Poole v Commissioner of Taxation

High Court of Australia|1970-07-01|Before: Walsh J

High Court of Australia Walsh J. Poole v Commissioner of Taxation (Cth) [1970] HCA 25

ORDER Poole v. The Commissioner of Taxation. Appeal dismissed with costs. Assessment confirmed. Dight v. The Commissioner of Taxation. Appeal allowed with costs. Assessment remitted to the Commissioner of Taxation to be amended in the manner stated in the judgment, that is to say, to be varied on the basis that the appellant's taxable income is reduced by one-eighth of the sum of $2,148 paid by Cooinda Pastoral Company as shown in the partnership income tax return of that firm.

Aug. 5 Walsh J. delivered the following written judgment: -

These two appeals were heard together. Each appellant lodged an objection in writing against an assessment of income tax for the year ending 30th June 1968, and when the objection was disallowed, requested the Commissioner to treat it as an appeal and to forward it to this Court pursuant to s. 187 of the Income Tax Assessment Act 1936-1968 Cth.

The appellant William Thomas Carew Poole, his wife and his two daughters, one of whom is the appellant Jean Dight, are members of a partnership which carries on the business of farmers and graziers under the name Cooinda Pastoral Company, pursuant to an agreement contained in a deed made on 23rd June 1955 and a supplementary deed made on 18th October 1961. The effect of the deeds is that Mr. Poole is entitled to one-half, Mrs. Poole to one-quarter, and each of the daughters to one-eighth of the net profits of the business and that upon a winding up of the partnership they will be entitled, in the same shares, to whatever surplus is available for distribution. No term is fixed for the duration of the partnership, but it is determinable by any partner on giving six months' notice in writing.

The deed of 1955 provided that the business of the partnership should be carried on upon some parcels of land therein specified. These included a large parcel of a little over 19,000 acres, described as Grazing Homestead 6473B and stated to be held by Mr. and Mrs. Poole as lessees as tenants in common in equal shares. The other parcels were smaller and were stated to be held as "proprietor", in some cases by Mr. Poole alone and in some cases by Mr. and Mrs. Poole as trustees. It was provided that nothing in the deed should be deemed to create any partnership in or interest in any of the Crown leasehold lands or freehold lands owned by any of the partners which should remain and be the separate and distinct property of the registered lessee or lessees or proprietor thereof respectively in his or her or their own right.

Each partner agreed with the others that at all times during the continuance of the partnership and until its affairs were fully wound up the livestock of the partnership might graze and should have the exclusive right of grazing upon the said lands and that as consideration therefor the partnership whilst it so enjoyed the right should pay "the rents rates taxes and assessments payable in respect of the said Crown leasehold and freehold lands and whatever sums may be necessary to perform and observe the conditions of the Land Acts Real Property Acts or any other Acts" (cl. 6).

In December 1958, the large parcel of land, under the description Grazing Homestead 7587, became the subject of a lease to Mr. Poole and his wife as tenants in common in equal interests for a term of twenty-eight years from 1st July 1958 at a yearly rent of £556 12s. 8d. The rent was later adjusted to £535 0s. 7d. when the area was reduced for road purposes and the term of the lease was extended to thirty years from 1st July 1958. The lease was granted under the provisions of The Land Acts, 1910 to 1958 Q., which were afterwards repealed and replaced by The Land Acts, 1962 to 1968 of the State of Queensland. A grazing homestead is one type of grazing selection for which a lease may be issued and held: s. 83 (1). As lessees of a grazing selection, the lessees were entitled to apply to the Minister, pursuant to s. 139, to have the tenure of their selection converted to a grazing homestead freeholding lease. The lessees did so apply on 19th January 1965. Section 140 (1) requires that in every case of an application under s. 139 the Land Administration Commission shall certify to the Minister whether or not the grazing selection is, in its opinion, substantially in excess of a living area and whether or not the selection is, in its opinion, reasonably improved having regard to its potential for economic development.

