Hepples v Federal Commissioner of Taxation

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION No QG 78 of 1995 BETWEEN: THOMAS JOSEPH CALLOW Applicant AND: COMMISSIONER OF TAXATION Respondent AND: IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION No QG 79 of 1995 BETWEEN: JANETTE CALLOW Applicant AND: COMMISSIONER OF TAXATION Respondent CORAM: Kiefel J DATE: 27 March 1997 PLACE: Brisbane REASONS FOR JUDGMENT The applicants, Mr and Mrs Callow, were at all material times the registered proprietors of land near Townsville upon which a service station was constructed. The land was leased by them to a company, Callow Nominees Pty Ltd ("the Company") of which they were the sole directors and shareholders. The lease agreement refers to a tenancy of three years duration, from 1 August 1982. It does appear that it was assessed to stamp duty in 1988, but this is not sufficient to permit a conclusion as to whether there was any further agreement to extend the initial term under the lease. If it be relevant the parties agree that, in the period in question, the Company was holding over as tenant. The Company carried on the business of service station proprietor in its capacity as trustee of the TJ and J Callow Family Trust, which was constituted in 1981. This business was managed by a person employed for that purpose, Mr and Mrs Callow residing and working on their cane farm which was situated some 100 kilometres from the service station. Prior to 1992 an agreement existed between Caltex and the Company for the supply of Caltex's petroleum products for resale at the service station. The agreement, dated 23 February 1989, was for a term of 24 months, although it provided that it was to continue in force until terminated by either party on three month's notice. There is nothing to suggest that that occurred. The Company, Caltex and the applicants entered into further negotiations to continue their business relationship. The outcome of them was a new contract between the Company and Caltex (the "Reseller Supply Contract") and an agreement, with which the Court is presently concerned, between the applicants and Caltex dated 30 March 1992. The Reseller Supply Contract, which was expressed to have commenced on 28 February 1992, was for a term of three years but was expressed to remain in force until termination by notice. It also provided that Caltex might terminate the agreement in the event that the Company "assigns, leases, licences, transfers or parts with possession or control of the service station or the business conducted thereon" or in certain circumstances of breach of the agreement by the Company. It contained provisions for the purchase of petroleum products from Caltex for the purpose of resale and for the provision of pumps and other equipment by Caltex. The Company undertook to sell only products bearing the Caltex brand or make. One may observe that, in general terms, the agreement between the applicants and Caltex was intended to secure Caltex's position under the Reseller Supply Contract. Mr and Mrs Callow were not only the owners of the land upon which the service station was situated but controlled the Company. It has however been accepted by the respondent Commissioner that they entered into the agreement with Caltex in their personal capacity and not as officers of the Company. The agreement provided, by clause 2.1, that: "In consideration of the payment by the Grantee [Caltex] of the sum of THREE HUNDRED THOUSAND DOLLARS ($300,000) which the Grantee agrees to pay to the Grantors [the applicants] on 28th February 1992, the Grantors covenant with the Grantee that they will during the Term:- (a) not exercise, carry on or be in any manner whatsoever either directly or indirectly concerned or interested in either by themselves or in partnership with or as manager, servant or agent for any person other than the Company a service station business; (b) not cause or permit the Land to be leased or sub-leased to or occupied by any person other than the Company; (c) procure that the Company shall not enter into any Re-seller Supply Contract or Franchise Agreement with any person other than the Grantee; (d) procure that there is no alteration in the officers of and the shareholders in the Company, provided that in the event of death or other incapacity preventing any such existing officer from holding office, the Grantors shall appoint as officers of the Company only such persons as the Grantee may approve; and (e) not sell or otherwise deal with the Land in any manner without the prior written consent of the Grantee." It went on to provide for its automatic termination, in the event that the Reseller Supply Contract came to an end for any reason other than the default of Caltex, and contained a formula for the calculation of the sum which was then to be repaid. The Commissioner disallowed the applicants' objections to the inclusion of one-half of the sum paid in each of their separate assessable income for the year ending 30 June 1992. The question which now remains on the appeal is as to whether s 160M(7) of Part IIIA ("Capital Gains and Capital Losses") Income Tax Assessment Act 1936 (Cth) has operation. The statutory provision was considered by the Court in Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492 and a question which here arises is whether it provides reasoning binding in the circumstances of this case. The subsection was subsequently