//
© 2026 Zoe. All rights reserved.
Zoe is a legal information platform. Always consult the Federal Register of Legislation for authoritative text.
[1977] FCA 3
Federal Court of Australia
1977-06-20
Original judgment source is linked above.
FEDERAL COKE CO. PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION (1977) 34 FLR
Income Tax - Whether receipt income or capital - Agreement between parent company and overseas purchaser varied - Compensation paid to wholly-owned subsidiary that was not party to agreement but had incurred capital loss in consequence of variation - Voluntary receipt - Not related to income-producing activities - Parent company and wholly-owned subsidiary separate entities - Character of receipt in hands of parent company irrelevant - Income Tax Assessment Act 1936-1973, s. 25. The Supreme Court of New South Wales decided that payments received by the taxpayer, the Federal Coke Co. Pty. Ltd. ("Federal") were income receipts and taxable. The payments were made to the taxpayer by Societe Anonyme Le Nickel ("Le Nickel") at the instigation of the taxpayer's parent company, Bellambi Coal Co. Ltd. ("Bellambi"). Bellambi, a coal-producing company, was at all material times the holding company of three coke-producing companies, including the taxpayer. By agreement dated 24th April, 1970, made between Bellambi and Le Nickel, Bellambi agreed to sell to Le Nickel coke produced by its subsidiaries. At the date of the agreement there existed an arrangement between Bellambi and each of its subsidiaries whereby the subsidiary converted into coke such quantities of Bellambi's coal as was required from time to time in return for a service fee.
In the first year in which Le Nickel was to buy coke from Bellambi, it failed to accept quantities of coke which it had contracted to accept under the agreement. After lengthy discussions a settlement was reached between Bellambi and Le Nickel varying the terms of the original agreement. The terms of the settlement were reduced to writing on 18th October, 1971, wherein it was provided that Le Nickel would pay approximately $1 million by two instalments in compensation for the alterations to the agreement. It was agreed that a reduced quantity of coke be purchased by Le Nickel and the terms of delivery were also varied. Subsequently, Bellambi obtained legal advice that the payments might be taxable and on this advice Bellambi refused to accept the first instalment and requested a further variation of the agreement. On 22nd March, 1972, an agreement was entered into between Le Nickel and Bellambi ("the deed"). The deed provided that Le Nickel would make the payments to the taxpayer and it recited that the payments were to compensate the taxpayer for the loss in value of the taxpayer's land and assets.
The taxpayer, Federal, carried on its coke-making business upon land situate in Wollongong, New South Wales. During the manufacture of coke, emissions of gases, smoke, dust and steam occurred. Federal had to incur substantial expense to mitigate the smoke nuisance and to comply with the Clean Air Act, 1961 (N.S.W.). The land was subject to a Planning Scheme Ordinance and was reserved for open space (public parks and recreation) subject however to the right to continue coke-making as an existing use. After the variation of the agreement with Le Nickel, the Federal works were closed down and as a result, the value of the land and plant was substantially reduced. There was no obligation on Bellambi to compensate Federal for any loss, nor was Federal a party to any agreement between Bellambi and Le Nickel.
Held: (1) The payment was a voluntary receipt by the taxpayer, in no sense a product of any business of income-producing activities which the taxpayer carried on, and was therefore a receipt of capital.
(2) It was irrelevant whether or not, had the payment been made to Bellambi, it would have been a receipt of income or whether or not Bellambi might have been liable to tax in respect of the payments made to the taxpayer.
(3) A parent company and its wholly-owned subsidiary are separate legal entities. It is not legitimate to disregard the separateness of different corporate entities or to decide liability to tax upon the basis of the substantial economic or business character of what was done.
Slutzkin v. Federal Commissioner of Taxation (1977), 51 ALJR 322, referred to.
(4) Although Federal suffered loss as a consequence of the compromise, it was not a party to the agreement, it gave no consideration, and so far as it was concerned, the payment was received on a voluntary basis. A mere gift or receipt without consideration, if nothing more appears, is prima facie not income in the hands of the recipient.
Hayes v. Federal Commissioner of Taxation [1956] HCA 21; (1956), 96 CLR 47, at p 54, referred to.
(5) A gift may be income if related to income-earning activities of the recipient or if it is a product of the business carried on by the recipient.
Federal Commissioner of Taxation v. Squatting Investment Co. Ltd. [1954] UKPCHCA 2; (1954), 88 CLR 413, referred to.
(6) The motive, to avoid tax, cannot alter the position, or change the character of the receipt.
The taxpayer appealed from a decision of the Supreme Court of New South Wales (Helsham J.) in favour of the Commissioner of Taxation, given on 11th February, 1977, upholding assessments to income tax for the years ended 30th June, 1972, and 30th June, 1973. The question at issue was whether two sums received by the taxpayer as compensation for variation of a contract were receipts of capital or income. The material facts appear from the judgment of Bowen C.J.
J. S. Lockhart Q.C. and T. M. Jucovic, for the appellant.
M. H. McLelland Q.C. and W. P. Kearns, for the respondent.
Cur. adv. vult.
Solicitors for the appellant: Allen, Allen & Hemsley.
Solicitor for the respondent: A. R. Neaves (Commonwealth Crown Solicitor).
The following judgments were delivered.
BOWEN C.J. These are two appeals brought by the Federal Coke Co. Pty. Ltd.
(hereinafter called "Federal") against a decision of the Supreme Court of New South Wales in its Administrative Division upholding income-tax assessments issued against the company by the Commissioner of Taxation in respect of the income years ended 30th June, 1972, and 30th June, 1973. (at p377)
2. In its return for the income year ended 30th June, 1972, Federal showed a taxable income of $7,677 arising from its coke-making activities. The commissioner in making his assessment added to this sum the amount of $499,567 which he described in an adjustment sheet forwarded with the assessment as follows: "Portion of net compensation on termination of contract with Societe Anonyme Le Nickel which is applicable to the year ended 30th June, 1972". This had the effect of bringing the taxable income to $507,244 and the income tax upon this was $240,940.90. (at p377)
3. Federal objected on various grounds, in substance claiming the receipt was not of an income nature or otherwise assessable income and was a capital receipt. The commissioner disallowed the objection whereupon Federal requested that its objection be forwarded to the Supreme Court of New South Wales. (at p377)
4. In its return for the income year ended 30th June, 1973, Federal showed a loss of $5,535. The commissioner, in his assessment, brought to account as income an additional sum of $499,567 which he described in an adjustment sheet forwarded with that assessment as follows: "Portion of net compensation of contract with Societe Anonyme Le Nickel". This had the effect of bringing the taxable income to $494,032 and the income tax upon this was $234,665.20. Federal objected as before and when its objection was disallowed, requested that its objection be forwarded to the Supreme Court of New South Wales. (at p377)
5. These matters were heard by the Supreme Court in its Administrative Division and judgment was given on 11th February, 1977, upholding the commissioner's assessments. Notices of appeal to this Court were lodged on grounds claiming, in substance, that the trial judge was in error in holding the respective amounts were assessable income and should have held they were receipts of a capital nature. (at p377)
6. The question to be decided is what is the nature of these receipts in the hands of the taxpayer, Federal. (at p377)
7. In order to determine the answer to this question it is necessary to consider the history of the matter and the circumstances leading to the receipt of the sums by Federal. They represented two equal instalments of $500,000 less certain adjustments paid in satisfaction of a total sum of $1 million. It is common ground that for income-tax purposes the same considerations apply to each instalment. (at p377)
8. Federal is a company incorporated in New South Wales. It had for many years carried on a coke-making business upon land situated less than 300 yards from the Princes Highway and less than 700 yards from Crown Street, the main street of Wollongong. It was very close to the general business area of Wollongong and extensive residential areas were well within a quarter of a mile of it, the residential area on the south actually abutting the coke works. (at p378)
9. During the manufacture of coke, emissions of gases, smoke, dust and steam occurred. Federal had almost continuously since 1930 been engaged in disputes with various authorities and persons complaining of its activities. In April 1930 it was prosecuted by the Wollongong Council. In 1938 the Department of Public Health and the Wollongong Council both brought pressure upon Federal to mitigate the smoke nuisance. In April 1955 the council arranged a conference between Federal and the council's Smoke and Dust Abatement Committee. A succession of conferences extending over some years took place, leading to the institution by Federal of improved methods of control. After the Clean Air Act, 1961 (N.S.W.) came into force, the coke works became "scheduled" and Federal was required to hold a licence. Licences had a currency of one year from the date of issue, but might be renewed from time to time for a further period of one year. Federal succeeded in procuring a licence, but the Department of Health insisted on various works being undertaken to lessen pollution. In about 1968 strong pressure was brought to bear by the department on Federal, who claimed that the capital works and dislocation of trade required to fulfil the demands of the department would cost it in excess of $1 million. In August 1969 the department gave directions to Federal, pursuant to s. 17 of the Clean Air Act. Federal advised the department that the cost to meet the initial requirements would be not less than $420,000, with no assurance that this would be the end of the matter. On 19th January, 1968, the Illawarra Planning Scheme Ordinance was proclaimed and under this, the land, except for a very minor area, was zoned as reserved for open space (public parks and recreation). The Ordinance also provided that coke making could be continued as an existing use, so long as the right was not lost by non-use. (at p378)
10. Bellambi Coal Co. Ltd. (hereinafter called "Bellambi") is a company incorporated in New South Wales which has, for many years, carried on the business of producing coal from South Bulli mines on the southern coalfields of New South Wales. It acquired all the shares in Federal on 21stJune, 1960. It also acquired as subsidiaries three other companies: the Mt. Pleasant Coke Co. Pty. Ltd. on 26th January, 1962; Corrimal Coke Pty. Ltd. on 10th March, 1970; and the Australian Coal and Coke Co. Pty. Ltd. on 16th October, 1972. It was the practice of Bellambi to make an arrangement with a coke-making subsidiary under which it would supply coal and the subsidiary would produce the coke which would then be sold by Bellambi. The arrangement between Bellambi and Federal, which was entered into on 26th June, 1968, provided that Bellambi would deliver its coal from time to time to the coke works of Federal for conversion into coke. No stipulated quantities were set. Federal would convert Bellambi's coal to coke and would then supply this coke to Bellambi who would market it. Both the coal and the coke produced from it were to remain the property of Bellambi. Bellambi agreed to pay Federal for this service a fee equal to the actual cost of conversion plus ten cents per ton of coke produced or such other amount per ton as was mutually agreed upon from time to time. In practice the service fee which was paid to Federal on top of the cost of conversion varied from year to year, being sometimes more and sometimes less than ten cents per ton. At 22nd March, 1972, the service fee being paid was eighty-nine cents per ton. (at p379)
