Glennan v Commissioner of Taxation

1. The taxpayer's appeal from the judgment given by Foster J given on 9 September 1998 be dismissed.

2. The taxpayer pay the Commissioner's costs of the appeal.

1. The taxpayer's application for leave to appeal from the judgment given by Foster J on 9 September 1998 be dismissed. 2. No order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

The Issues 1 Two appeals, both purporting to be as of right, and two motions are before the Court. The appeals and motions relate to judgments given by a Judge of this Court, respectively, on 17 October 1997 and 9 September 1998. The effect of his Honour's judgments, taken together, was to set aside a decision of the Administrative Appeals Tribunal ("AAT") and to remit the matter to the AAT, subject to certain directions. The AAT confirmed an assessment by the Commissioner which included an amount of $1,365,000 in the taxpayer's assessable income for the year ended 30 June 1988. In order to understand the issues presented for determination by this Court, a brief procedural history is necessary. 2 During the year ended 30 June 1988, the taxpayer received the sum of $1,365,000 ("the Sum") paid to him by Transfield Pty Ltd ("Transfield") and Kumagai Gumi Co Limited ("Kumagai"). The Sum was paid pursuant to terms of settlement resolving proceedings which the taxpayer had instituted in the Supreme Court of New South Wales in 1987, against seven defendants, including Transfield and Kumagai. In those proceedings, the taxpayer had sought orders, inter alia, requiring the payment of moneys said to be due under the terms of a Joint Venture Agreement dated 29 November 1985 ("JVA"). 3 Under the JVA, the taxpayer and two other parties had agreed with Transfield and Kumagai, inter alia, to enter into a joint venture to prepare and submit applications and reports necessary to receive approvals for the performance of "Works", defined to mean a vehicular crossing under Sydney Harbour, between the Warringah Expressway on the North Shore and Hickson Road on the South Shore ("the Sydney Harbour Tunnel"). In essence, the JVA provided for the taxpayer to require payment of $35,000 upon the signing thereof and an amount equivalent to the Sum within fourteen days of receipt of all requisite approvals for the commencement of the Works. 4 The Commissioner issued an amended assessment to the taxpayer in respect of the year ended 30 June 1988, including the Sum in his assessable income. On 29 January 1996, the Commissioner disallowed the taxpayer's objection against the amended assessment. 5 The taxpayer sought review of the Commissioner's decision in the AAT which, by a decision given on 8 November 1996, confirmed the Commissioner's assessment. The AAT found that the Sum "was properly brought to tax pursuant to the assessment, under either section 25(1) or section 25A of [the Income Tax Assessment Act 1936 (Cth)]". Because the AAT found that the Sum was assessable pursuant to ss 25(1) or 25A of the Income Tax Assessment Act 1936 (Cth) ("ITA Act"), it did not consider it necessary to rule on the Commissioner's alternative submissions that the Sum was assessable under s 26(e) or Part 3A of the ITA Act. 6 The taxpayer appealed to the Court under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) ("AAT Act"), contending that the AAT had erred in law in reaching its conclusion. The learned primary Judge held that the AAT had erred in finding that the receipt of the Sum was assessable as income under ss 25(1) and 25A of the ITA Act. Although his Honour set aside the AAT's decision, he rejected a submission by the taxpayer that the evidence permitted only one characterisation of the payment of the Sum, namely, a "windfall gain" which could not form part of the taxpayer's assessable income. His Honour expressed the opinion that this was the correct characterisation, but held "reluctantly" that the case had to be returned to the AAT so that it could "consider this fairly limited factual area and make appropriate findings". Accordingly, by orders made on 17 October 1997, the primary Judge set aside the decision of the AAT and remitted the matter for determination in accordance with his reasons. We refer to this judgment as "the first judgment". 7 Neither the Commissioner nor the taxpayer filed a notice of appeal from the orders made by the primary Judge. In further proceedings before the AAT, the Commissioner's counsel informed the AAT that he intended to call additional evidence and to cross-examine the taxpayer further. Apparently in consequence of this development, the taxpayer, by a notice of motion filed on 13 February 1998 and amended on 19 February 1998, sought to rescind the order previously made by the primary Judge for remittal of the matter to the AAT. The taxpayer sought to substitute an order declaring that, as a matter of law, the receipt of the Sum by the taxpayer had the character of a windfall gain and was not subject to income tax. 8 In a judgment delivered on 9 September 1998 ("the second judgment"), the primary Judge held that he should exercise his discretion under Federal Court Rules ("FCR"), O 35, r 7(1), to reconsider the earlier order. His Honour took this course on the basis that, during the first trial, he had not invited the assistance of counsel as to what orders might appropriately be made if he took a favourable view of the "windfall" argument. There was therefore a possibility of injustice if the earlier orders were not to be reopened.

9 The primary Judge further held that, in the unusual circumstances of the case, the undisputed facts required the conclusion that the Sum received by the taxpayer was not income, but a windfall gain. He was therefore satisfied that he should depart from his previous finding that the facts did not point inevitably to a finding of a windfall gain and hold instead that the facts reasonably admitted of that finding and no other. Accordingly, his Honour varied the previous order remitting the matter to the AAT, by directing the AAT to find that the Sum was not taxable under either s 25(1) or s 25A(1) of the ITA Act. The orders, as varied, left the AAT free to consider whether the Commissioner's alternative arguments (relying on s 26(e) and Part 3A of the ITA Act) should be upheld.