Section 140 (2) provides that save in the case of an application rejected by the Minister, the Minister may determine or may refer to the Court for determination certain matters including (a) the unimproved value, as at the date when he received the application, of the land comprised in the grazing selection, excluding the market value of any commercial timber on the land; and (b) the market value of the commercial timber, the property of the Crown, on the land. Section 141 (1) provides, omitting the last sentence thereof which is not material:

(1) For the purposes of this Division the unimproved value of any land shall be the amount which, in the opinion of the Minister or, if the Minister has referred the matter to the Court, the Court, experienced persons would be willing to pay for the fee-simple of the land, exclusive of the market value of commercial timber, including trees with commercial potentiality thereon, assuming the land were unimproved, and were offered for sale on such reasonable terms and conditions as a bona fide seller would require.

When the Minister has determined the value the lessee is required by s. 142 to notify the Minister in writing whether he elects, in the case of a grazing selection, to have the tenure of his selection converted to a grazing homestead freeholding lease. If he does not do so within the time prescribed his application lapses. Sub-section (5) of s. 142 provides:

(5) A lessee shall forthwith, upon electing pursuant to this section to proceed with his application to have the tenure of his selection converted, surrender the subsisting lease therefor and pay the first year's rent under the converted tenure less any prescribed adjustment.

Thereupon he shall be entitled to a new lease of his selection according to his application, and, in the case of a grazing selection in respect whereof he is entitled to apply and has applied for conversion of tenure to grazing homestead freeholding lease or perpetual lease selection, or a settlement farm lease, according as he has specified in his notice of election.

The converted tenure shall in every case be subject to the terms and conditions hereinafter provided in this Division.

Section 144A includes the following provisions: Terms and conditions of grazing homestead freeholding lease. Every grazing homestead freeholding lease (in this section referred to as the "new tenure") to which a grazing selection is converted pursuant to this Division shall be subject to the following provisions, terms and conditions: -

(a) the purchasing price under the new tenure shall be the unimproved value determined as prescribed by this Division and shall be payable by way of annual rent;

(b) the term of the lease of the new tenure shall be thirty years and shall commence on the quarter day next following the date when the Minister received from the lessee the application in writing to have the tenure converted unless, by notice in writing contained in or accompanying the notice of election to proceed with the application, the lessee informs the Minister that he desires the term of the new tenure to commence on the quarter day next following the date when the Minister or, as the case may be, the Court or, upon appeal thereto, the Land Appeal Court determined the unimproved value of the land comprised in the grazing selection, in which case the term of the new tenure shall commence on such later quarter day;

(d) moneys paid as rent under the surrendered tenure shall not be credited to the new tenure except any moneys so paid in respect of a time after the commencement of the term of the new tenure;

(e) the fencing, developmental and improvement conditions, if any, to which the surrendered grazing selection was subject;

(f) in the case of a surrendered lease which was subject to a condition of personal residence, notwithstanding anything in this Act, that condition shall continue to apply with respect to the new tenure for the unexpired period thereof remaining as at the quarter day when the term of the new tenure commences

Section 125 provides: When fee-simple of agricultural farm or grazing homestead freeholding lease may be acquired (1910, s. 100). Subject to satisfying the Minister that he has performed all the developmental or improvement conditions (including the condition of fencing or other improvement) of the lease of his selection, a lessee of an agricultural farm or grazing homestead freeholding lease may at any time complete the purchase by paying the amount then unpaid of the purchasing price and interest thereon, if any, to the date of such payment.

Upon so satisfying the Minister and completing the purchase and upon paying any moneys payable to the Crown in respect of the selection on account of survey fees or on any other account whatsoever which are unpaid, the lessee shall be entitled to a grant in fee-simple of the land comprised in the lease.

Section 147A contains provisions by which certain restrictions are imposed upon the transfer or assignment of an estate in fee simple acquired by deed of grant in respect of land comprised in a grazing homestead freeholding lease. It should be added that such a lease may be forfeited for non-payment of rent (s. 249), or for breach of conditions to which it is subject (s. 295), that it may be surrendered (s. 333) and that, with the approval of the Minister, a lessee may transfer his lease (s. 286), or may sublet (s. 274 (2)).