11. Similar arrangements were made by Bellambi with Mt. Pleasant Coke Co. Pty. Ltd. on 28th June, 1968, and with Corrimal Coke Pty. Ltd. on 26th March, 1971, after that company became a wholly-owned subsidiary. (at p379)
12. Societe Anonyme Le Nickel (hereinafter called "Le Nickel") is a corporation incorporated according to the laws of France and having its registered office at 1 The Boulevarde de Vaugirard, Paris, France. It has a subsidiary in Australia, Le Nickel (Australia) Pty. Ltd. (hereinafter called "Le Nickel (Australia)"). Prior to 24th April, 1970, Le Nickel was a buyer from time to time of coke supplied from Corrimal, Mt. Pleasant and Federal coke works and it was at that date in the course of a substantial expansion of its nickel treatment plant in New Caledonia. In the period October to December 1969, Le Nickel (Australia) on behalf of its parent company became involved in discussions with Bellambi and Corrimal for the supply of coke for use by Le Nickel in New Caledonia. Bellambi did not in its then subsidiaries have adequate production capacity to supply its existing customers and to supply in addition 70,000 tons per annum which was required by Le Nickel. The normal production capacity of Mt. Pleasant was approximately 46,000 tons per annum and Federal 53,000 tons per annum. Corrimal had been producing coke at the rate of approximately 128,000 tons per annum. So that when Bellambi acquired the shares in Corrimal its total capacity, combining the production of its three subsidiaries, would be sufficient to enable it to supply the local market in Australia and the 70,000 tons per annum to Le Nickel for use in New Caledonia. (at p379)
13. It seems that the discussions with Le Nickel (Australia) were broken off on 9th December, 1969. On 11th December, 1969, the manager of Bellambi prepared a report for submission to a board meeting held on 19th December, 1969. In his report, which was entitled "Future Operations in Coke Manufacture and Distribution by the Bellambi Coal Co. Ltd.", the general manager reviewed the various alternatives which were open to Bellambi and its subsidiaries. The two principal alternatoves were either to close each of the two coke works then separately owned by the company's subsidiaries, that is Federal and Mt. Pleasant, or to spend $1.12 million at those plants to achieve compliance with the requirements of the Clean Air Act and further to spend $1.13 million on the acquisition of Corrimal Coke Co. Pty. Ltd. and make some modification of its works. In the report, reference was made to the negotiations which had been proceeding with Le Nickel (Australia) and it was noted, "These negotiations have been temporarily suspended". It was noted that coke was on offer to a number of other overseas users and the general manager expressed the opinion that the surplus capacity of the industry could be profitably exported over the next few years. His recommendation was in favour of the second of the alternatives referred to above. At the board meeting on 19th December, 1969, it was resolved that the recommendation by the general manager in his report dated 11th December, 1969, relating to the expenditure of $1.12 million on the coke works operated by Federal and Mt. Pleasant to achieve a compliance with the Clean Air Act and to obtain increased capacity and greater efficiency at the Mt. Pleasant works and the expenditure of $1.13 million on the acquisition and modification of the coke works operated by Corrimal be approved subject to the signing of a memorandum evidencing the willingness of another company, Kembla Coal and Coke Pty. Ltd., to purchase coke for supply for a period of seven years commencing January 1970. (at p380)
14. It seems that negotiations were not long afterwards resumed with Le Nickel (Australia) and at a board meeting held on 24th April, 1970, the general manager tabled a proposed contract between Bellambi and Le Nickel for approval by the board. It was resolved that the contract be signed by Bellambi. This was done and the contract was also signed by Le Nickel and came into operation. (at p380)
15. It should be mentioned that at the board meeting of 24th April, 1970, before the contract was approved, it was resolved that approval be given to capital expenditure totalling $339,729 and to the general manager's authorization for certain expenditure, all of which was described in the minutes as part of the capital expenditure programme previously approved in principle for 1969/1970 and 1970/1971. (at p380)
16. The agreement between Bellambi and Le Nickel of 24th April, 1970, provided that Bellambi agreed to sell to Le Nickel and Le Nickel agreed to buy 350,000 long tons of coke to be produced by subsidiary companies of Bellambi. Such coke was to be delivered to Le Nickel at the rate of 70,000 long tons per annum over five years computed from 1st January, 1971. The price which was to be paid by Le Nickel to Bellambi was specified, together with certain adjustment provisions. (at p380)
17. In the event and notwithstanding the provisions in the agreement for delivery of 70,000 long tons per annum computed from 1st January, 1971, Le Nickel experienced difficulties and had accepted delivery of only 25,372 tons up to 30th June, 1971. There was a meeting in Sydney on 2nd July, 1971, at which Monsieur Germenot, the managing director of Le Nickel (Australia), requested cancellation of the agreement. On 7th July, 1971, Bellambi sent a telex to the head office of Le Nickel in Paris expressing concern about this request and pointing out that when the agreement was negotiated it was made clear to executives of Le Nickel that Bellambi were purchasing a coke plant for the purposes of fulfilling their obligation to supply the quantity. Capital expenditure on acquisition and subsequent modifications to achieve compliance with the Clean Air Act had been very substantial. It was suggested there should be an exchange of views between the executives of the parties. At a board meeting of Bellambi held on 27th July, 1971, it was resolved that the chairman of the board, Mr. J. B. Massy-Greene, and the general manager, Mr. Ryan, "be authorized to negotiate a settlement with representatives of Societe Anonyme Le Nickel". Meetings were held in Paris on 12th, 13th and 18th October, 1971, the meeting on the last of these days being attended by Mr. Massy-Greene and Mr. Ryan. On this last day a negotiated settlement was reached which was then recorded in minutes of the meeting. These minutes contained various recitals, including one that Le Nickel had informed Bellambi that the prevalent economic recession had affected the demand for nickel and Le Nickel had been obliged to reduce production entailing loss of profit and also other severe financial hardship and this situation had reduced its requirements for coke. It had accordingly asked Bellambi to vary the agreement between them. The minutes also recorded that Bellambi had pointed out that any reduction in the contractual deliveries of coke under the agreement would entail "not only loss of profit to Bellambi but also other severe financial hardship". (at p381)
18. The minutes then recorded that, "In consideration of the foregoing the parties had decided to change certain terms and conditions of the said agreement and they agreed on the following". Then followed various numbered and lettered paragraphs outlining negotiated variations to be made to the principal agreement. Paragraph (1) stated: "As total compensation for any and all alteration and changes to the said agreement, hereunder set forth, Le Nickel agrees to pay to Bellambi and Bellambi agrees to receive from Le Nickel a lump sum of 1,000,000 Australian dollars to be paid in two instalments: 500,000 Australian dollars on 31st December, 1971, and 500,000 Australian dollars on 31st December, 1972. Those amounts will be paid to the account of Bellambi at the Commercial Bank of Australia Head Office, George Street, Sydney, Australia." (at p381)
19. Paragraph (2) then set forth certain variations of particular terms and conditions of the agreement. The principal change which they effected was to substitute 132,000 long tons for 350,000 long tons of coke to be supplied and the rate of delivery was varied so as to be 52,000 long tons for the calendar year 1971 and 20,000 long tons for each of the calendar years 1971, 1973, 1974 and 1975. The final lettered paragraph of the minutes provided as follows: "The terms of the said agreement are to remain valid and binding and are hereby confirmed, save in so far as they are varied by these minutes". (at p382)
20. There was a board meeting of Bellambi held on 28th October, 1971, and it was then resolved that the settlement negotiated by the chairman and managing director in Paris be approved. The basic features of the settlement were stated in the minutes. Two further resolutions should be noted. The first was that the general manager obtain the opinion of Mr. D. L. Mahoney Q. C. regarding taxation aspects of the settlement and the second that the Federal coke works be closed. Federal in fact ceased production on 19th November, 1971. (at p382)
21. On 23rd December, 1971, Bellambi, under cover of a letter, forwarded to Le Nickel a form of deed varying the agreement between them which broadly embodied the settlement arrived at in Paris but departed in some respects from that settlement. On 29th December, 1971, the sum of $500,000 was received by the Banque Nationale de Paris in Sydney for payment to Bellambi. On learning of this, Bellambi refused to accept the money and on 30th December, 1971, sent a telex message to Le Nickel expressing surprise at the transmission of this before the completion of the amending agreement. They pointed out that the amending agreement had been sent by airmail on 23rd December and further pointed out that their legal advisers stated that if Bellambi were to accept payment from Le Nickel, then Bellambi would certainly pay income tax on the full amount, whereas if the amending contract under which the money was to be paid to Federal was accepted, then it was possible that both Bellambi and Federal would not pay tax on the moneys received. Bellambi and Le Nickel appear then to have entered upon a period of negotiation. There were some differences between them, Le Nickel at one point seeking to have the amending agreement operating according to French law and Bellambi refusing to accede to this request and requiring it to operate according to New South Wales law. Eventually, an amending deed was entered into on 22nd March, 1972, between Bellambi and Le Nickel. Pursuant to this deed, the sum of $499,134.28, being an instalment of $500,000 less bank and exchange adjustments, was paid by Le Nickel to Federal on 29th March, 1972. A further instalment of like amount was paid by Le Nickel to Federal pursuant to the amending deed on 16th January, 1973, and it is these two sums which have been assessed by the Commissioner of Taxation. (at p382)
22. It remains to record that the land of Federal was resumed by Wollongong Council on 21st December, 1973, for $150,000. (at p382)
23. In the argument against liability, considerable reliance has been placed upon the terms of the deed. It is convenient to set out certain material portions. Its recitals were as follows:
"WHEREAS
(A) By an agreement dated 24th April, 1970, (hereinafter called
'the agreement') Bellambi and Le Nickel provided for the sale by
Bellambi to Le Nickel over a period of five years approximately of
coke manufactured by certain subsidiary companies of Bellambi,
including Federal Coke Works Pty. Ltd. (hereinafter called
'Federal').