10 On 30 September 1998, the Commissioner filed a motion applying for an extension of time in which to file and serve a notice of appeal from the first judgment. An affidavit by the Commissioner's solicitor, filed in support of the motion, explained the Commissioner's failure to appeal on the basis that the solicitor had understood the first judgment to entitle the Commissioner to adduce further evidence in relation to the issues before the AAT arising under s 25(1) of the ITA Act. The solicitor said that the second judgment had altered the first judgment in a way that he had not anticipated in 1997. Had the first judgment included orders preventing the Commissioner from adducing evidence on the s 25(1) issue, he would have advised the Commissioner to file an appeal.

11 Despite not having received leave to file an appeal out of time from the first judgment, the Commissioner filed what Mr McGovern, who appeared on the Commissioner's behalf, described as a "composite notice of appeal", comprising grounds relating to both the first and second judgments. The composite document sought only the following orders:

"(a) The appeal be allowed. (b) The orders made by Foster J on 9 September 1998 and 17 October 1997 be set aside. (c) In lieu thereof, orders be made as follows: (i) the appeal be dismissed; (ii) the Appellant pay the respondent's costs of that appeal; (iii) the Respondent pay the Appellant's costs of this appeal." 12 It was pointed out in argument to Mr McGovern that these orders could not be made if the Court decided to refuse an extension of time for the Commissioner to appeal against the first judgment, since a successful appeal against the second judgment would merely reinstate the original orders made by the primary Judge. It was also pointed out that a composite notice of appeal purporting to specify grounds of appeal from both judgments was not appropriate, since the Commissioner had not received leave to extend the time for filing an appeal from the first judgment. 13 In the light of these observations, Mr McGovern replaced the composite notice of appeal with two documents. The first was a proposed notice of appeal which specified the grounds of appeal from the first judgment. That document was to be filed if the Court granted the Commissioner's application to extend the time for filing a notice of appeal. The proposed notice of appeal amended the grounds of appeal from those contained in the composite notice of appeal, but sought the same orders. The second document was a notice of appeal which specified grounds of appeal from the second judgment and sought alternative orders, should the Court decide to refuse an extension of time for the filing of an appeal from the first judgment or to dismiss that appeal. The orders sought in the Commissioner's second notice of appeal were that the taxpayer's motion be dismissed and the matter be remitted to the AAT for determination, with a direction that the AAT hear further evidence. 14 For his part, the taxpayer filed a notice of appeal appealing against the second judgment. The grounds identified by the notice of appeal, as subsequently amended, included constitutional issues, which had been the subject of a notice to Attorneys-General pursuant to s 78B of the Judiciary Act 1903 (Cth). The constitutional grounds were, however, expressly abandoned and nothing more need be said about them. 15 The taxpayer's notice of appeal also claimed that the primary Judge had erred by failing to determine completely and finally the cause before the Court. As explained by Mr Douglas QC, who appeared with Mr Sexton and Mr Henderson for the taxpayer, this ground was based on the contention that the primary Judge should have decided the issues arising under s 26(e) and Part 3A of the ITA Act since (so it was said) the AAT had merely reserved the opportunity to put forward legal arguments on those issues and had not contemplated that any further evidence would be adduced. The taxpayer sought orders declaring the amended assessment in respect of the 1988 tax year void and reducing his taxable income for that year by the amount of $1,365,000. 16 The taxpayer's notice of appeal was filed on 30 September 1998. This was within the period of twenty-one days from the date of the second judgment, prescribed by FCR, O 52, r 15(1). However, it was outside the period of seven days required for the filing of an appeal from an interlocutory judgment: FCR, O 52, r 10(2)(b). As a precautionary measure, the taxpayer sought an extension of time for the filing of an application for leave to appeal, should it be determined that the second judgment was interlocutory in character. If the second judgment were interlocutory in character, the Commissioner would also require leave to appeal. 17 The taxpayer also filed a notice of contention on the second day of the hearing of the appeal, seeking to uphold the first judgment on grounds not addressed by the primary Judge. As Mr Douglas frankly acknowledged, certain of the arguments raised by the notice of contention had not been put to the AAT. It will be necessary to return to this aspect of the case at a later stage. 18 The result of this complex procedural history is that a number of issues arise for consideration, although, depending on the conclusions reached on particular issues, not all necessarily require resolution. In broad terms, the issues are these: (i) Should the Commissioner be granted an extension of time to file its notice of appeal against the first judgment? (ii) If so, was the primary Judge correct in making the orders he did in the first judgment, whether on the grounds put forward by his Honour or those advanced in the taxpayer's notice of contention? (iii) To the extent that the taxpayer or the Commissioner requires an extension of time to file an application for leave to appeal against the second judgment, should the extension be granted and, if so, should the application be granted? (iv) Did the primary Judge err in the second judgment: (a) by directing the AAT to find that the Sum was not taxable under either s 25(1) or s 25A(1) of the ITA Act; or (b) by failing to determine whether the Sum was taxable under s 26(e) or Part 3A of the ITA Act?

Suppression Order 19 We were informed that his Honour had made an order pursuant to s 50 of the Federal Court of Australia Act 1976 (Cth) suppressing the name of the taxpayer. We were also informed that the circumstances giving rise to that order no longer prevailed. Accordingly, an order was made discharging the suppression order.

The Legislation 20 Section 25(1) of the ITA Act relevantly provides as follows: "25(1)The assessable income of a taxpayer shall include: (a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia; and ...". 21 Section 25A(1) of the ITA Act, as in force at the relevant time, provided as follows: "The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme."

