Tagget v Commissioner of Taxation

Background 6 Mr Tagget has been involved in the business of earth moving the whole of his working life. He lives in Tanglewood, New South Wales and has been involved in the Tanglewood Estate since the late 1970s. Tanglewood Estate covers approximately 1,100 acres of land overlooking Casuarina Beach, which is about 5 kms south of Kingston in the Tweed Shire of New South Wales. 7 In the late 1970s Mr Tagget started working with Tanglewood Valleys Pty Ltd (Tanglewood Valleys). Mr Geoff Bell was a director of Tanglewood Valleys and Mr Tagget came to know him well. Mr Tagget, through his involvement with Tanglewood Valleys and Mr Bell, became aware that in 1982 development consent was given by Tweed Shire Council for the development of part of Tanglewood Estate. The development consent provided for the construction of 44 lots within what is known as the Stage 5 development of Tanglewood (the Stage 5 Development). 8 In 1983 Mr Tagget started a business named Peter Tagget Earthmoving. He commenced working with Tanglewood Valleys on earthworks and road building and became a civil works contractor and adviser to the company. Between 1983 and 1987 Mr Tagget performed a large amount of work including land clearing and levelling, rubbish removal and landfilling, preparing driveways, laying bitchumen, installing water and electricity supply and arranging surveys in relation to the Stage 5 Development. In 1989 Mr Tagget sold the business of Peter Tagget Earthmoving to his brother. 9 In or about 1998, Mr Tagget became aware that Tanglewood Valleys was running into financial trouble and that the developer was not going to proceed with the Stage 5 Development. Financiers for the development had entered into possession and put the Tanglewood Estate up for sale. In early 1998, Mr Tagget acquired shares in Hillpalm which made an offer to MLC Lifetime Company Limited (MLC) to acquire the Tanglewood Estate. 10 In March 1998, Hillpalm and MLC entered into a contract for the sale of Tanglewood Estate by MLC to Hillpalm for the sum of $2,200,500. MLC allowed Hillpalm to enter into early possession of the Tanglewood Estate enabling Hillpalm to progress the development. In the meantime, Mr Tagget commenced negotiations with various parties in an attempt to raise finance for Hillpalm to complete the purchase. Those negotiations were unsuccessful. In July 1998 MLC terminated its contract with Hillpalm and in August 1998 MLC commenced proceedings against Hillpalm and Mr Tagget for breach of contract. 11 Mr Tagget then entered into negotiations with Joanne Hambrook and Pat Wilson with a view to having them take over Hillpalm. On 2 November 1998 the Deed was executed by Mr Tagget, Hillpalm, Joanne Hambrook and David Williams. Following execution of the Deed all shares in Hillpalm were transferred to another company associated with Ms Hambrook and Mr Williams. Mr Tagget and the other directors of Hillpalm resigned and Ms Hambrook and Mr Williams were appointed in their place. Hillpalm paid $2,275,000 to MLC which transferred the Tanglewood Estate to Hillpalm by memorandum of transfer dated 20 November 1998.

The Deed of Agreement 12 The recitals of the Deed are brief. They read: A. Hillpalm intends to acquire the Land. B. Hillpalm wishes to appoint Tagget to assist with the implementation of the Project. C. The parties wish to enter into this Deed to record the understanding between them.

13 The Land is defined in the Schedule as consisting of Lots 154, 155 and 156 in Deposited Plan 801121, Lot 74 in Deposited Plan 755701 and Lot 151 in Deposited Plan 630766. 14 As I have mentioned, MLC transferred the Tanglewood Estate to Hillpalm on 20 November 1998, a little more than two weeks after the Deed was executed. There is no evidence which indicates what, if any, interest Hillpalm had in the Land (as defined) at the time it entered into the Deed. The contract of sale originally made between MLC and Hillpalm was, as I have also mentioned, terminated by MLC in July of 1998. 15 "Project" is defined in the Deed to mean "… the planning, development, sub-division, marketing and completion of sale of the Land." 16 Clauses 2 and 2.2 of the Deed provide as follows: 2. Hillpalm may (at its discretion), appoint Tagget to assist in the management of the Project and will formalise that appointment by entering into an Agreement incorporating such provisions normally associated with an appointment of that nature including, inter alia:

(a) a list of services to be provided by Tagget which may include (at the discretion of Hillpalm), among other things:

(i) general advice and consultation in relation to the implementation of the Project;

(ii) liaison with relevant authorities in relation to development approvals and the status of current zonings and development approvals associated with the Land;

(iii) arranging and co-ordinating preparation of plans, drawings, specification surveys, reports and relevant documentation in relation to the Project;

(iv) recommending advisors and contractors to assist in the implementation of the Project;

(v) liaising with marketing consultants to co-ordinate the sale of the Land.

(b) Preparation of management reports in connection with the implementation of the Project;

(d) Provisions dealing with instructions and requests issued by the principal; and

2.2 The parties will negotiate in good faith, to incorporate, as part of that agreement a licence for Tagget to occupy Lot 157 prior to the transfer of that land to Tagget in accordance with Hillpalm's obligations under this Deed.