"(B) Le Nickel has informed Bellambi that, by reason of an
economic recession and a fall in the demand for nickel, the
requirements of Le Nickel for coke have greatly reduced.
"(C) Le Nickel has requested Bellambi to reduce the amount of
the coke produced by subsidiary companies of Bellambi as
referred to in cl. (1) of the agreement and to reduce the quantity of
coke to be sold by Bellambi to Le Nickel under the agreement.
"(D) Bellambi has informed Le Nickel that such reduction as
aforesaid can only be achieved in a practical manner if there is a
discontinuance of all production of coke by Federal and the
closure of Federal's coke works.
"(E) Bellambi has informed Le Nickel that discontinuance of
production at Federal's coke works will involve the closure of
those works and that thereby the value of the land and assets
owned by Federal comprising such coke works will be directly
and immediately reduced by reason, inter alia, of action likely to
be taken by authorities of the State of New South Wales and
certain local government authorities against the coke works in a
non-operating condition which would not be taken against them
while operating and by reason of other detriments to Federal."
Of the operative provisions, it is sufficient to record cl. (1) which
is as follows: "In the circumstances aforesaid Le Nickel hereby
agrees to pay to Federal the sum of one million dollars
($1,000,000) to compensate Federal (and consequently Bellambi)
for such loss in the value of the land and assets of Federal as
aforesaid (and consequently in the value of the assets of
Bellambi) and it is agreed that such sum shall be paid by two
equal instalments of five hundred thousand dollars ($500,000)
each on 31st March, 1972, and 31st December, 1972." (at p383)
24. Had Bellambi accepted the sum of $500,000 forwarded by Le Nickel on 29th December, 1971, and been assessed for income tax upon it, the question would have arisen whether it was income or capital in the hands of Bellambi. On the one hand it might have been argued that the payment simply constituted compensation for loss of profits under an agreement made in the course of its business which Bellambi would otherwise expect to have made, and, being a payment "to fill a hole in profits", it was income in the hands of Bellambi. If this argument was accepted, the receipt would presumably have been assessable income in the hands of Bellambi (Californian Oil Products Ltd. v. Federal Commissioner of Taxation [1934] HCA 35; (1934) 52 CLR 28 ; Heavy Minerals Pty. Ltd. v. Federal Commissioner of Taxation [1966] HCA 60; (1966) 115 CLR 512 ; Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners (1922) 12 Tax Cas 427 ; Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners (1931) SC 156 ; Van den Berghs Ltd. v. Clark (1935) AC 431 . (at p384)
25. On the other hand, it might have been argued that the payment constituted compensation not only for loss of profits but also for "other severe financial hardship" to use the language of the Paris minutes of 18th October, 1971. It might then have been argued that the facts suggested that the financial hardship referred to the effect of the alteration of the agreement of 24th July, 1970, upon the business of Bellambi and the business of its subsidiaries resulting, as events showed, in the closing down of coke production at one of the subsidiaries with all the consequences which that involved. It might further then have been argued that the instalment of $500,000 was not distinctly allocated to either the income or capital elements but rather was half of a conglomerate sum of $1,000,000 to which those elements contributed without distinction. If this argument was accepted, the position might be that the instalment was not taxable in the hands of Bellambi (McLaurin v. Federal Commissioner of Taxation [1961] HCA 9; (1961) 104 CLR 381 ; Allsop v. Federal Commissioner of Taxation [1965] HCA 48; (1965) 113 CLR 341 ). (at p384)
26. But Bellambi refused to accept the sum of $500,000. Eventually a like sum with adjustments was paid by Le Nickel to Federal in accordance with the deed of 22nd March, 1972. Had an assessment then been raised against Bellambi, it might perhaps have been argued that the $500,000 had accrued due to Bellambi as income and had been paid by Le Nickel to a subsidiary of Bellambi in accordance with the order and directions of Bellambi. Bellambi would then no doubt have argued that the money had not in fact accrued due to it and that, if it had, it was a conglomerate sum made up of indistinguishable income and capital elements and should be held not to be taxable. (at p384)
27. In the result, none of these bases of assessment were adopted by the commissioner. He assessed Federal upon the receipts so that the question for determination by the court is not what would have been the character of the receipts in the hands of Bellambi, but what, for the purposes of income tax, is the character of the receipts in the hands of Federal. (at p384)
28. Counsel for Federal argued that the payments were paid by Le Nickel to Federal under and in accordance with the amending deed of 22nd March, 1972; that the deed was not attacked as a sham; that the deed was not attacked as being annihilated by s. 260 of the Income Tax Assessment Act 1936-1973; and, finally, that the court should turn to the terms of the deed and give full effect to them. As has been noted, the recitals in the deed characterized the payments broadly as compensation to Federal in respect of loss of value in land and assets. If one simply accepted the statements in the recitals and the operative portions of the deed, including cl. (1), it would seem the conclusion would be inevitable that the receipts should be held to be capital in the hands of Federal. (at p385)
29. Certainly the deed was not attacked as a sham or by reference to s. 260. Undoubtedly the payments were made pursuant to the deed. But counsel for the commissioner challenged the correctness of the recitals and submitted that the court should look to the whole of the circumstances. I agree that the court is not bound to restrict itself to the deed and is not bound by the terms of the deed in characterizing the payments to Federal (cf. Ridge Securities Ltd. v. Inland Revenue Commissioners (1964) 1 WLR 479 ). (at p385)
30. The learned trial judge was not impressed with the recitals. He took the view that they did not accord with the facts. While the recitals may operate by way of estoppel between the parties to the deed, Federal was not a party. Furthermore, the recitals in no way constitute conclusive proof of the facts which they assert. I think the court, or a judge, is obliged to come to a conclusion as to what the true facts are and is not precluded from doing so by the terms of the deed. (at p385)
31. The true facts that appear are that Federal was engaged in a coke-producing business, although at the time the first payment was received by it, Federal had ceased to carry on that business. In the negotiation of the round sum of $1 million, which was agreed between Bellambi and Le Nickel, no precise factors were used in the calculation so far as appears from the evidence. It is plain from the order of events and the wording of the minutes of the Paris conference of 18th October, 1971, that what was in the minds of the negotiators was, on the one hand, the effect of the lessening in demand for nickel and the consequent necessity of reducing production and the loss of profit and other financial hardship entailed for Le Nickel making it necessary for that company to secure a reduction in its obligations to take coke from Bellambi, and on the other hand, the loss of profit to Bellambi and other financial hardship which would be suffered by that company if the quantities of coke were to be reduced. "Other financial hardship" referred to may well have involved some assessment of what Bellambi would suffer by reason of consequential loss of profit or capital loss suffered by all or any of its three subsidiaries including Federal. In the latter respect, what appears to have been under consideration was Bellambi's loss and not the loss of any particular subsidiary. When the arrangements between Bellambi and Le Nickel were altered, as appears from the deed of 22nd March, 1972, the decision that the payment should be made to Federal seems to have been made largely for the purpose of avoiding income tax. It is true that between the time of the Paris conference and the amending deed of 22nd March, 1972, a decision had been taken by Bellambi to close down the business of Federal and it had in fact been closed down. It had then become evident that, of the subsidiaries, it was Federal which would suffer loss of profit by loss of the service charge which it would have received from Bellambi for producing the coke from Bellambi's coal. It had also become evident that it was Federal which would suffer capital loss by reason of having to close down its coke works. In the case of Federal, its capital problem was particularly acute because its land, once the existing use terminated, would have value only as land zoned under the Illawarra Planning Scheme Ordinance as open space (public parks and recreation) and its plant and equipment could no longer be sold on a going-concern basis. (at p386)
