Commissioner of Taxation (Cth) v Montgomery

High Court of Australia|1998-02-06|Before: Gleeson CJ, Callinan JJ, Jenkinson J

For the reasons already given, the characterisation of the incentive payments as "an inducement to pay inflated rent" is not an accurate representation of the evidence. In this case, unlike Cooling [22] , there was no direct relationship between the rent and the inducement payment, and no choice of paying lesser rent and receiving no inducement payment. Furthermore, from the firm's point of view, an inducement to take a lease of the Collins Street premises included, amongst other things, compensation for substantial costs involved in leaving BHP House, and fitting out and moving into Collins Street. Insofar as it is proper to regard the payment as a form of compensation, it was certainly not only compensation for the higher rent the firm would have to pay, and there was no demonstrated relationship between any part of the payment and some "inflated" element of the rent.

The appellant's primary submission fails on the facts.

[1999] 1 WLR 873; [1999] 1 NZLR 529. 2. Wattie v Commissioner of Inland Revenue (1997) 18 NZTC 13,297. 3. Commissioner of Inland Revenue v Wattie [1999] 1 WLR 873; [1999] 1 NZLR 529.

The first ground for decision in Wattie was one which appealed to two members of the Full Court, Davies and Heerey JJ, in the present case. It being agreed that, ordinarily, a payment by a lessee to a lessor of a premium for a lease is on capital account, both the Court of Appeal and the Privy Council regarded it as impossible to distinguish, in principle, a payment, on an identical occasion, moving in the other direction. It was acknowledged that, in the case of a premium, the lessee would be paying for an asset which, in a case such as the present, would form part of the structure for the conduct of a business. It was considered unsound to distinguish between acquisition and disposition. We agree. In the Privy Council, Lord Nolan, delivering the advice of the Board, referred to the leading Australian authorities on the difference between capital and income, and then considered Regent Oil Co Ltd v Strick [26] which related to premiums paid by a lessee and held to be capital. His Lordship said that, in the absence of special legislation to the contrary, a premium has always been recognised, both in the United Kingdom and New Zealand, as capital rather than revenue. His Lordship said [27] :

The reason has probably never been better expressed than by Viscount Cave LC in the familiar passage from his speech in British Insulated and Helsby Cables Ltd v Atherton [28] when he said: "But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."

Viscount Cave's reference to an "asset or an advantage " (emphasis added) is to be noted. A payment may be capital although not made for the acquisition or disposal of a particular asset. The crucial question is whether in all the circumstances the payment or receipt can properly be attributed to a particular year. The question is crucial because income tax is charged annually upon the income or profits of each year. If the payment or receipt cannot properly be brought into the income tax reckoning for a particular year then (apart from special statutory provision) it cannot be brought into that reckoning at all.

[1966] AC 295. 2. Wattie [1999] 1 WLR 873 at 882; [1999] 1 NZLR 529 at 538. 3. [1926] AC 205 at 213-214.

In Selleck v Federal Commissioner of Taxation [29] , Beaumont J, correctly in our view, attached importance to the similarity between the nature and occasion of a receipt of an inducement payment and the nature and occasion of a premium. Both are once and for all payments made or received on the occasion of the acquisition of part of the structure of an ongoing business.

The second ground of the decision in Wattie relates to the significance, for a case such as the present, of Myer. The principle relied upon by the appellant is set out in the passage from Myer quoted earlier in these reasons. It may be compared with the language of certain of the grounds of appeal also quoted above.

In this connection it is necessary to refer again to the facts of the present case and, in particular, to the substantial costs associated with the firm's decision to move to Collins Street. The amounts in issue have been brought to tax on the basis that they represent, in whole, a profit or gain in business. Leaving to one side, for the moment, the relationship of the transaction with the firm's business, to treat the gross receipts as profit or gain represents an inversion of what was decided in Myer. In that case, the taxpayer sought to confine attention to one aspect of a larger transaction. The taxpayer argued that the assignment of a right to future interest payments was made for fair value and there was thus no profit or gain. The Court rejected that argument, insisting that the entire transaction, including the original loan, be considered. Here the appellant is seeking to do what the taxpayer in Myer attempted. If there were a scheme or venture entered into for the purpose of making a profit, or gain, then the costs associated with the scheme or venture would have to be taken into account.

Like the majority of the Court of Appeal their Lordships are unable to understand how the $5m can be regarded as a profit. It could only be so regarded if it constituted a benefit or bonus accruing to Coopers & Lybrand quite independently of the other terms of the bargain between the parties. To regard it in this way would be plainly erroneous in principle. 1. [1999] 1 WLR 873 at 883; [1999] 1 NZLR 529 at 539.

In the present case the amounts brought to tax did not represent a profit or gain. They were not received in the ordinary course of the firm's business. The occasion of the receipt was agreeing to enter into, and undertaking the obligations involved in, a long term lease which was to form part of the structure within which the firm was to conduct its business. To refer to ground seven of the grounds of appeal, the fact that an inducement payment was an ordinary incident of agreeing to take a lease in circumstances such as those involved here does not make receipt of the payment an incident of the ordinary course of the partnership business. This was a singular transaction, not part of the regular means by which the firm derived income. Myer decided that singularity was not conclusive, but it did not decide that it was irrelevant. It also decided that, in identifying a trading purpose of making a profit or gain, the whole transaction, and not merely part of it, is to be considered. Unlike Cooling, the present is not a case where it is apt to characterise the firm's change of accommodation as having the (or even a) purpose of obtaining the inducement payment. The payment was but one aspect of a wider transaction which was activated by practical necessity.

We are unable to accept that the inducement payment is properly characterised as proceeding from the use or exploitation by the firm of its capital, whether the relevant capital is taken to be the agreement to lease the Collins Street premises or the goodwill of the firm. We say that for the following reasons.

First, such characterisation involves disregarding the entire transaction and directing attention to only part of it. This, as was noted earlier, is the opposite of the approach taken in Myer.

Secondly, the agreement to take the lease, for which the inducement payment was part of the consideration, was not, at the time of the agreement for the inducement payment, an asset of the firm capable of exploitation. The owner of the premises agreed to grant, and the firm agreed to take, the lease. The rights to be granted under the lease were to form part of the capital structure of the firm. The receipt of the inducement payment accompanied, and was occasioned by, the lease agreement, but it did not constitute an exploitation of the agreement.

Thirdly, the asset of the firm which was its goodwill must be identified accurately. It is something different from the firm's size. The firm's size was not part of its capital. The goodwill of a firm has been described as "the attractive force which brings in custom" [31] . Depending upon the nature of the firm's trade or business, it may be related to a variety of factors including the premises from, or the locality in, which it operates [32] . What made the firm in the present case an "attractive tenancy target" was primarily its size but also, no doubt, its reputation. Those matters would have increased its bargaining power in negotiations about the size of the inducement payment, but it does not follow that it is correct to regard any part of the payment, let alone the whole of it, as the fruit of exploitation of the firm's goodwill.