17 Clauses 3.1 to 3.3 of the Deed provide: 3.1 Hillpalm agrees to transfer to Tagget, for nominal consideration ($10.00) and free of any encumbrance or charge whatsoever proposed lot 157 comprising an area approximately 11.2 hectare and shown in Michelle Survey Group Drawing No. 4440-93A annexed hereto (Lot 157). All survey fees to complete the excision of Lot 157, Council application fees and costs of compliance with any conditions of approval to sub-divide will be paid by Hillpalm. Stamp duty and Titles Office registration fees in connection with the transfer will be paid by Tagget. Hillpalm's liability under this Clause will be limited to $8,000.00. All costs of and incidental to the proposed transfer over and above this amount will be paid by Tagget who agrees to indemnify Hillpalm in respect thereof.

3.2 The sub-division and transfer of proposed lot 157 is subject to, and will occur as soon as reasonably practical after, Hillpalm realises gross sale proceeds from the sale of all or any part of the Land (including any funds received from a compulsory acquisition by any Statutory Authority), in the sum of $3.2 million. Hillpalm will fully and faithfully account at all times to Tagget in respect of the status of the receipt of sale proceeds and will authorise its accountant to provide such information as may be reasonably required by Tagget in relation to same at any particular time and from time to time.

3.3 If for any reason, beyond the control of Hillpalm, approval cannot be obtained to create a separate and indefeasible title to Lot 157 and Hillpalm cannot comply with its obligations under this Clause, Hillpalm will pay to Tagget a monetary sum equivalent to the unimproved value of Lot 157 to be agreed by the parties or failing agreement to be determined by a registered valuer appointed by the President for the time being of the Institute of Valuers whose decision will be final and binding. The costs of the valuation will be shared by the parties. Tagget will accept the compensation in full and final satisfaction of all claims. 18 Clauses 6.1 to 6.3 of the Deed provide: 6.1 As soon as reasonably practical after it completes its acquisition of the Land, Hillpalm will, through its consultants diligently pursue with the Tweed Shire Council approval for sub-division of "Stage 5" of the "Tanglewood Estate" in accordance with the development consent issued by Council on 8 March 1982 (as amended) ("the Stage 5 Development Consent"). The Stage 5 development consent comprises an approval for the sub-division of 44 rural residential lots. If Council confirms the validity of the Stage 5 development consent achieving a yield of no less than 40 lots, Hillpalm will do everything reasonably required to cause the relevant linen plan of survey to be prepared and sealed by Council as soon as reasonably practical. If the Linen Plan of Survey in respect of the Stage 5 Development Consent is duly sealed by Tweed Shire Council, Hillpalm will cause Lot 157 to be transferred to Tagget on the earlier of:

(a) the date determined in accordance with Clause 3.2 of this Agreement; and

(b) 24 months after the Linen Plan in respect of the Stage 5 development approval is sealed by the Tweed Shire Council and released to Hillpalm.

Hillpalm's obligation to transfer the Land within 24 months of the release of the relevant Linen Plan of Survey will only arise if the Plan of Survey creates individual titles to 40 lots (capable of onsale by Hillpalm), failing which, the sub-division and transfer of Lot 157 will be effected in accordance with Clause 3.2.

6.2 Tagget will, if requested by Hillpalm, enter into an agreement in the nature of the one contemplated by Clause 2 of this Memorandum prior to and as a condition of any transfer of Lot 157 in accordance with the accelerated timetable contemplated by sub-clause 6.1(b).

6.3 Hillpalm undertakes that it will use all reasonable endeavours to sell the lots created upon registration of the relevant Linen Plan in accordance with best business practices customary for a land subdivision of this nature.

19 Clause 7 of the Deed provides: 7 Hillpalm and the Guarantors have entered this Agreement with Tagget pursuant to a representation by Tagget that he has experience and a knowledge of the work required to be undertaken in order to plan and implement the Project, and Tagget hereby undertakes that he will use all reasonable endeavours to assist Hillpalm in planning and implementing the development and construction of the Project and provide all such assistance reasonably required by Hillpalm in respect thereof. Tagget acknowledges that Hillpalm has relied on Tagget's representations that he will, in good faith, assist with the implementation of the Project.

The dispute between Mr Tagget and Hillpalm 20 There was no written agreement entered into between Mr Tagget and Hillpalm of the kind contemplated by cl 2 of the Deed. But it appears that he did perform some work for Hillpalm. According to Mr Tagget, the work performed by him included conducting negotiations for machine hire and contracting of required labour and supervising the construction of an outdoor arena in what was known as the Equestrian Centre. He also said that he supervised the drainage and fixing of certain damaged levy banks, that he assisted in fixing a soil problem by developing a management plan as to which it was necessary for him to liaise with council and various environmental scientists. I will not record all that Mr Tagget says that he did in relation to the Stage 5 Development after he entered into the Deed but his evidence indicates that he did many things. 21 In June 1999 Mr Tagget wrote to Hillpalm claiming that it owed him $60,010. He stated: I refer to the Deed of Agreement dated November 1998 between myself and your company. Clause 2 of this Agreement provides that you will enter into a agreement in relation to the management by me of the project at Tanglewood. To date I have not received the agreement and I have raised this issue with you previously. I have assessed my fees in relation to my assistance as being at the rate of $2,500.00 per week. My costs based upon this fee are as follows:

22 Mr Tagget then provided some details of how the $66,010 was calculated. He continued: 20/11/98 - 25/6/99 - 35 weeks @ $2,500 $77,500.00 Reimbursement as per letter of John Costello dated 15/1/99 $34,910.00 Total $112,410.00 Less Amount paid $ 46,400.00 Amount owing $ 66,010.00 In addition to this fee I have incurred and will continue to incur motor vehicle expenses which I also seek reimbursement. In an effort to reach a speedy agreement I would propose the following: 1. To reduce my weekly fee to $1,000.00 2. That you will register and transfer the subdivision of Lot 157 to me forthwith. 3. That you will reimburse my motor vehicle running expenses. I have adhered to the terms of the agreement. I note resumption of land has been made by the RTA and note that Council has approved the subdivision of 41 lots. Please give your urgent attention to this letter.