32. The approach taken by the learned trial judge was to decide the case on what he regarded as the substance of the matter. He thought that the statements in the deed did not affect the nature of the receipt and that the $1 million was "a sum acceptable to Bellambi as compensation for the loss of part of a profitable contract". He did not overlook the fact that payment was in fact made by Le Nickel to Federal. He said: "How and why payment was made to Federal and not to Bellambi is here easy to ascertain. This is simply a case of a commercial arrangement designed to have the money received by the Bellambi group to the best commercial advantage, that is to say, without having to pay tax on it. To my mind, that does not alter the character of the receipt or the reason why the money was paid and received. I think it is simply a receipt by one hand instead of another, and it is received into that hand just as much as compensation for the contraction of the contract to supply coke as if the payee had been the parent rather than the subsidiary. The fact that the deed which was eventually brought into being was between Bellambi and Le Nickel and that Federal was not a party to it lends force to this conclusion. I do not consider the situation as being in substance different from there being a payment of this sum of money to Bellambi accompanied by a deed which calls it payment for something which it in fact is not. In my view it falls to be considered for taxation purposes as a payment representing compensation for contraction of the contract to sell coke." (at p386)
33. His Honour appears to have considered that he could approach the characterization of the receipts in the hands of the taxpayer by treating them as if they were received by Bellambi or the Bellambi group. On the other hand, if they were treated as received by Federal, his Honour thought that they were received by Federal just as much as compensation for the contraction of the contract to supply coke as if the payee had been the parent rather than the subsidiary. One may have some sympathy with an approach of this kind. However, in taxation matters, the court is obliged to have regard to the actual facts and not to their equivalents. In cases where it is appropriate the court may apply a statutory provision such as s. 260 to get rid of a contract, agreement or arrangement and deal with the case in disregard of that element, but, where there is no statutory warrant for doing so, the court cannot disregard certain of the facts or re-arrange the facts or decide the case according to its view of the substance of the matter. It is not legitimate to disregard the separateness of different corporate entities or to decide liability to tax upon the basis of the substantial economic or business character of what was done (Slutzkin v. Federal Commissioner of Taxation (1977) 51 ALJR 322, at p 324 ; Inland Revenue Commissioners v. Europa Oil (N.Z.) Ltd. (1971) AC 760, at p 771 ; cf. Littlewood's Mail Order Stores Ltd. v. Inland Revenue Commissioners (1969) 1 WLR 1241, at p 1255 ). (at p387)
34. Counsel for the commissioner contended that on a proper view of the facts, the payments to Federal were to fill "the hole in profits for the four years lost as a result of the arrangement under the deed to reduce the quantities to be supplied to Le Nickel". Some support for this contention can be found in the evidence that the days of Federal's coke works were numbered because of their emission of pollution, and that even if the works had continued for the balance of the term of the original agreement with Le Nickel, Federal would have had to close them down when that agreement ran out. The submission however, falls far short of being an adequate description of the payments. Even if loss of profits was used as a measure for calculating the amount of the payments, this would not necessarily mean they were of an income nature (Californian Oil Products v. Federal Commissioner of Taxation) (1934) 52 CLR, at p 115 ; Van den Berghs Ltd. v. Clark (1935) AC, at p 442 ). But in this case, the facts do not show that loss of profits which would be suffered by Federal was used at all in arriving at the sums in question. Even if one might speculate that the payments had been calculated with reference to Federal's position, the evidence suggests that Federal's profits past and prospective were very small. On any view of the evidence, four years' profit of Federal could account for only a small fraction of the total sum of $1 million. (at p387)
35. Counsel for the commissioner further submitted that the payments were to compensate Bellambi for loss of profits and for this reason acquired an income character and that they retained this character and did not lose it when the deed was interposed whereby the arrangement was altered and the payments were made to Federal. Nothing had been done, so it was argued, which would indicate that the character of the payments was altered. It may be possible to envisage a case where, for example, the subject of a gift would be seen to have in its origin the essential character of income and to retain that character in the hands of a donee. The case of a transfer without consideration of a payment of future interest on debentures might be regarded as such a case. But there the essential income character of the receipt, which would lie in its being the product of a capital investment coming forward in a series of periodic payments, would remain unchanged in the hands of the donee. In the present case, the suggested income character of the receipts having regard to the original arrangement, would be partly in the formulation of them as compensation for loss of profits and partly in their being received by Bellambi in the course of its business to "fill the hole in its profits". But under the deed of 22nd March, 1972, they were not received by Bellambi. A consequence of this is that one of the factors, which would have impressed them with the character of income, disappears. One is left only with the method of formulation and the original purpose of Bellambi and Le Nickel. It appears to me that this is insufficient to impress upon the sum an essential and unchangeable character of income. Indeed, it appears to me that the starting point of this argument for the commissioner is wrong. When one is considering the character of an amount received by a taxpayer, the inquiry must start with the question: what is the character of the receipt in the hands of the taxpayer? It appears to me to be wrong to ask: what would have been the character of the amounts had they been received by Bellambi? and then to pose the question: has their character been changed by the fact they were paid to Federal? One must, I think, pose the essential question and start from that question: what is the nature of the receipts in the hands of Federal? (at p388)
36. It then becomes less than decisive to observe that, in their origin and if they had been received by Bellambi, they may have been of an income character. Each receipt in the hands of Federal is broadly in the nature of a gift, being a sum received without consideration. Certainly Federal, although it suffered economic detriment as one of the consequences of the compromise arrived at between Bellambi and Le Nickel, was not a party to the amending deed and gave no consideration either to Bellambi or to Le Nickel. Le Nickel, by reason of the amending deed entered into with Bellambi, was no doubt obliged to make the payment and Bellambi could have enforced it (Beswick v. Beswick [1967] UKHL 2; (1968) AC 58 ). But so far as Federal was concerned, each payment was received by that company on a voluntary basis. (at p388)
37. In my view, for purposes of income tax, the same principles apply in determining whether an amount received without consideration is income as apply in determining that question in relation to a gift proper. A mere gift or receipt without consideration, if nothing more appears, is prima facie not income in the hands of the recipient (Hayes v. Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47, at p 54 ). Further facts may appear which show that it was so related to the income-earning activities of the recipient as to be, in truth, a product of those activities. Thus gifts by employers to employees related to their services have been held to be assessable income. Gifts to persons who are not employees but which are related to services which they have rendered such as tips to a waiter, a railway porter or a taxi-cab driver, or a jockey, have been held to be income (See cases cited in Whiteman and Sheatcroft on Income Tax 2nd ed. (1976) pars. 14.10 et seq. and, Challoner and Greenwood Income Tax Law and Practice, 2nd ed., p. 212). (at p389)
38. The same principle applies in the case of persons or corporations engaged in some profession or business. Thus an additional payment made by the government to a wool grower, who had previously submitted wool for appraisal and been paid for it, the additional payment by the government being discretionary but related to the amount of wool supplied, was held to be in a real sense a product of the business of wool growing carried on by the recipient and to be income in its hands (Federal Commissioner of Taxation v. Squatting Investment Co. Ltd [1954] UKPCHCA 2; (1954) 88 CLR 413 ). On the other hand, a payment made to a solicitor by a woman client for whom he had acted, which was held on the evidence to be not a product of his professional activities but a payment made by way of bounty, was held not to be income in his hands (Scott v. Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR 514 ). (at p389)
39. In the present case, and regarding the matter from Federal's point of view, it is seen that the two receipts were part of one large and unprecedented sum; that they were received without any consideration passing from that company; and that they were in no sense the product of any business or income-producing activities which it carried on. Federal's business was the production of coke and even this had ceased by the time the payments were received. Federal did not carry on any business of receiving payments or acting as banker or financial repository on behalf of Bellambi or the Bellambi group. Furthermore, the receipts did not constitute a compensatory equivalent for any loss suffered by Federal in its business. They were treated in its accounts as capital receipts. Even if it should be held that in their origin in the arrangements made between Bellambi and Le Nickel the receipts should be regarded as somehow impressed with the character of income, it does not appear to me, having regard to the circumstances of Federal, that they should be held to have retained this original character when received by Federal. On the contrary, having regard to all the circumstances, it appears to me that in the hands of Federal they bore the character, not of income, but of capital. (at p390)
