Shepherd v Commissioner of Taxation

Costs of the reference to be paid by the respondent.

Reference by a Taxation Board of Review pursuant to s. 196 of the Income Tax and Social Services Contribution Assessment Act 1936-1957 (the Act) of questions of law arising in a reference by the Commissioner of Taxation of an objection by a taxpayer to an assessment made by the Commissioner under the Act.

The taxpayer is the grantee of letters patent in respect of improved castors. He granted a licence to a manufacturer in Victoria to manufacture the castors upon terms inter alia that the licensee covenanted to pay him monthly during the continuance of the licence a royalty of five per cent of the gross sale price of castors manufactured by or on behalf of the licensee which had been sold during the preceding month.

On 23rd July 1957, whilst both the letters patent and the licence to manufacture were in force, the taxpayer executed a deed poll in the following terms: I George Frederick Shepherd of 11 Manor St. Brighton in the State of Victoria Engineer Do Hereby Assign absolutely and unconditionally to the persons hereinafter named and described and in the proportions hereinafter specified all my right title and interest in and to an amount equal to ninety per centum of the income which may accrue during a period of three years from the date of this assignment from royalties payable by Mark Cowen of 370 Orrong Road Caulfield in the said State manufacturer under a Deed made on the twelfth day of March 1954 between myself the said George Frederick Shepherd and the said Mark Cowen in respect of a license granted by me to the said Mark Cowen to make use exercise and vend castors under and in accordance with the Inventions protected by Letters Patent of the Commonwealth of Australia No. 122566 in respect of an Invention entitled "Improved Castor" and Letters Patent of the Commonwealth of Australia No. 136548 in respect of an Invention entitled "Improvements Relating to Castors" and Letters Patent of the Dominion of New Zealand No. 99930 for an Invention entitled "Improvements relating to Castors".

The names and descriptions of the persons to whom my right title and interest in such income is assigned and the proportions in which the amount of ninety per centum of such income is assigned are:

Mary Louisa Shepherd of 11 Manor Street Brighton in the State of Victoria Married Woman - twenty five per centum

Kathleen Campbell of 11 Manor Street Brighton aforesaid Spinster - twenty per centum

George Eric Campbell of 8 Ross Street Surrey Hills in the State of Victoria Clerk - fifteen per centum

Cecil Hamilton Campbell of 9 Norbert Street Balwyn in the State of Victoria Schoolmaster - fifteen per centum

Charles Geoffrey Campbell of Consolidated School Lockington in the State of Victoria Schoolmaster - fifteen per centum.

Thereafter the taxpayer informed the licensee of the "arrangements", meaning the provisions of the deed poll. He directed the licensee that each royalty payment due under the licence should be divided into six parts and to pay the persons named in the deed poll the appropriate proportion of the royalties set opposite their names therein. The taxpayer arranged at the same time that the licensee should pay the royalties quarterly rather than monthly as provided by the licence.

The payments by the licensee to the recipients of these respective percentages of the amounts of royalty payable under the licence apparently commenced in September 1957 and continued thereafter. Such payments were effected by not negotiable cheques drawn in favour of the named persons for the appropriate amount sent to the taxpayer and by him forwarded to the persons concerned.

The total amount which became payable under the licence for royalties during the financial year commencing on 1st July 1958 was £7,030; £999 thereof being paid to the taxpayer and the balance to the persons named in the deed poll in the manner described.

The Commissioner assessed the taxpayer in respect of the income year 1958-1959 upon the full sum of £7,030 as income derived by him. The taxpayer objected to that assessment claiming that £6,031, being the total of the amounts paid to the donees by the licensee, was not income derived by him during the year of income.

The questions upon which the Taxation Board of Review seeks answers are: "1. Whether the taxpayer by the deed referred to in par. 5 hereof effectively assigned to the persons named therein in the proportions therein set forth, all his right title and interest in and to an amount being ninety per centum of the royalties which in fact accrued during the period of three years from 23rd July 1957 under the agreement made on 12th March 1954 referred to in par. 2 hereof. 2. Whether the sum of £6,031 or some and what part thereof, referred to in par. 9 hereof formed part of the taxpayer's assessable income for the year ended 30th June 1958."