Inland Revenue Commissioners v Muller & Co's Margarine Ltd [1901] AC 217 at 224, per Lord Macnaghten; Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 613-614. 2. Federal Commissioner of Taxation v Williamson (1943) 67 CLR 561; Box v Federal Commissioner of Taxation (1952) 86 CLR 387; Duncan v Ridd [1976] 2 NSWLR 105; Geraghty v Minter (1979) 142 CLR 177 at 198; Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 615-617.

Fourthly, there is a measure of inconsistency between the appellant's reliance on the circumstance that, in the prevailing market conditions, receipt of an inducement payment was an ordinary incident of taking up a lease of a substantial portion of a new building in Melbourne, and a contention that the payment in the present case resulted from the exploitation of the firm's goodwill. Putting all other objections to the proposition to one side, the most that could be said is that the firm's size and reputation meant that it could expect to be offered a larger payment than some other prospective tenants.

We agree with the conclusion of the Full Court of the Federal Court.

The respondent (the taxpayer) is a partner in a large firm of solicitors. From 1977 to 1991 that firm carried on its practice in Melbourne from offices in BHP House (at 140 William Street) and from offices in Nauru House (at 80 Collins Street). On 9 August 1989, the firm decided (subject to a qualification that is now irrelevant) that it would accept an offer, made by the developers of a building then under construction at 101 Collins Street, Melbourne, of a lease of some floors of that building.

On 14 August 1989, three agreements were executed: an agreement for lease of six floors of the building at 101 Collins Street; an agreement "to record certain financial arrangements between the parties with respect to the agreement for lease" and made by the lessors "[a]s an inducement for the Lessee to execute the agreement for lease"; and a deed of acknowledgment by which some of the members of the firm covenanted to meet all of the obligations of Plurimus Holdings Pty Ltd, the company that had agreed to take the lease. (Plurimus Holdings was treated by the parties to the appeal as having made the first two of these agreements as agent for the firm. Because only some of the members of the firm executed the deed of acknowledgment, it may not be entirely accurate to deal with the matter in this way but nothing was said to turn on it and we do not notice it further.)

Under the second of these agreements (the inducement agreement) the lessors agreed to pay the lessee $15,890,000, described in the inducement agreement as the "Specified Amount". The lessee was entitled to draw down part of the Specified Amount, before the term of the lease commenced, to meet certain expenses identified in the inducement agreement. The balance, together with compound interest at 16.5 per cent per annum, was payable to the lessee at the end of the twelve week period for completion of the lessee's fitting out of its new premises at 101 Collins Street.

Both the agreement for lease and the inducement agreement were later varied to reflect (among other things) the fact that the lessee agreed to take two extra floors in the building. The Specified Amount fixed by the inducement agreement was increased from $15,890,000 to $21,490,000. A very small part of the money due under the varied inducement agreement was paid in the financial year ended 30 June 1990; nearly $3 million was paid in the financial year ended 30 June 1991; the balance (which, with interest, amounted to more than $26.3 million) was paid in the next financial year.

The appellant (the Commissioner) assessed the taxpayer to income tax in the 1991 and 1992 financial years, first, by including in the taxpayer's taxable income an interest in the net income of the firm, which included the sums received by the firm in those years under the varied inducement agreement, and secondly, by disallowing certain claimed deductions. The taxpayer objected to each assessment. He alleged that the sums received were capital, not income. Those objections were disallowed by the Commissioner and the taxpayer appealed to the Federal Court of Australia.

At first instance, Jenkinson J allowed the taxpayer's appeals against the disallowance of some of the claimed deductions [33] . Otherwise the taxpayer failed in his appeal. The primary judge concluded that the amounts paid under the inducement agreement were (to the extent of the taxpayer's interest in the partnership) assessable income of the taxpayer.

Montgomery v Federal Commissioner of Taxation (1997) 35 ATR 416; 97 ATC 4,287.

The taxpayer appealed to the Full Court of the Federal Court. The appeals were allowed [34] . All three members of the Court (Davies, Lockhart and Heerey JJ) held that the sums received by the firm under the inducement agreement were not income but capital [35] and were not properly included in the assessable income of the taxpayer. The questions about deductions were treated as depending upon the characterisation of the sums received under the inducement agreement as capital or income and were not separately considered in the reasons of the Full Court.

Montgomery v Federal Commissioner of Taxation (1998) 152 ALR 241; 38 ATR 186; 98 ATC 4,120. 2. Montgomery (1998) 152 ALR 241 at 244; 38 ATR 186 at 195; 98 ATC 4,120 at 4,129, per Davies J; at 259; 210; 4,142, per Lockhart J; at 266; 193; 4,127, per Heerey J.

By special leave, the Commissioner now appeals to this Court where the questions argued concerned only the characterisation of the sums received as capital or income. Questions about deductions were not argued.

The Commissioner's contention that the sums received under the inducement agreement were income in the hands of the taxpayer was put in several ways. It was said that because the sums received were an incident of a transaction that occurred in the course of the business activity of the taxpayer (even though it was not in the ordinary course of that business) and because the receipts were an ordinary incident of a transaction of that kind, the receipts were income. Next, it was said that the receipts were a gain from a profit-making undertaking or scheme and that a significant purpose of the taxpayer in entering the transaction was the derivation of a gain. Finally, it was said that it was an amount, received in business, as an incentive to pay greater rental payments than the taxpayer would otherwise have been prepared to pay and in circumstances, first, where the rental payments are a deductible expense and, secondly, where the incentive was bargained and negotiated for in the natural course of carrying on the taxpayer's business.

Before examining these contentions, or the taxpayer's arguments in answer, it is as well to say something about the fundamental issues that are raised by a debate about whether a particular receipt by a taxpayer is capital or income.

In 1991 and 1992, the Income Tax Assessment Act 1936 Cth (the Act) contained no definition of income, although it did define "income from personal exertion or income derived from personal exertion" and "income from property or income derived from property" (s 6(1)). Income from (or derived from) personal exertion was defined as meaning (in part):

income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of employee or in relation to any services rendered, the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person, any amount received as a bounty or subsidy in carrying on a business any profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme but does not include -

(a) interest, unless the taxpayer's principal business consists of the lending of money, or unless the interest is received in respect of a debt due to the taxpayer for goods supplied or services rendered by him in the course of his business; or

Income from (or derived from) property was defined as meaning "all income not being income from personal exertion".

