€, JUDGMENT No. an eS, op 2 ecseesevaceceel sessoerscese CATCHWORDS INCOME TAX - assessable income - whether difference between amount paid to principal assumption party assuming taxpayer's liability to redeem debentures at face value on maturity and the face value of the debentures assessable as income in the hands of the taxpayer - whether principal assumption agreement entered into primarily for the purpose of escaping debt to asset ratios in debenture trust deeds involved the carrying out of a profit-making scheme - whether "gain" derived under such an agreement made on revenue or capital account - times at which "gain" assessable - application of Div 16E of Part III of Income Tax Assessment Act. INCOME TAX - capital gains tax - whether "gain" derived under principal assumption agreement entered into for debt defeasance purposes is assessable under Part IIIA of Income Tax Assessment Act - whether right to compel performance of principal assumption agreement an "asset" - whether asset disposed of as principal assumption party performs its obligations by redeeming debentures - whether such performance constitutes "discharge" or "satisfaction" within s.160M(3) (b) of Income Tax Assessment Act. nv nt ed v eral issioner of Taxation (1992) 92 ATC 4239. ervic v issjo T. tion (1982) 150 CLR 510. Beauchamp (Inspector of Taxes) v FW Woolworth PLC [1990} 1 AC 478. Beswick v Beswick [1967] AC 58. nia utual Life 'ance ociet tt: v Commissioner of Taxation (1946) 73 CLR 604. -2- al neral Ac tance Ltd v Federa issioner of Taxatjon (1977) 137 CLR 373. sioner of ation v Cooling (1990) 22 FCR 42. i £ ti v loldings ty Limjt (1989) 23 FCR 435. Commissioner of Taxation v Myer Emporium Ltd (1985) 8 FCR 136. Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199. Coulls_v_ Bagot's Executor and Trustee Co Ltd (1966) 119 CLR 460. le state v j (1960] AC 528. Federal Commissioner of Taxation v Becker (1952) 87 CLR 458. Federal Commissioner of Taxation v Cadbury Fry Pascal] (Aust) Rimited (1979) 10 ATR 55. Federal Commissioner of Taxation v Hunter Douglas Ltd (1983) 14 ATR 629. Federal Commjssioner of Taxation v Spedley Securities Ltd Se (1988) 19 ATR 938. PT tional Pipecoaters Pty Ltd v Federal Commissioner o Taxation (1990) 170 CLR 124. Henry Jones (IXL) Limited v Commissioner of Taxation (1991) 31 FCR 64. Hepples_v Commissioner of Taxation (1990) 22 FCR 1. Hepples_v Commissioner of Taxation (1992) 173 CLR 492. Lomax (HM Inspector of Taxes) v Peter Dixon & Co Ltd [1943] KB 671. t. Co era. issjione ° atio (1971) 23 ALR 89. Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333. Xco_ Pty Ltd v Federal Commjssioner of Taxation 71 ATC 4154. ges t 1930 (Cth) s.19, s.25(1), 8.25A(1), 8.159P, 8.159GQ(1), s.159GX, 8.160A, 8.160M(1), (2), (3) (6) and (7). Nos VG 208 and 209 of 1991 RYAN J MELBOURNE 16 SEPTEMBER 1994 19 SEP 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL Nos VG 208 and 209 of 1991 <t id ie] fod BETWEEN: § ICI AUSTRALIA LIMITED (Applicant) AND: THE COMMISSTONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA (Respondent) Coxam: Ryan J Place: Melbourne Rate: 16 September 1994 REASONS FOR JUDGMENT Ryan_J: By an agreement made 6 June 1986 ("the principal assumption agreement") the applicant, ICI Australia Limited ("ICI") agreed that the Melbourne and Metropolitan Board of Works ("MMBW") should assume its obligations to pay the principal amount of stock issued pursuant to two debenture trust deeds respectively dated 17 October 1966 and 28 April 1978. The ANZ Executors and Trustee Company Limited, the trustee under both deeds, was a party to the principal assumption agreement, which referred to it as "the Trustee", to MMBW as "the Assumption Party" and to ICI as "the Company". There were terms of the principal assumption agreement that: "2. Payment by Company (a) On the Assumption Date, the Company shall pay to the Trustee (for the account of the Assumption Party) in Melbourne in same day funds, in consideration for the agreement by the Assumption Party under Clause 3, an amount equal to the aggregate of the respective Present -2- Values of the respective principal amounts of all Stock. (b) The Trustee shall invest until the Payment Date the amount paid by the Company under Clause 2(a). Such investment shall be with an Australian trading bank or an authorized dealer in the short-term money market. On the Payment Date the Trustee shall - (i) pay to the Assumption Party in same day funds the amount paid by the Company under Clause 2(a); and (12) pay to the Company any interest earned on the amount invested as aforesaid. (c) If at any time after the date hereof any change in law, regulation or regulatory requirement, or in the interpretation thereof by any competent governmental authority, increases the cost to the Assumption Party of making the payments required of it under this Agreement, then the Company shall indemnify the Assumption Party on demand in respect of such increase in cost PROVIDED in that event the Assumption Party shall negotiate in good faith with the Company so as to avoid or minimize such increase in cost (at all times to the satisfaction of the Trustee). 3. ton of (4 1 Payments (a) In consideration for the payment to be made by the Company under Clause 2(a), the Assumption Party shall, on and after the Assumption Date, assume in the manner provided in this Agreement the obligations of the Company to make due and punctual payment of the prancipal amount of all Steck in accordance with Clause 3 of each of the Trust Deeds and notwithstanding that after the date hereof an order is made for the winding up or dissolution of the Company or that the Company enters into any composition or arrangement binding on its creditors generally; and the Assumption Party shall indemnify the Company and the Guarantors, and keep them indemnified, in respect of such obligations. (b) Unless otherwise agreed between the Assumption Party and the Trustee, the Assumption Party shall pay or cause to be paid to a bank account held in the name of the Trustee and nominated by the Trustee the amounts payable by the Aasumption Party under Clause 3(a) and such payment shall be in pro tanto satisfaction of the obligations of the Assumption Party under Clause 3(a) and likewise in pro tanto satisfaction of the obligations of the Company as to repayment of principal under Clause 3 of each of the Trust Deeds." The following relevant definitions were contained in cl.1 of the principal assumption agreement. "Assumption Date" means 6th June, 1986. "Bond Rate" means, in respect of the principal amount of any Stock, the rate agreed between the Company and the Assumption Party to be the mid rate on the Assumption Date (expressed as a yield rate) for Commonwealth Government Bonds maturing on or reasonably close to the maturity date of that Stock (as agreed between the Company and the -3- Assumption Party prior to the date hereof) PROVIDED THAT if the Company and the Assumption Party cannot so agree on the mid rate for any such Bonds the rate to be used in respect of such Bonds shall be the arithmetic mean of the respective mid rates for such Bonds as quoted on the Assumption Date by Bain & Co., F.W. Holst & Co. and Peter Wallman & Co. (or by such of them as will provide such quotes). "Discount Rate" means, in respect of the principal amount of any Stock, a rate equal to the Bond Rate in respect of that amount less 0.03% per annum. "Payment Date" means lst July, 1986. "Present Value" means, in respect of the principal amount of any Stock, the amount obtained by discounting that amount, from the maturity date of that Stock to the Payment Date, at the Discount Rate in respect of that amount, calculated semi-annually in arrears." A schedule of maturity dates and principal amounts appended to the principal assumption agreement discloses that debenture stock to a total face value of $98,662,800 was to mature on various dates between 30 November 1986 and 31 January 2000. Also on 6 June 1986, ICI entered into another agreement ("the interest assumption agreement") with the State Bank of New South Wales ("the Bank") under which the Bank agreed to assume the obligations of ICI to make payments of interest in respect of the stock the subject of the principal assumption agreement. The interest assumption agreement contained terms and definitions substantially identical to those in the principal assumption agreement. The interest assumption agreement referred to the Bank as "The Assumption Party" and included the following clauses: "2. Payment by Company (a) On each date for the payment of interest in respect of the Stock, the Company shall pay to the Assumption Party as directed by the Assumption Party within Australia, in game day funds, as a fee in consideration for the agreement by the Assumption Party under Clause 3, an amount equal to the aggregate of: (i) the amount of interest payable in respect of the - 4 ~ Stock on that date; and (i2) subject to Clause 2(b), (¢), and (d), an amount equal to 0.125% of the amount referred to in paragraph (i). 3. Assumption of interest Payments (a) (b) In consideration for the agreement by the Company to make the payments to be made by the Company under Clause 2, the Assumption Party shall, on and after the Assumption Date, assume the obligations of the Company to make due and punctual payment of all amounts of interest in respect of the Stock 1n accordance with Clause 3 of each of the Trust Deeds and notwithstanding that after the date hereof an order is made for the winding up or dissolution of the Company or that the Company enters unto any composition or arrangement binding on its ereditors generally; and, in consideration for the payments to be made by the Company under Clause 2, the Assumption Party shall indemnify the Company and the Guarantors, and keep them indemnified, in respect of such obligations but failure by the Company to comply with Clause 2 shall not relieve the Assumption Party of its obligations under this Clause 3(a). Unless otherwise agreed between the Assumption Party and the Trustee, the Assumption Party shall pay or cause to be paid to a bank account held in the name of the Trustee and nominated by the Trustee the amounts payable by the Assumption Party under Clause 3(a) and such payments shall be in pro tanto satisfaction of the obligations of the Assumption Party under Clause 3(a) and likewise in pro tanto satisfaction of the obligations of the Company as to the payment of interest under Clause 3 of each of the Trust Deeds." The trust deeds under which the debenture stock had been issued each contained restrictions on ICI's borrowing capacity which are illustrated by the following extract from the 1966 deed: "6. The Company shall be at liberty to borrow money without security or upon any security whatsoever eubject to the following restrictions which shall apply while any amount remains owing on the security of this Deed:- (4) (14) no debentures secured by a floating charge ranking in point of security in priority to the debentures secured by this Deed may be issued by the Company but this restriction shall not apply to any overdraft accommodation obtained by the Company from time to time from its bankers on the security of a floating charge whenever given; the Company will not permit or suffer the total liabilities of the Company and the Guarantor -_ 5 - Companies at any time to exceed sixty per centum of the amount of the tangible assets of the Company and the Guarantor Companies; (LiL) the Company will not permit or suffer the secured liabilities of the Company and the Guarantor Companies to exceed forty per centum of the amount of the tangible assets of the Company and the Guarantor Companies; (iv) the Company will not permit or suffer the total liabilities of the Company and the Guarantor Companies which rank in point of security prior to the moneys owing on the security of this Deed (including if so ranking any overdraft accommodation obtained by the Company from time to time from its bankers) to exceed twenty per centum of the amount of the tangible assets of the Company and the Guarantor Companies. 