23 It is not clear how Hillpalm responded to that letter in the near term but in March 2000 Ms Hambrook wrote to Mr Tagget complaining about various matters. She stated: Since settling the Land acquisition, Hillpalm has experienced many difficulties in relation to both land and development issues and in respect of your performance as Development Consultant and Earthworks Contractor.

24 After referring in vague terms to Mr Tagget's activities on site which she asserted were a cause for serious concern, Ms Hambrook went on to state: Hillpalm is in the process of reviewing it's development scheme. It is intended that all further preparatory works on site be suspended pending formulation of a revised plan of development which will comply with Council requirements. It was anticipated that the Company would now be in a position to commence Stage 5 development works, but the advice of Council and the Company's Planning and Engineering Consultants cast considerable doubt over the feasibility of Stage 5 in it's current approved format. Stage 5 cannot be considered as an independent proposal and must be reviewed in the context of the overall Development Scheme. We will work through these issues as soon as reasonably practical and we will keep you informed of any significant developments. In the meantime, and so there is no misunderstanding, the Company wishes to clarify:- 1. Your services on site are no longer required and all on site development works will be suspended pending formulation of a revised development scheme. 2. Hillpalm does not intend to formalise any appointment with you in terms of the management of the project, either in terms contemplated by clause 2 of the Deed of Agreement or otherwise. In these circumstances the Company cannot consent to a licence to occupy lot 157 which was only ever to be considered in the event that the parties were able to reach agreement in respect of your project management role. 3. Hillpalm does not intend to cause a Transfer of lot 157 other than strictly in accordance with the terms contemplated by the Deed of Agreement and at all times subject to performance of your express and implied obligations under that agreement.

25 Mr Tagget's solicitor responded to this letter with what is best described as a request for further particulars of Hillpalm's complaints. In her reply Ms Hambrook declined to elaborate further, merely denying that Hillpalm was in breach of the Deed and indicating that any proceedings commenced by Mr Tagget would be defended. 26 In November 2000 Mr Tagget commenced proceedings in the District Court of New South Wales. His affidavit refers to Supreme Court proceedings but in this he is clearly mistaken. The original Statement of Claim is not in evidence but it appears from the Further Amended Statement of Claim which is in evidence that his original claim was for the liquidated sum of $122,610 in respect of work done and materials supplied by Mr Tagget at the request of Hillpalm between November 1998 and March 2000. By the amendments, Mr Tagget enlarged his claim substantially to $750,000 in damages inclusive of the liquidated sum. Most of the total amount claimed was for general damages for alleged breaches of the Deed. 27 In his pleading, Mr Tagget alleges various express terms of the Deed founded upon clauses 2.2, 3.1, 3.2, 3.3, 6.1 and 6.3. At paragraph 17 of his pleading it is asserted that: Pursuant to the Agreement, the First Defendant appointed the Plaintiff and the Plaintiff performed work and provided materials and services to the First Defendant to assist in the management of the Project between 20 November 1998 and about March 2000.

Six different breaches of the Deed are then pleaded in paragraph 19: In breach of the Agreement: (a) the First Defendant failed to negotiate in good faith to incorporate as part of the Employment Agreement a licence for the Plaintiff to occupy lot 157 prior to its transfer to the Plaintiff: and/or (b) the First Defendant has refused and/or failed to diligently pursue the Tweed Shire Council for approval for subdivision of Stage 5 of the Tanglewood Estate in accordance with the development consent issued by Council on 8 March 1982: and/or (c) the First Defendant has failed to do everything reasonably required to cause the relevant linen plan of survey to be prepared and sealed by Council as soon as reasonably practicable: and/or (d) the First Defendant has refused to pay to the Plaintiff the monetary sum equal to the unimproved value of lot 157: and/or (e) the First Defendant has refused and/or failed to transfer to the Plaintiff for a nominal consideration ($10) free of any encumbrance or charge whatsoever the proposed Lot 157: and/or (f) the First Defendant has failed to do things reasonably required to ensure that the Plaintiff obtained the benefit of the Deed.

28 The Defence filed by Hillpalm denied that it had breached the Deed. It also asserted that Mr Tagget's entitlement to be paid the liquidated sum was conditional upon Mr Tagget being appointed under cl 2, something which Hillpalm denied had occurred.

The deed of release 29 In August 2004 a judgment was entered by consent in favour of Hillpalm with no order as to costs. This appears to have occurred pursuant to a Deed of Release (the Deed of Release) dated 11 March 2004. The recitals state that the parties had previously entered into the Deed and that they are also party to the District Court proceedings commenced by Mr Tagget. They then state: It is the parties intention by this Deed to resolve any claims that they might have against the other and to substitute the rights and obligations created by this Deed for any other rights or obligations that the parties might otherwise have had against each other whether dealt with in the proceedings or otherwise.