Pursuant to the provisions of the Act, the lessees were notified on 18th October 1967 that the unimproved value of the land had been determined at $3 per acre and the value of commercial timber on the selection at $1,514. After referring to the determination of the value at $3 per acre, the notification stated "This amount will be the purchasing price of the land". It stated also "Based on the above value, the annual rent as Grazing Homestead Freeholding Lease, for a term of thirty years, will be $1,902.32". The lessees were given the option to have the term of the new tenure commence on 1st April 1965 or on 1st October 1967. The amounts which would be payable for "rent under the new tenure" up to the end of 1967 were set out. The lessees duly gave notice in writing of their election to proceed with the application and they surrendered the subsisting lease. They stated that they desired the term of the new lease to commence on 1st October 1967.

Thereafter what was described in the document as a "Lease of Grazing Homestead Freeholding Lease" and also as "Grazing Homestead Freeholding Lease No. 7587 Roma District" was granted to Mr. and Mrs. Poole "as tenants in common in equal interests". The earlier lease and its surrender were recited. The lease stated that "in consideration of the premises and of the rent hereby reserved and of the payment of the rent payable under the said Acts for the said land" the Crown did thereby demise and lease the land to the lessees to hold the same for and during the term of thirty years computed from 1st October 1967 yielding and paying in each and every year during the said term the yearly rent or sum of $1,902.32.

In the partnership income tax return of the Cooinda Pastoral Company for the year in question, the sum of $2,148 was shown as an expense of the partnership. It was described in the return as rent. It was made up of $1,902 being one full year's rent under the new tenure for the calendar year 1968 (which was paid in full within the tax year 1967-1968) and an additional amount of $246 which represented the balance of rent due in respect of the year 1967 and certain fees payable in relation to the conversion of the tenure of the land. Both amounts were payable and were paid within the tax year 1967-1968. The total net income was shown as $13,952. In the personal return of the appellant Mr. Poole, one-half, and in the personal return of Mrs. Dight, one-eighth, of that amount was included as income. In assessing the tax the respondent Commissioner made adjustments in the income of the partnership which included the addition to its income of the said sum of $2,148. Corresponding adjustments were made in the income of each of the appellants and tax was assessed upon the income as so adjusted.

The primary question in dispute in each appeal is whether or not a proportionate part of the amount paid for rent of the land which was converted to the new tenure was, in the case of each taxpayer, an allowable deduction under the provisions of s. 51 (1) of the Income Tax Assessment Act.

It was proved that the payment was made by Cooinda Pastoral Company, that is, by the partnership. There is no evidence on the question whether the partners, other than the lessees, expressly agreed to the conversion of the tenure and to the resulting increase in the annual payment due to the Crown. But it does not appear that any objection was raised. I think it must be taken that the partners have accepted the position that the amounts due to the Crown are payable by the partnership, in accordance with cl. 6 of the partnership deed.

The facts that the payments were made out of the funds of a partnership which by agreement had the right to use the land so long as the partnership continued and that, subject to that right, the rights conferred by the freeholding lease and by The Land Acts are vested in two only of the partners and in shares which differ from their shares in the partnership and that those rights are not assets of the partnership, raise questions to which I shall refer later. It is convenient to consider first the opposing submissions as to the applicability of s. 51 (1), without regard to those special facts and as if a sole lessee, carrying on business on his own account on the land, were claiming the deduction.

It is submitted for the respondent that the outgoing in question was an outgoing of capital or an outgoing of a capital nature. For the appellants it is submitted that it was not of that nature and, alternatively, that it was in part only an outgoing of a capital nature.

I think that the outgoing (or at least part of it) answers both the description that it was "incurred in gaining or producing the assessable income" and the description that it was "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". It might perhaps be argued that because the land could have been used throughout the term of thirty years from 1958 under the former tenure, it follows that so much of the outgoing as exceeds the lower rent payable under that tenure need not have been incurred to gain the income and was not necessarily incurred in carrying on the business. But I do not accept that view as stating correctly how s. 51 (1) should be applied. If a sole lessee of freehold land on which his business was carried on agreed with the owner to buy it and to pay the price by annual instalments, I am of opinion that the whole of each instalment would be an outgoing within either limb of s. 51 (1), whether or not it exceeded in amount the yearly rent which had been payable under the lease.

