Commissioner of Taxation v Cerche & Selleck M77/1997 [1998] HCATrans 21 (13 February 1998)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne Nos M76, M77 and M78 of 1997

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

MARK NICHOLAS CERCHE and PETER HOWDEN SELLECK as Executors and Trustees named in the Will of HENRY FRANCIS HOWDEN SELLECK

Respondents

Applications for special leave to appeal

GAUDRON J

GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 13 FEBRUARY 1998, AT 12.12 PM

Copyright in the High Court of Australia

MR G.A.A. NETTLE, QC: May it please the Court, I appear in each of these matters with my learned friend, MS A. RICHARDS, for the Commissioner, the applicant. (instructed by the Australian Government Solicitor)

MR B.J. SHAW, QC: If the Court pleases, Mr Selleck has died.

GAUDRON J: Yes, I read your application. It is not opposed, is it, Mr Nettle?

MR NETTLE: No, it is not opposed, your Honour.

MR B.J. SHAW, QC: In that case, I appear with my learned friend, MR J. de WIJN, QC, for the respondents. (instructed by Arthur Robinson & Hedderwicks)

GAUDRON J: The title of the proceedings will be amended appropriately.

MR NETTLE: If your Honours please. This application for leave raises a question which it is submitted is now of wide-ranging fiscal significance. That question is whether a lump sum incentive payment made to a commercial tenant in order to induce it to choose one set of premises over another is to be regarded as being, prima facie, on capital account or on income.

GUMMOW J: It sounds like a reprise of Cooling.

MR NETTLE: Indeed it does, your Honour, for the reason that it is submitted that whereas Cooling, following the decision of this Court in Myer, was of the view that ordinarily in the circumstances I have outlined the payment would be received on income or revenue account.

GAUDRON J: In the circumstances in Cooling, but in this case the money was in fact expended, so it seems, on the fit out.

MR NETTLE: In a sense it was, but it was not found so to be. What happened, as the evidence, shows, is that the money was paid into the general operating account into which, of course, other moneys went. But more significantly, that there was credited to a special suspense account the amount of the payment which, in turn, was distributed amongst all of the members of the partnership.

GAUDRON J: Was it not after the fit out was sold back to the bank? It was sold to the bank and leased back from the bank?

MR NETTLE: It was certainly sold to the bank and leased back.

GAUDRON J: It is far removed from Cooling, is it not?

MR NETTLE: It is submitted no, on the first of the two bases on which Justice Hill principally decided that case.

GUMMOW J: He did not decide it; the Full Court decided it.

MR NETTLE: I follow that, with respect, your Honour. But there are, it is submitted, to be found in the judgments two lines of authority, or two principles, one of which is that if a transaction of this kind is entered into, when it otherwise would not have been entered into but for the proffered payment, there will be an income receipt. The other of which is that if a transaction is so structured with an insignificant purpose of deriving the payment, and it is in a business context, then ordinarily it will be regarded as being on revenue account. It is that principle which, it is submitted - - -

GAUDRON J: Why is that a principle? I mean, how can you construct such a principle. Surely the most that can be said in this area is that it depends on the facts.

MR NETTLE: No, more than that. It depends upon the purpose of the party in entering in. Now, here, on the facts, it is established clearly that a not insignificant purpose of structuring the transaction in the way in which it was was to get the - - -

GAUDRON J: That was found against you in the Full Court.

MR NETTLE: No, with respect, not. It was not found against us that it was a not insignificant purpose to get the proffered payment that it was so structured.

GUMMOW J: No, Mr Nettle, but the point really is that the difference in views taken at first instance and in the Full Court indicates the vital nature of the fact-finding operations in this case and, in a way, the instability of it all in terms of principle.