The distinction between income from personal exertion and income from property was important when the two forms of income were taxed at different rates [36] and the distinction has been drawn for other purposes [37] . But the definition of income from personal exertion "has always been used as a possible guide or test in cases where the question is whether a particular receipt is income or not" [38] . The definition of income from personal exertion thus casts some light on what was meant by the Act when it said in s 25(1) that:

The assessable income of a taxpayer shall include -

the gross income derived directly or indirectly from all sources whether in or out of Australia; and

which is not exempt income But both of the definitions in s 6 (of income from personal exertion and income from property) begin by saying the term "means income " or "means all income " Both definitions, therefore, presuppose that "income" has a meaning. It follows, then, that the question what is income cannot be answered simply by resorting to the words of these definitions. 1. See, eg, s 8(1) of the Income Tax Act 1974 Cth imposing a surcharge on income from property where the taxable income exceeded $5,000. 2. See, eg, the provisions governing the calculation of the rebate on dividends granted to resident companies under s 46 of the Act as it stood until the Taxation Laws Amendment Act (No 2) 1987 Cth. 3. Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 555, per Dixon CJ and Williams J; see also Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 524, where Windeyer J said that the definition "refers to what is already by its nature income".

Nearly a century ago Lord Macnaghten begged pardon for reminding his listeners that "[i]ncome tax is a tax on income. It is not meant to be a tax on anything else" [39] . But, as Jordan CJ said in Scott v Federal Commissioner of Taxation [40] :

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts. [41] 1. London County Council v Attorney-General [1901] AC 26 at 35. 2. (1935) 35 SR(NSW) 215 at 219. 3. Attorney-General (British Columbia) v Ostrum [1904] AC 144 at 147; Lambe v Inland Revenue Commissioners [1934] 1 KB 178 at 182-183.

Because the distinction between income and capital has so often been considered by the courts, attempts to classify a particular receipt often proceed by seeking to draw analogies with decided cases [42] . That approach is often helpful, but resort to analogy should not be permitted to obscure the essential nature of the inquiry which is to determine whether "in ordinary parlance" the receipt in question is to be treated as income. As Jordan CJ made plain, the references to "ordinary parlance" and to the "ordinary concepts and usages of mankind" are no mere matters of ritual incantation; they identify the essential nature of the inquiry.

Van Den Berghs Ltd v Clark [1935] AC 431 at 438-439, per Lord Macmillan.

The core of the meaning of "income" in a context such as the present can be identified from what was said by Pitney J in the opinion of the Supreme Court of the United States in Eisner v Macomber [43] :

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. For the present purpose we require only a clear definition of the term "income," as used in common speech, in order to determine its meaning in the Amendment; and, having formed also a correct judgment as to the nature of a stock dividend, we shall find it easy to decide the matter at issue.

After examining dictionaries in common use (Bouv L D; Standard Dict; Webster's Internat Dict; Century Dict), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act 1909 [44] - "Income may be defined as the gain derived from capital, from labor, or from both combined," provided it be understood to include profit gained through a sale or conversion of capital assets, to which it was applied in the Doyle Case [45] .

Stratton's Independence v Howbert (1913) 231 US 399 at 415; Doyle v Mitchell Bros Co (1918) 247 US 179 at 185. 2. (1918) 247 US 179 at 183, 185.

Brief as it is, it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy. The Government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word "gain," which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. " Derived-from-capital "; - "the gain-derived-from-capital," etc. Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being " derived, " that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; - that is income derived from property. Nothing else answers the description. [46]

(Emphasis in original.) Although Holmes J (with Day J) and Brandeis J (with Clarke J) dissented, the dissenting opinions, powerful as they are in relation to the particular issue that fell for decision in the case, do not detract from the validity of the propositions advanced in the opinion of the Court.
1. (1920) 252 US 189 at 206-207. The Supreme Court was construing the Sixteenth Amendment to the United States Constitution which stated: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
2. Stratton's Independence v Howbert (1913) 231 US 399 at 415; Doyle v Mitchell Bros Co (1918) 247 US 179 at 185.
3. (1918) 247 US 179 at 183, 185.
4. (Emphasis in original.) Although Holmes J (with Day J) and Brandeis J (with Clarke J) dissented, the dissenting opinions, powerful as they are in relation to the particular issue that fell for decision in the case, do not detract from the validity of the propositions advanced in the opinion of the Court.

As was noted in Federal Commissioner of Taxation v Myer Emporium Ltd [47] , both the "ordinary usage meaning" of income and the "flow" concept of income derived from trust law have been criticised [48] . But both the ordinary usage meaning and the flow concept of income are deeply entrenched in Australian taxation law and it was not suggested by either party that there should be any reconsideration of them. Nor was it suggested that they should be replaced by concepts of gain or realised gain [49] , concepts that some economists consider preferable.

(1987) 163 CLR 199 at 215, per Mason A-CJ, Wilson, Brennan, Deane and Dawson JJ. 2. Parsons, "Income Taxation: An Institution in Decay?", Monash University Law Review, vol 12 (1986) 77. 3. Simons, Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy (1938).

What can be seen from the passage from Eisner v Macomber is that income is often the product of exploitation of capital. But, of course, that is not always so. The worker's wages are not (except figuratively) the product of exploitation of the worker's capital. Further, as has so often been stated, income will frequently be recurrent or periodical. But again, the fact that a person only ever works for wages for one week, and receives but a single pay packet (or more likely written advice of electronic funds transfer) does not make the wages thus earned any the less income in the hands of the worker. Most receipts from carrying on a business are income. But some receipts, such as amounts paid on disposing of capital assets of the business, are properly classified as receipts on capital account.

Each of the general propositions we have mentioned is qualified: income is often (but not always) a product of exploitation of capital; income is often (but not always) recurrent or periodical; receipts from carrying on a business are mostly (but not always) income. Further, in a case where it is said that the receipt is from carrying on business, often there will be a real and lively question whether what has been done amounts to carrying on business or is, in truth, no more than a singular transaction of purchase and resale of property [50] .

The search for analogous cases is, then, hardly surprising and was undertaken by both of the parties to this appeal. In doing so, each party tended to emphasise one or more features of the transactions that gave rise to the payments received by the firm. Sometimes the emphasis of one or more of these features was taken to the point of excluding any consideration of the other features of the transactions. But as Dixon and Evatt JJ said (in the more limited context of distinguishing between profits derived from carrying on or carrying out a profit-making scheme and proceeds of a mere realisation or change of investment [51] ) "it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities" [52] . We turn then to describe the transactions and their background in more detail.

As to which see Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1928) 41 CLR 148 at 151, per Knox CJ, Gavan Duffy, Powers and Starke JJ; Jolly v Federal Commissioner of Taxation (1934) 50 CLR 131 at 139, per Dixon J. 2. Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740.

