Alexander v Commissioner of Taxation

REASONS FOR JUDGMENT 1 These are interlocutory applications by the applicants seeking orders pursuant to Rule 30.01 of the Federal Court Rules 2011 ("FCR") that the following questions (reformulated by me from those crafted in the original applications) be heard separately: (1) Whether the amount of $31,229,000 received by Mr Alexander and the amount of $12,492,000 received by Mr Drummond from Pangaea 788P Investments Pty Ltd on 7 August 2009 was ordinary income of Mr Alexander and Mr Drummond respectively, and was included in their respective assessable incomes for the year ended 30 June 2010 pursuant to s 6-5 of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997"). (2) Whether the resolution made on 30 June 2010 by Pangaea Resources Pty Ltd, as trustee of the Pangaea Resources Incentive Trust, resulted in the percentages, set opposite the persons named below, of the net income of Pangaea Resources Incentive Trustee for the year ended 30 June 2010 being included in their respective assessable incomes of that year only by reason of s 97 of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936") (whether adjusted or not by Div 115-C of Pt 3-1 of the ITAA 1997: Mr Alexander 37.9983% Mrs Alexander 27.2033% Mr Drummond 26.0815% 2 The applications were opposed by the Commissioner principally on the ground that the determination of both questions required a far greater survey and scrutiny of the facts than that suggested by the applicants, who submitted that the first question could be determined solely by reference to affidavit evidence from the applicants, annexing relevant written agreements and deeds between the applicants and companies under the ownership and control of Mr Paul Fudge (which I shall refer to as the "Pangaea group"). The Commissioner submitted that the so-called efficiencies in time and cost, claimed by the applicants to be achievable by recourse to pursuing the determination of the separate questions, were more illusory than real and that there would be facts, particularly germane to the first question, but also the second, which could only be provided through one or both of Mr Fudge and Mr John O'Neill, Chief Financial Officer of the Pangaea group of companies and long-time adviser to Mr Fudge. 3 The Commissioner's submission in this regard highlights a difficulty in making an order under Rule 30.01 for the separate determination of a question in an appeal to this Court by a taxpayer under Pt IVC of the Taxation Administration Act 1953 (Cth) ("TAA"), save for a pure question of law that can be determined without reference to the facts. This is not to suggest that cases will not arise where it is appropriate to order separate determination of a question other than a pure question of law, cf., Oswal v Commissioner of Taxation [2013] FCA 745, but they will be few and far between. 4 The main reason for this is that appeals to this Court under Pt IVC of the TAA do not proceed by way of pleading. True it is that each side is required to file appeal statements setting out the party's statement of the facts, issues and contentions, and that has occurred in these cases, but those statements, unlike pleadings, are not intended to intersect with respect to each pleading. Their function is more to inform the Court what the case is all about than to hold the parties bound by the facts and legal conclusions pleaded. As the majority observed in Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334, even the utility of the demurrer procedure will be put in doubt if the pleadings do not contain all the relevant facts. At [50], their Honours said: The procedure adopted in the present case is far removed from that concerned with demurrers, a form of procedure which assumes the truth of a particular set of facts. If the "facts" which are the basis of an answer to a legal question are identified, that answer will have utility for the parties provided that no other evidence could add to or qualify those "facts". In such a case, the parties' rights will be determined when the evidence finally determines the existence or non-existence of those "facts". Because that is so, demurrers have been much used in determining the rights of parties to litigation. The demurrer proceeds upon identified facts and enables a court to declare whether or not they provide a cause of action or a defence or reply to another party's pleading. Unlike the present case, however, a demurrer assumes that the pleadings exhaust the universe of relevant factual material. The utility of demurrers is, however, heavily dependent on the pleadings containing all the relevant facts. When the parties are uncertain whether further investigation will reveal further factual material, the utility of the demurrer is diminished. 5 There can be no doubt that the two questions as originally formulated, and as reformulated in [1] above, are questions of mixed fact and law. That will always be the case where the question is whether a receipt has the character of income according to ordinary concepts, notwithstanding that the judicial concept of income has been described as one sourced in the trust law concept of "flows", rather than economic "gains" over a period of time. It will always involve the determination or findings of fact and in undertaking that fact-finding process it will be, as Dixon and Evatt JJ said in Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740, "necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities"; see too, Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 663 [67]-[69]. 