30 Clauses 1 and 2 of the Deed of Release are most relevant. They provide: 1. In consideration of the obligations created by this Deed

(i) Hillpalm will undertake its best endeavours at its own expense to obtain approval from the Tweed Shire Council for the subdivision of a parcel of land from Lot 529 in Deposited Plan 1003396, being a parcel of land conforming generally to the parcel identified and described as Lot 1 in the McLauchlan Surveying Plan No. 37342 which comprises Schedule 3 to this Deed ("Lot 1"). (ii) In the event that the subdivision application referred to in (i) is successful, then Hillpalm will transfer to Tagget, or to an entity nominated by Tagget, Lot 1 at the expense of Tagget. 2. In the event that the subdivision referred to in clause 1(i) of this Deed is unable to be effected within a period of six (6) months from the date of this Deed, then Hillpalm shall within fourteen (14) days appoint three (3) registered valuers comprising the persons or firms whose names appear in Schedule 4 to this Agreement, to produce a notional valuation of the proposed Lot 1, based on its current zoning, and shall pay to Tagget within twenty eight (28) days of the receipt of the last of those valuations an amount of money equivalent to the average of the three valuations so obtained.

The land transfer 31 The transfer from Hillpalm to Mr Tagget of what was by this time Lot 1 in Deposited Plan 1084992 was dated 20 September 2005 and expressed to be "pursuant to the Deed of Agreement between Hillpalm and Mr Tagget". It was registered on 18 October 2005. 32 The evidence established that Lot 1 in Deposited Plan 1084992 was not precisely the same as proposed Lot 157. Mr Tagget's evidence was that he still ended up with about 11.2 hectares but that the western boundary for Lot 1 was located about 40 or 50 metres away from where it was originally shown to be in the drawing attached to the Deed which identified proposed Lot 157. 33 It was common ground that the value of proposed Lot 157 was $450,000 as at the date of the Deed. I should note, however, that the valuation relied upon by Mr Taggert related to Lot 1 in DP 1084992 which was, as Mr Tagget's evidence established, slightly different to proposed Lot 157. But since the Commissioner was content to ignore the distinction between the two parcels of land I shall do the same. 34 A special purpose financial report by Grant & Brady, Chartered Accountants, was prepared for Mr Tagget in respect of the financial year ended 30 June 2006. It included a profit and loss report for that year which showed an amount of $1,200,000 as income. The relevant entry was described as "Land Compensation".

RELEVANT LEGISLATION 35 This proceeding is an appeal by the Applicant under s 14ZZ of the Taxation Administration Act 1953 (Cth) (the Administration Act). The appeal is against a "reviewable objection decision" within the meaning of sub-paragraph (a) of s 14ZZ: see the definition of that expression in s 14ZQ of the Administration Act. 36 Section 14ZZO of the Administration Act provides, in substance, that the appellant's challenge to the objection decision is limited to the grounds stated in the notice of objection unless the Court otherwise orders. It also provides that the appellant has the burden of proving that the assessment is excessive. 37 Section 6-5 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) and ss 21 and 21A of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) are relevant for the purpose of determining Mr Tagget's income for the year ended 30 June 2006. These provisions operate concurrently for income years following that which ended on 30 June 1998: Commissioner of Taxation v McNeil (2007) 229 CLR 656 at [41]. 38 Section 6-5 of the 1997 Act relevantly provides: (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income. … (2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. … (4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

39 Section 21 of the 1936 Act relevantly provides: (1) Where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of this Act, be deemed to have been paid or given. (2) This section has effect subject to section 21A.

40 Section 21A of the 1936 Act relevantly provides: (1) For the purposes of this Act, in determining the income derived by a taxpayer, a non cash business benefit that is not convertible to cash shall be treated as if it were convertible to cash. (2) For the purposes of this Act, if a non cash business benefit (whether or not convertible to cash) is income derived by a taxpayer: (a) the benefit shall be brought into account at its arm's length value reduced by the recipient's contribution (if any); and (b) if the benefit is not convertible to cash - in determining the arm's length value of the benefit, any conditions that would prevent or restrict the conversion of the benefit to cash shall be disregarded. … (5) In this section: arm's length value, in relation to a non cash business benefit, means: (a) the amount that the recipient could reasonably be expected to have been required to pay to obtain the benefit from the provider under a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction; or (b) if such an amount cannot be practically determined - such amount as the Commissioner considers reasonable. income derived by a taxpayer means income derived by a taxpayer in carrying on a business for the purpose of gaining or producing assessable income. non cash business benefit means property or services provided after 31 August 1988: (a) wholly or partly in respect of a business relationship; or (b) wholly or partly for or in relation directly or indirectly to a business relationship. …

41 While I have set out the relevant parts of these provisions of the 1997 Act and the 1936 Act for completeness, I need to refer to them only briefly when I come to an argument dealt with by me in para [69] below.

