Premier Automatic Ticket Issuers Limited v Federal Commissioner of Taxation [1933] HCA 51

Premier Automatic Ticket Issuers Limited v Federal Commissioner of Taxation [1933] HCA 51 - HCA 1933 case summary — Zoe

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£10,000 was received as the sale price of certain patent rights in Great Britain belonging to the company and was not income; - (6) That the said sum was received for the sale of a fixed capital asset of the company, viz., such patent rights, and was therefore a transmutation of capital and was not income. (c) Alternatively, , that if the said sum was income it was not derived from a source in Australia but from a source in England where the sale was - effected. - 3. The Commissioner considered the objection and disallowed it wholly, Thereupon the taxpayer being dissatisfied with the decision of the Commissioner requested the Commissioner to treat its objection as an appeal and forward it to the High Court. The objection was transmitted accordingly and the appeal came on to be heard before - me when the facts hereinafter appearing were proved. 4 4. On 24th July 1911 a company was incorporated in New South - Wales called " Totalling Mechanisms Limited." As appears from its memorandum and articles of association, its first object, in effect, - was to purchase or otherwise acquire rights in inventions of any totalisator machine or any invention which might seem to the company capable of being profitably dealt with, and, in particular, to - acquire from an existing company called " Premier Totalisator Limited," of Perth, the Commonwealth and New Zealand rights in a particular patent which had been granted in Australia and in New Zealand, and with a view thereto to enter into an agreement already prepared and expressed to be made between Premier Totalisator Ltd. and the said company. The company's objects: also included power to use, exercise, develop and grant licences in respect of or otherwise turn to account the patents, and power to carry on business as manufacturers of totalisators and contractors in connection with totalisators. 5. On 21st April 1915 another company was incorporated in Ne j South Wales, which was called '' Automatic Totalisators Limited." As appears from its memorandum and articles of association, its first object was, in effect, to purchase or otherwise acquire interes in any invention in relation to totalisator machines or any patel which might seem to the company capable of being profitably de

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passing of the bill and of bringing about a favourable consideration H.C. oF A. and adoption of their totalisator machine upon English racecourses. ney They gave demonstrations of a model machine before those bodies Premrr and generally endeavoured to promote the use of their totalisator. meee Julius returned to Australia early in 1928, but after February, SS°™8s b™- Early in 1928 Wilkinson considered it probable that the Jockey Club would not be entrusted by the Legislature with control of _stox totalisators. In January 1928 an inquiry was made on behalf of speculators in England by a cable addressed to a member of the board of Automatic Totalisators Ltd., with a view to the acquisition of the British rights in the inventions for the complete totalisator machine. This inquiry was discussed and considered by that company's board but nothing came of it. In or about March 1928 a syndicate in London made to Wilkinson an offer for the British tights of £100,000 and one-eighth per cent royalty. On 2nd April 1928 Wilkinson communicated this offer by cable to Automatic Totalisators Ltd. in Sydney. About 8th April 1928 he became aware that an inaccuracy had been discovered in the totalisator which the company had installed at Longchamp in France. One Bethell, who had formerly been connected with Automatic Totalisators Ltd., was in England supporting a rival totalisator. Setright was also in England supporting a rival totalisator. Wilkinson believed that Bethell was aware of the defect at Longchamp and of some defects discovered in installations by Automatic Totalisators Ltd. elsewhere. He expected that the third reading of the bill before the British Legislature would take place on 17th April 1928. By a cable proceed- ing on these grounds he strongly advised the board of Automatic Totalisators Ltd. to accept the offer. After consideration they authorized him to do so but various questions and details were submitted to and considered by the board in Sydney and their views were transmitted by cable to Wilkinson before the transaction was agreed. The syndicate formed a company called Totalisators Ltd. and two agreements were entered into with this company, dated respectively 17th and 18th May 1928. The patents comprised in the schedule to the agreement of 17th May 1928 included the British patents for Setright's invention (No. 201152) and for Julius' invention