The real question is whether or not the exception contained in s. 51 (1) operates to exclude its application. In the case which I have just supposed, I think it is clear that the outgoing would be an outgoing of a capital nature, for the reason that it would be part of the price for which a capital asset was being acquired. It has commonly been considered that a payment of the price or part of the price of a capital asset, whether payable in a lump sum or by deferred instalments over a period, is a clear case of an outgoing of a capital nature. The Commissioner contends that this is such a case. The appellants contend that each annual payment ought to be regarded as rent paid for the use for one year of the land. The question to be decided is what is the true character, having regard to the provisions of The Land Acts and to the facts of the case, of these payments: see Sun Newspapers Ltd. v. Federal Commissioner of Taxation [1] .

In the present cases I think that no assistance can be obtained from guides which have been found useful in other circumstances, such as the distinction between a recurring item of expenditure and a payment made once and for all, and the distinction between expenditure made in order to acquire "a new framework" in which to carry on business and expenditure which has not that purpose or effect: see BP Australia Ltd. v. Federal Commissioner of Taxation [1] . One of the submissions for the appellant was that from a practical and business point of view the new tenure did not provide "a new framework" and in support of this it was said that the previous tenure gave the same advantages as a freehold estate would give. Evidence was called to show that in a practical sense the former tenure could be regarded as perpetually renewable and that land held under such a tenure was not different in market value from freehold land. I shall refer again to that evidence. But in my opinion the basic question for decision is whether or not the true character of the payments is that they are made as the consideration for the acquisition of a capital asset. Unless they have that character there is no other ground in the present case upon which they could be found to be of a capital nature. If they do have that character, then in my opinion the proper conclusion is that they are capital outgoings or at least that to some extent they fulfil that description. The question cannot be answered in my opinion by ascertaining whether the rights of occupation and use of the land would have been any less secure or any less valuable if the lessees had elected to continue to occupy it under the former tenure. They elected to apply to have it converted and, when the unimproved value had been determined, they elected to proceed with the application and thus to become liable for the payment and entitled to the rights applicable to the new tenure. Their reasons for doing so, whether or not sound from a business point of view, seem to me to be immaterial to the determination of the question which has to be decided. This is to be decided by considering the nature of the rights acquired by the lessees, in return for the obligation imposed upon them to make the annual payments.

The appellants contend that what is obtained in return for an annual payment is the right to occupy and use the land for one year. They rely upon the terms of the relevant provisions of The Land Acts and the terms of the lease as showing that the payment is a payment of rent under a lease, which is subject to many of the conditions and incidents which are common to other tenures which give nothing but a leasehold interest. In denying that the relationship between the Crown and the lessees is comparable to that of the vendor and purchaser under a contract for the sale of land, they point not only to the fact that the transaction takes the form of a lease by which rent is reserved, but also to the facts that the lessees are not bound to complete a purchase of the freehold estate in the land and that the option to do so is subject to compliance with conditions imposed by the Acts and that the lease is liable to forfeiture.

These are significant considerations. But against them must be set the important differences between a lease of this kind and other leasehold tenures. Section 144A refers to "the purchasing price", this being the unimproved value of an estate in fee simple in the land, ascertained in accordance with s. 141. Upon payment at any time of "the amount then unpaid of the purchasing price" the lessee, provided he has performed the developmental or improvement conditions, may "complete the purchase" and become entitled to a grant in fee simple of the land: see s. 125. The total price which he has to pay is no higher, if he exercises the right to pay the balance of the price after many years, than it is if he exercises that right soon after he obtains the lease. The reference in s. 125 to interest must be read as applying only to interest upon annual payments which have not been made when due. The price is not increased by any charge for interest on any part of the unpaid balance, the payment of which has not yet become due. Thus the amount of each annual payment is subtracted in full from the amount which the lessee will be required to pay in order to obtain a fee simple estate in the land. The total amount so required and the annual amount which the lessee is required to pay are fixed by reference to the unimproved value of the land as at the time when the freeholding lease is granted, whereas the rental to be paid under an ordinary leasehold tenure of a grazing selection is fixed by reference to the unimproved value as at the commencement of each rental period of the lease: see ss. 131 and 242. In the present case a new rental period would have commenced, in respect of the tenure which was converted, in the year 1968.