The uncontradicted evidence at trial, accepted by the primary judge, was that in 1988 and 1989 it was an ordinary incident of renting premises in a new building in the centre of Melbourne to receive incentive payments of the kind paid under the inducement agreement. That finding was based on evidence given by a valuer who described what had been happening in the market for leasing commercial offices in the centre of Melbourne during this period. He said (and his evidence was not contradicted) that excessive office development in the late 1980s and early 1990s had brought about a "huge oversupply of office space in the premium or landmark building category" and that this had given rise to a period of intense competition between developers trying to obtain tenants for their buildings. He said that "faced with the unprecedented level of competition to secure tenants, the only method by which rentals could be maintained" at what he called "levels commensurate with the long term growth (CPI) rate or better" was by the offering of a range of leasing incentives. These incentives took various forms but included: making payments in cash or in kind to lessees, contributing to the whole or part of the lessee's costs of fitting out the premises, doing building works to suit the particular requirements of the lessee, granting rent free or reduced rent periods, and assuming the lessee's liabilities under an existing lease.

The agent of the lessors of the premises at 101 Collins Street gave evidence at trial that "in common with leasing patterns in the Central Business District at that time, it was the Lessors' position that the asking rental levels be maintained. This was achieved by providing incentive packages to tenants, such as cash payments, rent free periods, fit-out allowances and so on. At this point in time, asking rents were still regarded as market rents by the market in general. It was my understanding that the basis for this position, that is, a lessor preserving the asking rents by offering incentives, was to maintain the capital value of the building".

The evidence at trial showed that a valuer, seeking to determine the market rental for premises, or their capital value, may have to decide whether any part of an incentive payment made at the time of entering into a lease should be regarded as a de facto rent reduction. It followed that to make a proper determination of market rental or capital value it may be necessary to differentiate between the "face rent" (being what the developer of a building asked, or required, to be fixed as the rent payable under the lease) and the "effective rent" (being the amount of the face rent less the worth of the incentive that was paid).

The primary judge found that the firm "had not the alternative means of lessening the burden of the rent [for the premises at 101 Collins Street], by seeking to persuade the owners to accept a lower rent" [53] . Although the inducement amount that was offered to a prospective lessee might be influenced by negotiation, the rent to be fixed by the lease could not.

Montgomery v Federal Commissioner of Taxation (1997) 35 ATR 416 at 426; 97 ATC 4,287 at 4,296.

The taxpayer contended at trial that the firm was obliged to move its offices from BHP House because the lessor of those premises was proposing to refurbish the building and because the firm feared that asbestos particles might be dislodged in that process and cause harm to persons in the firm's offices. These contentions were not accepted. The primary judge found that on 9 August 1989, when the firm resolved to move to 101 Collins Street, some members of the firm knew of and were worried about these matters. But the primary judge was not persuaded that concern about the harmful effects of asbestos during refurbishment of BHP House led the taxpayer or any other member of the firm to consider themselves obliged to vote to move out of BHP House. Nor was he persuaded that the disruption that would attend refurbishment of BHP House obliged the firm to move. He found that the taxpayer and his partners "did not think themselves devoid of choice on 9 August 1989 between staying in BHP House and leaving it. On the contrary, they were set upon making a choice between the alternatives placed before them in the papers prepared for the meeting". [54] Those alternatives were to move to 101 Collins Street, to move to a building then proposed to be built at the corner of Bourke and William Streets (known as Grand Central) or to stay in BHP House. (Two other possibilities had been discarded earlier.)

Montgomery v Federal Commissioner of Taxation (1997) 35 ATR 416 at 426-427; 97 ATC 4,287 at 4,297.

In the Full Court, Lockhart J acknowledged that the primary judge had found that the taxpayer and his partners did not think themselves devoid of choice between staying in BHP House and leaving it [55] , but went on to say that "in practice it was not feasible for the firm to remain on the floors which it occupied in BHP House" [56] and that "the decision to move from the four floors in BHP House was in practical terms essential to the firm" [57] . If the conclusions that it was "not feasible to remain" in BHP House and that the decision to move was "in practical terms essential" mean no more than that the reasons for moving clearly outweighed the reasons against doing so, they are conclusions that were well open to the Full Court. But if the conclusions were intended to state some different finding from the primary judge's finding that the taxpayer and his partners "did not think themselves devoid of choice between staying in BHP House and leaving it", there was no sufficient basis for the Full Court to substitute its own finding on the issue. It was a finding that depended in part upon the primary judge's assessment of the oral evidence given at trial and there was no proper basis to depart from that assessment [58] .

Montgomery (1998) 152 ALR 241 at 257; 38 ATR 186 at 208; 98 ATC 4,120 at 4,140. 2. Montgomery (1998) 152 ALR 241 at 257; 38 ATR 186 at 208; 98 ATC 4,120 at 4,140. 3. Montgomery (1998) 152 ALR 241 at 257; 38 ATR 186 at 208; 98 ATC 4,120 at 4,140. 4. Devries v Australian National Railways Commission (1993) 177 CLR 472; State Rail Authority of NSW v Earthline Constructions Pty Ltd (In liq) (1999) 73 ALJR 306; 160 ALR 588.

The papers presented to members of the firm for consideration at the meeting of 9 August 1989 contained detailed financial evaluations of the offers that had been made in relation to 101 Collins Street and the Grand Central Project. The papers suggested that little separated the offers, which were described as "good but not startling". Significantly, the papers went on to say that the firm "is now of a size which makes it a particularly attractive tenancy target and it should therefore expect to receive from any prospective landlord, as a bare minimum, a substantial or total fit-out contribution and some initial rent incentive".

The essential nature of the three agreements executed on 14 August 1989 has been described earlier. Some further aspects of their provisions should be noted.

The agreement for lease provided, in effect, that the lessors would perform certain works to give a "core and shell presentation" of the premises and that the lessee would have a limited period "during which the Lessee will carry out and complete the Lessee's Work" (that is, the balance of works required to enable the lessee to occupy the premises).

The agreement for lease provided that (subject to a qualification that does not matter now) the lease that was to be granted and taken was to be "subject to the provisions, covenants, terms and conditions set forth in the Annexed Lease". For reasons that were not explained, the document tendered in evidence did not include the "Annexed Lease" and there was, then, no evidence at trial (or on appeal) of what were the terms of the lease that was to be made pursuant to the agreement for lease.