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to, and offer for, patent rights in the United States of America, SS'™S '""- Mexico and Cuba and gave another authority in respect of rights in aaa countries where the company's totalisators were not in operation stonsnigr and were the subject of negotiations. None of the ticket-issuing ~~ - __~ devices was of any practical use except in connection with the totalisators. The patents referred to in the schedule of the agreement of 17th May 1928, mentioned in par. 16 of this case, are in respect of inventions covered by Australian patents, and in each case the Australian patent was granted before the application for the British patent was made. 22. The taxpayer and Automatic Totalisators Ltd. each had its registered office in Sydney, although not in the same building. In each case the registered office of the company was its principal place of business and there its books of account were kept, its balance-sheets and reports were prepared and its board of directors met. The taxpayer had no other place of business. 23. The taxpayer did not in fact claim that the income was derived partly from sources outside Australia, but it claimed that it was derived wholly from sources outside Australia. The Commis- sioner did not, except upon the hearing of the appeal, claim that the income was derived partly from sources in Australia. He claimed that it was derived wholly from sources in Australia. Accordingly he made no determination under sec. 16c of the Income Tax Assessment Act 1922-1929, but on the hearing of the appeal before me his counsel contended, as an alternative to the contention that the income was derived wholly from sources in Australia, that 'the income was at least derived partly from sources in Australia. The questions reserved for the consideration of the Full Court 'were - - (1) Am I at liberty upon the materials included in the special case to find that the sum of £10,000 is not (a) income of the taxpayer or (b) derived directly or indirectly from sources in Australia ? VOU. 1 19

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do not extend to other places where the patents are also registered. The agreement of November 1922 merely evidences a pooling arrange- 'ment between the three parties thereto for the exploitation of their patents in other countries. This is clearly established by the facts, cwhich further show that one party acted as the agent of all the parties. The agreement did not operate as an absolute alienation of all interests then possessed by the appellant: it simply put the company into the position that it had to be an assenting party to asale. In Collins v. Firth-Brearley Stainless Steel Syndicate (1) there had been three dispositions of rights within three years as 'compared with the one disposal of rights here in eleven years ; therefore that case is much stronger than the present case for treating the proceeds arising from the various sales as income. The test to determine whether such proceeds are income is: Were the patents acquired for purpose of re-sale at a profit ? (Californian Copper Syndicate v. Harris (2) ). Having regard to the terms of the agree- ment and the circumstances of the case, the appellant's part in the _ transaction was not an " accidental dealing " but was an exceptional dealing forced upon it (Ducker v. Rees Roturbo Development Syndi- cate (3) ). The definition of "income," as given in sec. 2 (c) of the Income Tax Assessment Act 1930, is only a declaration of the then existing law. Its enactment was the result of observations by members of the Court in Blockey v. Federal Commissioner of Taxation @). The test still is: Was the transaction a realization of capital, ewes it a part of a profit-making enterprise? Here the patents _ Were acquired as " plant" and hence are capital assets. The money teceived by the appellant is not income derived either wholly or partly from a source within Australia, because it was the profits of the sale of fixed property situate in England, that is, the sale of the English patents. _ (Dixon J. referred to Dickson v. Commissioner of Taxation (NS.W.) (5).] Even though there may be only one business, that one business 'may have various sources of profits, some of which may be within,

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The taxpayer is a company incorporated to take over and use to advantage certain patent rights. The question whether the profits are capital or income depends upon the nature of the business the company carried on, which formed the source of the profits. The locality where the profits arose was determined by the place where the source was situated. The interdependence of the two questions results from the circumstance that if the activities in New South Wales are considered to be the source of the income it must be upon the ground that the profits are all attributable to the agreement made by the company in November 1922. If this is so, the question whether the company was carrying on or carrying out a profit- making scheme consisting of the acquisition and disposal of patent rights must be determined by what it did up to and before that date. The agreement of November 1922 is one of a very peculiar character. The decision of the Full Court depends almost entirely upon the effect ascribed to it. Their Honors took the view, to state it briefly, that it was a pooling arrangement by which the taxpayer contributed its patent rights to a pool into which the other two parties to the agreement contributed their patent rights for the purpose of disposal as a joint enterprise. As the patent rights were ultimately sold in Great Britain, and as this view of the agreement meant that the source of the profit from which the taxpayer derived its share was that sale, it followed that the profit arose from a source out of New South Wales and also of Australia. I have been unable to adopt this view of the agreement. I think its true effect, 'so far as material, was to confer an exclusive licence upon Automatic Totalisators Ltd. to exercise the taxpayer's inventions and patents and to give Automatic Totalisators power to sell the inventions and patents as their own, the consideration for these rights being a royalty and a payment of ten per cent of the proceeds of the sale. When the taxpayer company made the agreement it had in effect handed 'over its entire beneficial interest in, and power of disposal of, the patents. If, in common with the patents of Automatic Totalisators, 'they were advantageously sold, a consideration of ten per cent of the price would become payable to the taxpayer, but the sale would be quite independent of the taxpayer and would not be effected on its behalf as a principal. I recognize that the agreement is in many