MR NETTLE: I understand what your Honour says, with respect, and I endeavour to meet it by saying this to you: it is true, as is obvious, that Justice Lockhart decided the case on the basis that whereas in Cooling there would have been no movement to the premises without payment, in this case that was not so, and that the judge below, Justice Drummond, had gone wrong in holding that there was to be a cash distribution. The second is really neither here nor there. The first is important. His Honour Justice Lockhart and thus Chief Justice Black held that because this was a case in which there would have been movement in any event, it was distinguishable and different from Cooling. Can I put that to one side and direct your Honours' attention to the way in which Justice Beaumont went about it, which was to say whether or not that be so, there is also a principle, if I can use the word, that where a payment is made to a tenant in order to induce it to take up the lease, prima facie it is to be regarded as being received on capital account as some sort of negative lease premium.

That principle, if I can so describe it, infects Justice Lockhart's decision and, more importantly, it has now been seized upon by subsequent Full Federal Courts in cases such as Montgomery as being the discrimin or test by reference to which these cases are to be decided. That is to say, whereas before Cooling - - -

GUMMOW J: I know that. Mr Justice Beaumont's view is not determinative, is it, of the Full Court decision in this case?

MR NETTLE: No, it is not, but - - -

GUMMOW J: If it has some wider impacts and is contaminating, as you would see it, all these subsequent Full Court decisions in the Federal Court, one of them will come up here, I suppose, and it will be centre stage.

MR NETTLE: Maybe or maybe not, I cannot say, of course.

GUMMOW J: Exactly.

MR NETTLE: But, your Honour, what I do wish to urge upon you is that although Justice Lockhart says in terms that I, Justice Lockhart, decide the case on the basis that it has been shown the judge below was wrong about a question of fact and that this case is different to Cooling, the necessary consequence of that second aspect of his Honour's reasoning is that unless it is shown that the tenant would not have moved but for the payment, such payments are to be regarded as being on capital account. In other words, in substance albeit not in form, Justice Lockhart's reasoning process is the same as Justice Beaumont's, which is to say, unless it be demonstrated that the purpose which motivates the entry into the transaction, as opposed to the structure of the transaction, is the payment, one does not get away from what is prima facie capital.

Thus it is submitted, albeit perhaps imperfectly, there is revealed in this case the question which we ask this Court to entertain, namely, is it right, as Justice Beaumont and now subsequent courts and Justice Lockhart in effect have said, that prima facie incentive payments made to commercial tenants to enter into a lease are on capital account, or is it right that one decides the question by reference to the test enunciated, we would say, in Myer and in Cooling that if there is one not insignificant purpose of entry into the transaction as structured to obtain the payment it will ordinarily be income.

May I stress the last aspect of that. Justice Lockhart, and thus Chief Justice Black, made much play, it is submitted, of the fact that the motivation for the entry into the lease was to get a set of premises. That is to say, because the firm was pretty new and it needed a bigger set of offices, it had to move in any event. It was thus said or reasoned by Justice Lockhart, and hence by the Chief Justice, that the not insignificant purpose of this transaction was getting leased premises, not getting the payment. What was ignored or eschewed was the submission, we would submit to this Court the true view of the matter, namely that if a putative tenant chooses between two alternative form of transaction available to him or her as between, for example, a reduced rent on the one hand or, on the other hand, an increased rent and the incentive payment, and it is a not insignificant purpose of making that choice to get the payment, then the payment is income, just as much as if the choice had been between no premises and premises, or premises A and premises B, and the guiding light between the two was the availability at one of a payment. In short, it is nonsense or it is of no relevance - - -

GAUDRON J: What if the purpose, though, was to use it to obtain the money to do a fit out?

MR NETTLE: No, the choice was to get the money.

GAUDRON J: What if the purpose was to have the money to do a fit out?

MR NETTLE: It matters not, therefore, because of the decision of this Court in GP Pipecoaters, that is to say if it is income when it comes in because of the purpose of entering into the transaction, it is income, regardless of the way in which it is thereafter applied. In GP it was decided by this Court, as your Honour knows, that moneys were paid on revenue account, it was said that they should be treated as being on capital account because there was an obligation, either legal or implicit, to apply them to capital structure. This Court rejected that quite properly. So, too, here. That is the second of the errors, it is submitted, into which the court below fell. It made the very sort of error which your Honour has just identified, namely to say that because the recipient of the payment was either bound or chose to apply the payment to capital structure - - -

GAUDRON J: No, no, the purpose, I said. What if the purpose?