Under certain provisions of the inducement agreement, the lessee was entitled to draw down parts of the inducement amount to pay certain authorised expenses, including up to $3 million "in respect of expenses properly incurred with relation to the early termination" of the firm's lease of premises in BHP House and reasonable expenses with regard to the agreement for lease and the design, documentation and carrying out of the fit-out of the premises. It was pursuant to these provisions that payments of nearly $3 million were made in the year ending 30 June 1991. We were taken to no evidence that showed clearly what particular expenses were met in this way, but nothing turns on that.

The firm spent a considerable sum fitting out the premises. It was suggested in argument in this Court and in the Full Court that the amount spent was nearly $13 million but the evidentiary basis for this assertion is not readily apparent. Again, however, nothing turns on it. When the fit-out was finished, the firm sold it to a bank and leased it back.

The taxpayer submitted that, looked at in its entirety, the overall transaction recorded in the three agreements produced no net return or gain to the firm. It was said that the amounts received in the 1991 year of income were all on account of (and offset by) what the inducement agreement called "Authorised Expenses" and that the amount received in the next year had to be set off against various outgoings in that year. It may be doubted that all of the expenses that it was said should be put against the amount of the inducement amount received in the year ending 30 June 1992 could properly be said to be outgoings "arising from" the agreement to lease, or were incurred "because of" the move (to adopt the descriptions used in the taxpayer's submissions). Included in the outgoings were amounts paid for rent in respect of not only 101 Collins Street but also the former premises of the firm in BHP House and Nauru House. The outgoings were also said to include a sum suggested to be the loss suffered in relation to the fit-out of BHP House and the lease of that fit-out; that loss was shown in the 1991 return of the firm, not the 1992 return. The inclusion in the outgoings of the rent for all three sets of premises might be said to amount to double counting; the attribution of the loss sustained in 1991 to amounts received in 1992 may be open to question. It is not necessary, however, to stay to examine these aspects of the matter further. The questions debated on the hearing of the appeal to this Court focused on the characterisation of the receipts. Clearly, the firm did incur some outgoings as a result of the making of the three agreements. The exact quantification of those outgoings can be put to one side.

Characterisation of the receipts - incentive to pay greater rent?

It is convenient to deal first with the Commissioner's argument that the amount was received in business as an incentive to pay greater rental payments than the taxpayer would otherwise have been prepared to pay.

The sums received by the firm under the inducement agreement were not received as an incentive to pay a "greater" or "inflated" rent. That statement assumes a comparison can be made between the rent that the firm agreed to pay and some other figure for rent. But no other, lesser, rent was available to the firm at 101 Collins Street; the lessors would not negotiate about the rent.

If there had been a similar landmark building in respect of which the owner had been willing to accept a lower rent than were the owners of 101 Collins Street, it might be that the parties to the arrangements now in question would have struck some different bargain. But the agreements that were made reflected the then state of the market and in particular reflected the fact that the lessors (like other lessors of landmark buildings in Melbourne at the time) would not negotiate about the level of rent to be fixed in the lease, only about the incentive to be provided.

In these circumstances, it is not accurate, at least for our purposes, to speak of some "market rent" (calculated by reducing the face rent by the worth of the incentive that was paid) as if that represented the "true" or "real" market rent for the premises with which the face rent should be compared. The argument is one that depends upon an assumption or hypothesis that is artificial, if not positively contrary to the facts. The market produced a more complicated arrangement than the simple agreement to pay rent for the lease of premises; it produced an arrangement under which the lessee agreed to pay rent and the lessor agreed to pay an incentive. To speak in these circumstances of a "market rent" calculated in the way suggested is to speak of an artificial construct. That is not to say that the product of the calculation may not have been of great utility to valuers. It may also have been a very useful tool in the hands of the business community when making business judgments. But it is not the rent for which the parties stipulated by the lease (or, in this case, their agreement for lease) and it is not the rent struck in the marketplace.

Further, because the agreements that were made represent the result of arm's length bargaining it must follow that the bargain struck represented what each party thought to be an acceptable set of terms. It is not useful to note that one party to the bargain would have preferred to undertake some less onerous obligation. Almost every party to a commercial transaction would prefer to have less onerous obligations. But in the absence of some choice about what level of rent would be paid, it cannot be said that the sums paid under the inducement agreement were received in return for an agreement to pay a higher rent.

The absence of choice about the level of rent which is to be paid is not a helpful criterion against which the character of the lease incentives should be determined in cases such as this. The availability of choice about the level of rent depends upon behaviour in the market and that behaviour, in the nature of things, will ebb and flow with changes in the law. If availability of choice is adopted to determine the character of a receipt, that criterion will then prove to be inapplicable as market behaviour changes in reaction to earlier decisions applying it. Conceptual dangers lurk in the search for consistency in market behaviour where the range of prudent options left open to market participants is curtailed or otherwise modified to accommodate earlier court decisions. That is not because some question of the transaction being a sham intrudes [59] . Rather, the concern is with the ascertainment of the legal character of a transaction by reference to availability of choice, where it may be expected that the availability of choice will be affected, if not determined, by the market's desire to reflect developments in case law as well as statute law.

See Scott v Federal Commissioner of Taxation [No 2] (1966) 40 ALJR 265 at 279, per Windeyer J; Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 453-454, per Lockhart J.

For these reasons we do not consider that the decision of the Supreme Court of Canada in Ikea Ltd v Canada [60] (upon which the Commissioner relied) provides sure guidance to the proper disposition of the present matter. Although the legislative provisions governing Ikea differ from those that apply in this case, we doubt that much turns on those differences. But the decision appears to have proceeded from identifying a connection between the receipt of the lease inducement payment and the lessee's obligation to pay rent. Reference was made by the Court to the inducement payment being treated as if it were a "reduction of rent or consideration for the continued obligation to carry on business pursuant to the lease" [61] . For the reasons we have given, we do not consider that it is possible to describe the inducement payments in this case as a "reduction of rent" and the alternative description of the payments as consideration for the obligation to carry on business is not apposite.

[1998] 1 SCR 196. 2. Ikea [1998] 1 SCR 196 at 213, per Iacobucci J.

Characterisation of the receipts - a capital occasion?

The taxpayer submitted that the receipts were for the firm to take a long term lease of the premises from which it would conduct its professional practice. The lease, it was said, was part of the firm's profit-yielding structure and the payment was received to bring into existence an asset or advantage for the enduring benefit of the firm. This, so the argument went, was a capital occasion [62] .

British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205.

That the lease of the premises was part of the profit-yielding structure of the firm's business is beyond question. But it by no means follows that any and every aspect of the several transactions associated with the obtaining of the lease is necessarily a transaction on capital rather than revenue account. To take the most obvious example, it is beyond question that rent paid under the lease would be a deductible outgoing.