40. It would seem from the evidence that a principal motive of Bellambi in contracting for the payments to be made to Federal was to avoid income tax. In addition, it may be observed that Federal was a wholly-owned subsidiary of Bellambi. The importance of the motive of a donor in determining the characterization of a receipt was expressed by Fullagar J. in Hayes v. Federal Commissioner of Taxation as follows: "While I would not say that the motive of the donor in making the payment or transfer is, in cases of this type, irrelevant, motive as such will seldom, if ever, in my opinion, be a decisive consideration. In many cases, perhaps in most, a mixture of motives will be discernible. On the one hand, personal goodwill may play a dominant part in motivating a voluntary payment, and yet the payment may be so related to an employment or a business that it is income in the hands of the recipient. On the other hand, the element of personal goodwill may be absent - the dominant motive may have been of the most purely selfish and commercial character - and yet it may be impossible to find any connexion with anything that can make it income. The question in each particular case is as to the character of the receipt in the hands of the recipient: Moorehouse v. Dooland (1955) Ch 284 . The test to be applied is an objective, not a subjective, test" (1956) 96 CLR, at p 55 . It does not appear to me that the motive of Bellambi of avoiding tax, whatever view one may take of that motive when taken into consideration with all the circumstances of the case, can alter the position so as to lead to a conclusion that the receipts in the hands of Federal bore the character of income and not of capital. (at p390)
41. In the result I conclude that the receipts were of a capital nature in the hands of Federal. It follows, in my view, that Federal was incorrectly assessed and that the appeals should be allowed. (at p390)
NIMMO J. This is an appeal from a decision made in the Supreme Court of New South Wales Administrative Law Division dismissing appeals brought by the appellant, the Federal Coke Co. Pty. Ltd. (Federal), against the disallowance by the respondent, the Commissioner of Taxation (the commissioner), of objections by it to assessments of the taxable income derived by it in the years of income ending 30th June, 1972, and 1973 and of the tax payable thereon. (at p390)
2. Bellambi Coal Co. Ltd. (Bellambi), a coal-producing company, was at all material times the holding company of three cokeproducing companies, namely, Federal, Mount Pleasant Coke Co. Pty. Ltd. (Mt. Pleasant) and Corrimal Coke Pty. Ltd. (Corrimal). It has wholly-owned Federal from 21st June, 1950, Mt. Pleasant from 26th January, 1962, and Corrimal from 10th March, 1970. (at p391)
3. By an agreement dated 24th April, 1970, and made between Bellambi and a French company named Societe Anonyme Le Nickel (Le Nickel) Bellambi agreed to sell to Le Nickel and Le Nickel agreed to buy from Bellambi 350,000 long tons of Australian metallurgical coke produced by subsidiaries of Bellambi at the rate of 70,000 tons per annum over five years computed from 1st January, 1971. There was provision for monthly deliveries at a price which was fixed but was subject to variation in specified circumstances. At the date of the agreement there existed an arrangement between Bellambi and each of its three subsidiaries whereby the subsidiary converted into coke such quantities of Bellambi's coal as Bellambi delivered to it from time to time in return for a service fee. (at p391)
4. In the first year that Le Nickel was to buy coke from Bellambi it failed to accept the quantities of coke it had contracted to accept under the agreement. Up to 30th June of that year (1971) it accepted only 25,372 tons. On 2nd July, 1971, it requested cancellation of the agreement. On 7th July, 1971, Bellambi informed Le Nickel by cable that it was not possible for it to accede to Le Nickel's request. It stated that at the time the agreement was negotiated it was made clear to executives of Le Nickel that it was purchasing a coke plant (Corrimal) in order to be able to carry out its obligation to supply 70,000 tons to Le Nickel per annum. Thereafter, until 18th October, 1971, lengthy discussions took place in Sydney and Paris between representatives of the two companies on whether, and if so, on what terms, Bellambi would release Le Nickel from its obligations under the agreement. (at p391)
5. In the minutes of a meeting of the board of directors of Bellambi which was held on 27th July, 1971, the following minute appears: "(6) Contract with Societe Anonyme Le Nickel. The general manager reported that Societe Anonyme Le Nickel had verbally requested that Bellambi state under what terms it would agree to complete or partial cancellation of its contractual obligations. It was resolved that, "The chairman of the board, Mr. J. B. Massy-Greene, and the general manager, Mr. E. J. Ryan, be authorized to negotiate a settlement with representatives of Societe Anonyme Le Nickel.'" (at p391)
6. Messrs. Massy-Greene and Ryan and representatives of Le Nickel negotiated a settlement in Paris and its terms were reduced to writing on 18th October, 1971, and signed by Mr. Ryan on behalf of Bellambi and by one Monsieur Yves Ramband who had authority to sign on behalf of Le Nickel. The opening provisions of the document read as follows:
"It was recalled that the Bellambi Coal Co. Ltd. ('Bellambi')
and Le Nickel S.A. ('Le Nickel') had entered into an agreement
dated 24th April, 1970 ('the said agreement') for the supply by
Bellambi to Le Nickel of 350,000 long tons of Australian
metallurgical coke over a period of five (5) years commencing 1st
January, 1971, at a rate of 70,000 tons per annum upon terms
more particularly set out in the said agreement.
"Le Nickel has informed Bellambi that the prevalent economic
recession has affected the demand for nickel and in particular the
demand for nickel produced by Le Nickel from its plant in New
Caledonia. In these circumstances Le Nickel has been obliged to
reduce production at the said plant such situation entailing loss
of profit and also other severe financial hardship for Le Nickel
and this situation has in turn reduced Le Nickel's requirements
for coke.
"Accordingly Le Nickel has asked Bellambi to vary the said
agreement.
"Bellambi has pointed out that any reduction in the contractual
deliveries of coke under the said agreement would entail not only
loss of profit to Bellambi but also other severe financial hardship.
"In consideration of the foregoing the parties have decided to
change certain terms and conditions of the said agreement and
have agreed on the following: (1) As total compensation for any
and all alteration and changes to the said agreement, hereunder
set forth, Le Nickel agrees to pay to Bellambi and Bellambi
agrees to receive from Le Nickel a lump sum of 1,000,000
Australian dollars to be paid in two instalments - 500,000
Australian dollars on 31st December, 1971, and 500,000
Australian dollars on 31st December, 1972. Those amounts will
be paid to the account of Bellambi at the Commercial Bank of
Australia Head Office, George Street, Sydney, Australia." (at p392)
7. The document then goes on to provide for the reduction of the tonnage to be purchased by Le Nickel from 350,000 tons to 132,000 tons to be delivered at the rate of 52,000 tons in 1971 and 20,000 tons in each of the ensuing four years. After providing for other matters it concluded with the following paragraph: "The terms of the said agreement" (i.e. the agreement of 24th April, 1970) "are to remain valid and binding and are hereby confirmed, save in so far as they are varied by these minutes." (at p392)
8. The board of directors of Bellambi met on 28th October, 1971. The minutes of the meeting read as follows: "It was resolved that, 'The following settlement, negotiated by the chairman and managing director in Paris, be approved. (A) Le Nickel would pay Bellambi $500,000 on 31st December, 1971, and a further $500,000 on 31st December, 1972, as compensation for agreeing to reduce the contract tonnage. (B) Bellambi would agree to reduce the contract tonnage from 350,000 to 132,000 to be delivered as to: (i) 52,000 tons in 1971, and (ii) 20,000 tons in each of the four subsequent years.' It was further resolved that, 'The general manager obtain the opinion of Mr. D. L. Mahoney Q.C. regarding taxation aspects of the settlement.' It was resolved that, 'The Federal Coke Works be closed.'" The Federal Coke Works were closed on 19th November, 1971. (at p393)
9. The opinion of Mr. Mahoney Q.C. was obtained and on 23rd December, 1971, the general manager of Bellambi forwarded to the Directeur de l'Administration of Le Nickel a letter which reads as follows:
"You will recall that during our meeting in Paris in November,
which was for the purpose of determining certain alterations to
the coke contract which exists between our two companies, it was
agreed that this company would prepare the amending document
and submit it to you for your consideration.
"I regret the delay in not submitting this document to you
earlier. However, upon my return to Sydney from Paris, it was
necessary for me to leave for Japan almost immediately and I
have been there for nearly the whole of the last four weeks.
"I now enclose a copy of the document which is designed to
give effect to the agreement reached between us during our
meeting in Paris. It has been compiled after due discussion with
Mr. Pointon, of Herbert Smith & Co., and with Cooper Brothers,
the company's auditors who are also represented in Paris, and in
its present form I understand that payments made under the
document will be deductible by you for taxation purposes.