6 In this context, one is reminded of what was said by Hill J in Reuter v Commissioner of Taxation (1993) 111 ALR 716 at 731: Counsel for the applicant, while conceding that the court was entitled to look at all of the circumstances, sought to characterise the payment to Mr Reuter solely by reference to the agreement entered into with Bond Media Ltd, that is to say, as being a payment for giving up temporarily the right to sue Rothwells or, put another way, for subordinating that right to the rights of Bond Media Ltd. That the giving up of Mr Reuter's rights was temporary, stemmed, it was said, from the fact that, had Rothwells repaid the facility to Bond Media Ltd, the consent of the latter company could hardly have been withheld to prevent Mr Reuter prosecuting his cause of action against Rothwells for the approximately $40 million owing to him. The submission pointed also to the fact that the $8 million received by Mr Reuter did not, in law, reduce the $40 million prospectively payable by Rothwells on completion of the work for Tryart and payment by Tryart of the $100 million fee. This was so even if, as a matter of fact, it was unlikely that any such payment would, or for that matter could, be made. With the benefit of hindsight, of course, it is possible to know that there never was any possibility that Rothwells would be able to repay Bond Media Ltd. Even if it be accepted for this purpose that Mr Reuter had an asset, being a right to sue Rothwells in the future once Tryart made payment to Rothwells under the Tryart agreement, it is, in my view, too narrow an approach to characterise the payment made to Mr Reuter for the subordination of that asset as the payment of capital. Although the payment to Mr Reuter was not contractually made for his services, nor reduced in law the remuneration payable to him, nevertheless there was a sufficient relationship, not being a merely temporal relationship, between the payment and Mr Reuter's services to give the payment the character of income. The payment was so closely associated with the services which Mr Reuter performed for Mr Connell, or Rothwells, as the case may be, that it may be concluded, as a matter of fact, that that payment was a product of his services. 7 In the Full Court (1993) 27 ATR 256 at 262-263 the Court said: The consideration for the payment described in the Deed of Covenant is only part of a matrix of relevant events providing the context in which the Deed was executed and in which the character of the payment must be found. The record in the Deed that the payment made to Reuter had connection with the covenants to be provided by Reuter in the Deed, did not exclude connection with other events and was not conclusive of the nature of the payment received by Reuter. The issue to be decided was whether, in fact, the payment was a "product" of the taxpayer's services having regard to all relevant material: see Hayes v FCT (1956) 96 CLR 47 per Fullagar J at 57-8; 6 AITR 248. … Part of the relevant evidence was within the Deed but significant evidence outside the Deed made it obvious that the nexus between the sum of $8m received by Reuter from BML and the services provided by Reuter to Rothwells was such that it could be said that the sum received, however described, was a product of those services and properly characterized as income according to ordinary concepts. 8 In Bass, the majority said at [51]: It cannot be doubted that in many cases the formulation of specific questions to be tried separately from and in advance of other issues will assist in the more efficient resolution of the matters in issue. However, that will be so only if the questions are capable of final answer and are capable of being answered in accordance with the judicial process. (Emphasis added.) 9 Their Honours went on to say at [52]: Preliminary questions may be questions of law, questions of mixed law and fact or questions of fact. Some questions of law can be decided without any reference to the facts. Others may proceed by reference to assumed facts, as on demurrer or some other challenge to the pleadings. In those cases, the judicial process is brought to bear to give a final answer on the question of law involved. Findings of fact are made later, if that is necessary. Where a preliminary question is a pure question of fact that, too, can be answered finally in accordance with the judicial process if the parties are given an opportunity to present their evidence and, also, to challenge the evidence led against them. 10 Their Honours then observed that special problems can arise where the preliminary question is one of mixed fact and law. At [53] their Honours said: Special problems can arise where the preliminary question is one of mixed fact and law. As Brooking J pointed out in Jacobson v Ross [[1995] 1 VR 337 at 341, referring to Nissan v Attorney-General [1970] AC 179 at 242-243, per Lord Pearson], it is necessary in that situation that there be precision both in formulating the question and in specifying the facts upon which it is to be decided. His Honour added: "Care must be taken to ensure that, in one way or another, all the facts that are on any fairly arguable view relevant to the determination of the question are ascertainable … as facts assumed to be correct for the purposes of the preliminary determination, or as facts which both sides accept as correct, or as facts which are to be judicially determined. Failure to do this, and in particular failure to perceive that the facts alleged in a pleading are some only of the facts relevant to the determination of the preliminary question, may make the order for preliminary determination unfruitful." Quite apart from rendering the "order for preliminary determination unfruitful", the failure to identify the relevant facts or the means by which they are to be ascertained may result in procedures which do not conform to the judicial process. … (Emphasis added.) 11 In the present case it is clear that the relevant facts for the determination of both questions cannot be agreed; they will have to be judicially determined, that is, in accordance with the judicial process, and that will require evidence beyond that which can be given by the applicants in affidavit evidence annexing the relevant written agreements and deeds they entered into. In those circumstances it is difficult to see any perceived economies of time and cost in the determination process of the separate questions as against their determination in the process of allowing all issues of fact and law being determined at the one time: Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 at 141-142; if this be right, then the fact that the determination of the first question against the applicants would lead to all other issues falling away does not outweigh the considerations against making the orders sought. 12 The applications must be dismissed with costs. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.