7. The Trustee may at its discretion release from time to time any Particular asset or assets of the Company from the burden and Operation of the said floating charge in any case or cases where it is considered by the Board of Directors of the Company that such release is desirable in the interests of the Company." The constraints imposed by the trust deeds significantly inhibited ICI in realising its desire to expand by new capital works or the acquisition of new businesses without a further injection of equity capital or the disposal of existing assets. An example of ICI's desire for expansion was provided by the proposal to construct an "olefines" plant for ethylene production at the company's site at Botany in New South Wales. The entire cost of that construction could not have been met without infringing the asset to liability ratios specified in the debenture trust deeds. The difficulties which the asset to liability ratios posed for ICI had been compounded by the introduction in March 1984 by the National Council of the Institute of Chartered Accountants and the Australian Society of Accountants of a new Accounting Standard AAS 17. As explained by Mr Dickson, the former Corporate Treasurer of ICI: eee AAS 17 introduced a requirement for finance leases to be capitalised by lessees for all accounting periods ending on or after 1 January 1988. The lease was required to be identified in the lessee's financial statements, recognising as an asset the rights to us the leased property, and as a liability, the obligations to make lease payments. Transitional provisions applied to lessees of finance leases for all accounting periods ending on or after 31 March 1985 up until 31 December 1987." The introduction of that Standard required that obligations under certain equipment leases be identified in ICI's balance sheet as liabilities with a consequent adverse effect on the asset to liability ratios. The way in which several factors combined to impress on the Board of ICI a need to remove or liberalize those ratios has been described as follows in an affidavit sworn by Mr Eddey who was Finance Director of ICI until February 1991: "32. 33. I was also increasingly concerned that the trust deeds were far too inflexible and hindered the Applicant's ability to raise funds for future needs. Deregulation of the Australian financial markets saw the introduction of a number of different financing techniques such as promissory note and euro- commercial paper financing which offered various advantages. The most important of these from the Applicant's perspective was the development of negative pledge borrowing which has formed the foundation of its major borrowings since 1986. Negative pledge borrowing allowed access to larger levels of funds without security and at favourable rates of interest. As the trust deeds stood, the Applicant would have been constrained from taking advantage of such financing arrangements. The combination of the poor profit performance of the Applicant's plastics and olefines business, the requirements of section 269 of the Companies (Victoria) Code the effect of capitalisation of the Olefines lease liabilities upon the ICI Group's borrowing ability coupled with this general inflexibility of the trust deeds meant that even had AAS 17 not been introduced, I would have eventually recommended to the Board that the Applicant's finances be restructured to eliminate the constraints imposed by the trust deeds even though by then I might not have fully considered the means by which it would be achieved. If the constraints of the asset to liability ratios had not been removed before 30 September 1987 (that being the closing date of the last financial year in respect of which the ICI Group could rely on the transitional provisions in AAS 17), it would have been in breach of the asset to liability ratios and unable to raise further borrowings without major restructuring of its balance sheet. -7J- The introduction of AAS 17 left the Applicant with little choice but to seek means of either removing, or liberalizing, the asset to liability ratios. Hence, in 1985 at my request, Mr Dickson sought advice about likely means to achieve this from the Applicant's external advisors. Mr Madder (the then Group Treasurer), to a lesser extent, was also involved in some of the discussions." Under cl.10 of the deed, breach of those restrictions, amongst other things, made the security constituted by the deed enforceable at the option of the Trustee. Consequently, a paper was prepared and presented to the ICI Board in December 1985. That paper outlined the reasons which were perceived to exist for removing or liberalizing the borrowing limitations to which ICI was subject and identified the following four available options: wi Seek modifications to the Trust Deed. Provisions are available to have the Deed modified to possibly expand borrowing ratios (eg by increasing percentage of qualifying assets from 60% to 66%) but the process is legally cumbersome requiring an extraordinary resolution to be passed by debenture holders and the possibility of having to increase existing coupon rates. Li Seek early redemption of all outstanding debentures This would involve a similar approach to that adopted in the early redemption of S10M of debentures during 1984/85. However as the Trust Deed does not provide an option for the company to compulsorily redeem its debentures and some debenture holders may not accept the offer no matter how attractive, the problem with the Trust Deed would remain. iii Undertake a defeasance A defeasance involves the purchase of a portfolio of risk free securities such as government or semi-government stock with the cash flows from the portfolio matching as closely as possible those of the company's own debentures. This defeasance portfolio of investments is held by the Trustee and as the interest and principal commitments of the company's debentures are matched by the defeasance portfolio, negotiation with the Trustee results in the release by the Trustee of the debenture Trust Deed floating charge and restrictive borrowing ratios. iv Arrange a liability assumption As an alternative to a defeasance, a liability assumption can be arranged. Under this alternative, in consideration for a -g- payment by the company, the obligations to pay interest and principal on the debentures are aasigned to a risk-free party such as the Conmonwealth Bank, State Bank or a semi-government guaranteed body, the Trustee can be satisfied that obligations to debenture holders will be honoured and agree to release the floating charge over assets and the restrictive borrowing ratios. The success of a liability assumption is dependent upon identifying a suitable counter-party to assume the liability for debentures." The Board apparently authorized an investigation and assessment of the legal, tax, funding and accounting implications of each of those options in conjunction with discussions with the trustees and auditors. It also requested that a recommendation as to the preferred option be brought to a Board meeting in March or April 1986. The relevant executives of ICI then received several proposals from merchant banks and similar financial institutions including Dominguez Barry Samuel Montagu Ltd ("DBSM") after which a further memorandum was submitted to the Board at its meeting in March 1986. That memorandum recommended a "separated liability assumption" to remove the constraints imposed by the trust deeds and, in an attachment, indicated why the other options outlined in the paper considered by the December 1985 meeting had been discarded. The recommendation of the separated liability assumption was in these terms: "It is recommended that the company enter into two separate assumption agreements, one for the outstanding debenture principal and the other for the ongoing interest payment obligations until the respective debenture maturities. These obligations would be assumed by two separate parties whose obligations are guaranteed either by the Commonwealth or a State Government. Under the principal assumption agreement ICI Australia would pay to a Principal Assumption Party an amount calculated as the net present value of the debenture principal repayment only, discounted at a rate approximating the Commonwealth Bond yield for each of the principal repayment dates. The amount of principal assumed would be $99 million and the payment required would be approximately $59 million which could be provided from available cash sources of the company. -9 - In the interest assumption agreement ICI Australia would undertake to make a series of payments to an Interest Assumption Party to coincide precisely with existing debenture interest obligations. A fee would be payable to the Interest Assumption Party as consideration for assuming the primary legal responsibility for these payments. It is expected that an extraordinary profit of approximately $17 million (after tax) would arise from the two transactions in the 1986 year comprising a capital profit of $40 million on the principal assumption less $23 million (after tax) for the interest assumption payments. While the $40 million capital profit would not be subject to income tax the regular fee payments would be claimed as tax deductions. It ig proposed that debenture holders be given the option to early redeem their holding based on current market yield to redemption rates prior to the liability and interest assumption agreements being entered into. This step is recommended to avoid any adverse reaction from debenture holders. The number of debenture holders accepting the early redemption offer will affect the final extraordinary profit on the transaction. Imperial Chemical Industries PLC have been advised of the need to restructure the Trust Deed and the options considered. ccou and Audit Im ations The accounting and auditing implications of separate liability and interest assumption agreements have been discussed with Price Waterhouse. It is expected that in the year the principal lability assumption transaction takes place the accounts would disclose a general description of the transaction and the amount of debt that has been extinguished. The gain arising from the liability assumption lesa the aggregate amount payable to the Interest Assumption Party (net of tax) would be treated as an extraordinary profit." Also attached to that memorandum was the following illustration of the impact on ICI's profit and loss statement of implementing the separated liability assumption: "EXTRAORDINARY ITEM au GAIN ARISING FROM BANKS ASSUMING CERTAIN LIABILITIES RELATING TO INTEREST AND PRINCIPAL REPAYMENTS. - CAPITAL PROFIT ON PRINCIPAL ASSUMPTION (1) 40 - ACCRUAL FOR ANNUAL FACILITY FEE PAYABLE TO BANK RELATED TO PRINCIPAL ASSUMED (INCLUDING TAX EFFECT OF $23M TRANSFERRED TO FUTURE INCOME TAX BENEFIT) 123) EXTRAORDINARY PROFIT (NET OF TAX) ~ dL (1) CAPITAL PROFIT COMPRISED OF: - 10 - FACE VALUE OF DEBENTURES ASSUMED 99 PAYMENT TO PRINCIPAL ASSUMPTION PARTY (NPV OF DEBENTURES ASSUMED) (59) 40_" The Board's approval of the recommendation was recorded thus in the minutes of the meeting of 18 March 1986: "Restructuring Debenture Trust Deed A memorandum (Annex 10113/2) was discussed and the Board gave approval to proceed to negotiate "separated liability assumption" agreements substantially along the lines recommended in the Annex subject to the requirements that debenture holdera be informed of the proposal and given the opportunity to seek early redemption of their securities and that the Board be kept fully informed of progress on the transaction at subsequent meetings. The Finance Director and Treasurer were authorised to appoint the financial advisor to manage the transaction." The requirement that debenture holders be given the opportunity to seek early redemption of their debentures was not persisted in. The need for that change was explained as follows in a letter of 22 April 1986 from Mr Eddey to his fellow directors: "The volatility of interest rate movements on Commonwealth Bonds in recent weeks (a 1.3% drop to 12.2% since March) has prompted us to reconsider the desirability of proceeding to offer early redemption as originally planned. My conclusion, shared by Chris Hampson and the Treasury team is that we should not. Our original proposal was to so structure the redemption offer to debenture holders that there would be only a minimal acceptance and the funds required ($58 million) and the capital gain ($17 million) were Calculated on this basis. It has become increasingly evident that in the current interest rate climate it will be very difficult to strike the appropriate "yield to redemption™ rates to be offered for early redemptions, particularly as the offer must remain open for 14 days which increases the uncertainty of the outcome. In this regard, a high acceptance of the early redemption offer by debenture holders would significantly