Bennett v Federal Commissioner of Taxation [1947] HCA 25

High Court of Australia|1947-07-01|Before: Williams J

H.C. or A. Income Tax - Assessable income - Company - Absolute control vested in manag 1947, director - Release of such control - Lump sum paid therefor, by instalments, to

Seay managing director - Capital or income - Income Tax Assessment Act 1936.

July 25; : Big is. By an iudentire made t4°August 1036\totwenns Banal 2 teat) company, B. was appointed managing director of 'T. for a term of seven

Bide Ehgteenea by cortaia charcheldets uns carinal wool the :ecqulring company control of 'resulted in the execution of to ind

covenanted to pay B. the sum of £12,255 in instalments of £3, 000 ae 1940; £4,000 in January 1941; and £5,255 in January 1942. indenture provided for the re-appointment of B. as managing direc until January 1940, at the same annual remuneration but without control and in all respects he was required to conform to and cor the directions from time to time given to him by 'P.'s directors. 4 to renew the appointment for successive periods until August reserved to B. and 'T. respectively. Provision was made in the first i for the refunding by B. to T. of one or more of the above-mention«

'renewal. By an indenture made in November 1937 the indenture of May H. C. or A. 1936 and the second indenture of November 1936 were cancelled and the 1947. n as to the refunding by B. was deleted from the first indenture of = "7 Bexsert °.

pensation for the cancellation of the indenture of August 1935, under" +h B. had certain rights, and was of a capital nature and not assessable

el Edward Bennett appealed to the High Court against the in his assessable income by the Commissioner of Taxation he sums of £3,000 and £4,000 respectively received by him in wy 1940 and January 1941 respectively under an indenture the Theosophical Broadeasting Station Ltd., of which company d been the managing director.

ans J. 'delivered the following written judgment : - Aug. 12. sole question for determination on these appeals is whether of £3,000 paid to the appellant during the year of income

income ended 30th June 1941, fake part of his anweedable 'of those years respectively. ese 'sums were paid to the appellant pursuant to the terms of made on 12th November 1936 between the Theoso- sting Station, which I shall call 2GB, of the first part, of the second part, and Sir H.R. Denison and R. E. "the third part. The circumstances which led to the of s indenture, which I shall call for purposes of ; first indenture, and a second indenture of the

om of the second part, and the appellant of the third briefly as follows. The appellant had been acting for the managing director of 2GB. The principal share-

of the shares, at first in his own name and later through the share-

holding of his son and daughter in Aeme Investments Itd. as h nominees. By an indenture made on 24th August 1935 betwe 2GB and the appellant, the appellant was appointed managing director of 2GB for a term of seven years from 24th August 1935

at a fixed salary of £1,040 per annum, a bonus equal to five per cent - of the gross revenue of the company, and a commission of ten per cent of the gross return derived by the company from the sale or hire of electrical transcriptions or recordings or scripts sold by or hired by the company with certain exceptions. The indenture conferred on the appellant wide and sweeping powers, the effect - of which was to give him complete control of the business of the - company. By an indenture made on 26th November 1935 between 2GB, Radio 2UE Sydney Ltd., Sun Newspapers Ltd., and Broad. casting Service Association Ltd., it was agreed that Broadcasting _ Service Association Ltd. should be appointed the sole agent of 26B and 2UE for twenty-one years to determine what periods duri

it should think fit, and for certain other purposes. One of these - purposes was to sell or hire the electrical transcriptions previously f sold or hired by 2GB, and the indenture provided that upon these _ sales and hirings the appellant was to receive from the Associat

By an indenture made on 20th May 1936 between Broadcasting Service Association Ltd. of the first part, 2GB of the second part and the appellant of the third part, the appellant was appointe

to manage the business of the Association subject to the control of

directors, but since 2GB was entitled to appoint five of th

directors, the appellant was in de facto control of the business, Early in 1936 negotiations took place between the appellant

Ltd, and Denison Estates Ltd., with a view to the last mentione company, in which Sir Hugh Denison and R. E. Denison wi substantially interested, purchasing the shares owned by the two first mentioned companies in 2GB and thereby obtaining contr of this company. In case these appeals should go further, and th

ntents of the conversations between the appellant and R. E. on, who represented Denison Estates Ltd. in these negotiations, bject to objection. However, in my opinion, this evidence is But I am of opinion that evidence is admissible to hat the negotiations related to Denison Estates Ltd. acquiring olling interest in 2GB as shareholders, and to the extent to h control of the business of 2GB should then be left in the of the appellant. These negotiations resulted in the execution f two indentures of 12th November 1936, and the question ether the sums of £3,000 and £4,000 are part of the assessable ome of the appellant must depend upon their legal effect con- ed in the light of the surrounding circumstances (Inland Revenue sioners Vv. Duke.of Westminster (1) ). These indentures had fold operation. (i) The indenture of 24th August was elled. (ii) The appellant was re-appointed the managing rector of 2GB from 12th November 1936 to Ist January 1940. was to receive the same annual remuneration fixed and fluctuat- as under his previous appointment, but he was shorn of his ious absolute control and was re-appointed to perform such s and exercise such powers as might from time to time be ed to or vested in him by the directors of 2GB, and in all ts to conform to and comply with their directions. (iii) Hither the appellant or 2GB had the option to renew the appoint- the appellant as managing director for a period or successive riods from Ist January 1940 to 24th August 1942 (that is to say, the date on which the appointment of the appellant under the ture of 24th August 1935 would have expired if it had not cancelled),

ch indenture of 12th November 1936 recited that the appellant d been requested to agree to the cancellation of the indenture

