Brent v Commissioner of Taxation

1. The Vendor sells to the Company and the Company purchases from the Vendor the exclusive right to publish and/or re-produce throughout the world in any form whatsoever as the Company in its complete and absolute discretion determines in newspapers magazines periodicals and journals the life story of the Vendor and especially the story of the Vendor's life with her husband, Ronald Arthur Biggs.

2. The Company shall subject to the provisions of this agreement pay to the Vendor the sum of sixty five thousand two hundred and fifty dollars for the rights aforesaid to be paid as follows:

(a) the sum of ten thousand dollars on the signing hereof.

(b) The sum of forty thousand dollars upon the signing by the Vendor of the manuscript containing her said life story.

(c) The sum of fifteen thousand two hundred and fifty dollars at the expiration of thirty days from the date hereof.

(a) The said sum of ten thousand dollars referred to in paragraph 2 (a) hereof shall be forthwith paid into the trust account of Mr. J. A. Patterson, solicitor, of 414 Bourke Street, Melbourne, to be held by him upon trust for the company, subject to the due signing by the Vendor of the manuscript of her said life story, whereupon it shall become the property of the Vendor absolutely.

(b) The said sum of fifteen thousand two hundred and fifty dollars referred to in paragraph 2 (c) hereof shall only become due and payable if and when the Vendor signs the manuscript of her said life story.

The Vendor hereby signs all her right, title and interest in the copyright of the manuscript to be signed by her as aforesaid to the Company.

The Vendor hereby undertakes to give all assistance to and to co-operate with the Company in communicating to the Company and/or any person or writer authorised by it to act on its behalf all information and/or facts relevant to the subject matter of this agreement.

The Vendor shall make herself available for interview so far as is within her power and control in Australia or elsewhere by the Company or any person or writer authorised by it and the Vendor also undertakes to make available all photographs and tokens and/or other information in her possession relating to the subject matter of this agreement.

The Vendor shall sign the manuscript of her said life story in the form presented to her for such signature by the Company save and except that she shall have the right to correct any mis-statement of fact or description which may appear therein.

The Vendor hereby undertakes not to communicate with or to make any statements to any other person or persons in Australia or elsewhere relative to the subject matter of this agreement within the period of sixty days from the date of the signing by her of the said manuscript or in particular and without derogating from the generality of the foregoing but not limited thereto not to give any interview to Press, Radio or Television in Australia or elsewhere for the said period of sixty days about any subject whatsoever.

This agreement shall be construed and interpreted according to the laws of the State of Victoria and the parties hereto agree to submit any dispute arising hereunder to the exclusive jurisdiction of the Courts of the State of Victoria.

1. Nothing in this agreement shall be taken or construed as affecting the right of the Vendor to publish in hard or soft covered edition any book relating to the subject matter hereof.

On the day on which the agreement was signed two journalists employed by the Daily Telegraph, the newspaper associated with the company, commenced to question the appellant about the details of her life with Biggs. The discussions with these two journalists extended over four or five days; they occupied most of each day and sometimes lasted until late at night. The journalists took down in shorthand what the appellant said and reproduced her statements in the form of a story that was intended to be, as one of them said, "interesting readable and dramatic" and thus to be suitable for publication in the newspaper. She was then shown the typed version of their story and was given an opportunity to read it through and to offer suggestions as to mis-statements of fact, although it seems that she made few suggestions and that those that she made were rarely or never acted upon. She then signed each page of the story to verify "that it was reasonably authentic". Then a journalist from the London Sunday Mirror to which the English rights had apparently been sold, took up the questioning for another four or five days and by following a similar procedure produced his own story. It is quite clear that, although the appellant provided the information on which the stories were based, it was the journalists who wrote the stories. The work was completed by 30th October 1969 and "the signing by the vendor of the manuscript containing her said life story" within the meaning of cl. 2 (b) of the agreement was completed by that date.

