W & J Investments Ltd v Commissioner of Taxation
[1989] FCA 607
•05 OCTOBER 1989
Re: W & J INVESTMENTS LIMITED
And: COMMISSIONER OF TAXATION
No. N G2001 of 1987
FED No. 607
Income Tax - Contract
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Burchett J.(1)
CATCHWORDS
Income Tax - allowable deductions - investment allowance - eligible expenditure upon purchase of plant and equipment from dealer by subsidiary finance company (appellant) for leasing to customers of the dealer - whether purchase made "under a contract entered into before 1 July 1978" - elements of contract considered; whether illusory or void for uncertainty - variation of contract - relationship between dealer and appellant purchaser considered.
Contract - contract containing provision for cancellation and mechanism for determination of purchase price - whether binding contract formed - whether condition in contract is condition precedent to formation or condition precedent to performance - parties' intention to contract considered.
Income Tax Assessment Act, 1936-1979 s.82AB(2)
HEARING
SYDNEY
#DATE 5:10:1989
Counsel for the Applicant: Mr A.R. Emmett Q.C. with
Mr A.H. Slater and Mr S.J. McMillan
Solicitors for the Applicant: Minter Ellison
Counsel for the Respondent: Mr R.A. Conti Q.C. with Mr J.W. Durack
Solicitors for the Respondent: Australian Government
Solicitor
ORDER
The assessment be set aside.
The Commissioner of Taxation pay the appellant's costs of the appeal.
The Commissioner of Taxation be directed to reassess the appellant in accordance with the reasons for judgment of the Court.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
As 30 June 1978 approached, it was notorious that, in respect of contracts for the purchase of certain equipment eligible for investment allowance for income tax purposes, the end of the financial year would mark an important watershed. For s.82AB(2) of the Income Tax Assessment Act, 1936 (as it then stood) applied to provide a substantially higher investment allowance in cases
"where the eligible expenditure was incurred ... in respect of a unit of property acquired by the taxpayer under a contract entered into before 1 July 1978 ... and was so incurred in respect of a unit of property that was first used or installed ready for use before 1 July 1979 ... ."
It will be observed that there were two particular requirements: that the property be acquired under a contract entered into before 1 July 1978, and that it be first used or installed ready for use before 1 July 1979. This case is concerned with the former of these requirements.
The appellant W & J Investments Limited, then W & J Investments Pty Limited, carried on business as a finance company, concentrating particularly upon the financing of the acquisition of goods sold by Waugh & Josephson Pty Limited, a well known dealer in caterpillar tractors and other heavy equipment. Prior to 1979, the shares in the appellant were wholly owned by Waugh & Josephson Pty Limited. During June 1978, Mr Vale, who was secretary of both companies, Mr Kenny, who has since died but was then the appellant's manager, and Mr Knox, who was then the general sales manager of Waugh & Josephson Pty Limited, met together on a number of occasions to determine the quantities of plant and machinery the appellant was expected to require to purchase from Waugh & Josephson Pty Limited for leasing so as to be first used, or installed ready for use, before 1 July 1979. After detailed consideration, they decided that the appellant would enter into contracts with Waugh & Josephson Pty Limited for the purchase of all plant and equipment which was reasonably expected to be required. Before that decision was made, advice was obtained from accountants, articles were considered which had been published in "The Taxpayer", and Mr Kenny had a discussion with an officer of the Australian Taxation Office. Following the decision, Mr Kenny prepared, signed, and delivered to Waugh & Josephson Pty Limited a number of orders in respect of the equipment he had identified with Mr Knox. The orders bore the date 29 June 1978, and I am satisfied they were handed to an employee of Waugh & Josephson Pty Limited on that day. Each order was addressed to Waugh & Josephson Pty Limited on the normal order form of the appellant, with the insertion only of the description of the goods and the statement of the price. The goods were described by reference to the model the subject of the particular order, as for example "(2) Only New Caterpillar Model D10 Tractors", with the addition of the words: "fitted with attachments". The price was stated as: "Price ruling at time of delivery". Among the printed conditions appearing on the form was the following:
"IMPORTANT Show our Purchase Order Number on all invoices, Bills of Lading and all Shipping Documents. Advise immediately if unable to furnish. Do not substitute or back order. Notify us immediately and await our written instruction to substitute, cancel or back order. We reserve the right to cancel any part or all of this Order prior to shipment."