S thereinafter appearing, but it was the first indenture operated to cancel the indenture of 24th August 1935, it was the second indenture which operated to re-appoint managing director of 2GB. Clause 1 of the first indenture that the agreement of 24th mae 1935 should Be deemed

y 1941, and the balanee (£5,255) on Ist J jannuary 1942, Brovided that if the appellant exercised his option to extend ay ce) A.C, at pp. 20, 25.

late court should take a different view, I let in evidence of the H- ©: oF 4.

begat BENNETT v. Feprrat Commas- SIONER OF TAXATION.

the: refund to 2GB the said sum vas £3, 000, that if he ean h option to extend his appointment to Ist January 1942 he woul j on that date refund the said sum of £4,000, and that if he exerci: his option to extend his appointment to 24th August 1942 he wor on that date refund the said sum of £5,255, provided that in

provisions of this clause should (except as to any sums then dt and payable by the appellant) cease to have any effect. By indenture made on 17th November 1937 between 2GB of the fi part, Broadcasting Service Association Ltd. of the second part, an the appellant of the third part, the indentures of 20th May 19 and 12th November 1936 were cancelled as from 15th Novem! 1937. By a second indenture made on 17th November 1937

agreed that the first indenture of 12th November 1936 should varied by deleting clause 3 therefrom, and that otherwise guint should remain in full force and effect.

£4,000 a £5,255 were part ) the remuneration of the appe for his services as managing director under his new appointme

sable income. But the payment of these sums had no relation | any services which he had rendered to 2GB in the past or bound to render to 2GB in the future. The whole of the £12,25 was payable whether he rendered any services as managing directo between 12th November 1936 and Ist January 1940 or not. Th payments were not made to him as compensation for the remuner: tion which he would have received if he had remained mana; director for the original term ending on 24th August 1942 inste: his term being shortened to Ist January 1940, because he had option to extend the term to 24th August 1942. If the comps exercised the option to extend the term the payments wot not increase his remuneration, because he was entitled to th whether he served the company as managing director during further term or not. If the appellant exercised the option, th would not increase his remuneration because he had then to them wholly or pro tanto. The effect of the cancellation of t the indenture of 24th Angust 1935 and the re-appointment of the appellant as managing director of 26B under the indenture of 12th

1936 was that the appellant, instead of having unfettered

ition a8 managing director depended upon the success of mpany's business. His previous management had been very able both to himself and the shareholders, and he was justified

ring that if he was divested of control his remuneration might tins He was therefore entitled to demand a substantial sum

other hand his fears might prove to be unfounded and his revenue might increase. In that event he could exercise on to extend the term of his re-appointment until 24th 1942. It would then be reasonable that he should forego

e substance of the matter is that the sum of £12 m payable by instalments as compensation for the cancel- f the indenture of 24th August 1935, and such payments a capital nature unless the compensation is some form of for the loss of the income which the taxpayer would ed under the agreement but for its cancellation, as in the je payments in Commissioner of Taxes (Vict.) v. Phillips (1). ments in the present case are simply payments made as consideration for the appellant agreeing to cancel one under which he had certain rights and entering into a ment under which he had different rights. Adapting 'of Lord Macmillan in Van Den Berghs Ltd. v. Clark (2) g of the rights which the appellant enjoyed under the it and which for a price he surrendered was a capital asset. ym ents are in the same category as those in Du Cros v. Dewhurst v. Hunter (4) and the payment in Carter v. } so far as attributable to the cancellation of the agree- 'in question: cf. Asher v. London Film Productions

to amend the assessment for the financial 1940-1941 by omitting from the assessable income appellant the sum of £3,000 paid to him by af ical Broadcasting Station Ltd., and to reduce (5) (1946) 176 LT. 206. +) (1944) 1° KB. 133, at pp. 139,

Se Bennerr v. Fuperat Commus- SIONER OF TAXATION.

Solicitors for the appellant, C. Don Service & Co. eae? Solicitor for the respondent, H. F. E. Whitlam, Crown s

Order the respondent to amend the assessment for the finan year 1941-1942 by omitting from the assessable incon of the appellant the sum of £4,000 paid to hi Theosophical Broadcasting Station Ltd., and to the assessment accordingly. r Shae

Respondent to pay the costs of the appellant of both

At a glance

Court

Decision date

Before

Source

Judgment (43 paragraphs)