The Commissioner's principal contention is that the gift was a gift of part of the taxpayer's income to be derived from royalties. The income was thus first derived by the taxpayer and then, pursuant either to a voluntary promise so to do, or to a voluntary assignment of the royalties themselves, portions of his income were handed over to the donees. The taxpayer on the other hand contends for an immediate gift of parts of his right to the royalties.

The answers to the questions asked by the Taxation Board of Review turn, in my opinion, exclusively upon the construction of the deed poll. The licensee was under promise to pay royalties to the taxpayer. That promise in its entirety would have been assignable at law pursuant to the provisions of s. 134 of the Property Law Act 1958 Vict.. But part of it could not be so assigned, nor could the royalties as after acquired property be assigned at law. Thus, whether the deed poll be construed as an attempted assignment of part of the promise to pay royalties or an attempted assignment of part of the royalties themselves when received, it will in either case be ineffective at law. In my opinion, the deed poll is not capable of being regarded as or as containing a covenant by the taxpayer to pay money in the future to the named persons, the amount to be paid being quantified in relation to the amount of royalties received by the taxpayer. The function of the expression "an amount equal to" in the operative words of the deed poll is not, in my opinion, to make the purported assignment a covenant to pay money but, as I shall mention later, its purpose, in my opinion, is to work out the fraction of the right to royalties which in total is being assigned to the donees. Indeed, I see in the employment of the words "an amount equal to" an indication that it is the right to the royalties rather than the royalties as after acquired property which is the subject matter of the assignment. There is therefore no need to consider whether the principle that a person with whom or for whose benefit a covenant is made in a deed poll may recover at law upon the covenant though neither a party to nor a signatory of it would be applicable to this deed if on its proper construction it contained a covenant to pay money to the named persons.

In my opinion, the situation of the deed poll is that it is ineffective at law to confer on any of the named persons any legal right whether to any part of the promise to pay royalties or of the royalties themselves when received.

However, a part or parts of a chose in action can be assigned in equity. In my opinion, if the assignment of a part of the chose in action consisting of the promise to pay royalties is complete, it is effective to vest the appropriate part of the right equitably in the assignee, whether or not the assignment is for consideration or by way of gift. It is only if the donee needs the assistance of equity to complete the gift, as distinct from enforcing the right given, that he can be met with the defence that equity will not assist a volunteer. Here, if there was an immediate gift of a proportion of the right to the royalties, the donees need seek no assistance. If the deed upon its true construction evidences an intention presently to assign part of the right, the assignment would be complete within the doctrines of equity. If, on the other hand, the deed purports to assign the stated proportion of the royalties as after-acquired property the assignment would be ineffective in equity for want of consideration. The question therefore, in my opinion, is a narrow one, namely, whether upon its true construction the deed purports to assign part of the right to the royalties or of the royalties themselves as after-acquired property.

Nothing, it seems to me, turns on the fact that the taxpayer himself obtained or transmitted the cheques to the donees. Such a course is quite consistent with either construction of the deed poll, i.e. either construing it as an immediate gift of a part of the chose in action or as a gift of the royalties themselves as and when received.

The task in construing the deed is to find the meaning intended by the taxpayer as expressed. No form of words is required for an equitable assignment but it is necessary to find the expression of an intention to assign. The deed does purport in terms presently to assign its subject matter and to do so absolutely and unconditionally. In describing what he considered he had done by the operative words of the deed, the taxpayer in the second paragraph of the deed, speaks of the persons "to whom my right title and interest is assigned". The difficulty in the case arises in the description of the subject matter of the gift. That description begins with the words "all my right title and interest in and to" which words are appropriate to the assignment of a chose in action as distinct from its ultimate produce. But the words that follow create the problem, "an amount equal to ninety per centum of the income which may arise during a period of three years from the date of this assignment".