If land is purchased either on terms that possession is to be given upon completion of the sale by payment of the full purchase price or on terms that payment is deferred but the purchaser is let into possession, no doubt the rights acquired by the purchaser include the right to occupy and use the land. In the latter case a purchaser would ordinarily be required either to pay interest on the unpaid purchase money or to pay an occupation fee pending completion. But in either case the central feature of the transaction is the acquisition of the land as an asset to which the purchaser obtains a title either at law or in equity. By it he has made or has become entitled to make the land his property. In my opinion that is also the central feature of a freeholding lease under which the lessee obtains the statutory right conferred by s. 125. It is convenient for the scheme of administration embodied in The Land Acts that the means adopted for conferring a right to obtain a freehold estate is to provide for the granting of a lease of the land under which rent is reserved and is payable annually. But, in my opinion, the real purpose effected by the provisions permitting conversion of a tenure to a freeholding lease must be taken to be that of enabling the lessee to become at any time, if he wishes to do so, the holder of an estate in fee simple. He may do this by paying a price which is then determined. He may pay it by way of annual "rent", the amount of which is such that the price will be paid in full by making the annual payments throughout the period of the lease, or at his option he may pay the price at any earlier time.

I am of opinion, therefore, that each annual payment is an outgoing of a capital nature, because the lessee is by means of that payment paying off part of a purchase price for the acquisition of the fee simple in the land and reducing the balance required to be paid to obtain that estate. Although he is not under an obligation to pay the whole of the price and to complete the acquisition of that estate, his position is not different, in my opinion, in principle, for the purposes of s. 51 (1) of the Income Tax Assessment Act, from that of the appellant in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [1] or that of the appellant in Cooper v. Federal Commissioner of Taxation [2] . The payment by instalments of the price of a capital asset is a payment of a capital nature. Kitto J. said in the latter case [3] that the appellant was in the position of a person who "agreed to pay a fixed price by instalments" and that the "annual payments which he bound himself to make are simply the price of a capital asset". In the present case the lessees did not bind themselves to pay the whole price, for it is open to them to bring their obligation to an end by surrendering the lease. But in my opinion, whilst it remains in force the annual payments are properly to be regarded as payments of the price of a capital asset.

(1953) 89 C.L.R. 428. 2. (1957) 97 C.L.R. 397. 3. (1957) 97 C.L.R., at p. 405.

It is desirable to make some further reference to the evidence of a witness, Mr. Carter, who was called by the appellants. I do not think it is necessary to refer to the details, given by him in support of his opinions, concerning sales of land which he regarded as comparable. I shall state only the opinions which he gave. He was an experienced valuer and I have no doubt that his opinions were honestly formed and stated in evidence. He expressed the view that in the market for properties of different tenures there is no difference in value between tenures as freehold or as perpetual leases or "terminable leases which are renewable". By the latter phrase he meant terminable leases of holdings which do not substantially exceed a living area which, in his opinion, were in practice always renewable by the lessee. The property here in question should be assumed to be one which does not substantially exceed a living area, since otherwise the application to convert its tenure would not have been granted: see s. 142. He considered that the advantage to be gained by a lessee by converting his tenure to a freeholding lease is that his yearly commitment is thereby fixed for the term of thirty years, so that he is not subject to the effects of reappraisements made at intervals. In the present case there would have been a reappraisement of the rent payable under the former lease at the end of ten years of its term and again at the end of twenty years. When the value of the land has been determined upon an application for conversion, if it is considered, upon a comparison of the annual payment which will result from the conversion with that which is payable under the existing tenure, that it is better to become free from the uncertainty as to increases which may result from reappraisement, it is that advantage which will induce the lessee to elect to proceed with the application to convert.