amended (Act No 191 of 1992). The Statutory Provision Subsection 160M(7) of the Income Tax Assessment Act provided at the relevant time, and prior to its amendment in 1992, that: "(7) Without limiting the generality of subsection (2) but subject to the other provisions of this Part, where - (a) an act or transaction has taken place in relation to an asset or an event affecting an asset has occurred; and (b) a person has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration - (i) in the case of an asset being a right - in return for forfeiture or surrender of the right or for refraining from exercising the right; or (ii) for the use or exploitation of the asset, the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal - (c) the money or other consideration constitutes the consideration in respect of the disposal; and (d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset." Part IIIA is concerned with the inclusion, in the assessable income of a taxpayer, of a net capital gain which has accrued to that taxpayer in the relevant year of income. This occurs where an asset has been disposed of and the disposal exceeds the cost base to the taxpayer, in respect of that asset (s 160ZC(1)). Subsection (7) (and sub-s(6) also, but it is not presently relevant) does not relate to the actual disposal of an asset or assets but deems certain acts, occurrences or events, in connexion with assets, disposals for the purpose of the Part. As Hill J explained in Commissioner of Taxation v Cooling (1990) 22 FCR 42, 69-70, sub-s (7) deals with the situation where an asset of a taxpayer is not disposed of in the ordinary sense as a result of a transaction or other event and where there is no interest created out of it but that, nevertheless, there is something which related to or affected that asset which gave rise to money being payable. So far as concerns a transaction to which s 160M(7) may apply, the taxpayer may still retain the asset. Therefore it will not be appropriate to allow any cost base. His Honour went on to conclude that it must be the taxpayer's asset, to which the subsection refers, and not the assets of some other person. That is the principal area of contention on this appeal. Submissions on the Appeal The assets in question It was common ground that the relevant act, transaction or event must be the entry into the agreement between the applicants and Caltex, or the obligations which were assumed under it. This identification of it assumes some importance in connection with another submission to which I shall later refer. The first point of departure was as to whose asset the subsection might be taken to refer. The applicants submitted that it refers only to an asset owned by the taxpayer. Such a view is supported by the reasoning of Hill J in Cooling above, and in the Full Court (in dissent) in Hepples v Federal Commissioner of Taxation (1990) 22 FCR 1, 38 and of Deane J in Hepples, CLR 516-518. The submission for the Commissioner was that regard could be had to the assets, namely the goodwill and trade connection, of Caltex and that this approach was supported by a majority of the Court in Hepples. In Hepples, as here, the Commissioner identified the assets having the relevant connection with, or being affected by, the covenants made by the taxpayer, as the assets of the party paying. The taxpayer had promised to restrict his right to trade and to maintain, as confidential, special processes and trade secrets of his employer, after the termination of his existing employment agreement and the conclusion of his employment. It was, more particularly, the goodwill of the employer that the Commissioner contended was the asset to which the subsection might refer. And, in the view of Dawson and Toohey JJ, it did so because it protected or enhanced them. Deane J however reasoned that it must be the taxpayer whose asset was the subject of the deemed disposal. Whilst acknowledging that the language of the subsection was capable of referring to assets owned by others, a reference to other sections of the Part showed that this was not so. The definition of "taxpayer" in s 160C(1), read in conjunction with subsections 160Z(1), 160ZC(1) and 160ZO(1), did not accommodate the possibility of the relevant assets, the subject of disposal, being owned by a person other than the taxpayer. To hold to the contrary, in his Honour's view, would be an impermissible extension of the scope of those subsections (516). The possible qualification added by his Honour (517), that the subsection might apply to a person acting as owner or with the licence of the owner, is not presently relevant. Hill J in Cooling (69) also observed that the two examples in paragraphs (b)(i) and (ii) of subsection (7), which contemplated situations where money was paid in return for surrender, forfeiture or non-exercise of an asset, being a right, or for the use of an asset, tend also to suggest that the relevant asset was intended to be that of the taxpayer, and not some other person. The conclusion reached by Deane J, and by Hill J, by a construction which has regard to the operation of the Part as a whole and its central purpose is, in my view, to be preferred. I would apply it to the facts of this case if any majority decision in Hepples did not require me to apply a different line of reasoning. The observations of Heerey J in Paykel v Commissioner of Taxation (1994) 49 FCR 41, 53 are, in my respectful