Had the taxpayer been dealing with his entire right to royalties, probably the description of the subject matter of the intended gift would not have been difficult. But because the deed was to deal with only part of that right and that only for a limited period of years, the draftsman, it seems to me, has been led into the use of the awkward words which I have quoted. I think it not inappropriate when seeking the intended meaning of the words to notice the consequences of not finding in the language of the deed, as a whole, an intention to make a present gift of part of the right to royalties arising under the licence to manufacture. For if the deed poll is not an equitable assignment of part of that right it must be, in my opinion, an attempted equitable assignment of the royalties as after-acquired property. Equity would treat such an assignment as or as evidencing a promise to hand over the royalties when received: but the promise being voluntary would not be enforced by it. The directions given by the taxpayer to the licensee subsequent to the execution of the deed poll would then be no more than revocable mandates. As such, of course, they would not support the taxpayer's objections.

No doubt to speak of the subject matter of the gift as an amount of income to accrue from royalties would seem to support the conclusion that what is to be given is the property in the form of money produced by the promise to pay royalties. But the full description of the subject matter of the assignment is of "the right" to such amounts - an unlikely expression to describe the money itself. In my opinion, it indicates that the taxpayer was not intending to promise that he would pay money measured by the amount of royalties accrued or that he was intending to assign the royalties themselves. Its use rather suggests, to my mind, that he was intending to place the persons he wished to benefit in the position of being able themselves to assert a right to receive the appropriate amounts from the licensee.

As I have mentioned, the dominant consideration is the intention of the taxpayer as expressed in the deed. The expressed indications of an intent presently to assign portions of his right to royalties are strong enough, in my view, to overbear any contrary indication which might possibly be derived from the words which I have just discussed. These clumsy expressions are used, in my opinion, as I have said, in an endeavour to attain the two desiderata of a gift of part only of the right and only for a limited period of years. They are not in any case really so inappropriate to a present gift of a part of the right to royalties that they should be allowed to dominate the construction and to displace the evident intention expressed in the earlier part of the deed.

I have come to the conclusion that upon the true construction of the deed poll the taxpayer did thereby equitably assign to the named donees the stated proportions of his right during the ensuing three years to royalties from the licensee under the licence to manufacture the patented article.

It was also submitted by the Commissioner that the subject matter of the intended assignment was a mere spes or possibility which could not be voluntarily assigned. This argument concedes the intention to assign, but attacks its subject matter as insusceptible of assignment by way of gift. If there is no such intention to assign evidenced, the Commissioner would succeed on other grounds, as I have mentioned.

The basis of this submission is that in the event there may not be any amount payable for royalties because no sales of castors may be made. But this misconceives the matter. That a promise may not be fruitful does not make it incapable of assignment. Reference was made on behalf of the Commissioner in this connexion to Norman v. Federal Commissioner of Taxation [1] . But that case did not decide anything to the contrary of what I have just said. So far as the case dealt with the attempted assignment of the promise to pay interest, it must, in my respectful opinion, depend upon the view that the promise to pay interest in that case inhered in the existence of a principal sum upon which the interest was to be calculated and payable. Consequently, there was there no promise to pay interest, if no principal remained due. The case, in my opinion, has no relevance to the problem raised by the language of this deed poll as applied to the facts of this case.

Accordingly, in my opinion, the questions asked by the reference by the Taxation Board of Review should be answered: 1. Yes. 2. No.

The appellant, being the grantee of letters patent in respect of certain inventions for castors, granted to one Mark Cowen in 1954 a licence to use the inventions upon terms which included the payment to the appellant every month of a royalty of five per centum of the gross sale price of castors manufactured thereunder during the preceding month. In the year ended 30th June 1958, royalties amounting to £7,030 became payable by Cowen. He made quarterly instead of monthly payments, each payment being made by sending to the appellant, in accordance with a request made by him, six cheques, one drawn in favour of the appellant himself and one in favour of each of five other persons. The appellant distributed the cheques amongst the named payees, and they were duly honoured. In all, the appellant received during the year £999 from cheques drawn in favour of himself, and the other payees received amongst them £6,031. The Commissioner assessed the appellant to income tax on the footing that his assessable income including the £6,031 as well as the £999. It is clear that if there had been no more relevant facts in the case than I have stated the assessment would have been justified, for the making of the payments to the five persons other than the appellant, even if not to be considered as payments by the appellant out of income derived by him, would have constituted the derivation of income by him: s. 19 of the Income Tax and Social Services Contribution Assessment Act 1936-1957 Cth.