On 30 June 1978 each of the orders was acknowledged by letter signed on behalf of Waugh & Josephson Pty Limited by Mr Knox as general sales manager. His letters stated simply:
"We acknowledge and confirm your Order no. (the order number was quoted) dated 29th June, 1978, covering the supply of (the description of the equipment in the order form was repeated, but without the express reference to attachments)."
In sixteen cases in which subsequently leases were entered into prior to 1 July 1979, and in which the appellant did not assign or purport to assign to the lessee its right to claim a deduction in respect of investment allowance, the appellant claimed such a deduction on the footing that the equipment was "a unit of property acquired by the taxpayer under a contract entered into before 1 July 1978". In each case, its claim was disallowed. The appellant duly lodged an objection which, being also disallowed, was referred to the Supreme Court of New South Wales for hearing as an appeal. The appellant's appeal was dismissed. The appellant then appealed to a Full Court of this Court, which allowed its appeal and ordered a new trial: W & J Investments Ltd v. Commissioner of Taxation (1987) 16 FCR 314. By reason of the changes in the law with respect to appeals against assessments, which took effect after the decision of the Supreme Court, the new trial of the taxpayer's appeal came before this Court.
The sole issue remaining between the parties at the second hearing was whether the tractors and other items of equipment were "acquired by the taxpayer under a contract entered into before 1 July 1978". It was having regard to this issue that a new trial had been ordered, particularly in the light of the words "fitted with attachments", which raised the point, according to the Commissioner, that the contract was vitiated for uncertainty. At the hearing before me, however, this point receded into insignificance in the argument, after the appellant adduced fresh evidence showing clearly that there were standard attachments for each item of equipment at any given time, capable of identification by both parties to the contracts. Although, in a few instances, parts of equipment actually supplied were not standard (and not all of the parts in question could be described with felicity as "attachments"), I am satisfied these were cases of variation of contract, demonstrating no uncertainty in the original contract. The Commissioner did not contend, in the circumstances, for the view that variations involved termination of the original contract and substitution of a new one: see the cases to which I referred in the appeal to the Full Court (16 FCR at 322-323). Those cases, and particularly Tallerman and Company Proprietary Limited v. Nathan's Merchandise (Victoria) Proprietary Limited (1957) 98 CLR 93 at 135, establish that the question is one of intention. In the circumstances of the present case, an intention unnecessarily to destroy the existing contracts, which had been so carefully made to fulfil a statutory requirement, can scarcely be imputed to the officers of the appellant and of Waugh & Josephson Pty Limited.
At the new hearing, the focus of the Commissioner's argument shifted to the provision for cancellation; to an (as he contended) "implicit or tacit right not to proceed in any event, unless and until the Dealer (i.e. Waugh & Josephson Pty Limited), without obligation on its part so to do, might introduce to the Financier (i.e. the appellant) a prospective acquirer of the goods from the Dealer, whom the Financier was prepared to accept as a lessee thereof", that being a right the Commissioner asserted the appellant had; to a corresponding right he asserted the dealer had not to sell to the appellant in the absence of obtaining an acquirer of the goods at a price acceptable to the dealer; and finally to a contention that the price was not fixed by the contract since it was understood the ruling price would be susceptible of variation by mutual agreement. Alternatively, the Commissioner argued that, even if there was a contract concluded before 1 July 1978, the ultimate acquisition of the property by the taxpayer was not "under" that contract, but under a fresh contract made at about the time of the entry into the relevant lease.
No reliance was placed on s.260 of the Income Tax Assessment Act.