Background Facts 22 The following outline of the facts is based on the findings of the AAT, supplemented by reference to key documents or statements in evidence before the AAT. 23 The taxpayer practised as a barrister from December 1977 until the end of 1984. Thereafter, he practised only on a part-time basis. The taxpayer's practice was not, however, financially successful and from 1983 he operated at a loss. 24 In 1983, despite his lack of engineering or technical qualifications, the taxpayer commenced research on the possibility of building a second major transport crossing of Sydney Harbour (which the AAT referred to as "the Project"). After about twelve months' research, the taxpayer had selected the route for a tunnel, drawn up cross-section tunnel plans and selected the optimum engineering method for the tunnel construction. He undertook this work, in his own words, because he "desperately started looking around for a means of restoring [his] financial fortunes." The AAT found that he undertook work on the Project in the hope that it would be financially rewarding. 25 In August 1984, the taxpayer consulted an engineer and building consultant, Mr Hornibrook, about his proposals for a tunnel under Sydney Harbour. The taxpayer and Mr Hornibrook reached an agreement for a joint venture in which the taxpayer (according to him) would have a sixty per cent controlling interest. A shelf company was procured, but was not used, for reasons not made clear in the evidence. 26 Mr Hornibrook subsequently introduced the taxpayer to Wargon Chapman Partners ("WCP"), a firm of engineering consultants. Negotiations for a joint venture involving WCP took place between November 1984 and March 1985. 27 By the end of March 1985, the three parties were in dispute, although the evidence did not elucidate the precise nature of the dispute. In July 1985, Mr Hornibrook instituted proceedings against the taxpayer and WCP in the Supreme Court of New South Wales. 28 The proceedings were settled on 27 November 1985. The terms of settlement incorporated a document in the form of the JVA, the executed version of which is dated 29 November 1985. The parties to the agreement were the three parties to the litigation (together referred to as "the Initiators" in the JVA), Transfield and Kumagai. The taxpayer gave evidence that, as a result of the legal proceedings, Mr Hornibrook had the benefit of certificates of taxation for costs orders and that he (the taxpayer) entered into the terms of settlement under the threat of bankruptcy proceedings. As the AAT observed, the taxpayer's contention that the JVA was executed by him under duress was not tenable, having regard to the fact that he ultimately relied on the terms of the JVA when claiming moneys said to be due to him. The taxpayer did not persist with that contention. 29 The JVA contained the following recitals: "A. The Initiators own the property referred to in Schedule 1 herein in the proportions Wargon Chapman 30%, Hornibrook 35% and Glennan 35%. B. The Initiators, Kumagai and Transfield hereby agree to enter into a joint venture ('the Joint Venture') to co-operate and jointly prepare and submit to the Relevant Authorities all necessary applications, studies, reports and determinations necessary to receive all requisite Approvals for the Performance of the Works on the terms and conditions set out in this Agreement. C. The parties agree that if all such requisite Approvals are received by the Joint Venture then subject to the terms and conditions set out in this Agreement, the Performance of the Works shall be carried out by Kumagai and Transfield upon such terms and in such manner as Kumagai and Transfield mutually agree upon." Clauses 2 and 3 are important: "2. The Initiators, Kumagai and Transfield hereby enter into a Joint Venture to co-operate and jointly prepare and submit to all Relevant Authorities all necessary applications, studies, reports, and determinations necessary to receive all requisite Approvals for the commencement of the Performance of the Works on the terms and conditions set out in this Agreement. Transfield and Kumagai shall have the right of access to Schedule 1 and may use it in accordance with the terms of this agreement." Schedule 1 specified property of the Initiators including plans, reports and drawings relating to the proposed Sydney Harbour Tunnel, all copyright in such documents and certain confidential information. "3. The parties agree that upon receipt of all such relevant Approvals for the commencement of the Performance of the Works, the parties will agree on some form of compensation to the Initiators and if they fail to agree within seven (7) days the consideration referred to in paragraph (ii) of Schedule 2 is payable immediately thereafter by Kumagai and Transfield to the Initiators and this Agreement shall continue to operate until the said consideration referred to in paragraph (ii) of Schedule 2 hereto is paid to the Initiators." Schedule 2 provided that the total consideration referred to in cl 3 should not exceed $4,000,000. Paragraph (ii) of Schedule 2 stated that the consideration should be payable as follows: "that within fourteen (14) days of the requisite Approvals to Perform the Works, the Joint Venture shall pay to the Initiators the balance of the consideration due to each of them in the proportions [WCP] 30%, [Mr] Hornibrook 35% and [the taxpayer 35% subject to any adjustment necessary taking into account paragraph (i)]." Other provisions of the JVA relevant for present purposes are these: 4. Upon such payment to the Initiators this Agreement shall automatically terminate and the Performance of the Works shall be carried on by Kumagai and Transfield and all of the property of the Initiators referred to in Schedule 1 and any property of a like nature existing with the Joint Venture will pass to Kumagai and Transfield. 5. The parties agree that the purpose and object of this Agreement is to bind the parties on the terms and conditions hereto until the happening of any of the events referred in to Clause 11.1. 6. EXCLUSIVITY The parties undertake that they or their related corporations as defined in the Companies (New South Wales) Code, 1981 shall not investigate or prepare any details or be associated in any manner other than as provided for in this Agreement with the submission of any details for any crossing of Sydney Harbour unless otherwise agreed in writing between the parties. ... 9. INITIAL REMUNERATION TO INITIATORS In consideration of the work undertaken by the Initiators up to the date of and including the entrance into this Agreement by the Initiators, the parties hereto agree and hereby give to the Initiators the consideration referred to in paragraph (i) of Schedule 2 herein and that such consideration is to be paid for jointly by Kumagai and Transfield. Paragraph (i) of Schedule 2 provided that on the signing of the JVA each Initiator had the right to require the Joint Venture to pay $35,000. This amount was to be deducted from the amount payable under paragraph (ii) of Schedule 2. "11 DURATION OF AGREEMENT 11.1 The commencement of this Agreement shall be deemed to have commenced on the day of signing hereof and shall terminate upon the happening of the following events, whichever shall be earlier: (a) the failure of the parties to obtain necessary Approvals for the Performance of the Works under conditions acceptable to the parties within two (2) years from the date hereof or such later date as may be agreed by the Initiators, in which case any of the parties hereto are at liberty to withdraw from the Joint Venture. However, the Initiators will not refuse any reasonable request for an extension of the period required to obtain the Approvals; (b) unanimous agreement by the parties that the Joint Venture should be disbanded; (c) all relevant approvals are received to Perform the Works and the provisions of Clause 3 and 4 apply. ... 18. DEFINITIONS 'Works' means a vehicular crossing of Sydney Harbour between the Warringah Expressway on the North Shore and Hickson Road on the South Shore." 30 The taxpayer was paid $35,000 on or shortly after the signing of the JVA. On 18 June 1987, he commenced proceedings in the Supreme Court of New South Wales against seven defendants: Transfield, Kumagai, WCP, Mr Hornibrook, the Minister for Public Works, the Commissioner for Main Roads and Sydney Harbour Tunnel Company Limited. The taxpayer's statement of claim pleaded that Kumagai and Transfield were obliged to pay him $1,365,000 pursuant to cl 3 and paragraph (ii) of Schedule 2 to the JVA. He sought judgment against Kumagai and Transfield for that amount. 31 The proceedings were settled by means of terms of settlement embodying consent orders. The consent orders provided that, upon Transfield and Kumagai undertaking to make the payments set out in the Schedule, the proceedings were to be stayed and, upon the making of the payments, the proceedings were to be discontinued. The Schedule provided for a payment of $100,000 on 24 June 1987 and a further payment of $1,265,000 on the execution of certain documents contemplated by the Sydney Harbour (Private Joint Venture) Act 1987 (NSW). Both amounts were paid to the taxpayer in the 1988 tax year and together constitute the Sum.