The appellant contends however that by a deed poll which he executed on 23rd July 1957 he assigned to the five other persons, by way of gift, ninety per centum of the benefit of Cowen's covenant to pay the royalties which should accrue to him in the ensuing three years; and he says that accordingly the receipt by each of those persons of the amounts paid to him or her by the cheques drawn in his or her favour after 23rd July 1957 was a derivation by that person of income from property which was vested in him or her, and not a receipt of money which the appellant should be considered to have derived as his income. The abovementioned sum of £6,031 is taken to have been the total of the amounts received by the five persons between the date of the deed poll and the end of the relevant year of income.

The terms of the deed poll have been set out and I shall not repeat them. The deed exhibits in its operative words, and underlines twice later, the intention of effecting an immediate alienation of property presently existing, presently belonging to the assignor, and consisting of a right, title and interest in respect of royalties to become payable by Cowen under the licence agreement. The suggestion has been offered that nevertheless the operation of the deed on its true construction is not that of an assignment but is that of a covenant to pay an amount to be calculated by applying ninety per centum to the total of the royalties in the three-year period. If this were in truth its operation the consequence would necessarily be that the royalties themselves would have been the income of the appellant; but the suggested construction does not appear to me to give the deed its true effect. The force of the contention lies in the presence of the words "an amount equal to", which may be thought to show that the intention was to make over a sum of money measured by reference to the royalty income but not necessarily forming part of it, and thus to create though somewhat clumsily, a mere money obligation. But the subject of the right which the appellant had in respect of the three-year period under his agreement with Cowen was correctly described by the use of the indefinite article; it was "an amount" and not the royalty income itself. Consequently an assignment of ninety per centum of the right in respect of the period, or (what comes to the same thing) an assignment of the right to an amount equal to ninety per centum of the royalty income of the period, might be expressed, without inaccuracy, as an assignment of the right to be paid an amount out of that income equal to ninety per centum thereof. That, it seems to me, is what the collocation of words means. To construe what purports to be an assignment of property as a covenant to make payments seems to me a step which only compelling circumstances or a compelling context could justify, and I do not think that it can be right to take that step in the present case. It would mean doing no little violence to the language of the instrument, and the probabilities seem to me to be against it. After all, a person whose intention it was to undertake a future pecuniary obligation, equal to a percentage of his royalty income in a future period but to be met out of his resources generally, would not be very likely to choose the language of assignment to express that intention, or even, I should have thought, to choose a deed poll rather than a deed inter partes as the appropriate instrument for the purpose.