The effect of the deed 42 Clause 3.1 of the Deed records a conditional undertaking by Hillpalm to transfer proposed Lot 157 to Mr Tagget for nominal consideration at a future time. As is clear from the recitals, Hillpalm had not yet acquired the Land (as defined) from which proposed Lot 157 was to be created at the time Hillpalm entered into the Deed. Further, as is clear from cl 3.1, no approval had been obtained by that time for the sub-division of the Land or, more specifically, the creation of proposed Lot 157. By cl 3.2, the sub-division and transfer of proposed Lot 157 was subject to Hillpalm realising $3.2 million in gross sale proceeds from the sale of the Land. 43 It is hard to see how Mr Tagget could have acquired any equitable interest in the Land prior to it being acquired by Hillpalm. However, recent authority establishes that upon acquisition of the Land by Hillpalm, Mr Tagget acquired what is sometimes referred to as a "contingent equitable interest": Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 612 per Mason CJ and Dawson J; Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 252-253 per Mason CJ, Brennan, Deane and McHugh JJ; Stern v McArthur (1988) 165 CLR 489 at 522-523 per Deane and Dawson JJ. 44 It is not necessary to explore more fully the nature of the interest acquired by Mr Tagget in the Land or that part of it which was to make up proposed Lot 157 either at the time Hillpalm entered into the Deed or at the time it acquired the Land. It may be accepted that by the time Hillpalm acquired the Land Mr Tagget's interest was a contingent equitable interest. 45 Clause 6.1 of the Deed deals with the timing of the transfer of proposed Lot 157 to Mr Tagget pursuant to cl 3.1. It provides that the transfer shall occur upon the earlier of "the date determined in accordance with Clause 3.2 …" or "24 months after the Linen Plan in respect of the Stage 5 development approval is sealed by the Tweed Shire Council and released to Hillpalm". As I have mentioned, cl 3.2 provides, relevantly, that the subdivision is subject to Hillpalm realising gross sale proceeds from the sale of the Land in the sum of $3.2 million. 46 There is no evidence that Hillpalm ever achieved gross sales of $3.2 million, nor is there any evidence that the plan of subdivision in respect of the Stage 5 Development was approved by Council. So far as the evidence reveals, neither of the conditions precedent to the transfer of proposed Lot 157 was ever satisfied. 47 This brings me to cl 3.3. It is concerned with a situation in which, for reasons beyond the control of Hillpalm, the approval necessary to enable Hillpalm to transfer proposed Lot 157 to Mr Tagget cannot be obtained. In that situation Hillpalm is required to pay to Mr Tagget a sum of money equal to the unimproved value of proposed Lot 157 as agreed or as determined by a registered valuer appointed by the President of the Institute of Valuers. Clause 3.3 then provides that "Tagget will accept the compensation in full and final satisfaction of all claims." 48 The evidence does not really address the question whether the failure to obtain the relevant approval was beyond the control of Hillpalm. Assuming such a failure was beyond its control, it is clear that Mr Tagget was entitled to be paid compensation in an amount determined in accordance with cl 3.3 of the Deed. Even if such a failure was not beyond Hillpalm's control, it is difficult to see how Mr Tagget could be entitled to any lesser sum by way of damages for breach of contract if the failure was the result of a breach of Hillpalm's obligation under cl 6.1 to do everything that was reasonably required to achieve that outcome. But in that case Mr Tagget's entitlement to damages would not be restricted by the concluding words of cl 3.3.

Was the land ordinary income of Mr Tagget in the tax year ended 30 June 2006? 49 Counsel for Mr Tagget submitted that the land received by Mr Tagget never formed part of Mr Tagget's ordinary income. His argument involved three essential steps. First, cl 3.3 vested in Mr Tagget contractual rights to either acquire proposed Lot 157 for nominal consideration or to receive compensation in the event that proposed Lot 157 never came into existence. Secondly, these contractual rights were choses in action that could have been turned to pecuniary account by Mr Tagget and were, therefore, ordinary income derived by him upon entry into the Deed. Thirdly, the receipt of the land by Mr Tagget in September 2005 was the result of the exercise by him of the contractual rights acquired by him upon entry into the Deed and, as such, did not form part of Mr Tagget's ordinary income. 50 Counsel for Mr Tagget relied upon the decision of the House of Lords in Abbott v Philbin [1961] AC 352, arguing that the facts of this case were within the principles laid down by the majority in that case. He sought to characterise cl 3.1 not as an option, but as something stronger. I agree that cl 3.1 does not confer upon Mr Tagget an option to purchase land. In substance, Hillpalm agreed to sell and Mr Tagget agreed to buy proposed Lot 157 for nominal consideration subject to the conditions set out in the Deed. There was nothing in the nature of an option about it. But for reasons that I will explain I do not think it is either meaningful or correct to say that the rights acquired by Mr Tagget were stronger than the option under consideration in Abbott v Philbin. What is important is that Mr Tagget's entitlement to proposed Lot 157 or the sum of money payable under cl. 3.1 was in each case of a contingent nature. This is a feature which distinguishes the rights granted to Mr Tagget under the Deed from the option rights granted to the taxpayer in Abbott v Philbin. 51 In Abbott v Philbin the taxpayer was granted an option to purchase 2,000 ordinary shares in a company of which he was secretary at the price of 68s. 6d. per share. The option was granted in October 1954. The price of the option was £20 and it was expressed to be non-transferable and to expire after 10 years or on the earlier death or retirement of the taxpayer. In March 1956 when the market price of the shares was 82s. per share, the taxpayer exercised the option in respect of 250 shares. The taxpayer was assessed to income tax under Schedule E of the Income Tax Act 1952 (U.K.) in the year 1955-56 on £166 which constituted the difference between the option price and the market price of the shares (with a deduction of a proportionate part of the cost of the option) as being a perquisite received by him by virtue of his employment. The taxpayer appealed the assessment and, by majority, the House of Lords upheld his appeal. 52 The Income Tax Act 1952 (U.K.) provided that "Tax under Schedule E shall be annually charged on every person having or exercising an office or employment of profit … in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment …". Viscount Simonds appears to have decided the case on the basis that the option was something of value which could be turned to pecuniary account. His Lordship said at 365: My Lords, I cannot entertain any doubt that, when the company granted the option to the appellant, he acquired something of potential value. I do not think that it matters whether it falls into the category of proprietary or contractual right, or into some dim twilight that divides those juristic conceptions. We are concerned with a taxing statute whose language is to be reconciled with the law of England and Scotland alike, and the chosen words "perquisite or profit whatsoever" are as wide and general as they well could be. I can concede no relevant limitation of their meaning except in the oft cited words of Lord Watson in Tennant v. Smith that they denote "something acquired which the "acquirer becomes possessed of and can dispose of to his advantage-in other words, money-or that which can be turned to "pecuniary account." 53 Similarly, Lord Radcliffe said at 378-9: I think that the Revenue are right in saying that a line has to be drawn somewhere between convertible and non-convertible benefits, and that somehow we have to put a general meaning on the not very precise language used in Tennant v. Smith. What I do not think, however, is that a non-assignable option to take up freely assignable shares lies on that side of the line which contains the untaxable benefits in kind. The option, when paid for, was thereafter a contractual right enforceable against the company at any time during the next 10 years so long as the holder paid the stipulated price and remained in its service. That right is, in my opinion, analogous for this purpose to any other benefit in the form of land, objects of value or legal rights. It was not incapable of being turned into money or of being turned to pecuniary account within the meaning of these phrases in Tennant v. Smith merely because the option itself was not assignable. What the option did was to enable the holder at any time, at his choice, to obtain shares from the company which would themselves be pieces of property or property rights of value, freely convertible into money. Being in that position he could also at any time, at his choice, sell or raise money on his right to call for the shares, even though he could not put anyone he dealt with actually into his own position as option holder against the company. I think that the conferring of a right of this kind as an incident of service is a profit or perquisite which is taxable as such in the year of receipt, so long as the right itself can fairly be given a monetary value, and it is no more relevant for this purpose whether the option is exercised or not in that year, than it would be if the advantage received were in the form of some tangible form of commercial property.