For the Commissioner, emphasis was placed on the relationship between the appellant and the dealer. It was said they were not at arm's length, and that non-contractual understandings were to be expected. However, those in charge of both enterprises had had their attention drawn to the requirements of s.82AB(2). It does less than justice to their care to discuss the matter, both with their accountant and with an officer of the Commissioner of Taxation, to suggest, as it was suggested, that they thought a mere order, without any binding contract, would suffice. Although, as the argument underlined, the accountants referred to a "ruling" by an officer of the Commissioner which substituted for the statutory expression "under a contract" mention of a confirmed order, this is a quite inadequate basis from which to infer the plain language of the statute was ignored. Against any speculation of that kind must be set the fact that the transactions were documented with the meticulous care appropriate to binding contracts the conclusion of which was recognised as an essential step. Furthermore, the matter had been the subject of prolonged consideration, although not finalized until 30 June. Interestingly, the very same language was employed (the word "order" instead of "contract") in Kearney v. Federal Commissioner of Taxation (1984) 68 FLR 316 at 324 and 325, without being there regarded as any indication of a misunderstanding of what the Act required. Upon the appeal, which was dismissed, there was no challenge to Tadgell J's application of s.82AB(2): Federal Commissioner of Taxation v. Kearney (1985) 85 ATC 4183.
Kearney's case illustrates the proposition that a contract containing a condition, under which the contract may be brought to an end in the future, is not simply on that basis illusory or void. There, the taxpayer wished to acquire a vessel at a cost of $285,000.00. He could not afford this sum unless he received a guarantee from the Tasmanian Government, for which he had applied. Accordingly, he accepted the vendor's offer to construct and supply a vessel, subject to the following term:
"It is a term of that agreement that the whole agreement is subject to the condition precedent that on or before 31 July 1978 the Tasmanian Government agrees to enter into a guarantee ... ."
This conditional agreement was made on 30 June 1978, and a further formal agreement was made later in the calendar year, after a guarantee (though not precisely the one originally contemplated) had been obtained from the Tasmanian Government. Tadgell J. said at 327:
"In this case it was manifestly the intention, and indeed the mutual desire, of the parties to make a contract by 30 June to the advantage of both. That the taxpayer had both a desire and a need to take such legitimate benefit as could be derived from the then existing taxation law is clear ... ."
At 328, he pointed out:
"Non-fulfilment of the condition would have entitled the taxpayer to be discharged, and I think it would also have entitled the builder to withdraw. But neither chose to take advantage of it when the opportunity arose, each having in effect waived the non-fulfilment. Put in another way, I consider that each party was saying this: unless each could have the benefit of a term entitling him to retire if the Tasmanian Government would not guarantee a loan to the taxpayer, then he should not be obliged to proceed further. Each agreed to such a term, and each chose not to enforce it."
He held a contract had been made before 1 July 1978. The conditional nature of the contract, the fact that certain details of the boat remained to be decided, and the fact that a formal written agreement was later executed, did not prevent, in his Honour's opinion, the boat being "acquired by the taxpayer under a contract entered into before 1 July 1978". As I have said, his conclusions on these matters were not challenged when the Commissioner appealed to the Federal Court.
In the present case, the express power of cancellation included in the order form has already been the subject of consideration by the Full Court. Beaumont J., who wrote the leading judgment, said (16 FCR 321):
"Finally, in my opinion, the existence in the appellant of a power to cancel its order did not mean, in the absence of its exercise, that no contract for sale had been made between the parties ... ."
The implied or tacit terms now alleged do not seem to me to have any greater vitiating effect. Whether or not anything was said about it, I think both Mr Knox and Mr Kenny would readily have agreed that the purpose of the contract they were attempting to conclude related to the financing of transactions by which the dealer would, in the ordinary course of its business, be disposing of equipment to third parties. Though I am satisfied a genuine attempt was made to estimate requirements, I think it was also understood that completion of each contract would be subject to the finding of a suitable lessee. But such a condition would not be inconsistent with a binding contract. Indeed, in the particular situation, I think it would have involved an implied promise by both parties to make all reasonable efforts to endeavour to find a lessee. For the evidence shows that both parties were involved, in the ordinary course of their businesses, in the conduct of such negotiations, each referring appropriate customers to the other at an appropriate stage where the negotiations were successful. An implied obligation to do all that was reasonable to find a lessee, in circumstances of this kind, may be supported by reference to what was said in Perri v. Coolangatta Investments Proprietary Limited (1982) 149 CLR 537, by Gibbs C.J. at 541, and by Brennan J. at 566. In the same case at 552, Mason J. put upon a firm footing the proposition that a court will tend to construe a condition as related to the performance, rather than to the existence, of a contract. He said:
"Generally speaking the court will tend to favour that construction which leads to the conclusion that a particular stipulation is a condition precedent to performance as against that which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract. In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens. Instead, it is appropriate in conformity with the mutual intention of the parties to say that there is a binding contract which makes the stipulated event a condition precedent to the duty of one party, or perhaps of both parties, to perform. Furthermore, it gives the courts greater scope in determining and adjusting the rights of the parties. For these reasons the condition will not be construed as a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion."