I am not satisfied that the evidence of Mr. Carter was sufficient to establish that no additional market value can ever be attributed to a freeholding tenure. In his evidence he did not differentiate between cases in which that tenure has been recently obtained and those in which a major part of the term of a freeholding lease has already expired. It does not seem acceptable to me that a purchaser would not be willing to pay a higher price in the latter case than he would pay in the former case. It was pointed out in argument that a freeholder is liable to tax under The Land Tax Acts, 1915 to 1965 Q., whereas a lessee under a freeholding lease, like other Crown lessees, is not. Nevertheless it is difficult to suppose that where a substantial part of the price for which the fee simple estate could be obtained had already been paid this fact would not be of any interest to a prospective purchaser.

I am of opinion that the evidence of Mr. Carter is not of any assistance in deciding the major question in this case, namely the question whether the annual payment is of a capital nature. The right to acquire the fee simple is a right of a capital nature, whatever may be its value as compared with the value of the right to occupy conferred alike by a freeholding lease and a "renewable" grazing homestead lease. In some cases s. 51 (1) may require that an outgoing be dissected or even apportioned so that part of it is treated as an outgoing of a capital nature and part of it is treated as deductible: see John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation [1] . In this case it was submitted for the appellants, as an alternative to their main submissions, that the outgoing ought to be apportioned between what was paid for use of the land and what was paid for the right or option to purchase it. But in my opinion no basis upon which this may be done in this case is provided by The Land Acts or by the evidence. If I were satisfied that, as the appellants have contended, the consideration for the whole of the outgoing was simply the use of the land and was nothing more than that, it might be proper to conclude that it was not either in whole or in part an outgoing of a capital nature. For reasons which I have given I am not satisfied that this is so, either in a practical sense or as a matter of legal right. When I turn to consider the possibility of dissecting or apportioning the outgoing, I find that the provisions of the Acts and of the lease do not divide the payments into different component parts referable to the right to occupy and the right to obtain an estate in fee simple. Evidence has not been given which could provide a formula for such a division, even if it should be held that this is a case in which a dissection of that kind could properly be made.

I am of opinion, therefore, that upon the matters so far considered the appellants fail. If the lessees alone had been carrying on business on the land and had made the payment in question, in my opinion it would not have been an allowable deduction.

But there is a further question which must be considered. It has been submitted that from the standpoint of Cooinda Pastoral Company the payment made by it was an outgoing on revenue account and was an item which could not be disregarded in computing the net income of the partnership. Accordingly, the respondent was in error in adjusting the net income of the partnership by disallowing the deduction of that item and in making corresponding adjustments in the individual interests of the appellants in that net income: see ss. 90 and 92 of the Income Tax Assessment Act. It was argued, therefore, that the method adopted by the respondent in making the assessments under appeal was wrong and that, at least in the case of the appellant Mrs. Dight, if not in that of the appellant Mr. Poole, the appeal must succeed.

In my opinion, it is clear that from the point of view of the partnership considered as a whole this was a revenue outgoing. It was paid for the use of the land. It could not be left out of account in computing the income of the partnership available for distribution amongst its members. In my opinion there would be no warrant for holding that, for the purpose of that computation, you should treat the amount of the payment as being notionally paid back into the partnership funds by the two lessees. They were entitled, under the partnership agreement, to have it paid out of the partnership funds.

The first answer made by the respondent to this submission is that it is not open to the appellants because it was not covered by the notices of objection to the assessments. It is true that the point in the form in which I have just stated it was not made expressly in the notices of objection, which are in all material respects in the same form in each case. But a claim was made that the assessment should be amended to allow as a deduction a specified sum which was then described as "being proportion of an amount paid during the said year by Cooinda Pastoral Company (a partnership of which I am a member)". Reference was made in the notice of objection to the relevant freeholding lease, which was identified. The grounds of objection included in each case the following grounds:

The said amount of $2,148 was an outgoing incurred by Cooinda Pastoral Company (a partnership of which I am a member) in gaining or producing the assessable income for the year in question.

The said amount was not an outgoing of capital, or of a capital private or domestic nature.