The Taxpayer's Notice of Objection 32 Pursuant to s 14ZU of the Taxation Administration Act 1953 ("TAA"), a taxpayer is required to state in a taxation objection, fully and in detail, the grounds upon which he or she relies. It is the Commissioner's decision to disallow the taxation objection which constitutes the decision reviewable by the AAT: TAA, s 14ZZ. Under s 14ZZK, the taxpayer is, unless the AAT orders otherwise, limited to the grounds stated in the taxation objection, and has the burden of proving that the assessment is excessive. 33 In a notice of objection against assessment prepared by the taxpayer's accountant, the taxpayer claimed that the Sum was not an income received for services rendered, but was "a capital receipt for the disposal of a pre-CGT [capital gains tax] receipt" and was thus not assessable under the ITA Act. The notice of objection was accompanied by two documents entitled, respectively, "Contentions Supporting Objection" and "Statement of Supporting Facts". 34 It is not necessary to set out the contents of those documents. At this stage, it is enough to note that two of the principal arguments relied on by the taxpayer in this Court were not expressly addressed in the taxpayer's notice of objection or the documents accompanying the notice. These were the submissions that · the Sum was paid by Transfield and Gumagai to the taxpayer, not in respect of services provided or to be provided by him, but in order to remove the taxpayer from further involvement in the Sydney Harbour Tunnel concept; or, alternatively, · the character of the Sum was to be determined, not by the terms of the JVA but by reference to a release incorporated in the terms of settlement resolving the litigation instituted by the taxpayer. 35 The Commissioner contended before this Court that the terms of the notice of objection prevented the taxpayer from raising these arguments on the appeal. He also relied on the fact that the arguments had not been put to the AAT. As we have noted, Mr Douglas conceded that neither argument had been put to the AAT. While there was an attempt in supplementary submissions filed by leave on behalf of the taxpayer to resile from this concession, there was nothing in those submissions to suggest that Mr Douglas had been incorrect in taking the course he did. This creates a difficulty for the taxpayer, to which we shall return.