reduce the extraordinary capital profit on the transaction and increase the cash required. For example, a 50% acceptance of the early redemption offer would increase the funds required to $79 million and reduce the capital gain to $7 million. Our financial advisors agree that with the present interest rate uncertainties the debenture restructuring should proceed without an offer for early redemption. The Trustee for debenture holders has - li- also indicated that he would have no objection if the early redemption alternative was not offered. Whilst there may be some adverse reaction from debenture holders if they are not offered the early redemption option we could equally attract criticism if in offering early redemption the discount factor is perceived by debenture holders as being too high. In terma of the original loan arrangements no debenture holder will be disadvantaged by the decision not to offer early redemption. From our point of view it removes uncertainty, and quantifies the cash requirements and the net capital gain." The separated liability assumption was in fact implemented as indicated by the two agreements with MMBW as principal assumption party and the Bank as interest assumption party as described above. The two assumption parties were introduced by DBSM which had been appointed financial adviser to ICI for the purposes of the transaction. The effect of the principal assumption agreement and the interest assumption agreement on ICI's profit and loss account for the year ended 30 September 1986 was set out as follows in the accounts appended to its tax return for that year: "Extraordinary Profit Capital profit arising from refinancing Company's debenture borrowings under separate principal and interest liability assumption agreements. Principal liability transferred to assumption party 98,662,800 Less payment to assumption party (62,309,546) Capital profit 36,353,254 Fees payable from 1/7/86 until maturity of debentures in respect of interest liability assumption (50,629,595) Income tax - Future Income Tax Benefit 23,289,615" A resultant "extraordinary gain after income tax" was calculated as follows by Mr Dickson in a memorandum of 11 - 12 - February 1992: . $ $ Debenture liability assumed 98,662,800 Legg Liability Assumption Payment 62,309,546 Accrued future fee obligations 50,629,595 (112,939,141) Loss before income tax (14,276,341) Plus Future tax benefit of future obligations (at 46% rate) 23,289,614 Extraordinary Gain after income tax §_ 9,013,273" By a notice of amended assessment dated 23 April 1990, the respondent Commissioner of Taxation ("the Commissioner") added $36,353,254 to ICI's taxable income for the year ended 30 September 1986 and disallowed as a deduction $3,410,626 described as "fees paid to the interest liability assumption party". The explanation for the addition of $36,353,254 was that "the gain" of that amount "in respect of the liability assumption agreement carried out is considered to be assessable income". ICI by notice dated 22 May 1990 objected to the amended assessment and the objection was allowed in part in respect of the sum of $3,410,626 paid to the Bank as interest assumption party. However the decision on objection confirmed the Commissioner's view of "the assessability of the gain associated with liability assumption transactions". By request dated 5 February 1992 that decision was referred to this Court and resulted in that part of the present proceedings numbered VG 208 of 1991. In response to a request for particulars requiring him to state under which sections of the Income Tax Assessment Act - 13- 1936 ("the ITAA") the gain of $36,353,254 was asserted to be assessable, the Commissioner replied: "(1) The gain was income of the applicant for the income year ended 30 September 1986 pursuant to the provisions of subsection 25A(1) of the Income Tax Assessment Act (ITAA") as a profit derived from the carrying on or carrying out of a profit-making undertaking or scheme. (2) Alternatively, the gain constitutes assessable income of the Applicant for the income year ended 30 September 1986, pursuant to subsection 25(1), ITAA, being gross income derived directly or indirectly from a source in Australia, which is not exempt income, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of subdivision AA of the Income Tax Assessment Act 1936. (3) Alternatively, the PAA [principal assumption agreement] is a security which is a qualifying security within the meaning of those terms contained in Division 16E, ITAA. The Applicant, as holder of the qualifying security, is to include pursuant to subsection 159GO(]) of the ITAA, an amount representing a portion of the gain from the principal assumption transactions in its assessable income for the 1986 year of income." By a further notice of amended assessment dated 29 April 1991 the Commissioner added to ICI's assessment for the year ended 30 September 1987 an amount of $8,033,418 in respect of "profit made from debt defeasance transactions included as income". ICI, by notice dated 7 June 1991 objected against that amended assessment which objection was disallowed on 12 July 1991. That disallowance was referred to this Court and the resultant proceedings were numbered VG 209 of 1991. In response to a request for further and better particulars in VG 209 of 1991 which required him to state under which sections of the ITAA he asserted the partial gain of $8,033,418 to be assessable, the Commissioner replied: "(1) The gain is assessable pursuant to the provisions of section 19 and subsection 25(1) or alternatively subsection 25A(1). (2) Alternatively, the Principal Assumption Agreement ("the PAA") entered by the Applicant on 6 June 1986 is a security which is - 14 - a qualifying security within the meaning of those terms contained in Division 16E of the Income Tax Assessment Act ("ITAA"). The Applicant, as holder of the qualifying security is to include pursuant to subsection 1596Q(1) ITAA an amount representing a portion of the gain from the PAA in assessable income for the 1986 year of income. (3) Alternatively, pursuant to the PAA, the Applicant has acquired an asset, being a right, according to the provisions of section 160A ITAA. Pursuant to the provisions of paragraph 160M(3)(b) ITAA, that asset was disposed of in part on each occasion during the year of income ended 30 September 1987 on which the MMBW made a payment pursuant to the PAA for the benefit of the Applicant. (4) The consideration received on each partial disposal of that asset as determined under the provisions of sa. 1602D and 160D ITAA was in excess of the indexed cost base on the asset, determined under s6.160ZH and 160ZI (2) and 1602S ITAA. Thus a capital gain was realised by the Applicant on each partial disposal. (5) The Applicant reported no capital losses determined in accordance with the provisions of Part IIIA ITAA for the income year ended 30 September 1987. By the operation of the provisions of 6.160Z2C ITAA the total capital gains constituted the net capital gains of the Applicant for that year and pursuant to the provisions of s.1602P ITAA were included in the Applicant's assessable income." ofit? Section 25(1) of the ITAA provides: "The assessable income of a taxpayer shall include - (a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia; and (Db) where the taxpayer is a non-resident - the grosa income derived directly or indirectly from all sources in Australia, which is not exempt income, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of Subdivision AA." Counsel for ICI submitted first, that ICI derived no gross income from the principal assumption agreement because it received nothing. Rather, so it was submitted, it outlaid the sum of $62,309,546.00 which represented the full present value of the future redemption of the debentures as they matured. - 15 - Thus, applying ordinary business conceptions to the transaction, no profit was derived by ICI. A parallel was sought to be drawn between the present case and Federal Commissioner of Taxation v Becker (1952) 87 CLR 458 where a taxpayer wished to transfer a parcel of land for £12,000 which was its actual value. To overcome price controls imposed under the National Security (Economic Organization) Regulations, he formed a company to which he sold the land for £8,000 or such lesser sum as the appropriate authority might approve. He then caused all the 8,000 shares in the company to be issued to himself at £1 each in consideration of his transferring the land to the company. The taxpayer, in turn, sold the shares to the intended transferee for £1.10s each making a total of £12,000. In rejecting the Commissioner's appeal, Kitto J observed at 467: "The question then is, what really was the cost to the respondent of the shares which he sold for £12,000? The plain fact of the matter is that the cost was the land which he transferred to the company. It simply is not true to say that the cost was only £8,000. That was the sum which the sale agreement named as the price of the land, and it was the sum which was credited as paid up on the respondent's shares. But the respondent did not sell his land for £8,000 payable in money, and he did not receive or become entitled to receive the 8,000 shares upon paying £8,000 in money. The sale agreement provided for only one method of completion: it bound the respondent to transfer his land to the company and it bound the company to iseue fully-paid shares to him. Accordingly a profit cannot be said to have arisen from the sale of the shares, unless the land which the respondent gave for the shares was not worth as much as £12,000. The attempt to show that a profit arose from the sale of the shares thus leads to the same question as that upon which the commissioner's alternative submission depends; for his assertion that the land could not have been sold for more than £8,000 does not assist him to maintain that a profit arose from the entire procedure unless it means that the full value of the land which the procedure was designed to turn to account was £8,000, or at any rate an amount less than £12,000." Becker's case was expressly applied by two members of a Full Court of this Court to hold that no "profit" had been derived - 16 - upon the assignment of an "income stream" by the taxpayer in Commissioner of Taxation v Myer Emporium Ltd (1985) 8 FCR 136. However, it is to be borne in mind that both Becker's Case and the Myer Emporium Case were concerned with whether a profit had arisen in terms of what was then s.26(a) of the ITAA, the counterpart of the present s.25A(1), which provides: "The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme." In my view, the difference between the amount paid by IclI under the principal assumption agreement and the amount which ICI would have been required, but for that agreement, to pay to redeem the debentures is income according to the ordinary connotation of that word. It represents the price paid by the assumption party for the use of ICI's money over time. Whether it can be regarded as a price which is economically advantageous to ICI may depend, as has been suggested in evidence, on movements in interest rates and inflation over the same time. But that is not to the point. As the High Court said in Myer (1987) 163 CLR 199 at 216-217: "The accounting basis which has been employed in calculating profits and losses for the purposes of the Act is historical cost McRae v Federal Commissioner of Taxation (1969) 121 CLR 266; and see Lowe v Inland Revenue Commissioner (N.Z.) (1983) 15 ATR 102 not economic equivalence: Inland Revenue Commissioner v Europa Oil (NZ) Ltd {1971] AC 760, at p. 772. And so a taxpayer who lends money for a stipulated period at interest is treated as exchanging the money lent for a debt of the same amount, unlese the loan is made at a discount or premium, in which case there may be a gain or loss on capital account: Lomax (HM Inspector of Taxes) v Peter Dixon & Co Ltd (1943] 2 All ER 255. In the ordinary case, the debt is brought to account in the same amount as the money lent. The amount of the debt is not reduced because the lender is kept out of the use and enjoyment of the money lent for the period of the loan." -17 - The corollary of that proposition, I infer, is that the value of the assumption of a liability is not reduced because the assumption party has the use and enjoyment of the principal's funds for the period before the liability falls to be discharged. In Lomax (HM Inspector of Taxes) v Peter Dixon & Co