On behalf of the Commissioner the contention was made that if the deed be construed as intending an assignment it should be held to have been ineffectual on the ground that in respect of the royalties to become payable by Cowen the appellant had no more than a mere expectancy or possibility such as cannot be assigned either at law or in equity: In re Ellenborough [1] . In support of this contention reliance was placed upon the decision which this Court gave in Norman v. Federal Commissioner of Taxation [2] in relation to a purported voluntary assignment of what was described in the relevant deed as the assignor's right, title and interest in and to the interest payable by a firm in respect of a sum of £3,000 being portion of a larger sum that had been deposited by the assignor with the firm and was still outstanding at the date of the assignment. That case, however, stands in clear contrast with the case that is before us. The deposit had been made under an agreement which provided that the firm might repay the money or any part of it at any time without notice, but that the taxpayer should not be entitled to require payment except upon eighteen months' notice. As it turned out, the money was not repaid before the end of the relevant year of income, so that interest in accordance with the agreement became payable and was paid in respect of that year. The interest was held to be the assignor's income, on the ground that the attempt to assign the right to receive it was void as being an attempt to assign, without valuable consideration, property not presently in existence. To understand the ground of decision it is necessary to remember that in respect of the future year the loan agreement recorded the terms which should apply to the relationship of borrower and lender so long as such a relationship should exist, but it left the borrower free to decide whether such a relationship should exist in the relevant year. It gave the lender no right in any possible event to insist upon there being a loan in existence in that year. In the present case the situation at the date of the assignment was exactly the opposite. There existed at that time a contractual relationship between the appellant and Cowen which by its terms must continue throughout the ensuing three years, whether Cowen should wish it to continue or not. The appellant, therefore, had a vested right in respect of those three years. It might indeed become divested, for the licence agreement provided for cesser of Cowen's liability to pay royalties if the letters patent should not be maintained or should be declared void; but the right existed, though it was thus subject to defeasance by events not within the control of Cowen. It is true also that what the appellant's right under the licence agreement would yield in royalties in those years - indeed, whether it would yield any royalties at all in those years - no doubt depended upon contingencies partly within the control of Cowen. It was for him to decide how many castors, if any, he would manufacture in accordance with the appellant's inventions and try to sell. Market conditions would then determine how successful his efforts to sell would be. But whatever he might do or desire to do, the existence of the appellant's contractual right would be unaffected, though the quantum of its product might be. The tree, though not the fruit, existed at the date of the assignment as a proprietary right of the appellant of which he was competent to dispose; and he assigned ninety per centum of the tree. The case is of the general class of which Brice v. Bannister [1] is an example, and may be usefully compared with Bergmann v. Macmillan [2] and Hughes v. Pump House Hotel Company Ltd. [3] .

1. [1903] 1 Ch. 697. 2. (1963) 109 C.L.R. 9. 3. (1878) 3 Q.B.D. 569. 4. (1881) 17 Ch. D. 423. 5. [1902] 2 K.B. 190.

The intention being to assign a part only of a chose in action - only ninety per centum of it and for a limited period - the assignment had of necessity to be equitable: In re Steel Wing Co. Ltd. [4] . So far as the formal means employed is concerned there can be no doubt as to its sufficiency, for all that is required for an equitable assignment is a manifestation by the assignor of an intention to transfer the chose in action to the assignees in a manner binding upon himself, as distinguished from an intention merely to give a revocable mandate while retaining ownership of the chose in action: Milroy v. Lord [1] . Construed in the sense I have indicated, the deed in the present case manifests unequivocably the intention to make an assignment. To construe it as intending a revocable mandate would be impossible. But we have been invited to hold that an equitable assignment of existing property is ineffectual unless for valuable consideration. The general question was discussed by Windeyer J. in his dissenting judgment in Norman v. Federal Commissioner of Taxation [2] , where the proposition now contended for was rejected. I agree in the views which his Honour expressed in this portion of his judgment, as, apparently, did Dixon C.J. in that case. We are not here considering a purported equitable assignment of a legal chose in action capable of assignment at law. The consideration which is necessary to attract the jurisdiction of equity to perfect an imperfect assignment is not necessary where the only possible assignment is equitable and the assignor has done all that could be done by him to perfect an equitable assignment.

1. [1921] 1 Ch. 349. 2. (1862) 4 De G. F. & J. 264, at p. 274 [45 E.R. 1185, at p. 1189]. 3. (1963) 109 C.L.R. 9, at pp. 30-34.

In the result, I am of opinion that when the distributions of royalty moneys were made amongst the five persons nominated as assignees the moneys each received were the fruits of an undivided share of a contractual right which share had become beneficially his or her own property. Accordingly I would hold that the royalty moneys which were paid to the five persons, up to ninety per centum of the whole, were not assessable income of the appellant.

I would answer the questions asked in the case stated: (1) Yes; (2) No.