The AAT's Reasons 36 The AAT, after recording the facts, observed that the terms of the JVA were "of critical importance". It set out at length the recitals, cll 2, 3, 4 and 9 and Schedules 1 and 2 (but not cl 6). 37 The AAT found that, from the inception of the Project, the taxpayer researched and worked on it specifically in order to profit from it. The fact that he was not formally qualified as an engineer was not to the point. He had considerable ability and imagination and the determination to persevere, notwithstanding that his work might have had little commercial value in the absence of the approvals referred to in the JVA. The AAT found that the motivation behind the Project was profit, despite the fact that the taxpayer could not have known precisely how and by whom the Project could be brought to fruition. 38 The principles to be applied in the present case have been authoritatively stated by the High Court in Federal Commissioner of Taxation v The Myer Emporium Limited (1987) 163 CLR 199. The AAT quoted passages from the judgment of the Court, including the following (at 209-211) (we have corrected errors of transcription): "Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a [transaction] entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a 'one-off' transaction preclude it from being properly characterised as income: Federal Commission of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355, at 366-367, 376. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. ... The important proposition to be derived from Californian Copper Syndicate v Harris (1904) 5 TC 159 and Ducker v Rees Roturbo Development Syndicate [1928] AC 132, is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction." 39 The AAT reiterated its finding that the taxpayer had embarked upon the Project for the purposes of gain and, more particularly, because his legal practice was not successful. While his research might have generated an asset of a proprietary nature, the property in question (as to the nature of which the taxpayer had adduced no evidence) was merely an incident of the Project. 40 The AAT rejected the taxpayer's argument that the JVA, properly construed, amounted merely to a sale of property. To categorise the JVA as a sale agreement would contradict its terms. Clause 4, which had the effect of transferring the property in Schedule 1, was merely an incident of the operation of the JVA. Further, it was common ground that the JVA was not a sham. Whether a receipt had the character of income was "to be ascertained by a consideration of the true character of the receipt (in the hands of the recipient) and the circumstances in which it received". The AAT added the following comment: "The payment of $1,365,000, which was the subject of the assessment was received in consequence of the institution of the Applicant of legal proceedings. That factor does not, however, affect the character of the receipt, and it retains the same character as it would have done had the payment been made directly under the agreement." 41 Finally, the AAT restated its conclusions as follows: "(a) The present circumstances can also fairly be described as an 'adventure in the nature of trade'. (b) The fact that the Applicant did not know when he commenced research on the Project how that research would be exploited or completed is not relevant. (c) The Project was relevantly a scheme for profit-making or a scheme for the derivation of assessable income. (d) The Tribunal finds that the Joint Venture Agreement does not (as contended by the Applicant) relate to a sale of property, but rather the provision of services. That some property may have been created in connection with those services is incidental."