"I have sent a copy of this document to Mr. Germenot of your
Sydney office for his information. Our solicitors in Australia,
Allen, Allen & Hemsley, have sent a copy to Mr. Pointon and have
explained to him in detail, the reasons why certain phraseology is
used. Accordingly, if you desire further information on this
matter, may I suggest that initially you contact Mr. Pointon.
"From 27th January to 4th February next year Mr. Mahoney
Q.C. who has been advising this company on the taxation
aspects of moneys received by Bellambi under the agreement, will
be in London and is willing, at Bellambi's expense, to go to Paris
to further explain to you, if you should so require, why the
document is in the form that it is. Mr. Mahoney's function will be
solely to provide an explanation. Arrangements to meet him can
be made through Mr. Pointon, who will attend to all the
necessary details.
"If the document is acceptable to you in the form submitted,
would you please arrange to process it for signature through Mr.
Pointon. If it is not acceptable, I would appreciate receiving your
comments." (at p393)
10. On 30th December, 1971, Bellambi sent the following telex to Le Nickel:
"For Mr. Soulie
Le Nickel Paris.
"We are surprised that the French bank is holding a draft of
dlrs. Aust. 500,000 in Bellambi's favour. We expected that before
remitting this money, your company would require completion of
the amending agreement giving effect to the new coke sales
contract between us.
"The amending contract was sent to you by airmail 23rd
December, 1971. Our legal advisers state that if Bellambi was to
accept payment from you, then Bellambi would certainly pay
income tax upon the full amount.
"However, their advice is that, if you agree to sign the
amending contract which provides for the money to be paid to the
Federal Coke Works Pty. Ltd., then it is possible that both
Bellambi and Federal will not pay tax on the moneys received.
"Accordingly, we would ask you to instruct the French bank
to deposit the money in a trust account with the interest being
credited to your account until such time as you have decided
whether you are willing to sign the amending contract in the
form sent to you on 23rd December.
"In the event of signing the contract, it will be necessary for the
money presently held by the French bank to be either returned to
you or to be paid to Gold Fields, London, as agents for the
Federal Coke Works Pty. Ltd. or alternatively by direct
remittance from the French bank, Sydney, to Gold Fields,
London.
"All expenses associated with such an arrangement to be to the
account of Federal.
"I appreciate that this is almost New Year's Eve and you may
not be able to process the matter immediately, therefore I have
advised M. Germenot and the French bank that we have telexed
you on this matter and have requested you to take the
abovementioned actions." (at p394)
11. On the same day a telephone conversation took place between an officer of the Sydney branch of Banque Nationale de Paris and the secretary of Bellambi. The following is the bank officer's record of the conversation:
"Phoned Mr. Foley, secretary.
"He advises that the $A.500,000 received from Paris should, in
effect, be payable to the Federal Coke Works, and thus Bellambi
are unable to accept them as to do so, even in transit, would cause
a tax problem.
"He adds that the conditions of the original contract with
Societe Le Nickel had altered so much that a new draft agreement
had been drawn up but, because of difficulties in obtaining
counsels' opinions, was only sent to Ste Le Nickel on 23rd
December, 1971.
"Once approved and signed by SLN, then the payment could be
effected along the lines of the new agreement.
"It is however preferred that the payment be effected either in
France or in the U.K.
"We advise that in view of Bellambi's refusal to accept the
funds, we would be obliged to go back to the order givers to obtain
their new instructions regarding the disposal of the funds, and
that this implied exchange risk and other charges. Mr. Foley
stated here that he supposed that SLN would hold Bellambi
responsible for all this.
"When we asked Mr. Foley to confirm the above in writing to
us, he said that this was impossible as, although he had written
to Mr. Germenot explaining in brief the reason for the refusal, he
did not want to recognize in any way that the funds had been
received and were payable to Bellambi through the BNP. We then
pointed out to him that we would be obliged to write to him
outlining the above, to which he replied that in view of this, he
would see if it were possible to write to us. He would ring us later
in the day in this connection.
"Mr. Foley also added that he supposed that SLN France wish
to have these funds paid out before the end of the year, to be able
to register them as a loss for tax purposes.
"We await further news." (at p395)
12. The secretary of Bellambi wrote to the bank on the same day, stating: "Acting on advice given to us, we have decided we should not accept receipt of the amount of $A500,000 forwarded by Societe Le Nickel of Paris, until an answer has been received from them accepting the draft amended agreement forwarded to them on 23rd December, 1971." (at p395)
13. The document, in the form of a deed between Bellambi and Le Nickel, which was sent to Le Nickel on 23rd December, 1971, and which was executed on 22nd March, 1972, contains the following recitals:
"WHEREAS
(A) By an agreement dated 24th April, 1970 (hereinafter called
'the agreement') Bellambi and Le Nickel provided for the sale by
Bellambi to Le Nickel over a period of five years approximately
of coke manufactured by certain subsidiary companies of
Bellambi, including Federal Coke Works Pty. Ltd. (hereinafter
called 'Federal').
(B) Le Nickel has informed Bellambi that, by reason of an
economic recession and a fall in the demand for nickel, the
requirements of Le Nickel for coke have been greatly reduced.
(C) Le Nickel has requested Bellambi to reduce the amount of
the coke produced by subsidiary companies of Bellambi as
referred to in cl. 1 of the agreement and to reduce the quantity
of coke to be sold by Bellambi to Le Nickel under the agreement.
(D) Bellambi has informed Le Nickel that such reduction as
aforesaid can only be achieved in a practical manner if there is a
discontinuance of all production of coke by Federal and the
closure of Federal's coke works.
(E) Bellambi has informed Le Nickel that discontinuance of
production at Federal's coke works will involve the closure of
those works and that thereby the value of the land and assets
owned by Federal comprising such coke works will be directly
and immediately reduced by reason, inter alia, of action likely to
be taken by authorities of the State of New South Wales and
certain local government authorities against the coke works in a
non-operating condition which would not be taken against them
while operating and by reason of other detriments to Federal." (at p396)
14. The deed then provides as follows: "(1) In the circumstances aforesaid Le Nickel hereby agrees to pay to Federal the sum of one million dollars ($1,000,000) to compensate Federal (and consequently Bellambi) for such loss in the value of the land and assets of Federal as aforesaid (and consequently in the value of the assets of Bellambi) and it is agreed that such sum shall be paid by two equal instalments of five hundred thousand dollars ($500,000) each on 31st March, 1972, and 31st December, 1972." The deed then proceeds to vary the agreement of 24th April, 1970, on the lines set forth in the settlement of 18th October, 1971. The details of the variations are not material for present purposes. (at p396)
15. In keeping with the provisions of the deed, Federal received a sum of $499,567 in each of the years of income ended 30th June, 1972, and 1973. Each sum of $499,567 represented a payment by Le Nickel of $500,000 less expenditure incurred by that company in meeting bank charges and losses due to variations in rates of exchange. In its books of account Federal treated the two payments as receipts of capital being "compensation with respect to loss of value of land and assets arising from discontinuance of production at and closure of company's coke works". The commissioner disagreed with Federal's treatment of the two payments and included them in its assessable income for the two years concerned. Federal objected on the ground that the two sums were receipts of a capital nature. The commissioner disallowed Federal's objections and appeals to the Supreme Court of New South Wales against the disallowance were, as stated at the beginning of this judgment, dismissed. (at p396)
16. The learned trial judge held that if the two sums of $500,000 each payable to Bellambi under the settlement of 18th October, 1971, had in fact been paid to Bellambi they would have formed part of the assessable income of that company for the years of income concerned. I agree with his Honour's conclusion. (at p396)
17. It was argued by counsel for the appellant that the settlement of 18th October, 1971, was nothing more than a commercial arrangement and was not intended to be a legally-binding agreement but was intended to be only a basis for a future contract. I reject this argument for several reasons. First, the authority given to Messrs. Massy-Greene and Ryan on 27th July, 1971, was to negotiate a settlement with Le Nickel and that is precisely what they did on 18th October, 1971. Their authority went beyond negotiating "for" or "with a view" to a settlement. Secondly, the wording and terms of the settlement minutes are inconsistent with it being other than a legally-binding agreement. For example, the concluding paragraph of the minutes confirmed the terms of the agreement of 24th April, 1970, and provided that they were to remain valid and binding save in so far as they were varied by those minutes. Thirdly, the minutes contain no provision for the preparation and execution of another document nor is there anything in them which implies that any such document was contemplated. Fourthly, the board of directors of Bellambi in the first of the resolutions of 28th October, 1971, by approving "the . . . settlement negotiated by the chairman and managing director in Paris" on 18th October, 1971, acknowledged that a settlement between Bellambi and Le Nickel had been effected. Fifthly, on 29th December, 1971, Le Nickel sent to the Sydney branch of Banque Nationale de Paris the first sum of $500,000 which was to be paid to Bellambi on 31st December, 1971, under the settlement of 18th October, 1971. Finally, it was not until after the opinion of Mr. Mahoney "regarding taxation aspects of the settlement" had been obtained that the first mention was made of another document and then it and all subsequent references to such a document up to the execution of the deed on 22nd March, 1972, were made only by Bellambi. (at p397)