The sum of $10,000 referred to in cl. 2 (a) of the agreement was apparently paid to the appellant's solicitor on the signing of the agreement. There was a change of solicitors and on 31st October 1969 the appellant's new solicitor received from her former solicitor $7,490, the balance of the $10,000, after fees amounting to $2,500 and duties amounting to $10 had been deducted. Although the sum of $40,000 mentioned in cl. 2 (b) fell due for payment on or about 30th October 1969 and the further sum of $15,250 fell due on or about 20th November 1969, those sums were not paid on those dates and no explanation was given of this failure to observe the contractual requirements; the appellant's solicitor simply said in evidence: "The payments were not made and we did not ask for them." On 4th February 1970 the Commissioner, claiming to act in pursuance of the powers given by ss. 166, 167, 168 and 205 of the Income Tax Assessment Act 1936-1969 Cth ("the Act"), issued a notice of assessment based on income derived by the appellant during the period from 1st July 1969 to 3rd February 1970. The notice showed the taxable income as $65,250, the tax payable as $39,983.45 and the date for payment as 5th February 1970. On 5th February 1970 the Commissioner served on the company a notice under s. 218 of the Act requiring the company, as a person by whom money was due to a taxpayer, to pay to the Commissioner the amount of $39,983.45 claimed to be due by the appellant in respect of tax. The company did not immediately comply with the notice but eventually sent to the appellant's solicitor a letter, which was received about the end of June 1970, requesting the appellant to sign a document indemnifying the company if it made the payment demanded. On 1st July 1970 the appellant's solicitor refused this request and said that he would neither authorize the company to pay the Commissioner nor ask it to refrain from making the payment, but asked the company, if it did pay the Commissioner, to send the balance to the appellant. On 21st July 1970, the company finally paid $39,983.45 to the Commissioner and on the same day paid $15,266.55, the balance of the sum of $65,250, to the appellant.

An objection was lodged by the appellant to the assessment made on 4th February 1970 but was disallowed. The appellant thereupon requested the Commissioner to refer the decision to a Board of Review. On the reference the Board held that the sum of $65,250 was correctly included in the appellant's assessable income but that a deduction should be allowed for legal expenses in the amount of $2,210 and thus partially upheld the appellant's objection. From this decision the appellant has appealed to this Court. The Commissioner does not dispute that the decision involves a question of law and does not challenge the allowance of the deduction for legal expenses. On the appeal two questions only arise: (1) Was the amount of $65,250 income? and (2) If so, was it derived in the part of the year of income that ended on 4th February 1970?

The question whether the amount payable under the agreement was income in my opinion depends on whether it should properly be regarded as a sum earned by the appellant in relation to services rendered by her for the company. If so, it would not only be income within ordinary usages and concepts, but would also be within the scope of s. 26 (e) of the Act. If the moneys were, in truth, earnings from the performance of services by the appellant, it would not matter that she carried on no business or vocation, or that the moneys became payable as the result of an unexpected stroke of fortune or that there was no element of regularity or periodicity about their receipt. The question, therefore, is whether the moneys she received answer that description or whether they were rather, as the appellant contended, the consideration for the sale of proprietary rights or of rights analogous to rights of property. That question must be answered by examining the agreement and the manner in which the parties to it carried it out.

By cl. 1 of the agreement the appellant purported to sell to the company the exclusive right to publish and reproduce her life story and especially the story of her life with Biggs. This provision was of doubtful value. At the time the agreement was signed no story had been written. As a matter of construction "the life story" referred to in cl. 1 would appear to mean the life story embodied in the manuscript which was in due course to be signed by the appellant and which is referred to in cll. 2 (b), 3, 4, 7 and 8 of the agreement. If cl. 1 purported to confer on the company an exclusive right to publish any account of the life of the appellant, it would be quite illusory, for anyone who could obtain enough information to enable him to do so would be entitled, subject to such restrictions as the law of copyright and defamation might impose, to write a biography of the appellant. By cl. 4 the appellant purported to assign to the company her copyright in the manuscript which she intended to sign. It is clear, however, that, in the events which happened, the appellant had no copyright to assign. The stories were about her life but she did not write them, and they were not told in her words; the journalists who made the notes were not mere amanuenses who took down and transcribed word for word what she said, but they gave to the stories the form in which they finally appeared. In those circumstances the appellant, who had provided the ideas but not the form in which they were expressed, had no copyright: Donoghue v. Allied Newspapers Ltd. [1] . Clauses 5 and 7 of the agreement required the appellant to perform certain services for the company - to assist its agents, to make herself available for interview and to give information and to sign the manuscript. She, in fact, did these things. Clause 6 also required the appellant to make available (but not to sell or give away) all photographs and tokens in her possession relating to the subject matter of the agreement. It may be inferred from the fact that the articles when published did contain photographs that the appellant made some available; whether she made available any tokens (whatever they might be) does not appear. Clause 8 contained an undertaking by the appellant not to communicate with or make statements to others relative to the subject matter of the agreement and, in particular, not to give press, radio or television interviews on any subject within sixty days from the signing of the manuscript. This negative covenant was no doubt of real value to the company, but it was ancillary to the main purposes of the agreement.