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ways difficult to construe and that obscurities and inconsistencies abound in it, but I can find in it no trace of partnership, joint enter- prise or agency. I think that in substance it invests Automatic : Totalisators with complete control over the patents, exercisable on its own behalf as a principal, reserving only the considerations I~ have mentioned, which are, of course, contingent in their character, The profits were derived by the taxpayer from its enforceable right, conferred by the agreement in the events which happened, to a sum amounting to ten per cent of the purchase money. The source of this right was the making of the agreement which took place in New South Wales. For these reasons I think that as a matter of law the profits arose from a source in New South Wales. The question whether the making of the agreement so far as itrelated_ to the disposal of the patent was a transaction directed to revenue or - to capital has caused me much difficulty. I think that it is a necessary consequence of what I have already said that all the activities of Automatic Totalisators should, for the purpose of this question, be excluded from consideration. Under the definition of income now contained in the Income Tax Assessment Act 1922-1930 any profit is. included which arises from the sale by any person 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. The company was incorporated in 1917, and, before the agreement of November 1922, it had taken but few steps towards the realization of its patents. The nature of its business must, however, be gathered from its memorandum of association, from the character of the patents which it acquired, as well as from it subsequent acts. I think that the fact was that the company was incorporated to deal with the patents and the rights in relation to the invention and any future similar invention so as to make money out of them in any way which was considered most advantageous. - In Australia it may have been thought wiser to exercise the patents; _ in some foreign countries there can be but little doubt that the company from the first contemplated selling its patent rights; in others it probably looked forward to making more complicated arrangements by which royalties or shares were obtained. But do not think that the agreement: of November 1922 can be consid

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Totalisators Ltd., the taxpayer The Premier Automatic Ticket Issuers Ltd., and Setright. By it the parties agreed that all rights by letters patent or by any other means then held by them respec- tively as to the use, sale, manufacture or operation in any part of the world of ticket-issuing machines suitable for use in conjunction with totalisators should be governed by the conditions set forth in the agreement. Automatic Totalisators Ltd. were granted the sole and exclusive right to manufacture and sell all such ticket-issuing apparatus for which rights had been or might thereafter be secured by letters patent or any other means by the other parties to the agreement, and Automatic Totalisators were to pay the taxpayer a royalty of ten pounds for every machine manufactured and sold by it pursuant to the agreement. Setright agreed to transfer and assign to the taxpayer all patents then or thereafter to be held by him respecting ticket-issuers and all improvements therein, and the - taxpayer to transfer to Setright thirty per cent of the total shares fully paid up of the taxpayer and to pay him thirty per cent of the total proceeds arising from the sale of ticket-issuer rights in any - country. Important clauses of the agreement were as follows: - _ "5. In the event of Automatic Totalisators Limited disposing of the whole or part of their proprietary rights to the totalisator and/or ticket-issuers in any country Automatic Totalisators Limited shall i make payment to The Premier Automatic Ticket Issuers Limited _ by one of the following methods. The said Premier Automatic : Ticket Issuers Limited to have the right to choose the second- mentioned method of payment as against the first-mentioned:

Payment by Automatic Totalisators Limited to the Premier E Automatic Ticket Issuers Limited of the sum of £10 . . . for each and every ticket-issuing machine manufactured or sold by or for _ the said Automatic Totalisators Limited. 2. Payment by Automatic Totalisators Limited to The Premier Automatic Ticket Issuers Limited of a sum equal to ten per cent of any cash consideration - for the sale of totalisator and issuer rights in any country and a sum equal to five per cent of the total royalties received under the ; terms of such sale for a period of ten years dating from the receipt of such royalties from each individual installation. 6. In the event - of Automatic Totalisators Limited disposing of rights as in the

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v. Melbowrne Trust Ltd. (1); Commissioner of Taxes vy. Australian Wool Realization Association (2); Westminster Bank y Osler (3); Ruhamah Property Co. v. Federal Commissioner Taxation (4)). The object of the taxpayer here was to exploit the inventions in its hands. It apparently did not itself work inventions, though it manufactured electro-types in Sydney supply to Automatic Totalisators Ltd. It granted a licence to Automatic Totalisators Ltd. to use and vend the inventions in the - Commonwealth and New Zealand. It joined in forming or took shares in a company called Automatic Totalisators (France) Ltd., ¥ which installed totalisators and ticket machines in France. It appointed an agent and gave him authority to sell its patent rights - outside the Commonwealth and New Zealand. The agreement of 16th November 1922 assumes an authority in Automatic Totalisato Ltd. to sell issuer rights for a cash consideration and thereby impliedly authorizes such a sale. The taxpayer received its share of the proceeds of sale, and credited the same to its trading or business operations account, that is, its profit and loss account. - so doing the taxpayer " may well be held bound by its own actions (Commissioner of Taxes v. Melbourne Trust Ltd. (5) ). Facts such as these preclude any other conclusion than that the sum of £10,000 was a gain made in an operation of business in carrying out a scheme of profit-making. Question 1 (6) should also, I think, be answered in the negative. The agreement of 17th May 1928, under which purchase money amounting to £100,000 was paid to Automatic Totalisators Ltd., was a transaction entered into and carried out in England and in respect of patent rights granted or subsisting in England. It arose from business transacted and wholly carried out in England, and the purchase money paid under it was therefore not income derived directly or indirectly from a source in Australia (Lovell & Christma Ltd. v. Commissioner of Taxes (6) ; Studebaker Corporation of Aus asia Ltd. v. Commissioner of Taxation (N.S.W.) (7) ). But was sum of £10,000 paid to the taxpayer derived from this English