view, to the point: "Although, as has been mentioned, the legislation is very complex, the core notion of tax on capital gain is not. One acquires an asset and disposes of it at a profit. A capital gain is made and tax is payable. Section 160M(7) is understandable as a measure to plug what would be an obvious loophole were the legislation to be expressed in such Arcadian terms. For example, A, the owner of shares, might agree with B for consideration to pay to B all dividends and returns of capital on the shares and to vote the shares in accordance with B's direction. Section 160M(7) prevents A saying that there was no disposal of the asset and therefore no capital gain. Section 160M(7) provides a logical extension to the notion of what would ordinarily be understood as a capital gain. The theme of the extension is that a gain may be made even if ownership of an asset is retained - which necessarily means that the subsection is concerned with an asset of the taxpayer. Thus s 160M(7) can be seen as part of a coherent scheme and there is no need to impute to Parliament an intention to bring about odd and surprising results of the kind demonstrated by Hill J in Cooling (supra)." It is necessary, then, to consider the decision in Hepples. If there is no reasoning attributable to a majority, on the question of the application of sub-s (7), only the decision itself will be binding and only in relation to the statutory and factual situation which it resolved: Dickenson's Arcade Pty Ltd v Tasmania (1974) 130 CLR 177, 188, referred to by Burchett J in Trade Practices Commission v Abbco Iceworks Pty Ltd (1994) 52 FCR 96, 112 (Full Court) (see also Paykel, 51). In such a circumstance a case, whilst authority for its actual decision, cannot be said to have decided any proposition of law (Abbco Iceworks, 113). The position which resulted in Hepples was similar to that considered by Burchett J in Abbco Iceworks. With respect to the decision there sought to be applied as authority there was a bare majority of four. However one member of the majority had a different approach to the matter than the other three. It followed that there was not a process of reasoning common to the majority which provided a binding rule to apply (Abbco Iceworks, 111). The majority in Hepples held that subsection 160M(7) did not apply to the circumstances of that case. The reasoning to that conclusion however diverged and there is not discernible any common approach or principle to be derived from the judgments. Whilst it may be said that, numerically, there were four members of the Court who considered that the asset in question need not be owned by the taxpayer (Dawson, Toohey, McHugh and Gaudron JJ, and I do not consider the position of Gaudron J to be so clear) they did not constitute the majority. The result is that the decision in Hepples is applicable only to circumstances indistinguishable from it, as I have earlier referred. The situation here is different. Whilst the agreement does include promises to restrict a right to trade they are here made by re-sellers in connection with a product supply agreement. The other covenants, which relate to their rights or powers concerning the Company they control, and to their interest in the land on which the Company's business is conducted, secure the position sought to be achieved by the parties under the Reseller Supply Agreement. I would therefore conclude that regard is not to be had to the assets of Caltex in the application of the subsection. As I have earlier mentioned, the subsection was the subject of later amendment. That amendment provides that the asset in question is that owned by the person who is to receive the money. In the Second Reading Speech it was said that it was intended to clarify the position with respect to the subsection, and that the Courts had not done so. Whilst it has been held that a view later expressed by the Parliament, as to the legal meaning of a doubtful enactment, might be regarded as persuasive (see eg Kalwy v Secretary, Department of Social Security (1992) 38 FCR 295, 299) a subsequent legislative statement cannot always be regarded as a reliable indicator of an earlier intention (see the discussion of Gummow J in Interlego AG v Croner Trading Pty Limited (1992) 39 FCR 348, 382 and Dawson J in Downey v Trans Waste Pty Limited (1991) 172 CLR 167, 177). In any event, neither party to the appeal submitted that the subsequent amendment ought be used to construe the earlier subsection, and I have not followed that course. The Necessary Connection It is then necessary to consider the applicants' own assets as connected with or affected by the agreement in question. The applicants submitted that the subsection requires a strong connection with, if not a discernible effect upon, the asset in question. This can be seen to follow, it was submitted, when regard is had to the concept upon which the provision was based, namely that of payment being derived from the asset itself. There must, the submission proceeds, be some consequence upon the asset, which will usually require that there be some effect upon the applicants' proprietary interest. Here, it was argued, the covenants amounted simply to a constraint upon the applicants' freedom of action. In one sense that is correct. Even with respect to the land they promise not to exercise their rights with respect to it for the term of the supply agreement. But it must also