MR NETTLE: If the purpose of getting the money was to apply it to capital structure, it turns it into income, Quite clearly on the basis of GP it does not.

GAUDRON J: I do not think that GP takes you as far as you want to go, does it.

MR NETTLE: It is submitted it does, your Honour. If your Honours go to GP 170 CLR 124, which is in our book of authorities at tab 2, might we direct your Honours' attention to page 136 in the joint judgment, beginning about halfway down the page just after the reference to Scott v Federal Commissioner of Taxation:

The relevant question is not the character of the expenditure by S.E.C.W.A. A receipt may be income in the hands of a payee whether or not it is expenditure of a capital nature by the payer. Nor is the relevant question the nature of the expenditure made by the taxpayer in the construction of the plant. A taxpayer may apply income in the acquisition of a capital asset or, conversely, apply a capital receipt to discharge a liability of a non-capital nature.

I jump a paragraph:

And thus a receipt may be income although the recipient is bound to apply it for the purpose of discharging a capital liability.

GAUDRON J: But that is not addressing purpose. You rely on purpose.

MR NETTLE: Absolutely.

GAUDRON J: And my question to you was, what if the purpose was to effect the fit out? What if the taxpayer's purpose?

MR NETTLE: Yes. It makes absolutely no difference, it is submitted, on the basis of this very decision. Here it is even better than purpose. It is a higher and a stronger case because the recipient was legally bound to apply the receipt to the payment for the capital structure.

GAUDRON J: But you rely on purpose to bring it into revenue account.

MR NETTLE: Yes, I do. And what I am submitting, or endeavouring to submit to your Honour - - -

GAUDRON J: Well, what is the purpose, just to accept the money?

MR NETTLE: Yes, get the money.

GAUDRON J: If there is a purpose - if any purpose is to obtain the money, it immediately brings it into revenue account?

MR NETTLE: We do not seek to put it higher than this, that if a not insignificant purpose of entering into the transaction, as structured, is to get the payment, then other things being equal, the receipt of that payment will be on revenue account. Now, we submit that is clearly consistent with, indeed dictated by Cooling.

GAUDRON J: And the purpose issue was not really found your way in the Full Court?

MR NETTLE: It was found against us on the basis of illogical, it is submitted, with respect, legal reasoning that one could not have regard to the purpose of choosing between two available structures as opposed to choosing between a lease and no lease. Now, it was put on that basis and never dealt with, either satisfactorily or, we would say, at all. May I digress to say in just the same way as this case in Spotless was prepared to say that, in looking at dominant purposes for the purpose of Part IVA, one can look at the dominant purpose of structuring a transaction in a particular way. So, too, when it comes to this sort of case. The Court can look and say - - -

GUMMOW J: That was in the context of a very detailed statutory regime.

MR NETTLE: I do not suggest they are the same.

GUMMOW J: All of this comes out of one never knows quite where.

MR NETTLE: It comes to something very simple at the end of the day which I suspect - - -

GUMMOW J: It comes out of extraordinarily general words in the Act. This sort of case comes out of very very vague principles.

MR NETTLE: But what has not been imposed upon the principles enunciated clearly enough by this Court in Myer and by the subsequent Full Court decision in Cooling is a new, we would suggest, incorrect principle, that wherever a firm of solicitors decides to take up a lease and take an incentive payment for it, it is prima facie to be regarded on capital account unless it be shown that solicitors - - -

GUMMOW J: That is what you seek to stigmatise as Justice Beaumont's approach.