The appellant taxpayer was at all material times the grantee of certain letters patent relating to furniture castors. By deed dated 12th March 1954 he granted to one Mark Cowen an exclusive licence to manufacture and sell the castors in return for a royalty of five per cent on the amount of the gross sales made by the licensee. In November 1954 the appellant and the licensee agreed that the latter might grant to a company called Shepherd Castors Pty. Ltd. a sub-licence to manufacture and sell the castors upon the terms contained in the deed of 12th March 1954 and that the Company should pay whatever royalties became due direct to the appellant. Thereafter the Company manufactured and sold the castors and from time to time paid to the appellant the royalties for which the licence provided. On 23rd July 1957 the appellant executed a deed in the following terms: I George Frederick Shepherd of 11 Manor St. Brighton in the State of Victoria Engineer Do Hereby Assign absolutely and unconditionally to the persons hereinafter named and described and in the proportions hereinafter specified all my right title and interest in and to an amount equal to ninety per centum of the income which may accrue during a period of three years from the date of this assignment from royalties payable by Mark Cowen of 370 Orrong Road Caulfield in the said State manufacturer under a Deed made on the twelfth day of March 1954 between myself the said George Frederick Shepherd and the said Mark Cowen in respect of a license granted by me to the said Mark Cowen to make use exercise and vend castors under and in accordance with the Inventions protected by Letters Patent of the Commonwealth of Australia No. 122566 in respect of an Invention entitled "Improved Castor" and Letters Patent of the Commonwealth of Australia No. 136548 in respect of an Invention entitled "Improvements Relating to Castors" and Letters Patent of the Dominion of New Zealand No. 99930 for an Invention entitled "Improvements relating to Castors".

The names and descriptions of the persons to whom my right title and interest in such income is assigned and the proportions in which the amount of ninety per centum of such income is assigned are: " ". There followed the names and addresses of five persons, a percentage being set against each name. The deed was made without consideration.

During the year ended 30th June 1958 the total royalties which became payable amounted to £7,030. Of this amount the Company paid to the taxpayer £999 and to each of the other persons named in the deed it paid amounts totalling £6,031. These are the figures set out in the stated case but it is not clear to me how they were arrived at since ninety per cent of £7,030 is £6,327 and ten per cent of £7,030 is £703. However that may be, the fact is that in his return of income for the year the appellant showed the receipt of £999 but did not include the balance of £6,031. The Commissioner of Taxation took the view that this last amount was properly to be regarded as part of the income derived by the appellant and assessed him to tax accordingly.

The first task is to construe the deed. Did the appellant, by it, make an equitable assignment of a presently existing contractual right to be paid portion of moneys which might become due to him in the future by way of royalty or did he merely covenant that, in the event of royalties accruing to him in the future, he would pay to the named persons varying amounts to be ascertained by reference to the amount of those royalties? The opening words of the provision point to the conclusion that what was being assigned was a then existing right but the difficulty that seems to me to lie in the way of the construction for which the appellant contends is that what was expressed to be assigned was not the appellant's right, title and interest in and to ninety per cent of the royalties that might thereafter become payable under the licence. It was his "right title and interest in and to an amount equal to ninety per centum of the income which may accrue from royalties payable by Mark Cowen" and "the income which may accrue" is plainly a reference to income which may accrue to the covenantor. Notwithstanding the opening words of the covenant I think it is one by which the appellant undertook to pay to each of the persons named an amount to be measured by reference to the amount of royalties if and when they accrued to him under the licence. For the appellant reliance was also placed upon the fact that the later provision of the deed, which named the persons to whom the payments were to be made and defined the amount to be paid to each of them, speaks of the persons "to whom my right title and interest in such income is assigned and the proportions in which the amount of ninety per centum of such income is assigned" and the words "such income" refer back to "the income which may accrue from royalties". It was submitted that this shows that by the earlier clause it was intended to assign the appellant's contractual right to receive royalties if and when they became payable or at least to assign so much of that contractual right as would have entitled him to receive ninety per centum of such royalties. It is true that the two clauses do not run well together. One or the other must be moulded to some extent to fit the other but the first is the operative provision and the purpose of the later clause is merely to identify the persons who are intended to be benefited and specify the extent to which each is to benefit.

In the result, therefore, I am of opinion that what the appellant covenanted to do was to pay to the persons named amounts to be ascertained by reference to so much of his future income as might consist of royalties and that he did not assign a contractual right to receive any part of that income.

In these circumstances I would answer the questions (1) "No", (2) "Yes", and it is unnecessary for me to consider the further submissions made by counsel for the Commissioner.