It is important to keep well in mind that the receipts now in question were receipts associated with, or on the occasion of, the acquisition of part of the profit-yielding structure of the firm. That is, the receipts came in on an occasion different from many, if not most, that have fallen for consideration in other cases. In those cases the receipt is one that came in on the disposition of part of the profit-yielding structure. Similarly, it must be remembered that the sums now in question were receipts connected with the acquisition of part of the taxpayer's capital structure. In this respect, too, this occasion differs from those in other cases, where there was a payment to acquire part of that structure.

No question arises, in this case, of characterising the advantage that was sought by a taxpayer in making an expenditure [63] . This case concerns receipts not expenditures. Nor is there any question of characterising the receipts by reference to the place that property sold or realised may have had in the profit-yielding structure of the taxpayer.

G P International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137, per Brennan, Dawson, Toohey, Gaudron and McHugh JJ.

The analogies which the taxpayer sought to draw with payments to acquire part of a taxpayer's capital structure or receipts on disposition of part of a taxpayer's capital structure are at best imperfect and may mislead. In particular, the reliance on an analogy with lease premium payments is misplaced.

The taxpayer placed some emphasis on the decision of the Privy Council in Commissioner of Inland Revenue v Wattie [64] dismissing the Commissioner's appeal from the decision of the Court of Appeal of New Zealand [65] . Wattie concerned a lump sum inducement payment of $5 million paid by a lessor to a firm of accountants to induce that firm to take a lease of premises in Auckland. Lord Nolan, giving the advice of the Judicial Committee, noted that in the absence of special legislation to the contrary, a premium paid to obtain a lease has always been recognised as capital. His Lordship concluded that the Court of Appeal had been right to describe the payment of $5 million as "a negative premium" and therefore a capital receipt [66] . We do not agree.

[1999] 1 WLR 873; [1999] 1 NZLR 529. 2. Wattie v Commissioner of Inland Revenue (1997) 18 NZTC 13,297. 3. Wattie [1999] 1 WLR 873 at 883; [1999] 1 NZLR 529 at 539.

The character of an item of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure [67] . As Dixon J pointed out in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation [68] , there are three matters to be considered in distinguishing between expenditures on capital account and expenditures on revenue account: the character of the advantage sought, the manner in which it is to be used, relied upon or enjoyed, and the means adopted to obtain it. Of these, the character of the advantage sought is "the chief, if not the critical, factor in determining the character of what is paid" [69] by a taxpayer.

Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363, per Dixon J; Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 445-447, per Williams A-CJ; at 454, per Fullagar J; Cooper v Federal Commissioner of Taxation (1957) 97 CLR 397 at 404, per Kitto J (affirmed on other grounds (1958) 100 CLR 131); G P International Pipecoaters (1990) 170 CLR 124 at 137, per Brennan, Dawson, Toohey, Gaudron and McHugh JJ. 2. (1938) 61 CLR 337 at 363. 3. G P International Pipecoaters (1990) 170 CLR 124 at 137, per Brennan, Dawson, Toohey, Gaudron and McHugh JJ.

A lessee who pays a premium for a lease obtains the advantage of the lease and that lease may well form part of the profit-yielding structure of the lessee's business. The amount outlaid as premium would, in those circumstances, be outlaid on capital account. But an amount received by a lessee on agreeing to take a lease is not necessarily of the same character even if the lease is properly regarded as being part of the profit-yielding structure of the lessee's business.

"Whether or not a particular receipt is income depends upon its quality in the hands of the recipient." [70] The fact that the payment received is compensation for or reimbursement of an amount properly deductible under s 51(1) of the Act does not determine whether the receipt is income [71] . And it is well established that a receipt may be income in the hands of the payee whether or not it is an expenditure of a capital nature by the payer [72] .

Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526, per Windeyer J. 2. Allsop v Federal Commissioner of Taxation (1965) 113 CLR 341 at 350-351, per Barwick CJ and Taylor J; H R Sinclair & Son Pty Ltd v Federal Commissioner of Taxation (1966) 114 CLR 537 at 542-543, per Taylor J; at 545, per Owen J; Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 at 276-277, per Brennan CJ, Dawson, Toohey and McHugh JJ; at 291-292, per Gaudron, Gummow and Kirby JJ. 3. G P International Pipecoaters (1990) 170 CLR 124 at 136, per Brennan, Dawson, Toohey, Gaudron and McHugh JJ.

It is, therefore, wrong to assume exact congruence between the capital or revenue character of a sum as a receipt and its character as expenditure; it is also wrong to assume exact congruence between the character of a sum when received or paid by one taxpayer and its character when received or paid by another. The assertion of some such congruence or symmetry diverts attention from the fundamental inquiry in a case like the present: is the receipt income according to ordinary concepts [73] ? And reduced to its essentials the argument seeking to compare, if not equate, this receipt with a premium paid by a taxpayer for a lease is an argument founded on an assertion of congruence or symmetry between whether a payment is deductible and whether a receipt is on capital account. That assertion was expressly rejected by all members of the Court in Federal Commissioner of Taxation v Rowe [74] . We are therefore unable to accept the reasoning in Wattie.

cf Rowe (1997) 187 CLR 266 at 276-277, per Brennan CJ, Dawson, Toohey and McHugh JJ. 2. (1997) 187 CLR 266 at 276-277, per Brennan CJ, Dawson, Toohey and McHugh JJ; at 291-292, per Gaudron, Gummow and Kirby JJ.

Similarly, analogies with payments received by a taxpayer on its agreeing to give up part of its profit-earning structure are apt to mislead. In such cases, the sum that is received is in return for giving up (or, in Dickenson v Federal Commissioner of Taxation [75] , for modifying or restricting) the profit-earning structure of the business. What makes analogies with such cases inappropriate and misleading when it is sought to apply them to the present case is that in the former kind of case it is possible to discern an element of exchange: the taxpayer gives up, or gives up the use of, a capital asset in return for a receipt. By contrast, in the present case the firm gave up no part of its capital structure in return for the receipt; the firm added to its capital structure by acquiring the lease.

In Dickenson the taxpayer agreed to buy petrol and other products from only one oil company; he agreed not to buy from any other company. The taxpayer agreed to give up or sterilise part of his profit-yielding structure. In the present case, however, the firm did not agree that it would take no other premises and thereafter conduct its practice only from 101 Collins Street; it did not oblige itself to give up its premises in BHP House or its premises in Nauru House. So far as concerned the taxpayer's legal obligations it would have been entirely consistent with the agreements made in relation to 101 Collins Street for the firm to continue its practice from those other premises or, indeed, from any other premises. The lessors agreed to pay the amounts payable under the inducement agreement in return for the firm's agreement to take the lease - not in return for any disposal of part of the firm's capital structure.

