Reasoning: The Arguments Put to the Primary Judge
63 The question on this appeal is not whether the members of the Court would have reached the same conclusion as the AAT on the evidence before it. Rather, it is whether the primary Judge was correct in holding that the AAT committed an error of law in concluding that the Sum was within both s 25(1) and s 25A(1) of the ITA Act.
64 We accept that certain criticisms made by the primary Judge of the AAT's reasoning have considerable force. In particular, the AAT did not explicitly make the findings of fact that would seem to be necessary to support its alternative ground for confirming the assessment, namely, that the Sum was properly brought to tax under the second limb of s 25A(1) of the ITA Act. For example, the AAT made no explicit finding as to the "scheme" which was said to have brought the taxpayer within the terms of s 25A(1). Nor did the AAT explain why the whole of the Sum constituted a "profit" for the purposes of s 25A(1). In addition, as Mr Douglas pointed out, the summary of findings by the AAT mis-stated the terms of s 25A(1) (see conclusion (c) reproduced in par 41 of this judgment).
65 These deficiencies in the AAT's reasons might well constitute grounds for challenging the AAT's decision, insofar as it was based on s 25A(1) of the ITA Act. But even if this is so, it does not establish that the AAT's decision is liable to be set aside. The AAT's finding that the Sum constituted assessable income under s 25(1) of the ITA Act, provides an independent basis for the AAT's decision to confirm the assessment. This follows from the view expressed by Mason J in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1992) 150 CLR 355, at 382, that the second limb of the former s 26(a) of the ITA Act (the equivalent of s 25A(1)) applied only to profit not attributable to gross income that has already been captured by s 25 of the ITA Act. His Honour also observed that it was no part of the purpose of s 26(a) to limit the operation of s 25(1). Mason J's analysis has been adopted by a Full Court of this Court: First Provincial Building Society Ltd v Commissioner of Taxation (1995) 56 FCR 320, at 330, per Hill J, with whom Black CJ and Carr J agreed.
66 In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124, Brennan, Dawson, Toohey, Gaudron and McHugh JJ said (at 138):
"To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes by the character of a right or thing disposed of in exchange for the receipt; sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business."
As these observations imply, in determining the character of a receipt as income or capital, it is necessary to consider the whole of the circumstances surrounding the receipt, including the factual matrix of which any contract that generates the receipt forms part: J B Chandler Investment Company Ltd v Commissioner of Taxation (1993) 47 FCR 588, at 598, per Hill J. That is not to say, as the decision in Chandler makes plain, that surrounding circumstances can be used to contradict the terms of an agreement except (and the present is not such a case) where it is claimed that the agreement is a sham and does not represent the true intention of the parties to it.
67 Here, the question whether the receipt by the taxpayer of the Sum had the character of income falls to be determined by reference to what the payment he received was for, although the scope of the taxpayer's activities and his purpose in undertaking those activities (and in entering the joint venture arrangements) will be relevant factors. The AAT correctly stated the principles expounded by the High Court in Myer Emporium applicable to the case where a taxpayer makes a gain otherwise than in the ordinary course of carrying on a business. The relevant passage makes clear that whether such a gain (not merely a "profit") will constitute income according to ordinary concepts depends upon all the circumstances. It will generally do so if the purpose of the person entering the transaction was to make a gain and this is so notwithstanding that the transaction was extraordinary, judged by reference to the ordinary course of the person's business.
68 Myer Emporium concerned an assignment which, considered in its commercial context, was entered into for the purpose of making a profit. The taxpayer in the present case did not suggest that the general principles stated in Myer Emporium are confined to cases in which the taxpayer sells or assigns property, although that will ordinarily be the context in which the principles will fall to be decided.
69 The AAT found that, from the very outset, the taxpayer carried out his research on the concept of a tunnel under Sydney Harbour intending to profit from his work. As the AAT said, the taxpayer "embarked on the Project for the purposes of gain". This was not, for example, a leisure activity or hobby, undertaken with little or no thought of financial gain. On the AAT's findings, the very point of the taxpayer's research was to restore his fading financial fortunes.
70 The AAT also found that the taxpayer recognised that he would need the assistance of suitably qualified experts, since he did not have engineering qualifications. It was for this reason that he formed an association with Mr Hornibrook and WCP. The AAT further found that the taxpayer was determined to persevere with the Project, notwithstanding that it had little commercial value in the absence of approvals of the kind referred to in the JVA. In this connection, it is of some significance that the taxpayer's own evidence was that, in his joint venture with Mr Hornibrook:
"[i]t was always intended that...additional parties (being large publicly credible companies) would be brought into the venture at an appropriate time (upon terms to be negotiated) but with myself and Mr Hornibrook retaining an active ongoing role."
The AAT further found that the taxpayer could not have known when he commenced his research precisely how and by whom the Project would be brought to fruition.
71 To these matters must be added the fact that the JVA was predicated upon the basis that the payment to the taxpayer was consideration for the cooperation of and joint participation by "the Initiators" in the preparation and submission of applications, reports and determinations necessary to obtain approvals (that is, services to be performed, inter alia, by the taxpayer). In these circumstances, in our view, it was clearly open to the AAT to find that the payment of the Sum to the taxpayer had the character of income on ordinary concepts. This is particularly so where the other possible explanation for the payment, that it was the consideration for the sale of proprietary rights, was rejected by the AAT.
72 A repeated theme in the taxpayer's submissions was that the prospect of gain from the taxpayer's activities was fanciful, because of the numerous obstacles that had to be overcome before his ideas could be translated into financial rewards. This aspect of the submissions seems to have proceeded on the basis that there is a principle of taxation law denying the character of income to gains that, at the early stages of the commercial venture, are unlikely to eventuate. The fact that the prospects of reward are very slight may be a reason in a particular case to find that the taxpayer did not undertake the activity with the intention of achieving a financial gain. But the AAT found that, from the very beginning of his work, the taxpayer intended to obtain financial rewards. The mere fact that his chances of doing so, viewed perspectively, were extremely slim, did not preclude the AAT from concluding that the taxpayer's undertaking was always intended to yield income.
73 The AAT in the present case clearly enough took the view that the taxpayer, when embarking upon his research, contemplated the possibility that he might obtain pecuniary gains by any one of a number of means, including joint venture arrangements, and the involvement of "publicly credible companies". It is true that there is nothing to suggest that the taxpayer adverted at an early stage to possible conflicts with joint venture partners or other participants in the project. But it can hardly be said that disputes of this kind, or their negotiated resolution, necessarily change the nature of a project or the means by which financial gains are to be derived. The issue is one of fact. It was open to the AAT to conclude that the dispute between the taxpayer and his joint venture partners did not take the JVA or the terms of settlement outside the contemplated means by which he expected to receive gains.
74 In our view, there is no substance to the criticism by the taxpayer of the way in which the AAT treated the JVA. It must be remembered that the AAT was responding to the appellant's argument that the JVA was nothing more than a sale of property and that, therefore, the Sum was a capital receipt. It was in that context that the AAT analysed the terms of the JVA and concluded that the Sum was paid in relation to the provision of services. The taxpayer no longer maintains the submission that the JVA was in substance a sale of property. Accordingly, the treatment of the issue by the AAT does not give rise to any error of law.