18. The document of 18th October, 1971, states in cl. (1) of its operative part that Le Nickel agrees to pay the sum of $1,000,000 in two instalments of $500,000 each "as total compensation for any and all alteration and changes" to the agreement of 24th April, 1970. As the agreement of 24th April, 1970, was one for the sale and purchase of coke in the quantities and on the terms specified in it, and the alteration and changes provided for in the document of 18th October, 1971, relate only to those quantities and terms, the compensation of $1,000,000 payable in two instalments of $500,000 each Le Nickel agreed to pay to Bellambi would have been of a revenue nature had it been received by Bellambi. The principle relied on for this conclusion is that "moneys recovered from any source representing items of a revenue account must be regarded as received by way of revenue": Federal Commissioner of Taxation v. Wade [1951] HCA 66; (1951) 84 CLR 105, at p 112 and the passage there cited from the speech of Lord Macmillan in Van den Berghs Ltd. v. Clark (1935) AC, at p 440 . (at p397)
19. The learned trial judge went on to hold that the receipt by Federal instead of by Bellambi of the two instalments did not alter their character in the hands of Federal; they were still of an income nature and therefore formed part of the assessable income of Federal for the two years of income concerned. Counsel for the appellant argued that was not so. He contended that the source of the payments to Federal was the deed of 22nd March, 1972, and that receipt by Federal of each instalment was, as stated in the deed, part compensation for the loss in value of its land and assets arising from discontinuance of production at and closure of its works and was therefore of a capital nature. I cannot accept this contention. Although the payments were made pursuant to the deed of 22nd March, 1972, it is an incomplete statement of the position to say that the deed was the source of the payment to Federal. It was Bellambi that gave the consideration and arranged and directed that the payments be made to Federal. The deed, to which Federal is not a party, came into being at the instigation of Bellambi because Bellambi desired to avoid income tax on the two instalments of $500,000 each which it had been informed by Mr. Mahoney it would have been obliged to pay if it had received the two payments from Le Nickel. This is clear from the telex Bellambi sent to Le Nickel on 30th December, 1971. To Bellambi the way out of its taxation difficulty was to persuade Le Nickel to pay the two sums of $500,000 each to Federal instead of Bellambi as it was obliged to do under the settlement of 18th October, 1971, and to make it appear that the two payments were by way of compensation for an alleged loss in value of Federal's land and assets arising from the closure of its works. Bellambi on 23rd December, 1971, sent to Le Nickel a document designed to achieve that end and in the accompanying letter informed Le Nickel that payments by it to Federal would be deductible by it for taxation purposes. Bellambi's persuasion was successful for Le Nickel executed the document on 22nd March, 1972, notwithstanding that there never had been privity of contract between it and Federal and that it was not obliged to pay Federal anything by way of compensation or otherwise. The alleged compensation of $1,000,000 was not based on any valuation of Federal's alleged loss, it was simply the equivalent of what Bellambi was entitled to receive from Le Nickel. Nor was Le Nickel responsible for the closure of Federal. That was the result of a decision made by Bellambi which had it chosen could have kept Federal operative and closed one of its other subsidiaries, i.e. Mt. Pleasant or Corrimal or it could have kept all three subsidiaries active by reducing the output of all or one or two of them. When asked during the hearing before the learned trial judge why it was decided to close the coke works of Federal and not those of Mt. Pleasant or Corrimal, Mr. Ryan, the general manager of Bellambi, replied: "There were numerous reasons, but undoubtedly the major one was the Clean Air Act. Mt. Pleasant was much more advantageously placed than Federal as far as the Clean Air Act was concerned. In the case of Federal there were only seven and a half acres of land and in the case of Mt. Pleasant there were thirty. Federal was zoned open space, Mt. Pleasant was zoned light industrial. In the case of Federal there were buildings on the south and west and tennis courts and playing fields in the north. In the case of Mt. Pleasant there was residential area on the south, but some distance from the coke works, and separated by a line of trees. In addition the Mt. Pleasant works was a much more economic plant to operate than the Federal plant, and historically it had been subject to less industrial trouble than Federal. The reason why Corrimal was not closed was (that) the capacity of Corrimal was 128,000 tons a year, and we were only seeking to achieve a saving of 50,000 tons a year, and if we had done anything at Corrimal we would have had to close half the plant, which would have been a most uneconomic action to take." (at p399)
20. As the learned trial judge found the decision to close Federal was made after the settlement of 18th October, 1971, which stated that the two payments were total compensation for any and all alteration and changes to the agreement of 24th April, 1970. It was not a term of the settlement that Bellambi or Federal was to be compensated for the closure of Federal or any other subsidiary of Bellambi. The deed of 22nd March, 1972, was a far cry from the settlement of 18th October, 1971, and in my opinion was originated for the sole purpose of diverting from Bellambi to Federal the receipt of the two instalments of $500,000 each, which Le Nickel was obliged to pay Bellambi under the settlement, so that those sums would not be taxable in the hands of Bellambi. It was not contended that the deed was a sham for the parties to it intended that it be effective to achieve the purpose for which it was brought into existence. In my opinion it not only had the effect of providing Le Nickel with an alternative method of payment by which it could discharge its obligations to Bellambi but it also had the effect of the making of a gift by Bellambi to Federal of the two instalments. I have reached this conclusion because first there is no evidence that Federal received the instalments as agent of or trustee for Bellambi and secondly because under its arrangement with Federal, Bellambi was under no obligation to deliver coal to Federal for processing nor was it under any obligation to compensate Federal for any loss of profits occasioned by the variations in its original agreement with Le Nickel or for any capital losses resulting from its closure of Federal's works. (at p399)
21. It follows that, in my view, Federal had no claim or entitlement whatever on either Le Nickel or Bellambi to the two instalments it received from Le Nickel at the instigation of Bellambi. It does not follow, however, that a gift of what would have been income in the hands of Bellambi must necessarily be income in the hands of Federal. As stated by Kitto J. in Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation [1953] HCA 13; (1953) 86 CLR 570, at p 627 : "It must be observed at once, however, that even if it were correct to describe the payment as a gift in the strict sense of the word, the question we have to consider would still await an answer; for it is a commonplace that a gift may or may not possess an income character in the hands of the recipient." (at p399)
22. What then was the character in the hands of Federal of each of the instalments received from Le Nickel? It was not a payment received in the course of Federal's business for its business of a coke producer had ceased when the payment was made, nor was it a payment which arose out of the functioning of its business when it was operating. It was not a payment nor did it purport to be a payment by way of compensation for any loss of profit Federal sustained by reason of Le Nickel's failure to carry out the terms of its initial agreement with Bellambi or by reason of Bellambi's decision to close down its works. It follows that unless there are some special considerations which demand a view to the contrary, it has not the character of income. (at p400)
23. Counsel for the commissioner argued that there were special considerations in this case based upon the relationship between Bellambi and Federal, viz. that of a parent company and its wholly-owned subsidiary. In support he quoted from the judgment of Lord Denning M.R. in Littlewood's Mail Order Stores Ltd. v. Inland Revenue Commissioners (1969) 1 WLR, at p 1252 where his Lordship declined to treat a wholly-owned subsidiary company as a legal entity separate from and independent of its parent company, a course of which Sachs L.J. clearly indicated he was not prepared to approve (1969) 1 WLR at p 1255 . He then went on to claim that because the direction given by Bellambi to Le Nickel to pay the two instalments, which would have been income in the hands of Bellambi, to Federal, its wholly-owned subsidiary, was given not only to benefit Federal but indirectly to benefit Bellambi as well, as was acknowledged in the deed of 22nd March, 1972, it gave to the instalments in Federal's hands an income character. I cannot accept this argument. As the law stands in Australia today, Federal is a separate and independent entity - Slutzkin v. Federal Commissioner of Taxation (1977) 51 ALJR, at p 324 - and for that reason the fact that it is a wholly-owned subsidiary of Bellambi cannot operate to give the payments it received from Le Nickel a character they would not otherwise have. I am therefore satisfied that the two payments received from Le Nickel were not income in Federal's hands. (at p400)
24. As the commissioner elected to tax Federal and not Bellambi in respect of the two instalments, possible application of the provisions of ss. 19 and 260 of the Income Tax Assessment Act 1936 was not argued before us. (at p400)
BRENNAN J. The facts which gave rise to the deed of 22nd March, 1972, between the Bellambi Coal Co. Ltd. (which I shall call Bellambi) and Societe Anonyme Le Nickel (which I shall call Le Nickel) are set out in the judgments of the Chief Judge and of Nimmo J. and it is unnecessary to repeat them. Pursuant to the deed, Le Nickel paid to the appellant (which I shall call Federal) two amounts, each of $499,567. The first amount was paid in the income year ended 30th June, 1972, and the second in the income year ended 30th June, 1973. The respondent assessed Federal to tax in respect of each receipt, and the question in these proceedings is whether the assessments should be upheld or whether the assessments be varied by excluding therefrom the respective amounts of $499,567. (at p401)