In substance, the appellant earned the money payable under the agreement by devoting her time to the interviews at which she was questioned, by disclosing all the facts about her life with her husband that were thought worth printing and by lending her name to the stories which the journalists produced. The agreement to make available, apparently on loan, the photographs and tokens may rightly be regarded as a subsidiary matter and the negative covenant in cl. 8 was ancillary to the main purpose of the agreement. The purported grant of the exclusive right to her life story and the purported assignment of the copyright were, in truth, inefficacious to convey any rights to the company.

The main submission on behalf of the appellant was that the most important consideration which she provided in exchange for the money promised to her by the agreement was her undertaking to impart secret information; it was said that it was the predominant interest of the company to obtain the information which she alone possessed and that her services were only incidental to the giving of the information. It was submitted that the information which the appellant possessed was an asset - and, indeed, her only asset - and that when she conveyed the information to the journalists, with the result that it was published and no longer secret, it was no longer of any value to her; therefore, it was said, she parted with a capital asset and the money she received in payment was of a capital nature and not income.

It is not possible speaking strictly to say that in communicating the information to the agents of the company the appellant was parting with property. Neither knowledge nor information is property in a strictly legal sense, although they can be said to be property in a loose metaphorical sense and have been referred to as property in a number of cases (see Federal Commissioner of Taxation v. United Aircraft Corporation, per Latham C.J. [1] , per Williams J. [2] ). In Evans Medical Supplies Ltd. v. Moriarty (H. M. Inspector of Taxes). Lord Simonds said [3] that a company which had divulged a secret process had parted with part of its property or, in other words, with a capital asset. However, in the circumstances of that case, the company in selling the process was, in effect, disposing of its trade in a particular area and it was for that reason that the majority in the House of Lords treated the consideration for the sale as capital and not income. On the other hand, in other circumstances, an agreement to impart "know-how" has been held merely to be a method of trading, with the result that the moneys received as consideration were included in the profits and gains of the company: Jeffrey (H. M. Inspector of Taxes) v. Rolls-Royce Ltd. [4] and Musker (H. M. Inspector of Taxes) v. English Electric Co. Ltd. [5] . However, cases in which a trader agrees to disclose information used by him in the course of his business are so obviously different from the present case that they afford little guidance in solving the question that now falls for decision.

1. (1943) 68 C.L.R. 525, at pp. 534-535. 2. (1943) 68 C.L.R., at pp. 546-548. 3. (1957) 37 T.C. 540, at pp. 578-579. 4. (1962) 40 T.C. 443. 5. (1964) 41 T.C. 556.

I have not been referred to any case in which it has been held that information which was not acquired or used in connexion with a business should be treated as a capital asset whose disposal would result in the receipt of a capital gain rather than of income. In Trustees of Earl Haig v. Commissioners of Inland Revenue [6] , the trustees who had the right to publish the war diaries of Earl Haig gave to an author the right to make full use of the diaries so far as the public interest permitted and the sum received by the trustees as consideration for so doing was held to be a capital payment and not assessable to income tax. However, in that case, the trustees had the copyright in the diaries, which was indubitably property, and they did not merely sell information to the author, but in effect partially realized their copyright. On the other hand, in Hobbs v. Hussey [7] , the appellant, who had apparently been a notorious criminal, entered into a contract with a newspaper to write his reminiscences in a series of articles for payment of a sum of money. The contract involved the sale of the appellant's copyright in the articles, which had not been written at the time the contract was entered into. Lawrence J. held that the true nature of the transaction was the performance of services and that the profits were of a revenue nature. He further held that the fact that the transaction involved the sale of copyright did not affect the true nature of the transaction, since the sale of the copyright was merely ancillary. He said, [1] , that in his opinion, "the performance of services, although they may involve some subsidiary sale of property (e.g. dentures sold by a dentist) are in their essence of a revenue nature since they are the fruit of the individual's capacity which may be regarded in a sense as his capital but are not the capital itself". In that case the appellant himself wrote the articles but in Housden (Inspector of Taxes) v. Marshall [2] , a jockey agreed to make available to a newspaper company reminiscences of his life and of his experiences on the turf and to provide photographs and press cuttings and granted the company the first British serial rights in the reminiscences and authorized the company to publish the articles under his own name. In fact, the articles were written by a professional journalist, largely as a result of his own researches, although the appellant "vetted" the final product. The money paid to the appellant was held to be income. Harman J. held that the major effect of the agreement was that the appellant was paid for services rendered and that the right to use his name, which Harman J. seems to have regarded as a right of property, was merely subsidiary. The case is very similar to the present but it was suggested on behalf of the appellant that there is a ground of distinction between the two cases. In the present case the information which the appellant agreed to give related to matters which might properly be called secret, being known only to herself and Biggs and possibly to their confederates, whereas, according to Harman J., the appellant in the case before him - apparently an exemplary jockey - "had no secrets to impart, his life was open". However, as Latham C.J. pointed out in Federal Commissioner of Taxation v. United Aircraft Corporation [3] , knowledge does not become property simply because it is secret. In my opinion this circumstance does not distinguish the two cases.