As far as the price is concerned, there is in my opinion no difficulty in giving meaning to the words "Price ruling at time of delivery". However, the evidence showed that, although there were price lists which would establish a ruling price at any given time in the normal acceptation of that expression, in practice transactions were regularly concluded involving negotiated prices at significant discounts, and even, on occasion, prices above the list price. It may be, as was contended for the Commissioner, the regularity of this practice enables it to be inferred there was an implied condition by which the price would be adjusted to conform to the price negotiated with the lessee in the particular transaction. However, an implied condition in those terms would not make the contract illusory; it would not leave the determination of the price to the discretion of one of the parties in the sense explained in the cases, but would provide a mechanism for its ascertainment, namely, its negotiation by a third party, though with the dealer or perhaps with the appellant.
For the Commissioner, reliance was placed on the matters I have been discussing, not only individually, but also in combination with each other and with certain other aspects of the evidence. When all the circumstances were considered together, it was contended they showed either that there was no intention to contract, or that the contracts, once made, were simply ignored. In particular, attention was drawn to the fact that subsequent documents did not quote the order numbers as required by the printed form of order. But this seems to me a matter of little weight, since it is common ground the form of order was not printed for the purpose of these particular contracts. When the general form was used in dealings with outsiders, the utility of the requirement would have been obvious; but when it was used to conclude contracts between these closely related companies, quotation of the numbers may well have been regarded as quite unnecessary. In any case, there is express evidence in the affidavit of Mr Kenny that he in fact referred to the order forms and acknowledgements, to satisfy himself "that the appellant had already made arrangements to acquire the equipment required by the Customer and had not leased that equipment to any other person", when calculating the figures for each of the lease transactions. Plainly, there was good economic reason for him to do so, having regard to the impact, one way or another, on the investment allowance, of ascertainment of the date of the contract under which the particular piece of equipment was acquired by the appellant. Mr Kenny's affidavit is confirmed by notations he made from time to time on a schedule of the equipment ordered after his discussions with Mr Knox, showing the appellant's entry into each of the leases the subject of this appeal. There is no suggestion these notations were not in truth made when each lease was concluded.
The Commissioner also relied on evidence of certain isolated transactions, between the dealer (not the appellant) and an outside customer, involving orders "before 30 June 1978 of a doubtful or spurious character". But the senior executives who gave evidence denied any complicity in those orders, although Mr Knox (reluctantly) conceded an intention to take orders which were not firm. Apart from the few cases mentioned, which may have been due to the misplaced enthusiasm of a particular salesman or salesmen, the taking of an order which was not firm, because subject to a condition of the kind involved in Kearney's case (supra), is not a matter to which I would attach great significance. The present transactions were not transactions with customers, and there is no suggestion that any officer of the appellant was involved in or aware of the "orders" in question. I have of course considered carefully Mr Knox's answers. However, the appellant's case does not depend on his evidence alone, and I am satisfied on all the evidence that the parties did intend to enter into the contract which the orders and their acceptances purported to evidence, and that they did not thereafter abandon it in any of the cases the subject of this appeal in favour of a new contract at the time of negotiation of the relevant lease. I think in each case the unit of property was acquired under the contract evidenced by the order and its acceptance before 1 July 1978.
Accordingly, the appeal will be allowed; the assessment will be set aside; and I direct the respondent to reassess the appellant in accordance with these reasons for judgment. I order the respondent to pay the appellant's costs of the appeal.
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