Hepples v Commissioner of Taxation

Hepples v Commissioner of Taxation - [1991] HCA 39 - HCA 1990 case summary — Zoe

[58]

The above extract constituted the foundation of Rich and Dixon JJ's decision in Anderson. It represents a general statement of the "principles of construction applicable to an Act which imposes a tax or duty" (see, eg, Western Australian Trustee Executor & Agency Co Ltd v Comr of State Taxation (WA) (1980) 147 CLR 119, at 126; 11 ATR 330; 32 ALR 639). It is supported by strong reasons in both law and common sense. For one thing, statutes imposing taxation derogate from the ordinary rights of the citizen in that they represent a compulsory exaction of money. For another, the framing of the provisions of such legislation is essentially within the control of government. Indeed, in so far as provisions of the Act are concerned, it would seem that, particularly in relation to technical matters, the content and drafting of such provisions may, on occasion, reflect the advice and views of officers of the Australian Taxation Office itself (see, eg, Trevor Boucher, "Living with Tax Reform • The Taxation Office Approach", "Taxation in Australia", Vol 22, 1988, pp 652-3 ). In circumstances where the heavy burden of legal costs is likely to constitute an insurmountable obstacle to the challenge by the average taxpayer of an assessment in the courts and where successive administrations have allowed the Act to become a legislative jungle in which even the non-specialist lawyer and accountant are likely to lose their way in the search to identify the provisions relevant to a particular case, the least that such a taxpayer is entitled to demand of government is that, once the relevant provisions are finally identified, a legislative intent to impose a tax upon him or her in respect of a commonplace transaction will be expressed in clear words. So to say is not, of course, to deny that complicated and even obscure taxation provisions may be necessary either to deal with technical situations or to prevent the avoidance of tax by artificiality of form or other device. However, it could not realistically be suggested that there would be any difficulty at all in plainly expressing a legislative intent that an amount received by an employee as consideration for a promise to refrain from competing with his or her employer or divulging or using the employer's information after the termination of the employment should be included in the employee's assessable income for income tax purposes.

[59]

It has not been suggested that the contractual provisions providing for the payment of the $40,000 to the appellant in the present case represented a device to conceal what was in substance a payment of some other kind or were otherwise other than genuine. Traditionally, a genuine payment to an individual employee as consideration for covenants in restraint of his or her freedom to compete or to use or divulge certain information during a specified number of years after the termination of employment has not been seen as income in the ordinary sense for the purposes of s 25(1) of the Act (see, eg, FCT v Woite (1982) 31 SASR 223, at 226-7; 13 ATR 579; Dickenson v FCT (1958) 98 CLR 460, at 492; 7 AITR 257). Nor does such a payment fall within the scope of the central provisions of Pt IIIA (Capital Gains and Capital Losses) of the Act which include gains or net receipts resulting from a "disposal" (in the sense of a change "in the ownership") of an "asset" acquired on or after 20 September 1985 in the assessable income of "the person who owned the asset immediately before the disposal took place" (see, in particular, ss 160C(1), 160L(1), 160M(1) and, since 1990, s 160M(1A) and, generally, Professor Ross Parsons, "A Survey of the General Provisions of Part IIIA of the Income Tax Assessment Act", Australian Tax Forum, Vol 4, 1987, p 357, at pp 360-6 ). It is not argued on behalf of the Commissioner that the payment in the present case constituted income within the ordinary meaning of the word or that it fell within the central operative provisions of Pt IIIA. The Commissioner's argument is that, even though the transaction in the present case did not involve any "change" of ownership of any identified asset, the payment of $40,000 which the appellant received as consideration for the restraint upon his freedom to compete and to use or divulge certain information after the termination of his employment is brought within Pt IIIA by reason of the operation of s 160M(6) or s 160M(7) to produce a deemed "disposal" of an "asset" by the appellant for the purposes of that Part. On the Commissioner's argument, the $40,000 was received by the appellant as consideration for that "disposal" and is included in the taxpayer's assessable income by reason of the combined operation of the relevant sub-section and ss 160Z(1), 160ZC(1)and 160ZO(1). In the light of what has been said above about the settled principles governing the applicability of taxation provisions at least in cases not involving contrived artificialities of form, the Commissioner's submission can only be accepted if the relevant provisions of Pt IIIA of the Act express in "clear" or "plain" or "unambiguous" terms a legislative intent that they should be construed in a way which would (subject to any allowable expenses) include in the assessable income of an employee an amount received from his or her employer as consideration for covenants in restraint of his or her freedom to compete or to use or divulge certain information after the termination of employment. With due respect to those who see the matter differently, it appears to me to be plain to the point of incontrovertibility that the words which the Parliament has seen fit to use cannot properly be said to express such a legislative intent with even tolerable clarity. Indeed, when the provisions of s 160M(6) and s 160M(7) are read in the context of the other provisions of Pt IIIA, it appears to me that the preferable view is that any coherent legislative intent would probably have been to the contrary. I turn to explain why that is so.