Ltd [1943] KB 671, referred to in the passage just cited, Lord Greene MR examined a number of examples of money advanced on terms that it would be repaid at the end of a specified term together with an additional amount. In some cases, as his Lordship indicated, the difference may be characterized as interest, whereas in others it may be regarded as compensation for the capital risk. Each case, for the purpose of that characterization, turns on features which it possesses, such as the length of time for which money is lent, whether the contract stipulates payment of interest independently of the premium and the degree of risk assumed by the borrower. Myer and Lomax v Peter Dixon were both considered in this context by Gummow J in Commissioner of Taxation v Hurley Holdings (NSW) Pty Limited (1989) 23 FCR 435 where his Honour observed at 440: "The submission of counsel for the Commissioner was that the amount representing the discount had the character of recompense to the taxpayer for loss of the use of the moneys invested by the taxpayer during the currency of the term of the accommodation bill and thus was income according to the ordinary concepts and usages of mankind: cf Federal Wharf Co Ltd v Deputy Commissioner of Taxation (Cth) (1930) 44 CLR 24 at 28. The taxpayer purchased the bill, seeking to invest its funds with no risk and a reasonable return. The circumstance that the purchase of the bill was an isolated transaction would not, of itself, deprive the amount in question of the character of income: Commissioner of Taxation (Cth) v Myer Emporium Ltd (1987) 163 CLR 199 at 211. I accept these submissions." -~ 18 - The inference which I draw in the present case from the relatively short and ascertainable period before the debentures had to be redeemed, the selection as the assumption party of the MMBW, a "low-risk" statutory authority, and the fact that the premium was calculated by reference to Commonwealth bond rates, is that the premium notionally receivable by ICI is interest. The fact that the premium is not actually to be received by ICI does not detract from its character as income of ICI since s.19 of the ITAA provides: "Income or money shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise deal with on his behalf or as he directs." v. it-maki mM = i scheme? This question arises from the language of s.25A(1) of the ITAA which has been quoted above. In this context it was submitted on behalf of ICI that it did not enter into the principal assumption agreement in the ordinary course of its business or as an extraordinary transaction for the purpose of making a profit. The evidence disclosed that ICI, after 1979, was not directly engaged in manufacturing operations but was the holding company for the ICI Australia group of companies. It owned land and raised long-term finance for the group's operations, principally by the issue of debentures. The money so borrowed was lent to its subsidiaries at commercial rates of interest. IcI's entry into the principal assumption agreement was, for it, a novel initiative, and was undertaken - 19 - to overcome the inhibitions arising from the asset and liability ratios in the debenture trust deeds and to avail itself of more flexible methods of financing capital expansion which had emerged by 1986. It was accepted by Counsel for ICI that a profit or gain may constitute income even though it is not derived in the ordinary course of the taxpayer's business. So much was made clear by the following from the joint judgment of the High Court in the Myer Emporium Case (1987) 163 CLR 199 at 209: "Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355, at pp. 366- 367, 376. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit." However, that passage, it was submitted on behalf of ICI, does not entail that every gain made by a taxpayer who carries on business is made in the ordinary course of that business. In support of the proposition that the distinction between - 20 - capital and revenue profits 1s still valid, I was referred first to a judgment of a Full Court of this Court in Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 19 ATR 938. In that case, the taxpayer, a merchant bank, had agreed, in consideration of commission of 14% of the amount of the loan, to procure a loan of $65m for a mining enterprise to be carried on by Santos Ltd. The agreement was discharged and it was a term of the deed of discharge that Santos Ltd should pay the taxpayer $200,000.00. On whether the taxpayer was assessable in respect of the sum of $200,000.00, the Full Court observed, at 942: "The second principal submission relies on the recent decision of the High Court in FCT v Myer Emporium Ltd (1987) 18 ATR 693; 61 ALJR 270. The decision in that case was given jointly by five judges, doubtless with some recognition that the court was reversing cumulative decisions of the Supreme Court of Victoria, and this Court on a question of whether a receipt was, on the application of the Income Tax Assessment Act 1936 (the Act) s.25(1), one of capital or income. The case ia strong authority for what it decides, but it may only have taken a different view of the facts than had the lower courts. The use made of the decision in this case on behalf of the Commissioner is to say that the amount in question was received in the course of business operations, the operations, taken broadly, being intended to produce a profit. The phrase "in the course of" involves a temporal connection. If the proposition were correct, it would mean that any receipt by a business would necessarily be of an income nature, and this would be contrary to authority, to the Act itself and to basic concepts concerning the distinction between capital and income. In Myer's case what was received related solely to income by way of interest on a loan made by the taxpayer, the amount received being for a transfer of the right to receive the interest in the future. The High Court did not base its decision on Myer being, in a broader sense, a profit making company. The purpose of profit making must exist in relation to the particular operation. Compare the decision of the Administrative Appeals Tribunal in AAT Case 146 (1987) 18 ATR 4066; case U224 (Fisher J, RA Layton and D J Trowse) 87 ATC 1238 at 1250." That passage was approved by another Full Court of this Court in Commissioner of Taxation v Cooling (1990) 22 FCR 42 where Hill J, with whom Lockhart J and Gummow J agreed, prefaced his quotation by saying, at 55: - 21 - "Following Myer it would seem that the Commissioner sought to argue that the case established a new principle that all gains made by a business entity were assessable. That the case did not stand for such an extreme proposition was made clear by the Full Court of this Court (Fox, Fisher and Sheppard JJ) in Commissioner of Taxation (Cth) v Spedley Securities Ltd (1988) 19 ATR 938. ..." In the result in Cooling's case, the Full Court held that an incentive payment received by a firm of solicitors to induce a service company ("Bengil") controlled by the members of the firm to take a lease of a floor of a city building had the character of income according to ordinary concepts. On that aspect, Hill J observed at 56-57: "Another way of analysing the facts of the present case 18 to consider whether the transaction giving rise to the incentive payment can properly be characterised as a profit making scheme. It was submitted that the evidence illustrated that the firm was reluctant to move. That may be so. But the firm did commit iteelf to the move and it was an integral part of this commitment that it receive the incentive payment which is properly a profit of the partnership. It is true that the incentive payment was not the sole purpose of the firm moving premises. The previous premises had the disadvantages to which I have earlier referred and the securing of Premises in what may be assumed to have been a prestige building was a clear purpose of the firm in taking the course it did which led both to Bengil entering into the lease and to the receipt of the incentive payment. A scheme may be a profit making scheme notwithstanding that neither the sole nor the dominant purpose of entering into it was the making of the profit. In Myer the assignment of the right to interest was an integral part of the total reorganisation entered into by the Myer Group. While the judgment of the High Court in Myer referred to the case as involving the intention or the purpose of making the profit there is no suggestion that the Court dissented from the factual finding of Murphy J that the motivating purpose of the transaction was for Myer to obtain working capital to enable it to diversify. I[t should however be noted that on the facts of that case the obtaining ef working capital was possible only if the profit contemplated by the taxpayer was made. In Moana Sand Pty Ltd v Commissioner of Taxation (Cth) (1988) 88 ATC 4897, the profit made by a taxpayer on the sale of land acquired with the twofold purpose of working and/or selling surplus sand on it and thereafter holding the land until some time in the future when it became appropriate to sell it at a profit, was held to be income in ordinary concepts. This was eo despite a finding that the dominant purpose of the company in acquiring the land was not resale of the land at a profit. The Court (Sheppard, Wilcox and Lee JJ) applied Myer's case in so holding. In my view the transaction entered into by the firm was a commercial transaction; it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial - 22 - profit by way of the incentive payment. This result accords with Common sense. The firm had the alternative of paying less rent and therefore obtaining a small tax deduction for its outgoings or paying a higher rent, (assuming its lessor (Bengil) passed on the rental holiday), and therefore obtaining a larger tax deduction but receiving an amount in the form of assessable income." Myer and Cooling were together discussed by a Full Court of this Court in Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333 where Hill J, with whom Lockhart and Gummow JJ again agreed, said at 342: "what was said in Myer has been applied in a number of casea in this Court since. Among them are Moana Sand Pty Ltd v Commissioner of Taxation (Cth) (1988) 88 ATC 4897 and Commissioner of Taxation (Cth) v Cooling (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer or, for that matter, from the judgments un any later cases, that every profit made by a taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit. A taxpayer carrying on a business might sell its headquarters in order to move to larger premiees and make a profit over historical cost. The transaction of sale may be one which arises in the ordinary course of the taxpayer's business, but the profit will not ordinarily be income, particularly where, at the time of acquisition of the site, there was no intention or purpose of profit-making by sale when the premises became too small. The profit in Cooling {gupra), the receipt of a leasing incentive payment, was one intended to be made at the time the transaction with the lessor was entered into, just as the profit in Myer was one which underlay the whole transaction." An illustration of a profit characterized, according to the dichotomy there recognised, as a capital profit, is provided by AGC (Investments) Limited v Federal Commissioner of Taxation (1992) 92 ATC 4239. There, a Pull Court of this Court held that a profit made on the sale of shares acquired with a view to long-term capital growth was on capital account. In coming to that conclusion, the Full Court noted the views expressed, for instance, in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of fTfaxation (1946) 73 CLR 604 at 620 that the buying and selling of - 23 - investments is a necessary incident of insurance business so that any profit derived is assessable as income and any loss sustained is deductible. However, the Full Court in AGC (Investments) Limited distinguished the Colonial Mutual Case because it found, by contrast, that the investments by the taxpayer, which was the investment vehicle for the Insurance Division of the group, were not made with a view to short-term sale as needed to maintain liquidity, but were made with a view to long-term capital growth. A similar approach was taken to foreign exchange gains and losses on overseas borrowings by a finance company in AVCO Financial Services Ltd v Federal Commissioner of Taxation (1982) 150 CLR 510. In