be recalled that the subsection, by its terms, extends to just such a case, in the examples provided in para (b) which give, as an example of a deemed asset disposal, a promise not to exercise a right which is of the nature of an asset to which the subsection relates. It seems to me, therefore, that if some of the "constraints" which the applicants come under because of the agreement do not fall within the ambit of the subsection, it will be because they do not relate to assets. The term "asset" is defined in very wide terms in s 160A, but which connote an item of property or an interest in property: Cooling, 59; Hepples FCR 9-10, 20-7; Reuter v Federal Commissioner of Taxation (1993) 111 ALR 716, 733-4. One might then infer that mere personal rights, such as that to work or carry on business (as in clause 2.1(c) of the agreement here) may be put to one side as irrelevant. As Hill J observed in Reuter (733-4), following the Full Court in Hepples rejecting the notion of a right to work as an asset, that matter was not pursued by the Commissioner in the High Court. In the present case the agreement is concerned with more than a restriction of mere personal rights. And a feature of this case is that there were a number of promises given with respect to different assets or rights. There are however two assets which might fall within the statutory definition - the applicant's land and the shares. The words "in relation to", used to connect the relevant transaction with an asset, would appear to be very broad. But, in the context of a subsection which concerns some dealing which gives rise to payment, such that it is to be deemed a disposal of the asset or rights associated with it, a closer connexion must be required. That those words should be understood in context was a subject discussed by Toohey J in Hepples (CLR, 523). Hill J in Cooling (71) considered that the transaction need have a "real relationship to the asset" and McHugh J in Hepples (541) considered that the words "has taken place", which follow the reference to the "act or transaction" suggest a direct connexion between the two is necessary. The need for there to be a real or direct connection with the asset to which the agreement, or the covenants contained within it, refers, is reinforced, in my view, by the following reference to an "event affecting an asset" in para (a) having occurred. Whilst expressed as an alternative, in the subsection, there appears to be no reason to treat the possible dealings or occurrences other than consistently. Further the transactions, of which examples are given in para (b) of the subsection, may be seen to involve either actual use of the asset or the non-exercise (or sterilisation) of a right associated with it, in the latter case likely involving a lessening in value of the asset. The question which must then be addressed is what the connection must be between and that involves the identification of the act, transaction or event which has taken place or occurred. It was at this point that the parties were given the opportunity to make further submissions. The possibilities appeared to be to either take the entry into the agreement as a whole as the relevant act, or to treat the covenants as individual promises which might however relate to different rights or assets. A difficulty with the second approach is that there has been no apportionment of the price paid. In the Commissioner's submission it is more likely that the relevant act, transaction or event is the entry into the agreement, rather than the making of individual covenants contained within it, for the reason that the former is the explanation for the receipt of the money (referring to the judgment of McHugh J in Hepples, 540-1). But that does not conclude the matter. Here, as I have observed, the money is paid for promises from the applicants concerning the exercise or non-exercise of some rights, but only those relating to the land have a connection with an asset to which the subsection might refer. A conclusion that the "amount of money or other consideration", the $300,000, was paid in return for the applicants refraining from exercising their rights with respect to the land is not possible, and neither party submits that apportionment ought to be considered. The Commissioner's submissions at this point implicitly acknowledge the difficulty. It was submitted that, in the event that only the land be held to be an asset to which the subsection might refer, one ought view the other covenants as simply securing the position with respect to the land, and no more. The provisions, other than paras (b) and (e) of clause 2.1 of the agreement, which concern the land, comprise personal covenants restricting the applicants' rights to trade in a particular business and tying them to the company and to the maintenance of its obligations to Caltex. It is not possible, in my view, to conclude that these promises had no value. To accede to the Commissioner's submission would require a finding that, contrary to the express terms of the clause, the consideration was not paid for all of the promises. There is nothing, objectively, which would bring me to that view and the statement of agreed facts does not touch upon the matter. In my view it is not possible to say either that the entry into the agreement constitutes a disposal of the kind referred to in the subsection or that the monies were paid for that disposition.