[60]

Neither s 160M(6) nor s 160M(7) operates, of itself, to include anything in the assessable income of a taxpayer. All the two subsections do is to deem that certain acts or transactions constitute "disposals" for the purposes of Pt IIIA. For present purposes, what is included in the assessable income of "the taxpayer" is "a net capital gain" which has "accrued to a taxpayer in respect of the year of income" (see s 160ZO(1)). Under s 160ZC(1), a "net capital gain" will not have accrued to a particular taxpayer in a tax year unless "a capital gain or capital gains accrued to the taxpayer" during that tax year. Such "a capital gain" will "have accrued to the taxpayer" only where "an asset … has been disposed of during the year of income" (s 160Z(1)) (emphasis added in each case). In that context, it is obviously critical to an understanding of Pt IIIA to identify "the taxpayer" to whom the "capital gain" or "net capital gain" "shall be deemed … to have accrued" (s 160Z(1)) or "shall be taken to have accrued" (s 160ZC(1)). At least prima facie, that identification is effected by s 160C(1) which expressly and unequivocally provides that a "reference" in Pt IIIA "to a taxpayer, in relation to an asset that has been disposed of or in relation to a capital gain … that accrued" is, subject to a presently immaterial exception (see ss 160C(1)(b), 160V(1)and 160W), a reference "to the person who owned the asset immediately before the disposal took place". That definition of a taxpayer specifically for the purposes of Pt IIIA provides strong support for the view that it was the legislative intent that Pt IIIA should apply only to a case where one can identify a relevant "asset" which the suggested taxpayer owned "immediately before" the relevant "disposal" took place. The fact that the definition in s 160C(1) applies both to a reference to a taxpayer "in relation to an asset that has been disposed of" and to a reference to a taxpayer "in relation to a capital gain" provides no reason for denying the above effect to the sub-section since Pt IIIA contains references to a taxpayer in each of those two contexts (see, eg, ss 160Z(1)(a)and 160ZC(1)). Indeed, since a receipt can only, in a case such as the present, be brought to assessable income under Pt IIIA by a process which includes both an actual or deemed "disposal" of an "asset" by "a taxpayer" and the attribution of a "capital gain" and a "net capital gain" to "a taxpayer", the express provision of s 160C(1) that a reference to "a taxpayer" in relation either to "an asset that has been disposed of" or to "a capital gain … that accrued" has the effect at two distinct levels that, at least prima facie and subject to the qualification contained in s 160C(1)(b), Pt IIIA does not bring a receipt to assessable income in a case where the person alleged to be liable to tax was not the "owner" of a relevant "asset" immediately before the actual or deemed "disposal". Put differently, if one can identify no such "owner", there is, at least prima facie, no "taxpayer" either in relation to the actual or deemed "disposal" of the relevant asset or in relation to the "capital gain" under s 160Z(1) or the "net capital gain" under s 160ZC(1).

[61]

Section 160M(6) must be read in conjunction with s 160R which provides that, for the purposes of Pt IIIA, "a reference to a disposal of an asset includes, unless the contrary intention appears, a reference to a disposal of part of an asset". Where what is disposed of is "part" of an already existing asset, s 160R applies. Section 160M(6) applies only where there is a "disposal" of an "asset" which "did not exist (either by itself or as part of another asset) before the disposal" but which "is created by the disposal". It was argued on behalf of the Commissioner that the words of s 160M(1) encompassed any case in which an "asset" (eg a "chose in action" or "any other right" or "any other form of incorporeal property": see s 160A) is "created" by mutual dealings regardless of whether the person allegedly liable to tax was at any time the owner of any relevant "asset". One difficulty about that construction of s 160M(6) is that it involves giving to the word "disposal", where first occurring in the subsection, a meaning that lies ill with the ordinary meaning of the word and with the general scheme of Pt IIIA. Both that ordinary meaning and that general scheme lend support for the view that the section should be confined to the case where the "disposal" of the newly-created "asset" involves something done by the suggested taxpayer as the actual or purported owner of something. Another and greater difficulty with that wide construction is that, for the reasons given in the preceding paragraph, it either attributes to s 160M(6) a pointless operation in a case such as the present where the person allegedly liable to tax owned no relevant asset immediately before the deemed "disposal" or requires that s 160Z(1), s 160ZC(1) and s 160ZO(1) be construed so as to include in assessable income a net capital gain which is not caught if those subsections are construed in accordance with the plain and unqualified direction of s 160C(1). In these circumstances, it appears to me that the above-mentioned "principles" applicable to the construction of taxation provisions compel the conclusion that s 160M(6) should, in the context of the other provisions of Pt IIIA, be construed as applying only to a case where the newly-created "asset" to which it refers arises from, or involves the use or exploitation of, an existing "asset" owned by the person alleged to be liable to tax "immediately before the disposal". That construction of those provisions substantially conforms with the general context provided by the other provisions of Pt IIIA (particularly s 160C(1)), with the use of the word "disposal" in the opening words of the subsection and with the implication of ownership which is implicit in the ordinary meaning of the word "asset" and of the word "property" in the definition of "asset" (see s 160A). It is also supported by s 160L which confines the operation of Pt IIIA to an asset that "immediately before the disposal took place, was owned by … a person" and by the absence of any express general provision that operates to deem the existence of a prior "ownership" in the circumstances contemplated by s 160M(6) or, for that matter, those contemplated by s 160M(7); cf s 160ZZC(3)(b). In that regard, I do not construe the provisions of s 160U(6) as being applicable to create a deemed ownership for the purposes of ss 160Cand 160L. Nor do I consider that, in the context of taxing provisions, it is permissible to read s 160M(6) in conjunction with ss 160M(1) and 160M(2) as impliedly creating a deemed ownership for the purposes of ss 160Cand 160L.