The First Judgment 42 The primary Judge was critical of many aspects of the AAT's reasoning. For example, his Honour criticised both the AAT's failure to define the Project more precisely than "a certain large infrastructure project" and its failure to make findings as to what "the Project" was in the taxpayer's mind at the time he conceived it. The primary Judge also criticised the AAT's finding that the taxpayer had been legally represented in respect of the preparation and execution of the JVA. A finding in these terms paid insufficient regard to the taxpayer's evidence that he was presented with the JVA on a "take it or leave it basis" (although he appears to have been legally represented in the proceedings instigated by him). 43 His Honour pointed out that the AAT's reasons did not deal separately with the two separate bases for holding that the Sum constituted assessable income, namely ss 25(1) and 25A(1) of the ITA Act. He considered that the AAT had failed to make a positive determination that would bring s 25A(1) into play. His Honour also had difficulty in ascertaining the way in which the AAT had found that the Sum was assessable under s 25(1) as being income in accordance with ordinary concepts. In the absence of the identification of the "business" in respect of which the transaction was an extraordinary one-off transaction, he considered that it was difficult to see the relevance of Myer Emporium to the AAT's reasoning. 44 The primary Judge held that the AAT had failed to make findings that would support its conclusion that the taxpayer had engaged in an isolated business venture. It was necessary to identify the venture and what gave it a commercial character. The work performed by the taxpayer in creating the concept of a harbour tunnel crossing and undertaking research into its feasibility could not answer this description. "Although the evidence shows that the applicant entertained some hope of ultimate gain from his efforts, his testimony makes it quite clear that he foresaw no possibility of commercial return unless persons or organisations equipped with the necessary technical expertise and financial worth could be interested in joining with him in an appropriately structured business venture. I am satisfied that his endeavours, now under consideration, could not qualify, as a matter of law, for the relevant description. They were aptly and properly described as being in the category of 'pipe dream' or 'fairy tale'" (at 26). Nor could the dealings between the taxpayer, Mr Hornibrook and WCP constitute a business venture, since the contemplated business arrangements never came to fruition, but "dissolved in dispute and litigation". 45 Moreover, there was no transaction entered into by the taxpayer with the intention of making a gain. The evidence disclosed nothing that could be described as a "transaction". Nor did it establish that the taxpayer was seeking gain from a business deal. "He entertained a hope of ultimately sharing in an income producing venture. Nothing more" (at 27). 46 The primary Judge considered that the AAT had erred in concluding that there was a "profit-making scheme" for the purposes of s 25A(1) of the ITA Act. Far more would have been necessary to elevate the taxpayer's research into the category of a "scheme" than the work he undertook. In any event, the taxpayer's gain could not be said to have been generated by an operation undertaken for "the purpose of profit-making by the means giving rise to the profit" (Myer Emporium, at 209). If the taxpayer had a commercial purpose, it was to have an ongoing role in a "credible consortium" which would produce income for him. It could have been no part of such a purpose to end up in litigation and to enter into an agreement with strangers which provided for the payment of money on "remote contingencies after giving up all interest in the project". Nor could the taxpayer have contemplated that he would only receive the money after further litigation. 47 The primary Judge further held that the AAT had erred in finding that the Sum constituted income within ordinary concepts. This finding depended on a construction of the terms of the JVA which permitted the receipt to be characterised as a payment for services. The JVA was not the product of hard negotiations between the taxpayer and the other parties. He had been forced to accept the JVA on commercial grounds, with the threat of the costs order hanging over his head. In these circumstances, the terms of the JVA did not preclude the taxpayer from requiring the decision-maker to look to the "entire context in which the payment was made" to determine the character of the payment received by the taxpayer. The AAT had erred in not looking beyond the words of the JVA to the "whole factual matrix". 48 As has been noted, the primary Judge rejected a submission that he should determine that the Sum was a "windfall" gain and therefore not taxable. He set aside the AAT's decision and remitted the matter to the AAT for determination in accordance with his reasons. Should the Commissioner be Granted an Extension of Time to File a Notice of Appeal Against the First Judgment? 49 FCR, O 52, r 15(2) provides that notwithstanding the requirement in r 15(1) that a notice of appeal be served within twenty-one days, the Court "for special reasons may at any time give leave to file and serve a notice of appeal." See also FCR, O 52, r 15(5) and Form 54A, r 15(6); Jess v Scott (1986) 12 FCR 187 (FC), at 188. 50 In Jess v Scott, the Full Court (Lockhart, Sheppard and Burchett JJ) rejected a submission that r 15(2) should be given a restrictive interpretation. The Court said this (at 195): "What is needed to justify an extension of time is indicated in r 15(2) by the words 'for special reasons'. It is that there be shown a special reason why the appeal should be permitted to proceed, though filed after the expiry of twenty-one days. In that context, the expression 'special reasons' is intended to distinguish the case from the usual course according to which the time is twenty-one days. But it may be so distinguished (not necessarily will, for the rule gives a discretion) wherever the Court sees a ground which does justify departure from the general rule in the particular case. Such a ground is a special reason because it takes the case out of the ordinary. We do not think the use of the expression 'for special reasons' implies something narrower than this. ... It should not be overlooked that r 15(2) enables leave to be given 'at any time'; the 'special reasons' relevant to such a power cannot but describe an elastic test, suitable for application across a range of situations, from an oversight of a day to a neglect persisted in during a prolonged period. It would require something very persuasive indeed to justify a grant of leave after, for example, a year; equally, it may be said, something much less significant might justify leave where a party is a few days late. 'Special reasons' must be understood in a sense capable of accommodating both types of situation. It is an expression describing a flexible discretionary power, but one requiring a case to be made upon grounds sufficient to justify a departure, in the particular circumstances, from the ordinary rule prescribing a period within which an appeal must be filed and served." 51 Mr Douglas, in opposing the Commissioner's application for an extension of time, pointed out that the application had been made nearly one year after the first judgment. Moreover, the solicitor's explanation for failing to advise the Commissioner to appeal went to his understanding of the terms of the order for remittal, rather than providing an explanation as to why no appeal was brought in relation to the order setting aside the AAT's decision. 52 These submissions have considerable force. In particular, as the Court observed in Jess v Scott, something very persuasive is required to permit an appeal where a year has elapsed since the judgment under challenge. The solicitor's evidence gives an explanation for the delay by the Commissioner in filing a notice of appeal, but does not entirely explain why the Commissioner apparently decided not to attempt to uphold the AAT's decision (the position now adopted by the Commissioner). Ordinarily these factors would lead to the rejection of the Commissioner's application. 53 This case is, however, very unusual. While the orders made by the primary Judge in consequence of the first judgment were final, the taxpayer succeeded in reopening those orders and obtaining fresh orders. The second judgment effectively disposed of the Commissioner's claim that the Sum formed part of the taxpayer's assessable income by virtue of ss 25(1) and 25A(1) of the ITA Act. In substance, therefore, the proceedings before the primary Judge were not finally resolved until the second judgment was delivered. Moreover, the second judgment built on the first, as his Honour revisited the reasoning that led to the orders made in the first judgment. 54 In our opinion, it is in the interests of justice to grant the Commissioner an extension of time in which to file a notice of appeal, for four reasons. First, having regard to the history of the matter, to treat the two judgments as if they were self contained is artificial. Secondly, if in dealing with the appeal from the second judgment, the Court were to come to the conclusion that the first judgment incorrectly set aside the AAT's decision, the Court should be able to make orders giving effect to that conclusion. It cannot be in the public interest for the matter to be remitted to the AAT, if the AAT's decision ought not to have been set aside in the first place. Thirdly, if the matter were remitted to the AAT, there is every prospect that it would come back to this Court and that some of the issues dealt with in the first judgment might have to be reagitated. If the first judgment incorrectly set aside the AAT's decision, a determination to that effect is likely to save a great deal of time and costs. Fourthly, while an order extending time for the filing of an appeal would of course expose the taxpayer to loss of the benefit of the orders made by the primary Judge, Mr Douglas did not suggest that the lapse of time had created any prejudice to the taxpayer in addressing the issues sought to be raised by the Commissioner. 55 In the very unusual circumstances of this case, we think it appropriate to extend the time for filing the Commissioner's notice of appeal until the second day of the hearing and to regard the notice as having been filed in Court on that day.

