys p a l d a t t h e d i r e c t l o n of Bellambi for

t h e p u r p o s e of a v o i d l n g p o s s l b l e t ax l i a b l l i t l e s i f Bellambi

s h o u l d r e c e l v e t h e m . T h e r e c e i p t s were n o t t h e r e f o r e r e l a t e d

t o an i ncome-p roduc ing ac t iv i ty and t h e y do n o t f o r m p a r t

of F e d e r a l ' s assessable income. During argumcnt, much

was s a d as t o t h e I ~ a b l l i t y o f Bellxmb1 t o l a x In r e s p e c t

of the payments which Le Nlcke l agreed t o make. Whether

Bellambl i-S, o r w h e t h e r I n d i f f e r e n t c l r c u m s t a n c e s It

might have made by L e N lcke l are questions nhlch

been ,

l l a b l e

t o

t a x

I n

r c 5 p c c l

o f

t h e

p n b m e n t s

do n o t now f a l l

f o r d e c l s l o n . I t is s u f f l c l c n t t o s a y t h a t , w h a t e v e r

B e l l a m b i ' s l l a b i l l t y 1s or mlgh t have been , Fcde ra l canno t

be made t o b e a r i t .

. . . / a .

I would therefore allow the appeals with costs
here and in the Suprcme Court of N e w South Wales.

.

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Citations

The Federal Coke Company Pty Limited v The Commissioner of Taxation of the Commonwealth of Australia [1977] FCA 29

Cases Citing This Decision

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Statutory Material Cited

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P~yir~c31~~	t rzcell led wlthout cznslderatim	.- Whc.t-ht?r
conpensation f o r l o s t p r o f l t s	- Whether	received In

cmrse o f business - Whethar c a p i t a l o r incorm.	TrLconc T ~ x
Assessment	Act 1936, s.25(1).
Before Eowen C . J . ,	Nmmo and BrenKan JJ.

f”’	L
I N THE FEDER &L COUHT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGTSTRY
GENERAL EIVISION

respec t of	the income	years ended 30th June	1972 and 30th June
1973.

of	cantl-act m th	S c c x t e E ~ ~ ) n y n ; e	Lc IJickcl
which is apFlicaSlt! t.i tnt.	year	endxi	3‘,tn
June 7 972 .

Federzl showed a l o s s of $5,535.	The Commissioner, in his
assessment, brought	to account as income, an additional

sum of $499,567 which he described	in an adjustnent sheet
forwarded with that assessment	as follows:

*Portion of net compensatlcn	of
contract with Societe	Ansnpe
Le Nickel.	*

respective amoun:ts were assessable lnccme and should	h:ive held
they were rece>.pts	of a capital nature.

it is necessary to consider the history	of the matter and
the circumstances leading to the recelpt	of the sums by Federal.
They represented two equal instalments of	$500,000 less certain
adjustments paid m satisfaction of	a total sum of $1 million.

mile of it, the residential area	on the south actually abutting
the coke works.

smoke, dust and steam occurred. Federal had almosx continuously	i
since 1930 been engaged	in disputes with various authorities

was prosecuted by the Wollongong Council.	In 1938 t h e Department
of Public Health and the Wollongong	Cowxi1 both brought pressure
upon Federal to mitigate the smoke nuisance.	In April 1955 the

Smoke and Dust Abatement	Commttee. A succession of conferences
rxtending over some years	took place, leading to the institulior,

Ordinance	was	proclaimed	and	under	this,	the l and , except for
a	very mlnor area,	was	zoned	a s r e s e m e d f o r	Open	Spaye	(Wolic
t h a t

Bellambi	and	Federal,	which	was	en te red i n to	on 26th June 1968,
provided that Bellambi	would	de l ive r	i t s	coa l	from time	tc; time

of coke f c r u s e	by Le Nickel i n New	Caleaonia.	Bellamhl
did	n o t i n	i t s	then subsidiaries have adequate producticn

capac i ty t o supply its existing customers	and to supply	11:
addi t ion 70,000 t o m p e r	annum whlch was	required by Le Nickel.

alternatives were either to close each	of the two coke works
then separately owned by the companyts subsidlaries, that	is
Federal and Mt.	Pleasant, or to spend $1.12 mllllon at those
plants to achieve compliance with the requirements	of the Ciean
Air Act and further to spend	$1.13 million on the acquislti.on
of Corrimal Coke	Co. Pty. Limited and meke sone modification
of its works. In the report, reference	was made to the
negotiations which had been proceeding with	Le Nickel (Australia)

suspended'.	It was noted that coke	was on offer to a nunber
of other overseas users and	the general manager expressed	tne

[1977] FCA 29

20 June 1977

was done and the contract	was also signed by	Le Nickal and
came into operation.

resolvsd that approval	be given to capital expendlture
totalling $339,729 and to the general	manager's authorlsation
for certain expendlture, all	of which was described m the minutes
as part of the capltal expenditure programme	previously epproved
in principle for 1969/70 and 1970/71.

in the agreement	for delivery of 70,000 long t m s per annm
computed from	1st Jaxuary 1971, Le Nickel experienced dlflzculties
and had. accepted delivery	of only 2.5,3'72 tons lip to 39th June

Paris expressing concern about this request and	pointmg out
that when the agreement	was negotiated it was made clear to
executives of Le Nickel that Bellambi were	purchasmg a coke
plant for the purposes	of fulfilling thelr obligatlon to
supply the quantlty. Capltal expenditure	on acquisition
and subsequen-r; modifications to achieve compliance	with the
Clean Air Act had been very substartlal.	It was suggested there
should be an exchange of views between the executives	of the
parties. At a board meeting	of Yellmbl held on 27th July 1971.

Meetings were held	in Paris on 12th, 13th and	18th October 1971,
the meeting	on the last	of these clap being attended by Mr.
Massy-Greene and KZ.	Ryan.	On this last day a negotlated
settlement was reached which	was then recorded	in minutes of

including one that Le Nickel had informed	Bellmbi that the
prevalent ecocomic recession had affected the demand	for nizkel

situation l;ad reduced its requirscents	fcr coke. It had
according’y asked Aellambi to vary the	agreeneut between them.
The minutes	also recorded thst Bellamtl had pointed out that
any reduction ir. Lhc contractual dellverics	cf coke uader thF;
agreement would entail	tr?ot ofiiy 138s of profit to Sellambi

of the foregoing the partles had declded to change	certain
terms and conditions	of the said agreement ard they agreed

lettered paragraphs outlining negotiated variations	to be
made to the principal agreement. Paragraph	1 stated:

set forth, Le Nickel agrees to pay	t o Sellambl
and Bellambl agrees to recelve from	Le Nlckel
a lump sum of 1,000,000	Australian dollars