First Provincial Building Soc Ltd v Commissioner of Taxation B11/1995 [1995] HCATrans 217 (22 June 1995)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Brisbane No B11 of 1995

B e t w e e n -

FIRST PROVINCIAL BUILDING SOCIETY LIMITED

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

DAWSON J

TOOHEY J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON THURSDAY, 22 JUNE 1995, AT 10.58 AM

Copyright in the High Court of Australia

MR P.A. KEANE, QC, Solicitor-General for the State of Queensland: May it please the Court, I appear with MR H.L. ALEXANDER, of counsel, for the applicant. (instructed by McCullough Robertson)

MR A.H. SLATER, QC: If the Court pleases, I appear with my friend, MR J.A. LOGAN, for the respondent. (instructed by the Australian Government Solicitor)

MR KEANE: Your Honours, the issues in this case are whether the provisions of section 26(g) of the Income Tax Assessment Act 1959 operate beyond the scope of section 25 of the Act so as to bring subsidies of a capital nature into the assessable income of the taxpayer. The case thus concerns, in our submission, core provisions of the Act and, as is confirmed by paragraphs 6 and 7 of our learned friend's summary, core provisions with which this Court has not directly dealt, that is to say, this Court has not dealt with section 26(g) and its relationship with section 25.

Your Honours, the approach of the Full Court to the determination of the case was to treat a payment of a subsidy, which was held not to be a payment of income according to ordinary concepts, as having been received in relation to the carrying on of a business within the meaning of 26(g) if there is a real relationship as a matter of fact between the payment and the carrying on of the business. Your Honours will see their Honours' reasons in that regard at page 51 of the record commencing at about line 11 in the passage that really goes to the bottom of the page and over the page to line 5.

Your Honours, it is submitted that this approach fails to appreciate that the statutory context affords necessary instruction as to the plane on which the relationship must be sought and identify. When we speak of "the plane" of the relationship, your Honours, we are using the language of Sir Alan Taylor in Tooheys Ltd v Commissioner of Stamp Duties to which we have referred in paragraph 13 of our summary of argument. I think your Honours have a bundle of cases that were supplied.

DAWSON J: No, but we may have the cases themselves. It is coming up.

MR KEANE: It is here. May we hand that to your Honours. Your Honours, the nature of the relationship is not, as our learned friends urge in paragraphs 12 and 15 of their summary and as the court concluded, simply an issue of fact. Your Honours will have seen that the court relied upon observations by members of this Court in O'Grady v Northern Queensland Company Limited. Can we hand to your Honours copies of that decision and simply make the point in relation to the Full Court's reliance on your Honour Justice McHugh's observations at page 376, that your Honour said that the phrase "in relation to" was indefinite. This is at page 376, commencing at the second paragraph of your Honour's judgment. The phrase was indefinite:

But, subject to any contrary indication derived from its context.....it requires no more than a relationship, whether direct or indirect, between two subject matters.

Your Honour goes on in the next paragraph to point out there was no context suggesting a narrow reading.

In our respectful submission, one can see, with respect, the Full Court has picked up part of what your Honour said, that is to say, that if there is nothing in the context which provides instruction, a relationship in fact will do so long as it is not so exiguous as to be remote or insignificant. In our respectful submission, here, the context does afford necessary instruction. In the context of this Act, the Income Tax Assessment Act, the carrying on of a business is to be seen as being, in our respectful submission, on the other side of the line from the structure of the business. In principle, a payment which relates to the structure of the business is distinctly not related to the carrying on of the business. To say that it is related, because in a real sense the payment assists the applicant to continue to carry on its business, is to, in our respectful submission, ignore the dichotomy between establishing or strengthening the business and carrying on its actions which itself reflects the dichotomy between capital and income.

In our summary, at pages 14 and 15, we have referred to the authorities in which the dichotomy is recognised and we say, with respect, that the latest recognition is in GP International Pipecoaters, which is at tab 4 of our bundle, and the relevant passage is at page 142 of the CLR report.

TOOHEY J: But as I understand your argument, Mr Keane, it really is that section 26(g) of the Income Tax Act really adds nothing to section 25. At any rate, must be read as bearing only upon moneys received which bear the character of income.

MR KEANE: Your Honour, we do submit that it really does not add anything to section 25. Can we say that, in this respect, it is quite different from section 26(e), for example, which this Court considered in Smith's Case. It is different in its text in that it refers to the carrying on of the business rather than simply to the fact of employment.

Now, in our learned friends' summary, they refer to, in paragraph 6(d), the observations of Justice Brennan, as his Honour then was, in relation to section 26(e). On can see that the effect of those observations which are exerpted there is that if the relationship posited by the statute is with the fact of employment - it does not mean that it is with the carrying on the duties of employment, it is with the fact which may be the capital fact of employment. So that one is concerned, firstly - if one looks at the text, one sees that it is a different relationship which is posed by section 26(g) and when one looks at the legislative history one can see, as we have pointed out in our written summary at paragraph 22 on page 8, that the authorities contain dicta which support the view that section 26(g) was inserted for greater caution.

We have referred to those authorities there and the legislative history to which we refer is mentioned in paragraph 23. It derives, your Honours, from the decision in the House of Lords in Seaham Harbour Dock v Crook which is in our bundle at tab 8, and the particular passages that are of interest in that judgment are at page 353 of the report at the top of the page in the speech of Lord Buckmaster with whom Lord Warrington agreed - Your Honours will see the passage is quite short -and then in the judgment of Lord Atkin at about point 7 of the page where there are suggestions that this kind of subsidy has nothing to do with trade and is really something in the nature of a welfare measure which immediately puts it outside the field of trade altogether.