The Submissions 56 The Commissioner submitted that the findings of the AAT, both in relation to s 25(1) and s 25A(1) of the ITA Act,disclosed no error of law. The AAT had applied the correct tests and was entitled to reach the conclusions it did. Mr McGovern contended that the primary Judge had trespassed into the fact-finding process in making his criticism of the AAT's reasoning process. The issue was not whether the Court would have reached the same conclusion as the AAT on the factual material available to it, but whether the AAT had committed an error of law. 57 In particular, it was submitted by Mr McGovern that the AAT had made proper use of the JVA for the purpose of characterising the nature of the Sum received by the taxpayer. There was no suggestion that the JVA was a sham and the taxpayer had abandoned his claims that he had entered the JVA under duress. It was not to the point that the taxpayer had not provided further services to Transfield and Kumagai after the JVA. The AAT was entitled to find that the Sum was paid primarily in respect of the taxpayer's promise to provide services, by joining in the preparation and submission of all documents necessary for the requisite approvals. 58 Mr McGovern submitted that the primary Judge's characterisation of the Sum as a windfall gain overlooked the taxpayer's evidence, which identified the profit-making purpose underlying his research and his efforts to establish a joint venture. Moreover, the fact that the amount the taxpayer ultimately received was greater than he could have reasonably expected did not answer the question of whether the Sum was income according to ordinary concepts or a profit arising from the carrying out of any profit-making undertaking or scheme. The JVA was a mechanism foreseen by the taxpayer as a means of fulfilling his objective to reap rewards from his endeavours. 59 The taxpayer submitted that the primary Judge was correct in identifying errors of law in the AAT's reasons. Mr Douglas contended that a mere belief or expectation that a particular activity might produce a financial gain or benefit sometime in the future, however remote, is insufficient to establish that a payment relating to that activity is income. The prospect of gain from the taxpayer's activities was fanciful, even after Mr Hornibrook and WCP had been introduced to the concept. The Sum received by the taxpayer was not in accord with his expectation or belief. Thus it was neither income within s 25(1) of the ITA Act nor a profit arising from the carrying out of a profit-making undertaking or scheme within s 25A(1) of the ITA Act. 60 Mr Douglas further submitted that the AAT had placed too much weight on the terms of the JVA. The JVA was not a negotiated document, but one which the taxpayer had no "real choice" but to sign. Moreover, having regard to the hostility between the taxpayer and the other parties to the JVA, the possibility that the JVA would be performed according to its terms was remote. 61 The taxpayer also argued that s 25A(1) of the ITA Act could not apply to the facts as found by the AAT. The AAT had not identified the relevant "scheme" and none could be found. Further, even if the taxpayer's prospects of gaining a return from his activities was something more than a "pipe dream", that return could not be characterised as a "profit". 62 Finally, the taxpayer raised by way of notice of contention the two arguments to which we have already referred. · The Initiators were compensated for the work due prior to the execution of the JVA by the payment of $35,000 pursuant to cl 9. The Sum was "for" something other than the services already compensated for by the payment pursuant to cl 9. It follows that the Sum was paid in return for the obligations incurred pursuant to cll 2 and 6 of the JVA. Clause 2 (so it was said) did not oblige the taxpayer to do anything. Clause 6 was in the nature of a covenant in restraint of trade. It followed that the Sum paid to the taxpayer was capital, or, alternatively, a conglomerate amount made up of indistinguishable income and capital elements without dissection or apportionment. · Alternatively, the Sum was paid pursuant to the terms of settlement and not pursuant to the JVA. Neither the whole nor any part of the Sum could be attributed solely to any consideration payable under the JVA. On this argument, the Sum was also a conglomerate amount made up of indistinguishable income and capital elements without dissection or apportionment. If the taxpayer succeeded in making good either of these contentions, consideration would need to be given to the possibility of apportionment of the Sum or, alternatively, if there is no basis for dissection or apportionment, to whether the whole of the receipt is to be treated as one of capital in accordance with authorities such as Allsop v Federal Commissioner of Taxation (1964) 113 CLR 341 and Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 88 ATC 4126.

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.