that case, it was observed in the joint judgment of Mason, Aickin and Wilson JJ, at 527: "There is therefore an important and material difference between borrowing by a finance company in an ordinary course of its business and borrowing by a manufacturer or trading company. In general the finance company's borrowings provide money which it turns over at a profit. Borrowing otherwise than for on-lending or for the repayment of funds borrowed for on-lending, that is, borrowing undertaken for capital rather than revenue purposes, as in CAGA (1977) 137 CLR 373, ig an exception to the general rule. On the other hand, borrowing by a manufacturing or trading company is often undertaken to strengthen the capital or profit~earning structure of a company. A finance company usually borrows in order to increase its working capital which is then turned over at a profit; the manufacturing or trading company frequently borrows to strengthen its permanent capital." In Commercial & General Acceptance Ltd v Federal Commissioner of Taxation referred to in that passage, Gibbs J went so far as to say, at 377: "I incline to think that an exchange gain or loss on the repayment of moneys lent will alwaya be a capital gain or loss, and can never be taken into account in the assessment of income." However, the same Judge in AVCO Financial Services Ltd (supra) said, at 518: "The view which I expressed in Commercial & General Acceptance Ltd v Federal Commissioner of Taxation that an exchange gain or loss on the repayment of moneys lent will always be a capital gain or loss must, on reconsideration, be rejected. In a case such as the present, the gains and losses do not have the same character as the repayments that produced them, and, considered separately, but in the light of all the circumstances, are seen to be revenue in character." In the Myer Case it was noted by the High Court that the transactions entered into by the taxpayer were novel, in the sense that it had not previously entered into a transaction of that kind. However, that was held not to take them out of the course of the taxpayer's profit-making business. The joint judgment continued, at 216: "By no stretch of the imagination is it possible to describe the transactions, or the assignment standing on its own, as the mere realization of a capital asset. As we have seen, the assignment was not unrelated to and interdependent in the sense that Myer would not have entered into the loan agreement unless it knew that Citicorp would shortly thereafter take an assignment of the moneys due or to become due for a sum approximating the amount payable in consideration of the assignment. Indeed, from the viewpoint of Myer the two transactions were essential and integral elements in an overall scheme, that scheme being a profit-making scheme." In the present case, I accept that the prime motivation for ICI's entering into the liability assumption agreement was to procure the release of ICI from the restrictions imposed by the asset to liability ratios specified in the debenture deeds. That, it was apparent, could be achieved by laying out a present sum of money less than the liability being assumed in return for the promise to discharge that liability as it fell due on dates in the future. Whether the transaction would prove to be to ICI's financial advantage in strictly economic terms depended on factors which could not be known at - 25 - the time when the transaction was entered into, primarily fluctuations in interest rates between that date and the dates on which the assumption party would be required to discharge ICI's liability to the debenture holders. However, ICI, I consider, was prepared to take the risk of unfavourably high interest rates in the meantime in order to remove the debenture liability from its balance sheet and thus free itself from the restrictions imposed by the borrowing ratios. On the other hand, it was an attraction of the arrangement for ICI that it was assured of some return for the use of the money which it advanced to the assumption party over the period which was to elapse before discharge of the debentures. In Henry Jones (IXL) Limited v Commissioner of Taxation (1991) 31 FCR 64, the taxpayer assigned to a financier the right to receive royalties under a licensing agreement whereby two other fruit-processing companies had undertaken to pay royalties over ten years for the right to use certain trademarks and labels, most of which were owned by the appellant. The consideration received for the assignment was a lump sum of $7,581,691.00. Hill J, who delivered the leading judgment, again applied the reasoning of the High Court in the Myer Emporium case and concluded that the appellant had not entered into the licence agreement for the purpose of making a profit on the assignment of it. He said, at 74-75: "Counsel for the appellant preferred to direct attention, not to the end of licence period, but to the beginning of that period, when the diminution of value of the royalty agreement could be assumed to be equal in value to the considerations payable by Citicorp. Looked at - 26 - at that time, there was no profit. In determining whether there was a profit-making purpose, it cannot be correct to focus attention at a particular period of time to the exclusion of any other period of time. The question falls to be resolved over the whole period of the agreement. The profit need not emerge in the one year of income. There is much to be said for the view that, in a case such as the present, the profit emerges to the appellant over the entire period of the licence agreement, but that is not to deny that there was a profit. Rather, it would raise the iwsue whether the whole of the consideration received from Citicorp was derived in the year of income, rather than progressively over the term of the licence agreement. It is not, however, necessary to pursue these issues since I am of the view that, unlike the taxpayer in Myer, the appellant did not enter into the licence agreement with the purpose of profit-making by a sale of it. Thus in respect of the first strand of the Myer decision, I am of the view that the facts of the present case are distinguishable from those in that case." Hill J considered what he called "the second strand in Myer" and observed at 78: "Notwithstanding some doubt, I think Myer must be taken as establishing that, except in the case of the assignment of an annuity where the income arises from the very contract assigned, an assignment of income from property without an assignment of the underlying property right will, no matter what its form, bring about the result that the consideration for that assignment will be on revenue account, as being merely a substitution for the future income that is to be derived. Thus, the fact that the future income may be secured by an agreement, and that the assignment 18s of the right title and interest of the assignor in that agreement, will not affect the result. So stated, the principle is consistent with the development of the law in cases involving compensation for rights of income. Amounts received as compensation for an income right, amounts which thus fill the whole of income, have the character of income. The giving up of an opportunity to earn remuneration in consideration of the payment of an agreed sum payable in instalments was held to be income in Commiggioner of Taxes (Vic) v Phillips (1936) 55 CLR 144. The proceeds of an insurance policy on the life of an employee of a subsidiary was held to be income in Carapark Holdings Ltd v Commiasioner of Taxation (Cth) (1967) 115 CLR 653 where Kitto, Taylor and Owen JJ said (at 663): "... in general, insurance moneys are to be considered as received on revenue account where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against has prevented from arising ..." No question arises here of any assignment of a right to income or a sale of any asset of ICI. The only issue as to the application of s.25A(1) of the ITAA is whether the profit -27- attritubed to ICI is one arising from the carrying out by ICI of a profit-making scheme. Consistently with the views expressed by Gibbs J (as he then was) in Xco Pty Ltd v Federal Commissioner of Taxation 71 ATC 4154, the principal assumption agreement involved a scheme, an element of which was that ICI should receive a return on the money which it was required to outlay to procure MMBW to assume ICI's liability to redeem the debentures. That intention, I find, subsisted at the time when the transaction was entered into. The receipt of a return on its money was not ICI's sole or dominant purpose in entering the principal assumption agreement, but it underlay, and was an integral part of, the whole transaction. Accordingly, by application of the principals enunciated in Cooling, as explained in Westfield, that transaction is properly to be characterized as a profit-making scheme. It was next submitted on behalf of ICI that it had no disposable item of property from which it could be said to have derived a profit. Any profit, it was said, arose, or would arise, from the discharge of an existing liability. Reference was again made to the CAGA case as illustrating the possibility of making a gain on capital account from exchange rate fluctuations on overseas borrowings for capital purposes. By way of a similar illustration of the non-deductibility of foreign exchange losses on borrowings on capital account, I was referred to Federal Commissioner of Taxation v Hunter - 28 - Douglas Ltd (1983) 14 ATR 629. On the other hand, profits and losses on foreign exchange transactions involving the purchase of trading stock (Federal Commissioner of Taxation v Cadbury- Fry Pascall (Aust) Limited) (1979) 10 ATR 55 and Thiess Toyota Pty Ltd v Federal Commissioner of Taxation (1971) 23 ALR 89) have been held to be on revenue account. That is consistent with the conclusion reached by the High Court in the AVCO case (supra) where funds borrowed by a finance company to be lent to customers were effectively equated with trading stock. I was also referred in this context to the English authority of Beauchamp (Inspector of Taxes) v F W Woolworth PLC (1990] 1 AC 478, where a foreign exchange loss made on borrowing for a fixed term of five years was held to be on capital account because the funds so borrowed constituted additions to the capital employed by the taxpayer company. By analogy, it was argued on behalf of ICI that the funds which it had raised by issuing the debentures were a permanent or long-term addition to its funds. I am disposed to accept that characterization. However, the question remains whether, because the transaction into which ICI entered (the principal assumption agreement) contemplated the repayment of borrowings on capital account, any gain made from that transaction was similarly attributable to capital rather than income. By contrast with what happened in Beauchamp's case, ICI's "gain" was not made on repayment of the debentures; that repayment was not to occur until the debentures matured up to more than thirteen years after the making of the assumption agreement. The "gain" rather - 29 - represented the difference between the advance or price paid to MMBW and the face value at which the debentures would have to be redeemed on maturity. The fact that it was to be applied in elimination of a capital liability does not detract from the character, which I have found it should bear, of income. See eg GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136. It will be recalled that, as an alternative basis for assessing ICI to tax, the Commissioner asserted that the principal assumption agreement was a qualifying security within the meaning of Division 16E of Part III of the ITAA and that ICI, as holder, was required by s.159GQ(1) of the ITAA to include a portion of the gain from the principal assumption agreement in its assessable income for 1986. When requested to provide particulars of income assessed on that alternative basis, the Commissioner quantified it as $2,486,704.00, being the sum of the notional accrual amount ("NAA") for the period between 6 June 1986 and 31 July 1986 and the NAA for the periods between 1 August 1986 and 30 September 1986. When asked by a further request for particulars to state, by reference to the provisions of Division 16E of the ITAA, how he had calculated, quantified, derived or ascertained the sum of $2,486,704.00, the Commissioner responded as follows: "Section 1596Q(1) of the ITAA includes in the assessable