MR NETTLE: I do not seek to stigmatise it, your Honour. I think, if I might say so with respect, that is his approach and he is proud of it and I submit, with respect, it is wrong. What is wrong about it is to impose upon general principles some sort of quasi principle that there is - - -

GUMMOW J: I know all that, Mr Nettle. The reason why I mentioned it is Justice Beaumont's judgment was not the determinative one in the Full Court in this case. I can see why later courts under the Full Court could be moved by it, and I can see why later Full Courts might want to follow it. That is for another day, so far as this Court is concerned. That is what has been put to you and you say it has infected Justice Lockhart's decision and I understand that submission.

MR NETTLE: Can I try one more, your Honour. That is to say, quite apart from the way in which Justice Beaumont expressly identifies the principle to which your Honour has just referred, and the infection if it be there in Justice Lockhart's, there is within both judgments, clearly enough, this view expressed also that a not insignificant purpose of entering into the transaction cannot be found to exist unless the tenant would not have moved but for the payment. It is on that basis that Justice Beaumont decides that because these tenants had physically to move, this had to be a capital transaction. His Honour reasoned from that that because they had to move and it was a capital transaction that the incentive payment was therefore on capital account.

Now what their Honours, it is with respect submitted, both failed to grasp, or at least to deal with, is that the choice does not have to be between moving for the incentive payment and not moving, it is sufficient to show that there is a choice open to the taxpayer of either taking a lease which he is going to have, in any event, with an incentive payment, or taking a lease without the incentive payment but with reduced tax deductible outgoings. If the tenant as between those two available choices chooses the option of taking the incentive payment structure, then it is submitted that a not insignificant purpose of the tenant in entering into that transaction as structured is to get that payment and that is sufficient to come within the Cooling principle.

Now, that is not what is dealt with. It is ignored. It is ignored, perhaps, because Justice Lockhart takes the view about prima facie capital receipts and perhaps not, but it is a principle, the third question which we identify in our application, which we submit to the Court is one of such overriding revenue significance that it warrants the attention of this very busy Court. It is of overriding significance for this reason: it is not confined to solicitors' tenancies; it is confined to every sort of commercial lease of property real or personable which is imaginable. Every time an incentive payment is made, if the answer can be, "Well, I would have taken the lease of the computer, or the truck, or the library in any event", the receipt is going to be treated as being on capital account in accordance with Justice Lockhart's decision and the second leg of Justice Beaumont's.

If, on the other hand, it be right, as we contend with respect it is, that if a taxpayer makes a deliberate choice as between the structure offered to him with payment and on the other hand reduced rental, the payment will be income because a not insignificant purpose of entry in is the receipt of that payment, then consequently most of these incentive payments will be treated, as it is submitted they should be, as revenue receipts.

To put it in a more general context, your Honours, it is submitted that there is something offensive and therefore likely to be wrong about the conclusion that what comes in is on capital account, albeit that what goes out to get it is the increased rental which is tax deductible because it is said it is on revenue account. It does not necessarily follow, of course, as a matter of logic that there should be a matching between them but it does, it is submitted, make one stop to wonder is there not something wrong with the logical process which has caused the lower courts to lead to that, and yes, there is. The logical process which has faulted is in saying that the only choice can be as between going and not going, whereas if one looks at it in terms of between one structure and another, all of the difficulties pass away because then, if the significant purpose of taking the payment rather than the reduced tax deductible outgoing is seen to be taking the incoming payment, there will be an incoming payment on revenue account which matches the increased outgoings on tax deductible revenue account.

If your Honours please, those are our submissions.

GAUDRON J: Thank you, Mr Nettle. We need not trouble you, Mr Shaw.

Having regard to the different approaches taken by the members of the Full Court and to the differences between the Full Court and the trial judge as to the relevant facts in this matter, we are of the view it is not a suitable vehicle for the further elucidation of any point of general principle. Special leave is refused.

MR SHAW: I would ask for costs, if your Honours please.

MR NETTLE: I have no submission, your Honour.

GAUDRON J: It is refused with costs.

AT 12.33 PM THE MATTER WAS CONCLUDED