Characterisation of the receipts - a singular transaction

The taxpayer contended that the receipts were on capital account because the transactions that gave rise to the receipts were not in the ordinary course of the ordinary business of the firm. The firm conducted its practice from offices in BHP House and Nauru House from 7 March 1977 until 12 July 1991. Although the firm (or more accurately a company associated with the members of the firm) had made a number of separate leases and subleases regulating its tenancy of the premises at BHP House, there was no evidence that any inducement was paid to the firm for making any of those leases or subleases. It follows that the receipt of the sums paid under this inducement agreement could not be said to be receipts in the ordinary course of the ordinary business of the firm. But it is well established that the singularity of the receipts that now are in question, or (to put it another way) the fact that they are receipts standing apart from or outside the ordinary course of the ordinary business of the firm, does not inevitably stamp those receipts as capital receipts [76] .

Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199; Californian Copper Syndicate v Harris (1904) 5 TC 159; Ducker v Rees Roturbo Development Syndicate [1928] AC 132.

The submissions on behalf of the Commissioner (particularly the second of the contentions we have identified earlier - gain from a profit-making undertaking or scheme) placed great emphasis on this Court's decision in Federal Commissioner of Taxation v Myer Emporium Ltd [77] and the decision of the Full Court of the Federal Court of Australia in Federal Commissioner of Taxation v Cooling [78] .

The important proposition to be derived from Californian Copper and Ducker is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction. The reference to "profit or gain from the transaction" attracted some attention in the course of argument. In particular there was some debate about whether the "profit" or the "gain" that was mentioned was intended to invite some calculation of a net difference between receipts and outgoings. (It was in this context that the taxpayer referred to the various items mentioned earlier as amounts that he contended offset the amounts received under the inducement agreement.) As always, the references to profit or gain must be read in the context in which the references are made. In particular the often quoted questions from Californian Copper Syndicate v Harris [80] : Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making? must be understood against the background of the then relevant legislation that brought "profit" to tax [81] . 1. (1987) 163 CLR 199 at 211, per Mason A-CJ, Wilson, Brennan, Deane and Dawson JJ. 2. (1904) 5 TC 159 at 166. 3. Ducker v Rees Roturbo Development Syndicate [1928] AC 132 must be understood in the same light. See also Commissioner of Taxes v Melbourne Trust Ltd [1914] AC 1001.

The references to profit and gain from a singular transaction must also be understood in the light of three later developments: the House of Lords decision in Jones v Leeming [82] , the enactment of what was, for many years, s 26(a) of the Act, and the decision of this Court in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd [83] .

In Jones v Leeming it was held that "the profit on an isolated sale which is not a trading transaction" is a capital accretion and therefore not income [84] . That decision depended, however, on the finding of fact that there was no "adventure or concern in the nature of trade" [85] . But, as had been established in cases like Californian Copper, the fact that the purchase and resale of property was an isolated transaction did not necessarily mean that there was no trading adventure. All that was held in Jones v Leeming was that if, as a matter of fact, the transaction was not a trading transaction, the profit that was made on realisation of the asset was not income simply because the asset had been bought with the intention of making a profit on resale. The importance of the factual premise can be seen from the later decision in Edwards (Inspector of Taxes) v Bairstow [86] in which an isolated transaction of purchase of property for the purpose of resale at a profit was held to be an adventure in trade.

Jones v Leeming [1930] AC 415 at 430, per Lord Macmillan. 2. Income Tax Act 1918 UK, s 237. 3. [1956] AC 14.

Soon after the decision in Jones v Leeming, the Income Tax Assessment Act 1922 Cth was amended [87] by inserting in the definition of "income" words which were later to be repeated in s 26(a) of the Act:

The assessable income of a taxpayer shall include -

(a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

The first limb of this provision was intended to undo the effect of Jones v Leeming [88] and it treated as income, profits that would ordinarily have been regarded as a capital gain. 1. Income Tax Assessment Act 1930 Cth, s 2. 2. H R Lancey Shipping Co Pty Ltd v Federal Commissioner of Taxation (1951) 25 ALJ 145 at 146; 5 AITR 135 at 140, per Williams J; White v Federal Commissioner of Taxation (1968) 120 CLR 191 at 208, per Windeyer J; McClelland v Federal Commissioner of Taxation (1970) 120 CLR 487 at 499, per Lords MacDermott and Pearson; Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 362, per Gibbs CJ.

The origin of the second limb of s 26(a) (profit-making undertaking or scheme) may, perhaps, be more obscure. Before it was enacted, it had been said in Ruhamah Property Co Ltd v Federal Commissioner of Taxation [89] that:

The principle of law is that profits derived directly or indirectly from sources within Australia in carrying on or carrying out any scheme of profit-making are assessable to income tax, whilst proceeds of a mere realisation or change of investment or from an enhancement of capital are not income nor assessable to income tax The second limb of s 26(a) echoed this statement. It must, however, be noted, that in the same joint judgment in Ruhamah Property their Honours went on to refer to "the question whether the sale was an operation of business in carrying out a scheme of profit-making" [90] but these words find no echo in the second limb of s 26(a). 1. (1928) 41 CLR 148 at 151, per Knox CJ, Gavan Duffy, Powers and Starke JJ. 2. Ruhamah Property (1928) 41 CLR 148 at 152, per Knox CJ, Gavan Duffy, Powers and Starke JJ.

In Whitfords Beach the Court examined the relationship between s 25 and s 26(a) of the Act. Much of the detail of that examination does not bear directly on the questions that now fall for decision and need not be noticed. What is important for present purposes is that in Whitfords Beach it was necessary to resolve what was seen to be the overlap of s 25 (and its bringing to tax of income according to ordinary concepts) and transactions falling within one or other of the limbs of s 26(a). In particular, the second limb of s 26(a) (about profit-making undertakings or schemes) was not seen as adding words to the Act that would capture profits or receipts not otherwise brought to tax as income according to ordinary concepts.

In addition, it is necessary also to recognise, as Mason J said in Commercial and General Acceptance Ltd v Federal Commissioner of Taxation [91] , that "gross income includes a net amount which is income according to the ordinary concepts and usages of mankind, when the net amount alone has that character, not being derived from gross receipts that are revenue receipts" [92] . But that is not to say that only net amounts are properly to be regarded as income of a business [93] . Income of a business can, and usually will, comprise gross receipts. Deductions will be allowed against that income. In some circumstances, however, a net amount - not derived from gross receipts that are revenue receipts - may, according to ordinary concepts, constitute income.