1. (1939) 22 T.C. 725. 2. [1942] 1 K.B. 491. 3. [1942] 1 K.B., at p. 496. 4. [1959] 1 W.L.R. 1; [1958] 3 All E.R. 639. 5. (1943) 68 C.L.R., at p. 535.

In my opinion, the appellant's arguments that the moneys received under the agreement are not taxable cannot succeed. As a matter of law the agreement entitled the appellant to payment for services rendered to the company in making herself available for interview, in communicating information and in signing the manuscript which the journalists produced and which was not her property. There is no special reason as a matter of fact to treat the information which she possessed as equivalent to a right of property; it was not acquired in the conduct of a business, and could not be described as property in a business sense, it did not relate to anything in which copyright existed, and there was no other justification for regarding it as having in fact a character which the law denied it. The fact that the appellant had secret information made her services more valuable but moneys paid as the consideration for services rendered are income notwithstanding that the person rendering the services is employed only because of the special knowledge or information that he possesses. It is impossible to hold that the appellant sold any property to the company. As I have said, the purported sale of the right to publish her life story and the purported assignment of copyright were illusory and the agreement to make available photographs and tokens and the negative covenant contained in cl. 8 of the agreement were subsidiary to the main objects of the agreement. In my opinion the consideration provided by the agreement was for services rendered by the appellant to the company and was properly treated as income.

The second question that arises is whether the whole sum of $65,250 was income derived during the relevant year of income. In that year the whole of that sum had become due and payable to the appellant but she had been paid only $10,000 of the total. The question is whether the balance which, although receivable, had not been received was rightly treated by the Commissioner as income derived during that period. In my opinion, that question must be answered in the negative.

Section 17 of the Act provides that income tax is to be paid upon the taxable income derived during the year of income by any person and by s. 25 (1) (a) it is provided that the assessable income of a taxpayer shall include, where the taxpayer is a resident, the gross income derived directly or indirectly from all sources whether in or out of Australia which is not exempt income. The Act does not define the word "derived" and does not establish a method to be adopted as a general rule to determine the amount of income derived by a taxpayer, although particular situations not relevant to the present case are dealt with. The word "derived" is not necessarily equivalent in meaning to "earned". "Derive" in its ordinary sense, according to the Oxford English Dictionary, means "to draw, fetch, get, gain, obtain (a thing from a source)". It has become well established that unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which "is calculated to give a substantially correct reflex of the taxpayer's true income" (Commissioner of Taxes (S.A.) v. Executor, Trustee and Agency Co. of South Australia Ltd. (Carden's Case)) [1] . The Court in that case was concerned with the question whether an accounting on an earnings basis appropriately reflected the professional income of a medical practitioner as regards each year which had ended before his death and it was held in respect of those years that his professional income was properly assessed upon actual receipts. In the course of a judgment with which Rich and McTiernan JJ. concurred, Dixon J., as he then was, said [2] :

Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form. However the decision itself shows that his Honour did not intend to hold that moneys realizable, but not received, in an accounting period should always be treated as income derived during that period. Indeed, Dixon J. went on to advert to the distinction between trade and other sources of income drawn by Sir Houldsworth Shaw and Mr. Baker in their Law of Income Tax in the following passage which he cited [2] : There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains. With regard, however, to other income there must be something "coming in"; that is, for income tax purposes, receivability without receipt is nothing. His conclusions on the question whether a receipts basis appropriately reflected the professional income of a medical practitioner were expressed as follows [3] : Where there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstandings on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts represent in substance a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree, then I think according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income. But this is subject to one qualification. There must be continuity in the practice of the profession. 1. (1938) 63 C.L.R. 108, at pp. 152-154. 2. (1938) 63 C.L.R., at p. 155. 3. (1938) 63 C.L.R., at p. 155. 4. (1938) 63 C.L.R., at pp. 157-158.