The textbook that we have referred to, Ratcliffe, McGrath & Hughes, The Law of Income Tax, which is a 1938 publication, that is to say, immediately after the 1936 Act, and we have referred to this in paragraph 23 of our submissions. Your Honours will find it at tab 12. The passage is at the bottom of 264, the passage under the heading "Bounties and subsidies", and going over the page and then a further passage at 292, at the bottom of the page, to 293 where it says:

In the absence of such a provision the matter might have been open to doubt until the decision in Smart v Lincolnshire Sugar -

in which the House of Lords made it plain that the observations by Lord Buckmaster and Lord Atkin, with whom the others of their Lordships agreed, should not be taken as suggesting that any kind of subsidy to business can never be a receipt in the nature of income.

Your Honours, we point out that the contemporary comment was to that effect. We point out the closeness in time between the 1936 Act and the decision in Seaham Dock and the dicta - and they are dicta - by individual justices of the court to the effect that it is inserted for greater caution rather than to bring to account receipts that would not be in their nature income.

TOOHEY J: Are you saying that would explain section 26 generally?

MR KEANE: No, your Honour. We do not do that because there are provisions of section 26 which are plainly more apt to catch receipts of a capital nature. Section 26(e), for example, where the relationship only has to be between the receipt and the fact of employment. Whereas, here, there is a strong context in 26(g) which deals with the particular matter of bounties and subsidies and a context which, in our submission, far from departing from the dichotomy between establishment and business and carrying it on, adopts it.

TOOHEY J: But if you accept that section 26 is not merely explanatory or an exemplification of section 25, then you are driven to look at each paragraph on its own merit, so to speak.

MR KEANE: We are, your Honour, but, with respect, we would not accept what may be the implication of your Honour's question that therefore the point does not warrant the attention of the Court, because even - - -

TOOHEY J: That was not the point, at least, not at that stage. But what I think I was really putting to you is that you are driven to look at the language of paragraph (g) without any underlying preconception that section 26 is merely exemplifying what is contained in section 25 and, in that event, you are driven to the language of the paragraph itself and I suppose it is at that point that what you anticipated arises, namely, it is very much a question of fact and what is it about this matter that attracts its own special leave?

MR KEANE: Your Honour, in our submission, it is distinctly, with the greatest respect, not a question of fact. It is a question of statutory construction as to the nature of the relationship that is posited. It might be a question which is narrower than if the totality of 26 was in issue but, nonetheless, it is important. These are not particularly refined provisions. These are core provisions and the case raises a question as to the approach to the relationship which is suggested in relation to this important provision. Whether it is just a connection, just a relationship, or whether it is a relationship of a particular kind where one is instructed by the context.

Your Honours, it is important, in relation to every subsidy to business. If the Full Court is right, it is difficult to conceive of a case where a subsidy to business will not be assessable because of the factual connection, the factual connection that exists in every case, as a matter of fact, between the profit-earning structure and its operations. There will always be a factual relationship but, in our respectful submission, that is not the relationship of which the Act strikes. If it were, one would have expected the legislative intention to be expressed in terms simply by reference to subsidies received in business.

The suggestion that where subsidies are directed to the refurbishment of capital assets are quite exceptional - that cases of that kind are quite exceptional, in our submission, a moments reflection on the effects of the droughts, the dislocation of business in recent years, would cast doubt on that suggestion.

As to the point made in paragraph 9(a) of our learned friend's submissions, we once again rely upon the history of the provisions that we have referred to in paragraph 23 of our outline which indicates a perceived need to make it explicit that a subsidy is to be treated as the proceeds of the business because of the concern indicated by the judgments in Seaham Dock that such assistance may have been entirely outside of trade or business altogether. And while your Honours have paragraph 9 of our learned friend's submission open, can we say that the point made in paragraph 9(b) in relation to the words in parenthesis in section 26(g) which exclude from its scope subsidies "received under an agreement entered into under an Act relating to the search for petroleum" is that these words are apt to refer to receipts of capital character and it would be unnecessary if the paragraph were confined to receipts of a capital nature. The Act in question is the Petroleum Subsidy Act which we have in our bundle. We do not need to take your Honours to it. But the answer to our learned friend's point is that there is no presumption that operations involving the search for petroleum will be the capital nature or, indeed, of a revenue nature. That is clear from the decision in Federal Commissioner of Tax v Ampol Exploration which is in tab 1 of our bundle. That is said in terms by Mr Justice Lockhart with whom Mr Justice Burchett agreed at page 562.

Your Honours, if we can just say there are some further added features which are relevant to the grant of special leave, in our submission. They are, firstly, the long-standing questions which this Court has not finally addressed in relation to section 26(g), whether it operates at all to bring into assessable income receipts which would not be income according to ordinary concepts and, secondly, there is, in our respectful submission, a degree of public interest in whether a State government's subvention to the finance industry of $50 million should be diluted by the imposition of income tax, a capital subvention. A subvention held to be in the nature of capital by the Federal Court.

Your Honours, unless your Honours have something to raise with us, those are our submissions.

DAWSON J: Thank you, Mr Keane. The Court need not trouble you, Mr Slater.

On a number of occasions this Court has pointed out that in taxation matters the Full Court of the Federal Court is to be regarded as a court of final resort, save where questions of fundamental importance and of general application are involved. The question raised by this application is confined to the application of the relevant provisions of the Income Tax Assessment Act to particular circumstances and, as such, it does not warrant a grant of special leave. Special leave to appeal is refused.

MR SLATER: I make a submission for costs.

MR KEANE: No submission about that.

DAWSON J: It is refused with costs.

AT 11.19 AM THE MATTER WAS CONCLUDED