2. Le Nickel paid the respective amounts to Federal because the deed bound it to do so. The consideration for the promise to make the payments was provided by Bellambi. Bellambi secured Le Nickel's promise to pay the amounts to Federal in consideration of the variation of the coke supply contract between Bellambi and Le Nickel. As between Le Nickel and Federal the payment was gratuitous: the payment did not discharge any antecedent liability owed to Federal and its receipt did not impose any obligation upon Federal. (at p401)
3. Federal was, at all material times, a wholly-owned subsidiary of Bellambi, but it did not receive the amounts paid to it as agent or trustee for Bellambi. It received these amounts for itself. When received, each amount increased Federal's net assets and the value of its shares was thereby enhanced. That was the benefit which flowed, and which was intended to flow, to Federal's shareholder, Bellambi. Federal may, in a sense, be said to have received the payments as a gift, but such a description does not determine the character of the receipt. As Kitto J. said in Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation: "It must be observed at once, however, that even if it were correct to describe the payment as a gift in the strict sense of the word, the question we have to consider would still await an answer; for it is a commonplace that a gift may or may not possess an income character in the hands of the recipient. The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances; and even in respect of a true gift it is necessary to inquire how and why it came about that the gift was made" (1953) 86 CLR, at pp 627-628 . (at p401)
4. Whether a payment be made by way of gift or not, the principle is that moneys received from any source, representing items of a revenue account must be regarded as received by way of revenue (Federal Commissioner of Taxation v. Wade (1951) 84 CLR, at p 112 ). (at p401)
5. When a recipient of moneys provides consideration for the payment, the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not. The character of an asset which is sold for a price, or the character of a cause of action discharged by a payment will ordinarily determine, unless it be a sham transaction, the character of the receipt of the price or payment. The consideration establishes the matter in respect of which the moneys are received. The character of the receipt may then be determined by the character, in the recipient's hands, of the matter in respect of which the moneys are received. Thus, when moneys are received in consideration of surrendering a benefit to which the recipient is entitled under a contract, it is relevant to inquire whether or not that benefit was a capital asset in his hands. To adapt the words of Lord Macmillan in Van den Berghs Ltd. v. Clark (1935) AC, at p 443 , and of Williams J. in Bennett v. Federal Commissioner of Taxation [1947] HCA 25; (1947) 75 CLR 480, at p 485 , the inquiry is whether the congeries of the rights which the recipient enjoyed under the contract and which for a price he surrendered was a capital asset. (at p402)
6. When a recipient gives no consideration for a receipt, it is not possible to identify the matter in respect of which the moneys are received by reference to rights which the recipient surrenders. Nevertheless, an inquiry into the "how and why" of the receipt may reveal the matter in respect of which the payment is received. If there be a consensus between the payer and the payee, their common understanding may identify the relevant matter. The intention or understanding of the payer alone is insufficient for "it would plainly be unsound to allow a determination of the character of a receipt in the hands of the recipient to be affected by a consideration of the uncommunicated reasoning which led the payer to agree to pay it" (McLaurin v. Federal Commissioner of Taxation (1961) 104 CLR, at p 391 ). In the present case there is a consensus between Bellambi and Federal - between the company which directed the payment to be made and the company which received the payment. Each of the companies had common directors who acted simultaneously as the boards of both. Federal may thus be taken to have shared Bellambi's motive in causing the payments to be made to Federal and Bellambi's selection of the matter in respect of which the payments were made. (at p402)
7. In casting the transaction in the form which Bellambi chose, Bellambi and Federal were no doubt motivated to avoid the possible tax liability in Bellambi which may have arisen if Bellambi had received the payments from Le Nickel. There was a sufficient similarity between Bellambi's position and that of the appellant company in Heavy Minerals Pty. Ltd. v. Federal Commissioner of Taxation [1966] HCA 60; (1966) 115 CLR 512 to warrant the devising of a scheme which would divert the proposed payments by Le Nickel to a recipient who might take the payments without incurring a tax liability. The motive for devising the scheme, however, says nothing as to its success. (at p402)
8. When a recipient gives no consideration for a receipt, the motive of the payer is not irrelevant (albeit not conclusive) in determining the character of the receipt (Hayes v. Federal Commissioner of Taxation (1956) 96 CLR, at p 56 ). The motive may either tend to identify the matter in respect of which a payment is made, or it may show that there is a mere gift, which is unrelated to any matter by reference to which the character of the receipt may be ascertained. The significance of the motive depends upon the circumstances. (at p403)
9. Federal's business of processing coal into coke for Bellambi was, of course, dependent upon Bellambi's ability to sell the coke to its customers. So long as Bellambi had sales for the coke which Federal could produce, Federal was assured of a profitable business. Bellambi had agreed on 28th June, 1968, to pay Federal a fee for processing its coal at a rate per ton which would cover Federal's costs of processing plus a sum which would provide Federal with a profit. In 1971, the profit rate stood at four cents per long ton. Bellambi had not bound itself, however, to provide any minimum quantity of coal for processing. When Bellambi's sales to Le Nickel partly fell away, the directors decided to close Federal's works to avoid the high capital outlay and other disadvantages that were involved in continuing production there. Whether the works of another subsidiary may have been closed instead of the Federal works is immaterial. The fact is that, on 19th November, 1971, Federal ceased production and thereafter its works were closed and its coke-processing business ceased. It was no longer entitled to use its land for the purpose of making coke and its plant was dismantled. The result was a diminution in the value of its capital assets. Bellambi was not obliged to compensate Federal for that diminution. But the appellant's case is that Bellambi chose to do so, and that the payments were directed to and accepted by Federal in compensation for that diminution. (at p403)
10. If there were any motive, other than the mere avoidance of a possible tax liability, in directing the payments to Federal, the likely motive was to compensate Federal for loss in the value of its capital assets. Federal had, at the date of the deed, sustained an actual loss in the value of its assets, and a cause of that loss was the contraction of Le Nickel's requirements for coke. Le Nickel was to pay $1,000,000 in order to procure its release from an obligation to take more coke than it required. By the deed of 22nd March, 1972, Bellambi directed Le Nickel to make the payments to Federal "to compensate Federal (and consequently Bellambi) for such loss in the value of the land and assets of Federal as aforesaid", that is, the loss in the value of the land and assets "comprising the coke works". I do not see why the contents of the deed should not be admissible to explain the contemporaneous motive and purpose of Bellambi in giving Le Nickel the direction, therein contained, to make the payments to Federal. The evidence tends to identify the matter in respect of which the payments were received, but the conclusion to which it tends must be tested by reference to other relevant evidence. (at p404)
11. The disparity between the amounts received by Federal and any reasonable estimate of the value of its expected profits in the future is a factor which supports the conclusion that the amounts were received as compensation for loss in the value of assets of a capital kind. What other explanation can there be for Bellambi's direction to pay the amounts to Federal? The receipts could not have represented the temporary loss of profits which the carrying on of Federal's business were expected to yield, for Federal's business was closed before the direction was given, and the magnitude of the receipts appears inconsistent with an explanation of this kind. The evidence shows that Bellambi directed the payments to be made, and Federal received the payments, as compensation for the loss in value of capital assets. The consequence of this finding is that the receipts bear the character of receipts on capital account and do not form part of Federal's assessable income (cf. Californian Oil Products Ltd. v. Federal Commissioner of Taxation [1934] HCA 35; (1934) 52 CLR 28 ). (at p404)
12. If it be said that Federal did not receive the amounts in respect of any loss sustained by it, but merely to provide a tax-free sanctuary for the funds, the respondent's case is not thereby advanced. A money sum is amenable to characterization only in the hands of a recipient (Scott v. Federal Commissioner of Taxation (1966) 117 CLR, at p 526 ) and if it be impossible to relate the receipt to any income-producing activity on the part of the recipient, that fact is decisive (Hayes v. Federal Commissioner of Taxation (1956) 96 CLR, at p 56 ). (at p404)
13. Federal did not conduct a business of receiving moneys which were earned by or payable to other members of the Bellambi group, nor did its business extend to the receipt of moneys paid at the direction of Bellambi for the purpose of avoiding possible tax liabilities if Bellambi should receive them. The receipts were not therefore related to an income-producing activity and they do not form part of Federal's assessable income. During argument, much was said as to the liability of Bellambi to tax in respect of the payments which Le Nickel agreed to make. Whether Bellambi is, or whether in different circumstances it might have been, liable to tax in respect of the payments made by Le Nickel are questions which do not now fall for decision. It is sufficient to say that, whatever Bellambi's liability is or might have been, Federal cannot be made to bear it. (at p404)
14. I would therefore allow the appeals with costs here and in the Supreme Court of New South Wales. (at p404)
Federal Coke Co Pty Ltd
Federal Commissioner of Taxation [1977] FCA 3;
(1977) 34 FLR 375
(1977) 34 FLR
375
(1934) 52 CLR 28
(1966) 115 CLR 512
(1961) 104 CLR 381
(1965) 113 CLR 341
(1977) 51 ALJR 322
(1956) 96 CLR 47
(1954) 88 CLR 413
(1966) 117 CLR 514
(1951) 84 CLR 105
(1953) 86 CLR 570
(1947) 75 CLR 480