In the present case the taxpayer did not carry on a business or profession. She had no stock-in-trade. Her expenditure did not correspond with, or materially contribute to, her earnings. What she received, and was entitled to receive, was a reward for personal services. If the whole of the amount receivable was treated as income in the year in question, and part of that debt proved bad, there was not likely to be any income in a future taxation year against which the bad debt could be written off. There is no commercial practice, or principle of accountancy, that requires the whole of the amount due to the appellant in a case such as the present to be brought into account for the year in which it was earned. In all the circumstances of the case it seems to me that the true income derived by the appellant was the amount that she actually received in the year in question.

The Commissioner relied on Henderson v. Federal Commissioner of Taxation [1] and J. Rowe and Son Pty. Ltd. v. Federal Commissioner of Taxation [2] but those cases are clearly distinguishable. In the former case it was held that the earnings in a year of a partnership conducting a very large accountancy practice represented its income derived in that year for the purposes of the Act. Barwick C.J. [3] set out the effect of the evidence as to the nature and extent of the operations of the partnership whose income was there in question and said that those operations were in sharp contrast with the operations of the medical practitioner whose affairs were the subject of discussion and decision in Carden's Case [4] . Obviously, it does not follow from that decision that an earnings basis would be appropriately adopted for the purpose of computing the income derived as the result of an isolated transaction entered into by an individual in circumstances such as those of the present case. J. Rowe and Son Pty. Ltd. v. Federal Commissioner of Taxation [2] was the case of a store-keeper who derived income by selling goods on terms. It was held that it was right to assess tax on the footing that there must be brought into the assessable income of a year the full price ultimately receivable for goods sold in that year, although the payments were not all either received or receivable in that year. This conclusion was supported by reliance on the effect of the provisions of the Act as to trading stock, and as to the writing off of bad debts which had been brought to account by the taxpayer as assessable income, as well as by reference to general accounting principles. As I have already said, however, the appellant in the present case had no trading stock and no likelihood of writing off bad debts, and the accepted method of accounting for business and trading concerns had no application to her situation.

1. (1970) 119 C.L.R. 612. 2. (1971) 124 C.L.R. 421. 3. (1970) 119 C.L.R., at p. 646. 4. (1938) 63 C.L.R. 108. 5. (1971) 124 C.L.R. 421.

In an alternative argument in support of the assessment, counsel for the Commissioner relied upon s. 19 of the Act which reads as follows:

Income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs. It was submitted on behalf of the Commissioner that the appellant had failed to show that the balance of the money due to her had not been dealt with on her behalf or in accordance with her directions. However, the evidence is simply that the appellant did not ask for payment and that the company refrained from making payment. On the evidence I decline to hold that the company held the balance of the money pursuant to a request by the appellant not to pay it. However, even if the company had deferred payment at the request of the appellant, s. 19 would not have applied. Income is not "dealt with", under s. 19, when all that happens is that a debtor refrains from paying his debt at the request of the borrower. In Permanent Trustee Co. of New South Wales Ltd. v. Commissioner of Taxation [1] , Rich J. said: "The object" (of s. 19) "is to prevent a taxpayer escaping though his resources have actually been increased by the accrual of the income and its transformation into some form of capital wealth or its utilization for some purpose But here the facts show that the deceased got nothing except a new obligation to pay in exchange for an existing obligation to pay. He was no nearer getting his money or of transferring it into anything of any value." He held in those circumstances that s. 19 did not apply. In the present case, even if the money had been retained at the request of the appellant, her position would have remained exactly as it was; the income would not have been used on her behalf and the company would have remained under an obligation to pay it to her. There is not the slightest ground in the present case for applying the provisions of s. 19. 1. [1940] 2 A.I.T.R. 109, at pp. 110-111.

It follows that the assessable income which the appellant derived during the income year in question was the sum of $10,000 and that her taxable income was that amount less the agreed deduction. The Commissioner was wrong in bringing into her income for the year of income that ended on 30th June 1970 the further amount of $55,250 which she did not, in fact, receive in that income year.

I shall allow the appeal and remit the matter to the Commissioner to amend his assessment in accordance with these reasons for judgment.