Reasoning: The New Contentions 75 As we have explained, the taxpayer raised two arguments by way of notice of contention that had not been put to the AAT. Although the Commissioner contended that the taxpayer was precluded by the terms of his notice of objection from raising these arguments, we are content to proceed upon the assumption that the taxation objection was expressed at such a level of generality that those matters are within its umbrella. Whether that assumption accords with the facts would require a consideration of authorities such as Szajntop v Federal Commissioner of Taxation (1993) 42 FCR 318, an issue which the submissions did not address in detail. 76 The AAT is required, subject to immaterial exceptions, to give reasons orally or in writing for its decision: AAT Act, s 43(2). Where written reasons are given, the reasons are to include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based: AAT Act, s 43(2B). 77 The issue which we have to decide is whether the AAT made an error of law in failing to find that the assessment was excessive on the grounds now advanced by the taxpayer, notwithstanding that these grounds were not exposed to the AAT for its consideration. This raises the question of whether, in the context of a statute which places the burden of proof on the taxpayer of proving that an assessment is excessive, the AAT is bound to consider for itself and to make findings of fact based on a contention which may be open on the evidence before it, albeit that a contention to that effect is neither formulated nor advanced by the taxpayer. 78 Kuswardana v Minister for Immigration & Ethnic Affairs (1981) 54 FLR 334 was relied upon by the taxpayer. That was a case in which the applicant's status as an immigrant was a precondition to the application of the statutory provisions which the AAT was endeavouring to apply. The material before the AAT was such as to throw up, as being a matter which obviously required consideration, whether the applicant was an immigrant. Bowen CJ said this (at 343): "...there was a clear statutory precondition upon which the Tribunal had to be satisfied and enough material and evidence before it to raise the issue independently of the parties' submissions. In these circumstances it was an error of law not to consider and decide the issue of immigration status." See also at 348-349, per Fox J and at 354-355, per Deane J. 79 But, as the passage cited makes plain, that was a case in which the terms of the statute were such that the Tribunal was bound to consider and decide whether the applicant was an immigrant. A failure to take into account a matter which the Tribunal was bound to consider constitutes an error of law. Kuswardana is an illustration of the principle expressed by Lord Greene M R in Associated Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, at 229: "...a person entrusted with a discretion must, so to speak, direct himself properly in law. He must call his own attention to the matters which he is bound to consider." Cf Minister for Aboriginal Affairs v Peko Wallsend Ltd (1987) 162 CLR 24, at 39. It may also be observed that no question of burden of proof arose in Kuswardana. 80 In Federal Commissioner of Taxation v Raptis (1989) 89 ATC 4994, at 4999, Gummow J observed that: "[t]here must be some difficulty...in finding an 'error of law' in the failure in the Tribunal to make a finding first urged in this Court." Raptis was cited with approval by the Full Court in Secretary, Department of Social Security v Cooper (1990) 26 FCR 13, at 18. In Federal Commissioner of Taxation v Perkins (1993) 93 ATC 4524, the issue on which the Commissioner sought to rely on appeal had not been brought to the attention of the AAT as a matter for its decision. Davies J, with whom the other members of the Court concurred, said (at 4526): "I am of the view that no error of law has been demonstrated in the manner in which the Tribunal dealt with the matter. It was the role of the Tribunal to decide questions of fact and, before the Tribunal, counsel for the Commissioner identified one fact alone as the crucial fact which had not been disclosed. No other fact was so identified or relied upon. The Tribunal did not err in law in failing to regard as a material fact a fact which counsel for the Commissioner failed in his submissions to the Tribunal to contend was material." 81 Ferriday v Repatriation Commission (1996) 69 FCR 521 (Lee J), at 528, and Maretech CMDL Pty Ltd v Federal Commissioner of Taxation (1996) 97 ATC 4033 (Nicholson J) are decisions of single judges of the Court which have proceeded on the basis that no question of law arises in relation to a matter with which the AAT was not invited to deal and in respect of which it did not make material findings of fact. The authorities were reviewed by Carr J in Paull v Department of Immigration & Multicultural Affairs (unreported, Federal Court, 23 October 1998), where his Honour said (at 11): "It is true...that the Tribunal is at liberty to inform itself of any matter and in any manner that it thinks appropriate. However, that does not mean, in my opinion, that the Tribunal was obliged to consider the relevance of the alleged representation to an argument based on estoppel which was never put to it. That issue was not a precondition to the exercise of the Tribunal's discretion and nor was it, in my view, sufficiently fundamental to require it to make its own enquires. This particularly so, given that the applicant was represented before the Tribunal by counsel." In a slightly different context, in Commissioner of Taxation v Osborne (1990) 26 FCR 63, a Full Court recognised that the duty arising from s 43(2B) of the AAT Act is not necessarily breached by a failure to advert to matters which were not argued before the AAT. 82 As a matter of general administrative law, it has long been accepted that it is no part of the duty of the decision-maker to make out a case for the applicant: Prasad v Minister for Immigration & Ethnic Affairs (1985) 6 FCR 155, at 170, per Wilcox J. In a statutory context in which a taxpayer seeking to challenge an assessment is required to specify the grounds of his objection, and bears the burden of proving that it is excessive, as a general rule it cannot be said that the AAT is bound to make findings of fact and rulings on issues not relied upon by the taxpayer in the proceedings before it. It follows that, as a general rule, there is no error of law if the AAT fails to address issues of fact and law not the subject of argument by the taxpayer. 83 It follows from what we have said that we do not see the problem facing the taxpayer as simply being that he has sought in this Court to raise fresh arguments not put to the AAT. It is not simply a matter of whether the AAT would have found in favour of the taxpayer had the arguments been put and whether raising those arguments before the Court creates "prejudice" to the Commissioner. The issue in the present case is, in the context of the relevant provisions of the TAA, whether the AAT erred in law by not addressing the arguments now sought to be raised: cf Australian Fisheries Management Authority v PW Adams Pty Ltd (No. 2) (1996) 66 FCR 349 (FC). In our view, it did not.

Other Issues 84 Since we have concluded that there was no error of law in the AAT's decision that the Sum was income within s 25(1) of the ITA Act, there is no need to consider the appeal or application for leave to appeal from the second judgment.

Conclusion 85 The Commissioner should be granted an extension of time until 23 February 1999 to file an appeal from the first judgment. The notice of appeal from the first judgment filed in Court on 23 February 1999 is to be taken as having been filed in accordance with the extension of time. 86 The Commissioner's appeal against the first judgment should be allowed. This must carry with it the consequence that the Commissioner's appeal against the second judgment should also be allowed, since the second judgment proceeded on the basis (which we have found to be erroneous) that the AAT had erred in law in confirming the assessment. It follows that the orders made by Foster J on 17 October 1997 and 9 September 1998 should be set aside. In lieu thereof, the following orders should be made: 1. Appeal dismissed. 2. The taxpayer pay the Commissioner's costs. 87 Although the orders made by the primary Judge in consequence of the second judgment have been set aside, it is necessary to dispose of the taxpayer's appeal from that judgment. 88 The appropriate order is that the taxpayer's appeal from the second judgment be dismissed, with costs. It is not necessary to deal with the taxpayer's application for leave to appeal from the second judgment. The appropriate order is that that application be dismissed.

I certify that the preceding eighty-eight (88) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Hill, Sackville & Hely.

Associate: Dated: 26 March 1999 Counsel for the Commissioner of Taxation: Mr D McGovern

Solicitor for the Commissioner of Taxation: Australian Government Solicitor

Counsel for the Taxpayer: Mr F Douglas QC with Mr J Sexton and Mr A C Henderson

Solicitor for the Taxpayer: A E Dunne Date of Hearing: 22 February 1999

Date of Judgment: 26 March 1999