income of the applicant for the income year ended 30 September 1986 the whole of the notional accrual amount ("NAA") for the notional accrual period ("NAP") ended 31 July 1986 and a fraction of the NAA for the NAP ended 31 January 1987. ~ 30 - The assumption agreement between the applicant, the Melbourne and Metropolitan Board of Works and the ANZ Executors and Trustees Co Ltd is a security which falls within paragraph (d) of the definition of security in section 159GP(1) being a contract under which a person is liable to pay an amount or amounts. The security is a qualifying security asa defined in subsection 159GP(1) ("the qualifying security"). The NAP in relation to the qualifyzng security, as defined in subsection 159GP(1), is the period ending 31 January 2000 and any period of 6 months ending 31 July or 31 January in any of the years from 1986 to 1999. The applicant's yield to redemption as defined in subsection 159GP(1) is 6.29542421% being the rate of compound interest per NAP in the term of the security, ie the period from 6 June 1986 to 31 January 2000, at which the sum of the present values of all amounts payable under the security equals the issue price of the security (ie $62,309,545.00). The NAA is determined in accordance with the provisions of subsection 159GP(1) and is ascertained in accordance with the formula AB-C set out in subsection 159GP(1). The calculations applying the applicant's yield to redemption are contained in Schedule 1 to the respondent's further and better particulars dated 23 October 1991. The first table of calculations in Schedule 1 applies the assumed yield to redemption to the payments over the term of the qualifying security and establishes that the assumed yield is the correct yield because it writes down the payments made under the security to a present value equal to the iseue price of the security. The second table of calculations in Schedule 1 further tests/verifies the accuracy of the yield to redemption by calculating the accrual amounts that would attach to each payment under the security if a notional accrual period ended on the date of each payment. The table establishes that the yield to redemption achieves a spread of the gain on the security over the term of the security and that the security has no value at the expiration of its term. Schedule 2 calculates the NAA by the application of the formula AB-C, as get out in the subsection 159GP(1). Wherever it has been necessary to calculate the "C" component in that formula, the proper adjustment for any payment made under the security otherwise than at 31 July or 31 January in any NAP has been made by multiplying the whole NAA for the NAP by the number of whole months remaining in the relevant period after payment, expressed as a fraction of the total months in that period. For example, in relation to the 2 payments made on 30 November 1986, the adjustment to reflect the timing of those payments has been made as follows: "c" bd $1,761,000.00 [(1 + 1) 2/6 — 1} = $1,762,000.00 (1.020559137 - 1) be $36,204.00 Thus, AB-C = i x (§$62,309,545.00 + $1,166,739.00) - $36,204.00 ™ (6.29542421% x $63,476,284.00) - $36,204.00 " $3,959,897.00 - 31 - Schedule 3 sets out the NAA for the first NAP and the relevant fraction of the NAA for the second NAP for the period from 1 August 1986 to 30 September 1986. In calculating the relevant fractional amount, the relevant fraction has been calculated on the basis of whole months rather than days. Thus, the relevant fraction has been taken to be 2/6 of the NAA. The sum of the NAA for the NAP ended 31 January 1987 is the amount included in the applicant's assessable income by the operation of subsection 159G69(1). In calculating the NAA for each NAP, it has been assumed that each 6 monthly period from 1 August to 31 January in any year 18 of the same duration as the period from 1 February to 31 July in any year, regardless of the actual number of days in each period or the occurrence of leap years. The calculations have been done on the basis of whole months." The following relevant definitions are contained in s.159GP(1) of the ITAA: "@ligible notional accrual period", in relation to a fixed return security issued or transferred to a taxpayer, means - (a) any notional accrual period in relation to the security the whole of which occura after the issue or transfer of the security to the taxpayer; and (b) where the security was issued or transferred to the taxpayer during a notional accrual period in relation to the security - the part of the notional accrual period that occurs after the issue or transfer of the security; "fixed return security" means a qualifying security under which the amount or amounts payable are or consist of - (a) a specified amount or specified amounts; (b) an amount or amounts the method of calculation of which does not involve an interest or indexation rate or other factor, being a rate or factor that varies or may vary during the term of the security; or (¢) any combination of amounts referred to in paragraph (a) or (b); "holder", in relation to a security at a particular time, means the person who, if the amount or amounts payable under the security were due and payable at that time, would be entitled to receive payment of the amount or amounts; "notional accrual amount', in relation to an eligible notional accrual period in relation to a fixed return security that was issued or transferred to a taxpayer, means the amount ascertained in accordance with the formula AB - C, where ~- A is the taxpayer's yield to redemption in relation to the security, properly adjusted in a case where the eligible notional accrual period is part only of a notional accrual period; Bis - (a) (b) - 32 - un the case of the first eligible notional accrual period in the term, or the adjusted term, as the case requires, of the security - the issue price or transfer price, as the case requires, of the security; and in any other case - the sum of: (4) the issue price or transfer price, as the case requires, of the security; and (ii) the notional accrual amounts in relation to all preceding eligible notional accrual periods in the term or the adjusted term, as the case requires, of the security; reduced by the amounts of all payments (other than payments of periodic interest) made or liable to be made under the security during those periods; and Cc is the sum of: (a) (b) all periodic interest payments made or liable to be made under the security during the eligible notional accrual period, properly adjusted in the case of any payment made otherwise than at the end of the period; and where any payments (other than payments of periodic interest) made or liable to be made under the security during the eligible notional accrual period are made or liable to be made otherwise than at the end of the period - an amount to adjust properly for the making of the payments otherwise than at the end of the period; "Notional accrual period", in relation to a fixed return security, means any of the following periods: (a) (b) "qualifying (a) (b) (c) (a) (e) the period of 6 months ending at the expiration of the period that is, or 2.8 at the time of issue of the security reasonably likely to be, the term of the security; any period of 6 months ending immediately before a period that, under paragraph (a) of this paragraph, is a notional accrual period in relation to the security; security" means any security - that is issued after 16 December 1984; that is not a prescribed security within the meaning of section 26c; the term of which, ascertained as at the time of issue of the security will, or is reasonably likely to, exceed 1 year; that has an eligible return; and where the precise amount of the eligible return is able to be ascertained at the time of issue of the security - in relation to which the amount of the eligible return is greater than 14% of the amount ascertained by multiplying the amount of the payment or the sum of the payments (excluding any periodic interest) liable to be made under the security by the number (including any fraction) of years in the term of the security; - 33 - but does not, except as provided by subsection (10), include an annuity; "zedemption", in relation to a security, means the discharging of all liability to pay any amount or amounts under the security representing a return of the issue price of the security; "redemption payment", in relation to a security, means any payment that has the effect of redeeming the security; "security" means ~ (a) stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security; (b) a deposit with a bank, building society or other financial institution; (c) a secured or unsecured loan; or (a) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured; "taxpayer's yield to redemption", in relation to a fixed return security held by a taxpayer, means the rate of compound interest per notional accrual period, or part of a notional accrual period, in the term or, where the security was transferred to the taxpayer, the adjusted term of the security, at which the sum of the present values of all amounts payable under the security during the term or adjusted term, as the case may be, of the security equals the issue price or, where the security was transferred to the taxpayer, the transfer price of the security." By s.159GP(3) it is provided: "For the purposes of this Division, there shall be taken to be an eligible return in relation to a security if at the time when the security ia issued it is reasonably likely, by reason that the security was issued at a discount, bears deferred interest or is capital indexed or for any other reason, having regard to the terms of the security, for the sum of all paymente (other than periodic interest payments) under the security to exceed the issue price of the security, and the amount of the eligible return is the amount of the excess." The Commissioner has identified the amount of $62,309.546.00 as the issue price of the security which he contends is constituted by the principal assumption agreement. It was first argued by ICI that Division 16E of Part III of the ITAA is concerned not to make receipts assessable but - 34 - rather to stipulate particular times at which receipts which are concededly income should be assessable. In this regard, reliance was placed on s.159GX which provides: 'Where, but for this section, an amount would be included in, or allowable as a deduction from, the assessable income of a taxpayer of a year of income under section 159GQ or 159GR in respect of the whole or a part of a payment under a qualifying security, no amount shall be so included or allowable unless the payment or a part of the payment, when actually made or liable to be made, would, disregarding section 128D, be included in the assessable income of the taxpayer of a year of income." In a related way, it was submitted that Division 16E has no application to the principal assumption agreement because ICI, having no entitlement to receive a payment from MMBW, is not a "holder" as defined in s.159P(1) and stipulated in s.159GQ. Sub-s.