(1977) 137 CLR 373 at 382-383. 2. See also Whitfords Beach (1982) 150 CLR 355 at 364-365, per Gibbs CJ. 3. Investment and Merchant Finance Corporation Ltd v Federal Commissioner of Taxation (1971) 125 CLR 249 at 255, per Barwick CJ; at 264, per Menzies J; Williams v Federal Commissioner of Taxation (1972) 128 CLR 645 at 653-654, per Stephen J; Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (In liq) (1978) 138 CLR 210 at 229-230, per Mason J; Whitfords Beach (1982) 150 CLR 355 at 365-366, per Gibbs CJ.

It may be that the distinction drawn by Mason J in Commercial and General Acceptance Ltd v Federal Commissioner of Taxation is not absolute. That is, there may be cases where it would be possible to characterise the same set of transactions of receipt and outgoings as either gross receipts that are revenue receipts (against which the outgoings are to be allowed as deductions) or as giving a net amount that alone is to be characterised as income. But the nature of the distinction can, perhaps, be seen as exemplified by the treatment of a singular adventure in the nature of trade or business, that is not undertaken in the course of some other, wider business activity. There, it may be said, that only the profit (the net amount) is income according to ordinary concepts and that the gross receipts are not revenue receipts against which deductions are to be allowed. By contrast, however, if the singular adventure is undertaken in the course of a wider business, the gross receipts, as opposed to the net profit from the adventure, are properly characterised as revenue receipts.

Against this background, it can be seen that the references to "profit" or "gain" are not to be read as denying that a singular transaction may give rise to a gross receipt properly classed as a revenue receipt. No doubt, as was said in Myer [94] :

The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind. But so too, as the definition of income from (or derived from) personal exertion recognises, "the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person" are income in accordance with the ordinary concepts and usages of mankind. 1. (1987) 163 CLR 199 at 215, per Mason A-CJ, Wilson, Brennan, Deane and Dawson JJ.

The singularity of a transaction may very well invite close attention to whether it is in business. The singularity of a transaction may suggest that there is a mere realisation of a capital asset or change of investment rather than a transaction on revenue account. The purpose of profit-making may be an important consideration in deciding these questions. But, as Myer demonstrates, a singular transaction, in business, even if unusual or extraordinary when judged by reference to the transactions in which the taxpayer usually engages, can generate a revenue receipt [95] . And that is why, in Federal Commissioner of Taxation v Cooling [96] , the Full Court of the Federal Court rightly emphasised the fact that, in that case, the receipt was an ordinary incident of part (albeit an extraordinary and unusual part) of the firm's business activity [97] .

Myer (1987) 163 CLR 199 at 215, per Mason A-CJ, Wilson, Brennan, Deane and Dawson JJ. 2. (1990) 22 FCR 42. 3. Cooling (1990) 22 FCR 42 at 56, per Hill J.

It can be seen, then, that two of the different ways in which the Commissioner put his case (receipt as an ordinary incident of transaction in course of business, and gain from profit-making undertaking or scheme) intersected or overlapped. The "gain" alleged was the gross amount of the receipts under the inducement agreement. The "profit-making undertaking or scheme" was the entry into these agreements as a step in the conduct of the taxpayer's business. The receipt was, so the argument went on, a receipt from carrying on the business (albeit by means of an unusual transaction). The receipt was an ordinary incident of transactions of this kind. Its receipt was, then, neither an unexpected nor unintended by-product of the transaction; its receipt was a purpose of entering the transaction.

The taxpayer accepted that the agreements that the firm made in August 1989 were agreements made in the course of the business of the firm. Indeed much of his argument proceeded from this premise for it was directed to demonstrating that the agreements related to the acquisition of part of the profit-yielding structure of the business. The taxpayer (and the Full Court [98] ) emphasised that the transaction was not in the ordinary course of the business of the firm. So much is clear but, for the reasons given earlier, it does not inevitably follow that the receipts were not on revenue account.

Montgomery (1998) 152 ALR 241 at 259; 38 ATR 186 at 210; 98 ATC 4,120 at 4,141, per Lockhart J; at 266; 193; 4,127, per Heerey J.

The taxpayer placed some reliance on what was said in Federal Commissioner of Taxation v Orica Ltd [99] concerning the transactions that were in question in that case. As is pointed out in the joint judgment, the benefit or gain said to have been obtained by Orica Ltd was "a difference between an amount that was expended and an amount that would have had to be expended" but for the transactions in issue; "[s]econdly, the obligation of the taxpayer that was satisfied by the payment made by MMBW was an obligation of the taxpayer that was on capital account"; and "[t]hirdly, the transaction was a singular transaction concerning liabilities separately created by the taxpayer in raising capital for its business" [100] . The present case is very different. In particular, unlike Orica, the taxpayer in this case received a payment. No question arises (as it did in Orica) of characterising some gain reflected only in the accounts of the taxpayer and not by an actual inflow of money.

(1998) 194 CLR 500 at 532-534, per Gaudron, McHugh, Kirby and Hayne JJ. 2. Orica (1998) 194 CLR 500 at 532, per Gaudron, McHugh, Kirby and Hayne JJ.

The inducement amounts received by the firm did not augment the profit-yielding structure of the firm. The lease was acquired as part of that structure; the inducement amounts were not. There was, in the words of Pitney J in Eisner v Macomber [101] " not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being " derived, " that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal".

(1920) 252 US 189 at 207 (emphasis in original).

To put the matter another way, the firm used or exploited its capital (whether its capital is treated for this purpose as being the agreement to take premises or its goodwill) to obtain the inducement amounts. As the papers presented to the firm in August 1989 said, the firm was then "of a size which makes it a particularly attractive tenancy target". And it was because it was a particularly attractive tenancy target that it was suggested in those papers that the firm should receive a good inducement offer to take premises. The firm used or exploited its capital in the course of carrying on its business, albeit in a transaction properly regarded as singular or extraordinary. And the sums it received from the transaction were not as some growth or increment of value in its profit-yielding structure - the receipts came in or were derived for the separate use, benefit and disposal of the firm and its members as they saw fit. (That the firm decided to retain the sums received rather than distribute them to partners - other than to the extent necessary to meet the amounts of taxation payable by partners on account of their receipt - is of no consequence. The very fact that the firm chose to dispose of the sums in this way demonstrates that they were receipts at the disposal of the firm.)

The primary judge was right to hold that the amounts paid under the inducement agreement were (to the extent of the taxpayer's interest in the partnership) assessable income of the taxpayer. The appeals to this Court should be allowed with costs, the orders of the Full Court of the Federal Court of Australia set aside and in lieu it be ordered that the appeals and the cross-appeals to that Court are in each case dismissed with costs.

High Court of Australia Gleeson CJ Gaudron, McHugh, Gummow, Kirby, Hayne and Callinan JJ Commissioner of Taxation (Cth) v Montgomery [1999] HCA 34

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