[62]

As has been said, s 160M(6) must be read in conjunction with s 160R. In the Federal Court, the distinction was made between an asset which was "part" of an existing asset and an asset which was "carved out of" an existing asset. The example of an easement was given. Strictly speaking, it is unnecessary that I express any view in relation to that distinction since it has not been suggested that, on any approach, any relevant "asset" was owned by the appellant in the present case or that the Full Federal Court was mistaken in holding that the appellant's "right to work" was not an "asset" for the purposes of Pt IIIA. I should, however, indicate that, in a context where s 160R (when read with s 160ZI) allows and s 160M(6) precludes an allowance being made in respect of a proportion of the cost base of the existing asset, I have difficulty in accepting that it would have been the legislative intent that s 160M(6) (and not s 160R) should apply to every case where there is "carved out of" an existing asset something which could not previously be identified as already independently existing as a distinct "part" of that asset. It seems to me that the preferable approach is to treat s 160R as applying to a case where there has been a disposal, in the sense of a change of ownership, of any part of the rights involved in the ownership of an asset, those rights themselves constituting an asset for the purposes of Pt IIIA. On that approach, the grant of an enforceable easement or profit a prendre would come within s 160R as a disposal of part of the pre-existing right to use or exploit and the calculation of any resulting "capital gain" would make allowance for any resulting diminution in the value of the subject property. On the other hand, if all that was involved was, for example, the creation of a personal right in relation to the use of the taxpayer's pre-existing asset in circumstances where the creation of that right did not involve any "disposal" of any of the pre-existing rights of ownership with resulting diminution in value of the residual asset (eg a mere personal licence to enter which was revocable at will), the case could be of a type which fell within the provisions of s 160M(6) .

[63]

The provisions of s 160M(7) raise comparable problems of construction to those raised by s 160M(6). Their prima facie effect, if they be construed without regard to context, is that any person who receives, or becomes entitled to receive, an amount of money or other consideration by reason of an act or transaction in relation to an asset or an event affecting an asset is deemed, for the purposes of Pt IIIA, to have disposed of "an asset created by the disposal" in consideration of the money or other consideration so received. Such a construction would embrace cases where the person receiving the money or other consideration had never been the owner of any relevant asset and was therefore, by reason of the express provision of s 160C(1), not a "taxpayer" for the purposes of s 160Z(1), s 160ZC(1) or s 160ZO(1). The result would be that the operation of the subsection would be pointless in a case where the suggested "taxpayer" was not the owner of the pre-existing asset unless one could extend the scope of ss 160Z(1), 160ZC(1)and 160ZO(1) in disregard of the express direction of s 160C(1). For reasons corresponding to those given in relation to s 160M(6) and subject to one possible qualification, I consider that it is not permissible so to extend the scope of ss 160Z(1), 160ZC(1)and 160ZO(1) and that the provisions of s 160M(7) should be construed as confined to a case where the person who has received the money or other consideration was, immediately before the deemed disposal, the owner of the pre-existing asset referred to in the subsection. When s 160M(7) is so construed, it is apparent that it is not applicable to the present case where the suggested existing "asset" for the purposes of the subsection is the goodwill and trade secrets which were owned by the employer and not by the appellant. The possible qualification, which is not relevant for the purposes of the present case, is that it may be arguable that the provisions of the subsection should be construed as applying to a case where the person allegedly liable to tax, while not the owner of a relevant pre-existing asset, has received consideration for an act purportedly done as such owner or for an act done for or with the licence of the owner.

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