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transaction, or was it derived from a transaction entered into in Australia and embodied in the agreement of 16th November 1922 ? That question depends upon the proper interpretation of that agree- ment. The parties undoubtedly associated themselves together for the exploitation of their various inventions and patent rights. Automatic Totalisators Ltd. had totalisator rights, whilst the tax- payer had ticket-issuer rights, which are of no practical use except in connection with totalisators. An exclusive licence was granted to Automatic Totalisators Ltd. to use and exercise the ticket-issuer rights, paying a royalty of £10 for every machine manufactured or sold by it. Clearly these royalty rights arise from the agreement, and from no other transaction. But clause 5 contemplates the event of a disposition of the whole or part of the proprietary rights to totalisator and/or ticket-issuers. One view is that the clause simply determines the proportion in which proceeds of sale shall be distri- buted, and provides for their distribution through Automatic Totalisators Ltd. But that interpretation does not fit the first method of payment, namely, payment by Automatic Totalisators Ltd. to the taxpayer of the sum of £10 for each and every ticket-

issuing machine manufactured or sold by or for Automatic Totalisa- tors Ltd. This sum is obviously connected with the royalty of _ £10 mentioned in clause 2, and it is an obligation which arises from the agreement and from no other transaction. The taxpayer has the right to choose the second method of payment, that is, payment by Automatic Totalisators Ltd. to it of a sum equal to ten per cent of any cash consideration for the sale of totalisator and issuer rights in any country, and a sum equal to five per cent of the total royalties received under the terms of sale for a period of ten years. But that choice can only arise, I apprehend, if there be a sale for a cash _ consideration and royalties. It is noticeable in both cases that the _ payment stipulated for is payment by Automatic Totalisators Ltd. _ Again, it is noticeable that the taxpayer is not entitled to ten per cent of the whole consideration for the sale, but only to ten per cent of the cash consideration. The totalisator rights were the property of Automatic Totalisators Ltd., and it had the sole and exclusive tights to manufacture and sell the ticket-issuing apparatus for use with totalisator machines. The clause, as it appears to me, treats

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that expressed in the first two objects, namely, to acquire patents, and in particular a patent for ticket-issuers, to that end to adopt an agreement already in draft, and to use, exercise, develop, grant licences in respect of, or otherwise turn to account, sell, or dispose of, any such patents. The taxpayer company, in pursuance of these objects entered into an agreement, which conferred upon it patent rights in the ticket-issuing invention and any improvements. The invention so acquired was saddled with contractual obligations which the vendors had undertaken immediately before the incorpora- tion of the taxpayer. These included an exclusive licence in favour of Automatic Totalisators Ltd. at a royalty for the duration of the patent for the Commonwealth and New Zealand. From its incor- poration, in 1917, until the making of the agreement of 16th November 1922, the taxpayer made no attempt to dispose of the patent rights, or any of them, whether by assignment, licence, or otherwise, except that in 1919 it appointed a director agent for the sale of all patent rights outside the Commonwealth and New Zealand. It derived royalties from Automatic Totalisators Ltd., it obtained assignments of the improvements for ticket-issuers for win and place bets invented by the vendors, and it negotiated the agreement with Setright and Automatic Totalisators Ltd. in the circumstances set out in par. 12 of the special case. Except for the manufacture and supply of an attachment used in ticket-issuing machines, these appear to be the only active transactions of the taxpayer until the making of the agreement, which, in my opinion, is the source of the profit in question. In Collins v. Firth-Brearley Stainless Steel Syndicate (1), Atkin L.J., as he then was, upheld the view that profit arising in that case from the disposal of patents was capital and not income because he thought the Commissioners "took the right view in this case, and came to the conclusion that this company was formed for the purpose of acquiring these patent tights as its one capital asset and that it was to make money out of the use of this one capital asset, but that it was not to make money by retailing them or peddling them, but to treat the one asset that it acquired as its capital and to use it accordingly, just

At a glance

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Judgment (184 paragraphs)