(1) of the latter section provides: "Where a taxpayer is the holder of a fixed return security during a period (other than a period at the end of which the taxpayer transfers the security), being the whole or a part of a year of income (which whole or part ie in this sub-section referred to as the "assessability period"), there shall be included in the assessable income of the taxpayer of the year of income an amount equal to the sum of - (a) if an entire eligible notional accrual period or entire such periods occur in the assessability period - the notional accrual amount or amounts in relation to the eligible notional accrual period or periods; and (b) if a fraction of an eligible notional accrual period or fractions of such periods occur in the assessability period - the same fraction of the notional accrual amount, or the same fractions of the notional accrual amounts, in relation to the eligible notional accrual period or periods." I am inclined to accept the submission made by Counsel for ICI that Division 16E is concerned with the time at which accruals of payments under certain securities which are conceded to be income fall to be assessed for tax purposes. On this view, the Division does not make taxable an accrual which would not otherwise be included in the taxable income of a taxpayer at -35- any time. However, this tentative conclusion does not avail ICI in the present case because of the view that I have already formed that the "gain" to be made by ICI on redemption of the debentures by the principal assumption party is to be regarded as forming part of ICI's income either according to the general concepts embodied in s8.25(1) or as arising from the carrying out of a profit-making scheme within 8.25A(1). In my view, Division 16E applies to fix the time at which ICI is to be assessable to tax in respect of parts of the premium involved in the principal assumption agreement. The principal assumption agreement is a "security" as defined in par. (d) of the definition of that expression in s.159GP(1), being a contract under which MMBW is liable to pay an amount or amounts in redemption of the ICI debentures. It is also, I consider, a "qualifying security" having a term exceeding one year from the date on which it was executed, even if some debentures matured for redemption before the expiration of the first year of the term of the agreement. As well, I regard ICI as being, at all times before redemption, the "holder" of the principal assumption agreement in the sense of being the person jn relation to that security who is entitled to have the amounts payable in redemption of the debentures paid on its behalf to the Trustee. Although the Trustee is nominated as the recipient of the payment, it is ICI's obligations which are pro tanto to be discharged by the payment and it is ICI which has provided consideration for - 36 - the promise by the assumption party to procure that discharge. ICI's position is not, as was submitted on its behalf, analogous to that of a guarantor who has no antecedent right to receive payment from the principal debtor. The principal assumption agreement did not, from the date of its execution, discharge ICI's primary liability to the Trustee for the debenture holders. It simply provided a mechanism where that liability could be discharged pro tanto by a new co-principal as payments by way of redemption were made by MMBW as the assumption party on behalf of, or at the direction of, ICI. Each payment so made is one which ICI, in relation to the principal assumption agreement, is entitled to receive. As Lord Jenkins observed in a different context in E£lmdene Estates Ltd v White [1960] AC 528 at 550: "But if the payment in question is in fact required by the prospective landlord as a condition of granting the tenancy, I cannot gee why the payment should be any the lesa a premium because the landlord chooses to stipulate that it should be made to a third party designated by him. Illegslity apart, the landlord 1s master of the situation and can demand any payment he pleases to be made to himself or to any third party he may please to designate. He can decide to receive the payment himself and pay it over to any third party he chooses immediately after receipt, and the fact that he requires payment to be made directly to the third party of his choice cannot, so far as I can see, make any difference." For these reasons, I conclude that Division 16E applies to determine the times at which parts of the "gain" made by ICI notionally accrue to it for the purpose of being included in its assessable income. It is not appropriate for the whole "gain" of $36,353,254.00 to be assessed in the tax year ended 30 June 1986 when the principal assumption agreement was executed because it does not wholly accrue to ICI in that year. For the reasons explained above, the transaction can - 37 - most closely be assimilated to a loan by ICI to MMBW with a premium in the nature of interest accruing as debentures are redeemed during the term of the loan. It is not an analogous to the sale of trading stock considered by the High Court in J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421 where the cash price of the goods was held to have accrued to the seller at the date of the sale on terms and that component in the total price which represented interest was regarded as accruing from time to time during the extended periods stipulated for payment. I therefore consider that the alternative approach taken by the Commissioner in issuing the amended assessment dated 29 April 1991 as explained in para 2 of the further and better particulars in proceedings numbered VG 208 of 1991 is the correct one. I ask the parties to bring in minutes of orders which they agree, or respectively contend, give effect to this conclusion. Capital Gai Tr A further alternative contention of the Commissioner is that, pursuant to the principal assumption agreement, ICI acquired an asset in the form of a right which was partly disposed of on each occasion on which MMBW redeemed debentures in discharge of its obligations under the principal assumption agreement. The consideration on each such partial disposal of the assets was said to exceed the indexed cost base of the asset thereby realising a capital gain taxable under Part IIIA of the ITAA. - 38 - By s.160A it is provided, so far as is relevant: "160A In this Part, unless the contrary intention appears, "asset" meana any form of property and includes - (a) any of the following: (L) an option; (if) a debt; (iii) a chose in action; (iv) any other right; whether legal or equitable and whether or not a form of property; (aa) goodwill or any other form of incorporeal property; (b) currency of a foreign country." By s.160M a change in the beneficial ownership of an asset acquired on or after 19 September 1985 [(s.160L(i)] is deemed to have effected a disposal of the asset by the person who owned it immediately before the change. Sub-ss.160M(1) (2) and (3) provide: "(1) Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change ... (2) A reference in subsection (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way, including any of the following ways: (a) by the execution of an instrument; (b) by the entering into of a transaction; (c) by the transmission of the asset by operation of law; (d) by the delivery of the asset; (e) by the doing of any other act or thing; (f) by the occurrence of any event. (3) Without limiting the generality of subsection (2), a change shall be taken to have occurred in the ownership of an asset by - (a) a declaration of trust in relation to the asset under which the beneficiary is absolutely entitled to the asset as against the trustee; - 39 - {b) un the case of an asset being a debt, a chose in action er any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset; (c) in the case of an asset being a share in or debenture of a company - the redemption in whole or in part, or the cancellation, of the share or debenture; or (a) subject to subsection (4), a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person." Before its amendment with effect from 25 June 1992, sub- 8.160M(6) was in these terms: "(6) A disposal of an asset that did not exist (either by itself or as part of another asset) before the disposal, but 1s created by the disposal, constitutes a disposal of the asset for the purposes of this Part, but the person who so disposes of the asset shall be deemed not to have paid or given any consideration, or incurred any costa or expenditure, referred to in paragraph 160ZH(1)(a), (Bb), (c) or (ad), (2)(a), (b), (¢) or (d) or (3)(a), (Bb), (¢) or (ad) in respect of the asset." Sub-s.160M(7) provides: "(7) Without limiting the generality of subsection (2) but subject to the other provisions of this Part, where - (a) either: (i) an act or transaction has taken place in relation to an asset, whether or not affecting the asset; or (ii) an event affecting an asset has occurred; where, in a subparagraph (i) case in which the asset was affected or in any subparagraph (ii) case, it does not matter whether the asset was affected adversely or beneficially, or neither adversely nor beneficially; and (b) the person who owned the asset at the time of the act, transaction or event has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration - (4) in the case of an asset being a right - in return for refraining from exercising the right; or (iL) for use or exploitation of the asset, the act, transaction or event constitutes a disposal by the - 40 - person who received, or ia entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal - (ec) the money or other consideration conatitutes the consideration in respect of the disposal; and (d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (¢) or (qd), (2)(a), (b), (ce) or (da) or (3)(a), (Bb), (¢) or (d) in vespect of the asset; and (e) the person is taken to have acquired and owned the asset immediately before the disposal." A capital gain is deemed to have accrued when the consideration, identified in accordance with s.160ZD received on its disposition exceeds its indexed cost base. The indexed cost base falls to be determined pursuant to s.160ZH by application of the index afforded by the All Groups Consumer Price Index [s.160ZJ]. Section 1602C provides a mechanism for setting off capital losses, including capital losses carried forward, to arrive at a net capital gain or net capital loss in respect of a given year of income. Net capital loss can only be carried forward to be offset against future capital gains and is not deductible from the taxpayer's assessable income in the year in question. It was submitted on behalf of ICI that its right to compel performance by MMBW of its obligations under cl.3(a) of the principal assumption agreement was not an "asset" as defined in 8.160A. In this respect, Counsel for ICI relied on the conclusion reached by Lockhart J, as a member of a Full Court of this Court in Hepples v Commissioner of Taxation (1990) 22 FCR 1 where his Honour observed at 15: - 41 - "I do not find 1t necessary to discuss 1n detail whether a relevant asset is an asset of proprietary nature or may be a human right or a right to work or a right to trade. I am satisfied that, like subs (6) that precedes it, subs (7) isa talking about rights of a proprietary nature: see Kirby v Thorn EMI (supra) and see also Forbes v NSW Trotting Club Ltd (1979) 143 CLR 242 at 260. In the present case Hunter Douglas employed the applicant as the Marketing Director/General Manager of its Window Furnishings Division. There was a written contract of employment made on or about 1 September 1985; and on or about 27 June 1986 the applicant and Hunter Douglas entered into the deed by which Hunter Douglas agreed to pay the applicant $40,000 in consideration of hia covenant to observe certain restrictive covenants contained in his earlier written employment contract for the period of two years after the cessation of his employment with Hunter Douglas. The asset of which #.160M(7)(a) speaks (ie the asset in relation to which the relevant asset or transaction is said to have taken place) consists of the trade secrets and trade connections and the goodwill attaching to the business of Hunter Douglas. These were not the assets of the applicant. In my opinion that does not prevent the operation of the subsection for the reasons already given. The special case does not refer to the existence of goodwill in Hunter Douglas or any of its subsidiaries but it is obvious that goodwill in fact exists and thie Court may draw inferences both of fact and of law (0.50, r.3 of the Federal Court Rules 1979 (Cth)). The grant of the restrictive covenant by the applicant to Hunter Douglas under the deed constitutes an act or transaction that took Place in relation to an asset of Hunter Douglas and was also an event that occurred affecting that asset. The applicant received and was entitled to receive $40,000 under the deed in consideration for his giving the restrictive covenants. The deeming provisions of s.160M(7) then operate so as to constitute the giving of the restrictive covenant a disposal by the applicant of an asset created by the disposal. The §40,000 is therefore to be treated as the base cost from which only the incidental cost is therefore to be treated as the base cost from which only the incidental cost to the applicant of the disposal of the asset, reduced or indexed as the case may be, may be taken into account. For these reasons the applicant succeeds with respect to the argument before the Court on 9.160M(6) but the respondent succeeds with respect to #.160M(7)." To similar effect Gummow J concluded, at 27: "In my view, rights which are not proprietary in character (in the sense described earlier in these reasons), whether because they are personal rights or because they are "rights" merely in some popular sense, are not "assets" within the meaning of #.160A of the Act. It