54 His Lordship also said at 379: The advantage which arose by the exercise of the option, say £166, was not a perquisite or profit from the office during the year of assessment: it was an advantage which accrued to the appellant as the holder of a legal right which he had obtained in an earlier year, and which he exercised as option holder against the company. The quantum of the benefit, which is the alleged taxable receipt, is not in such circumstances the profit of the service: it is the profit of his exploitation of a valuable right. Of course, in this case the year of acquiring the option was only the year immediately preceding the year in which, pro tanto, it was exercised. But supposing that he holds the option for, say, nine years before exercise? The current market value of the company's shares may have changed out of all recognition in that time, through retention of profits, expansion of business, changes in the nature of the business, even changes in the market conditions or the current rate of interest or yield. I think that it would be quite wrong to tax whatever advantages the option holder may obtain through the judicious exercise of his option rights in this way as if they were profits or perquisites from his office arising in the year when he calls the shares.

55 Abbott v Philbin was followed by Bowen CJ in Eq. in Donaldson v Federal Commissioner of Taxation (1974) 3 ALR 516. His Honour held that convertible notes which carried the right to purchase shares in Hooker Corporation Limited were benefits of an income nature in the hands of a taxpayer who was an employee of that company. The options were the subject of various conditions including one which excluded any right to exercise them until after the employee had remained in the company's employment for a specified period. 56 His Honour held that the options to purchase shares granted to the taxpayer were benefits within what was formerly s 26(e) of the 1936 Act. For the taxpayer it was argued that the options were not a benefit that could be enjoyed by him in the income year in question. His Honour said at 532-3: …I find myself in general agreement with the argument advanced by counsel for Mr Donaldson that the Income Tax Assessment Act is dealing with what "comes in" to the taxpayer, and, generally, with what is enjoyed or capable of being enjoyed by the taxpayer in the income year in question. But these are generalizations which do not greatly assist in the resolution of the present case. I am unable to accept a proposition that the option rights conferred on Mr Donaldson did not "come in" to him or were not enjoyed by him in the year of income. Items rendered assessable income by s 26(e) have to be regarded according to their nature, whether they are meals, use of quarters, or option rights. To say the option rights could not be exercised in the year of income is no answer to the application of s 26(e). Indeed, it is to confuse the enjoyment of the fruit of the rights with the enjoyment of the rights, a mistake made in argument on behalf of the Crown in Abbott v Philbin, supra. Again, to say rights are non-transferable is no answer to the application of s 26(e). Meals which are consumed may be non-transferable and yet they are within s 26(e). What is made assessable income by s 26(e) is the value to the taxpayer of the benefit allowed, given or granted to him, that is to say, the rights conferred on him which others lack. Whether they have any value to him, and what that value is, are matters to be determined according to the facts of each particular case, preferably with the assistance of expert evidence. But that does not affect the principle that where such rights are given they are present rights, though exercisable in the future, and confer an immediate benefit upon the taxpayer which he enjoys as the owner of them.