The said amount is an allowable deduction in accordance with s. 51 (1) of the Income Tax Assessment Act 1936-1968.

The grounds of objection did not state that the partners and the lessees were not identical. But this fact had not been concealed from the respondent. One of the documents attached to Mr. Poole's return referred to the lease and indicated that he and Mrs. Poole each had a half share in it.

I have come to the conclusion that the argument is open to the appellants. I do not seek, of course, to detract in any way from the statements made in this Court in Archer Brothers Pty. Ltd. v. Federal Commissioner of Taxation [1] , and in other cases, concerning the need to give effect to s. 190 (a) of the Income Tax Assessment Act, which limits a taxpayer to the grounds stated in his objection. But the sufficiency of what is stated must be determined according to the circumstances of each case. Here attention was drawn explicitly to the fact that this was a partnership outgoing made in relation to a specified lease. The respondent was thereby put upon notice that the assessment had to be considered on that footing. He was not entitled to assume, contrary to the fact and contrary to information already in his possession, that all the partners held the lease in equal shares. He must be taken to have been aware of the provisions of ss. 90, 91 and 92, which in my opinion have the effect that, when considering what must be included in the assessable income of a partner as his individual interest in the net income of a partnership, it is necessary first to ascertain what is the net income of the partnership and to determine what are allowable deductions in arriving at its net income.

I propose, therefore, to examine the effect in these appeals of the submissions now under consideration. In my opinion it was not correct to treat the partnership income as stated in the partnership return as being understated by reason of the deduction of the amount paid out to the Crown. But in the appeal by Mr. Poole I do not think that by this means he is able to establish, as required by s. 190 of the Act, that the assessment is excessive. The amount in question was paid by the partnership as required by the partnership agreement. But it discharged an obligation which, between himself and the Crown, lay upon him as lessee. He obtained the benefit of a payment on his behalf of an outgoing which if paid by him would have been, according to the opinion I have already stated, an outgoing of a capital nature. In my opinion that benefit formed part of his assessable income. If as a lessee of the land he had allowed a stranger to use it in return for a money payment, this would have been included in his assessable income. In my opinion it makes no difference that by an agreement to which he was a party, the partnership was allowed to use the land, in consideration of paying any amounts due in respect of it to the Crown. In my opinion an amount so paid must be treated as income "derived" by Mr. Poole: see s. 19 of the Income Tax Assessment Act and cf. Cooper v. Federal Commissioner of Taxation [1] .

If the amount of Mr. Poole's individual interest in the net income shown in his return as being derived from the profits of the partnership as shown in the partnership return had been accepted as correct, but an addition had then been made to his income, as shown in his personal return, of one-half of the amount paid by the partnership to the Crown, the total of his taxable income would not have been different from the amount upon which the assessment was based. I am of opinion that it is not established that the assessment of his tax was excessive. In my opinion his appeal should be dismissed.

In the case of the appellant Mrs. Dight the position is quite different. She has no interest in the lease. The partnership of which she is a member has the right to use the land but has no other rights in respect of it. She will get no benefit if an estate in fee simple is acquired by payment of the purchasing price. Therefore, the payment made by the partnership was not related in any way to the acquisition by her of a capital asset. From her point of view it was simply a payment made in fulfilment of a condition which attached to the right of the partnership to use the land. The share to which she was entitled in the profits of the partnership was ascertainable on the basis that the payment was a deduction properly made in arriving at its net profits. Her taxable income should not have been increased by adding to the amount of her interest in the partnership income any part of the amount so deducted in arriving at the income of the partnership as shown in the partnership return. In her case the appeal should be allowed and the assessment should be varied, on the basis that her taxable income is reduced by one-eighth of the sum of $2,148 paid by Cooinda Pastoral Company in respect of the lease.

In the first appeal, No. 2 of 1970, I order that the appeal be dismissed with costs and that the assessment be confirmed.

In the second appeal, No. 3 of 1970, I order that the appeal be allowed with costs and that the assessment be remitted to the respondent to be amended in the manner stated in this judgment.

At a glance

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Before

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Judgment (56 paragraphs)

Parties