is true that s.16028(1) provides, inter alia, that where a taxpayer has obtained a sum by way of compensation or damages for any wrong or injury to the person of the taxpayers, a capital gain shall not be taken to have accrued to the taxpayer within the meaning of 8.160Z. Section 1602 postulates disposal of an "asset". Whilet the gum recovered would be an asset, the cause of action for personal injury which it satisfied would be personal in nature. But I would regard s.1602B(1) as included for more abundant caution rather than as throwing any clear light upon the meaning of the definition of - 42 - "asset" in s.160A." Hill J in the same case emphasised that the relevant asset must be an asset of the taxpayer and indicated that there is a difficulty in regarding personal rights and obligations under a contract of employment as an asset of the employee even if it may be possible to regard the contract itself as an asset of the employer. His Honour further indicated, at 40, that it could not be said that the entry into the restrictive covenant was an act or transaction which took place in relation to the employment contract. The same learned Judge in Commissioner of Taxation v Cooling (1990) 22 FCR 42, in which judgment was given on the same day as that in Hepples case, observed, at 59: "Three points may be noted from the definition of "asset" in s.160A. First, it is clear that the definition is expressed in wide terms and that the concept of "asset" was intended to be comprehensive. Second, it is clear that the concept of "asset" takes some colour from the context of the present legislation. An aseet must be capable of disposition to give rise to a taxable gain. Prima facie, this suggests that when the Act speaks of an "asset", what is comprehended is an item of property or an interest in property rather than rights of a non~proprietary kind: cf as to the comparable United Kingdom definition (8.19(1) of the Capital Gaines Tax Act 1979 (OK) reproduced post, and its predecessor, s.22(1) of the Finance Act 1965 (UK)); see Kirby (Inspector of Taxes) v Thom EMI Plc (1988) 2 All ER 947; O'Brien v Bensons Hosiery (Holdings) Ltd (1980) Ac 562. The meaning of the expression "disposal" and cognate tezms must be explored to confirm whether this prima facie view is to be accepted. Third, the words "any other right" and the words "any other form of incorporeal property" in par (a) of the definition suggest that, in that paragraph at least it is only proprietary rights and interests that are included within the definition of "asset": cf Commissioner of Stamp Duties (NSW) v Yeend (1929) 43 CLR 235 at 241 and 244-245." His Honour then noted, at 60, the four instances provided in s.160M(3) of a change in the ownership of an asset and observed of those enumerated in pars. (b) and (c) of that sub- - 43 - section: °The second and third class of case involves the extinguishment of the relevant asset, be it a share, a debenture, a debt, a chose in action or another right. Since the concept of dispos:tion ordinarily requires the continuation in existence of the asset after the dealing with it, this second class of case clearly extends the operation of the legislation beyond the normal concept of disposal." At p.65 of the report of Hepples case in this Court, Hill J declined to comment on the ultimate ambit of s.160M(6) saying: "If suffices to say that the section should be confined to those cases where proprietary rights are created out of or over existing assets in circumstances where the asset affected by the right created continues to exist. That is not the present case and accordingly, like his Honour below, I am of the view that 9.160M(6) has no application to the facts of the present case." When Hepples case was considered by the High Court, as reported in (1992) 173 CLR 492, Brennan J examined the definition of "asset" in 8.160A and concluded, at 501: "The term "asset" is defined to mean "any form of property"; the Classes of property falling within the definition include those specified in pars (a), (b) and (c). Each paragraph thus specifies particular forms of property, and therefore a "chose in action, any other right [or] goodwill" falling within par.(a) must be a form of incorporeal property." In the same context, Toohey J observed, at 526-7: "Essentially what Hunter Douglas obtained by reason of the deed was the right to hold the appellant to his undertakings, whether by injunction or damages or both. Although s.160A defines "asset" in broad terms for the purposes of Pt IIIA, including "any other right, goodwill and any other form of incorporeal property", it is incorporeal property with which the section is concerned and in the present context it is the incorporeal property of the taxpayer. The freedom of a person, in this case the appellant, to compete in the marketplace is not of itself an asset Forbes v New Scuth Wales Trotting Club Ltd (1979), 143 CLR 242, at pp.260-261. In Kirby (Inspector of Taxes) v Thorn EMI Ple (1988) 1 WLR 445, at p. 458; (1988] 2 All ER 947, at p.959, Purchas LJ observed of the capital gains tax provisions of the Finance Act 1965 (UK): "The right to trade in the marketplace is a right which is common to all ... To suggest that it is an incorporeal right +. ds wholly unjustifiable within the basic concept of an acquisition of an asset with its accretion in value owing to changes in economic circumstances, etc. over a period of - 44 - inflation followed by dispesal with a realisation of a chargeable gain." Likewise, McHugh J at 549, expressed the conclusion which he reached in these terms: "While it is true that the appellant has obtained a gain in the sense that he received $40,000 and that he had no prior claim to that eum, that gain was obtained by the surrender of his liberty. It was the result of his exploitation of what his counsel called his "right to work". The Pull Court held unanimously that such a right was not an "asset" for the purposes of Pt IIIA(2) and that propoaition was not disputed in this Court. If the receipt of $40,000 in return for the appellant surrendering part of his right to work when, where and how he pleases is a net gain in an economic sense, it is a gain which arose from the exploitation of a personal right which was not an asset for the purpose of Pt IIIA." The same reasoning, it was contended on behalf of ICI, requires its rights against MMBW under the principal agreement to be characterized as rights to specific performance or damages in the event of a failure to pay through the Trustee on maturity, the amount required to redeem the debentures. Those rights were personal not proprietary. For the Commissioner it was pointed out that a contract whereby X promises Y to pay money to Z is enforceable by a decree of specific performance in favour of Y: Beswick v Beswick [1967] AC 58: Coulls v Bagot's Executor and Trustee Co Ltd (1966) 199 CLR 460. From that premise it was contended that the obligation assumed by MMBW to ICI was so like a debt that it must fall within the words of $.160A(a))ii) as constituting an asset. Reference was then made to the following passage from Meagher, Gummow and Lehane Equity - Doctrines and Remedies (2nd Edn) p.695: - 45 - "The law seems to be as follows: (a) a right to sue for tort is always regarded as a bare right of action, never property, and thus is unassignable: Prosser v Edmonds (1835) 1 Y¥ & C Ex 481; 160 BR 196; Defries v Milne, supra; Poulton v Commonwealth (1953) 89 CLR 540 at 602. But this does not affect the right of an insurer to be subrogated to his insured's right to sue: Compania Colombians de Seguros v Pacific Steam Navigation Co (1965) 1 QB 101 at 121, 122; see Chapter 9: the insurer has, of course in any event an interest in his insured's action; (b) a debt, or, presumably, any liquidated claim under a contract is regarded as property and is assignable; and it does not matter that the debt is overdue for payment - that is, that there has been a breach of the contract to pay and that, in fact, all that is assigned is the right to sue to recover the debt. The case of an overdue debt merely points up the problem inherent in the distinctions drawn in this breach [sec branch] of the law: for what is a debt but a right to sue to recover a sum certain? In what other sense is a debt to be regarded as property? Nevertheless, the propositions stated in this paragraph are clearly eetablished by authority: a debt is property and is assignable: Comfort v Betts (1901} 1 QB 737; Fitzroy v Cave {1905] 2 KH 364, especially at 373-4 per Cozens-Hardy LJ. The fact that the assignment is made simply to enable the assignee to sue for the purpose of achieving some ulterior end does not affect its validity: see Fitzroy v Cave, supra, where the assignee procured the assignment of a debt so that he might sue the debtor and thus force him into bankruptcy and disqualify him from his directorship of a company of which the assignee also was a director; and the arrangement was that the proceeds of the action, if any, less the costs of recovery, were to be paid, not to the assignor, but to the assignee. And it is clear that a debt may be assigned though it 18 overdue for payment: County Hotel and Wine Co v London & NW Railway (1918} 2 KB 251; (c) the benefit of a contract, whether the claim to which it gives rise is liquidated or unliquidated, may be assigned before breach: sea, for example, Torkington v Magee (1902) 2 KB 427, where Channel J draws a distinction between the benefit of a contract of which the obligor 1s not in breach and the right to sue for damages for breach." However, in my view, what ICI acquired under the principal assumption agreement was not, before breach by MMBW, a debt or chose in action which was assignable. That is because no conceivable assignee would have any interest in enforcing MMBW's obligation which was to discharge ICI's obligation to the debenture holders. The right to the enforcement of the assumption agreement was thus personal to ICI and enforceable, unless ICI had itself redeemed the debentures, only by a decree of specific performance. Accordingly, had the gain to be derived by ICI not been assessable as income under s.25 or 8.25A, I would have been inclined to hold that ICI's rights under the principal assumption agreement did not constitute an - 46 - "asset" to which Part IIIA of the ITAA was capable of applying. If the conclusion just reached were wrong, it would have been necessary to consider the alternative contention advanced on behalf of ICI that, if the rights against MMBW under the principal assumption agreement did constitute an "asset", no disposal of that asset was to be effected by MMBW's performing its obligations to redeem the debentures. Attention was directed to the extended definition of change in the ownership of an asset contained in s.160M(3)(b) which, it will be remembered, extends to: "in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the aseet." Each of those expressions was said to connote a different legal species of extinguishment of a right, none of which is apt to embrace what occurs upon performance of a contractual obligation. I disagree. The collection of expressions in s.160M(3)(b), I consider, has been cast as widely as possible to embrace all means by which the owner of a debt, chose in action or cognate right can bring about, or allow to be brought about, its extinguishment. On this view payment of the debt or performance of the obligee's obligation under some other form of contract embodying the right amounts to a discharge or satisfaction of the right which constitutes the asset contemplated by par. (b). - 47 - CONCLUSION For these reasons, I conclude that the difference between the amount payable under the principal assumption agreement and the face value of the ICI debentures is assessable as income of ICI under either s.25 or s.25A of the ITAA. However, it should be assessed as accruing in the manner stipulated in Division 16E of Part III. As already indicated the parties should bring in minutes of orders to reflect these conclusions when I shall hear them on the question of costs. I certify that this and the preceding forty six (46) pages are a true copy of the reasons for judgment of his Honour Mr Justice Ryan associate: Wuboad Nat Date: {{ Seplevtbes ay. Counsel for the applicant: Mr J Merralls Qc with Mr T Murphy Solicitors for the applicant: Mallesons Stephen Jaques Counsel for the respondent: Mr B J Shaw QC with Mr G Davies Solicitors for the respondent: Australian Government Solicitor