57 Federal Commissioner of Taxation v McArdle (1988) 19 ATR 1901 was also concerned with the application of what was then s 26(e) of the 1936 Act. Mr McArdle, the taxpayer, had been granted options to acquire his employer's stock between 1975 and 1980. In 1979 Mr McArdle entered into what was referred to as a "limited stock appreciation rights agreement". The effect of the agreement was to allow Mr McArdle to receive a cash payment in certain circumstances in lieu of the stock to which he would be entitled if he exercised his options. The cash payment would equal the difference between the value of the stock and the exercise price of the options. In the year ended 30 June 1982 Mr McArdle received a payment under the agreement. 58 The Full Court agreed with the trial judge who held that the payment should not have been included in the taxpayer's assessable income. Davies, Gummow and Lee JJ said at 1909: His Honour held that the agreement by Delhi International to pay $1,100,000 was made by Delhi International, not in consequence of Mr McArdle's employment with the Delhi group, but in consequence of and as consideration for the surrender by Mr McArdle of his stock options and his limited stock appreciation rights. … We respectfully agree with his Honour that what occurred in the year ended 30 June 1982 was not the grant to Mr McArdle of a valuable benefit assessable under the provisions of s 26(e) of the Act but rather the exploitation by him of rights received in previous years, the value whereof would have been assessable under s 26(e) in those years but for the period of s 26AAC(10). Had we been of the view that, in the year ended 30 June 1982, Delhi International granted to Mr McArdle a benefit of value, we would have thought that the value was assessable to tax under s 26(e). However, an analysis of what occurred in the year ended 30 June 1982 shows that what was done was not the grant by Delhi International to Mr McArdle of a valuable benefit in respect of, for or in relation, directly or indirectly, to the services he had rendered for the Delhi group. Rather, Mr McArdle negotiated with Delhi International a means of exploiting the rights which had been granted to him by Delhi International in prior years. Before the trial judge and again on appeal, reliance was placed on s 25(1) of the Act. We need say no more about this matter than did the trial judge, namely, that it was a capital receipt, being received as consideration for the surrender of valuable rights. The sum was not received by way of a reward for service and was negotiated as the consideration for the surrender of valuable rights.

59 In the present case the Deed created various contractual rights including a right in favour of Mr Tagget to have Hillpalm transfer proposed Lot 157 to him for nominal consideration subject to the fulfilment of conditions which would make that possible. This was coupled with a right in favour of Mr Tagget to be paid compensation if, for reasons beyond Hillpalm's control, the conditions which would make the transfer of proposed Lot 157 possible could not be fulfilled. These rights were legal choses in action which I am prepared to assume (though there is no evidence to this effect) that Mr Tagget could have turned to pecuniary account in the same way the options under consideration in Abbott v Philbin were held to be capable of being turned to pecuniary account. But I do not think it follows that the choses in action were ordinary income of Mr Tagget. 60 A distinction needs to be drawn between an agreement which confers a right upon a person to obtain property or money and an agreement in which property or money is actually vested in him or her. Each of the cases I have referred to was concerned with a situation in which the taxpayer was granted share options by his employer. Moreover, the grant of the options was not conditional or contingent in any respect. Of course, the options may not have been exercisable unless certain conditions were fulfilled; Mr Donaldson, for example, could not exercise his options until he had completed specified periods of further service. But that is quite different to saying that the grant of the options was conditional upon Mr Donaldson completing the specified periods of further service. If Mr Donaldson's employer had promised to grant him options on condition that he completed a period of further service then I do not consider that promise would have been a benefit to which s 26(e) would have applied - at least not until Mr Donaldson had completed his period of further service. 61 As the late Professor R W Parsons explains in Income Taxation in Australia (1985) at para [2.15]: …Generally where there is a right to some benefit or to property other than money there cannot be a derivation, whether the taxpayer is on accruals or cash, until the benefit or property has come to be vested in the taxpayer. Property for this purpose may, it seems, include a chose in action. Thus the taxpayer in Abbott v. Philbin [1961] A.C. 352 and the taxpayer in Donaldson (1974) 74 A.T.C. 4192 who came to have rights to options over shares were regarded as having derived those options at the time when a distinct set of legal relations constituting the options came into existence. There is, it seems, a difference for tax purposes between a contractual right to an issue of options which will not involve a derivation and the actual issue of options which will involve a derivation…

62 The learned author returns to the topic in the context of tax accounting. He states at para [11.59]:

There is a question as to what is an actual receipt where the item receivable is itself a chose in action. In Abbott v. Philbin [1961] A.C. 352 and Donaldson (1974) 74 A.T.C. 4192, in both of which the taxpayer was, presumably, on a cash basis in relation to the item, there was held to be a derivation when options over shares were issued to him. One must distinguish the arising of a right to the issue of options, which would not be a derivation, and the arising of the rights given by the options when they are issued, which would be a derivation.

63 A key question posed by Bowen CJ in Eq. in the passage from Donaldson's case quoted at para [56] above was whether the option rights had "come in to the taxpayer" in the year in question. This language is reminiscent of what Dixon J (with whom Rich and McTiernan JJ agreed) said in Commissioner of Taxes (SA) v Executor Trustee and Ageing Co of South Australia Ltd (1938) 63 CLR 108 (Carden's case) at 155: Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form. Thus, in Thorogood's Case, where the question was whether, in a business of buying land and selling it in subdivision on instalment contracts, future instalments of purchase money should be taken into the account of taxable income derived during the accounting period, the court pronounced decisively against the inclusion of the present value of these future payments. Isaacs J. said:" 'Derived' is not necessarily actually received, but ordinarily that is the mode of derivation." Substantially the same thing is said in reference to the words "arising or accruing" by Sir Houldsworth Shaw and Mr Baker in their work on the Law of Income Tax, and they place distinction upon the difference between trading and other sources of income. They say: - "There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains. With regard, however, to other income there must be something 'coming in': that is, for income tax purposes, receivability without receipt is nothing" (Law of Income Tax, p.111).

64 In Barratt v Commissioner of Taxation (1992) 36 FCR 222 the question that arose was whether the income of taxpayers, who were medical practitioners registered under the Medical Practitioners Act 1938 (NSW), should be computed on a cash or an accruals basis. In finding that an accruals basis was appropriate, Gummow J (with whom Northrop and Drummond JJ agreed) said at 231: No doubt a debt that is presently recoverable by action generally will be an amount "derived" in the relevant sense by the creditor. The creditor will have a present right to receive the amount in question, something both earned and quantified, without the presence of any element of contingency or defeasibility. At the other end of the scale, where the right of the taxpayer is contingent, there will be no derivation before the contingency is satisfied: see R W Parsons, Income Taxation in Australia (1985), s 11.49. Nor will there be derivation if the debt is yet to be quantified: see Farnsworth v Commissioner of Taxation (Cth) (1949) 78 CLR 504 at 513, per Latham CJ. The present case is at neither extreme end of the spectrum. But it is well to bear in mind that what is being sought is a method of giving, for each year of income, a substantially correct reflex of the true income of the taxpayers, having regard to what Fullagar J called the truth and reality of the situation: see Ballarat Brewing Co Ltd v Commissioner of Taxation (Cth) (1951) 82 CLR 364 at 369. 65 In Gasparin v Commissioner of Taxation (1994) 50 FCR 73 the Full Court was concerned with the tax treatment of allotments of land that were the subject of contracts of sale which were expressed to be conditional upon registration of a plan of subdivision. The plan of subdivision was duly registered. It was nevertheless held that the allotments of land continued to form part of the vendor's trading stock up to the time of settlement of the contracts of sale. It was also held that the vendor did not derive income from the sale of allotments until a debt accrued due from the purchaser, something which, it was found, did not occur until settlement. Only then could it be said that "the vendor finally loses all dispositive power, and the contingency that the sale will not proceed to completion disappears" per von Doussa J at 83 (with whom Jenkinson and Spender JJ agreed). After referring to Gummow J's judgment in Barratt's case, his Honour observed at 81 that "[t]he element of contingency is an important one". And after referring to the judgments of the High Court in Farnsworth v Commissioner of Taxation (Cth) (1949) 78 CLR 504 his Honour explained at 83: The reason for the proposition stated in the judgments of the High Court that income is derived when a debt has accrued due, is to eliminate the element of contingency and uncertainty in the exercise of determining when income is derived for the purpose of levying taxation. See also the decision of the Full Court in BHP Billington Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation (2002) 126 FCR 119. 66 It was anticipated at the time of entry into the Deed that it might take some years before proposed Lot 157 could be transferred to Mr Tagget: see cl 6.1(b). If for reasons beyond Hillpalm's control, such a transfer was not possible then cl 3.2 would apply and Mr Tagget would be entitled to compensation equal to the unimproved value of proposed Lot 157. I think the compensation would have to be based upon a valuation as at the date cl 3.3 was engaged as opposed to a valuation as at the date of the Deed. The significance of this is that at the date of the Deed the value of Mr Tagget's entitlement to either land or compensation was quite uncertain. The value of Mr Tagget's entitlements would in all probability vary over time in accordance with fluctuations in the property market and could never be fixed with any degree of certainty until either land or compensation was received by him. 67 In my opinion Mr Tagget did not derive income merely by entering into the Deed. Moreover, nothing in the nature of income could come in to Mr Tagget under cl 3.1 or cl 3.3 of the Deed until proposed Lot 157 was transferred to him under cl 3.1 or a sum of money became due to him as a result of an agreement reached or a valuation struck under cl 3.3. Even then, if Mr Tagget's income was computed on a cash basis (as would seem to be appropriate in his circumstances) such sum would not be derived by him for tax purposes until it was received. 68 If proposed Lot 157 had been transferred to Mr Tagget pursuant to cl 3.1, or if he had instead been paid a sum of money pursuant to cl 3.3, then the value of the land, or the sum of money in question, would have been ordinary income derived by Mr Tagget when the transfer or payment occurred. That being so, both parties accepted that the land received by Mr Tagget under the Deed of Release would also form part of his ordinary income. This view is supported by the relevant authorities: see, for example, Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 568 and Tinkler v Commissioner of Taxation (Cth) (1979) 29 ALR 663 at 666. 69 It was faintly argued by Counsel for Mr Tagget that the land received by him in September 2005 might not be income according to ordinary concepts. A related question touched upon in argument was whether Mr Tagget was carrying on business at relevant times. If he was not then s 21A of the 1936 Act would not apply to him: see the definition of "income derived by a taxpayer" in s 21A(5). But even if Mr Tagget was not carrying on business, his entitlements under the Deed were given in return for him agreeing to make his services available to Hillpalm: see, in particular, cl 7. I would therefore have no hesitation in finding that the receipt of the land was income according to ordinary concepts. Assuming s 21A of the 1936 Act did not apply to Mr Tagget, s 21 of the 1936 Act would deem the money value of the land to have been paid or given to him. In any event, although an application for leave to raise an additional ground of objection was foreshadowed, it was not pursued by Mr Tagget and I accept the submission made by Counsel for the Commissioner that it is not open to Mr Tagget to rely on any such argument in this appeal since it raises a ground of objection that was not included in the Notice of Objection. 70 The appeal should be dismissed with costs. I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholas .