JUDGMENT NO. sone Soe eroded CATCHWORDS INCOME TAX ~ Default assessments based on taxable incomes determined on assets betterment basis - Appeal from decision of Administrative Appeals Tribunal - Ascertainment of amounts injected into business by way of loans - Ascertainment of amounts of non-business expenditure charged to credit cards - Whether decisions arbitrary and perverse bearing in mind findings of Tribunal as to credibility of witnesses - Whether amounts received by taxpayer under "Distribution agreements" receipts of capital or income. CARMEL CHARLES BORG v COMMISSIONER OF TAXATION No. ACT G 47 of 1993 Neaves J. 31 October 1994 Canberra RECEIVED ~2 NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY IN THE FEDERAL COURT OF AUSTRALIA My APIT. ERRITOR DISTRICT REGISTRY ENE DIVISION No. ACT G 47 of 1993 Ne ee ee eee ON_ APPEAL FROM THE GENERAL ADMINISTRATIVE DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: i, CHARLES BOR' Applicant AND: COMMISSIONER OF TAXATION Respondent MINUTE OF ORDER D RDER 3: Neaves J. DATE OF ORDER 3 31 October 1994 WHERE MADE 3 Canberra THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of and incidental to the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. HE FEDE RT_ OF AUSTRALIA AN CAPITAL TERRITORY DISTRICT REGISTRY ENERAL VISION No. ACT G 47 of 1993 QN APPEAL FROM THE GENERAL ADMINISTRATIVE F_ THE ADMIN RATIVE APPE. RIBUNAL BETWEEN: 1, CHARLES BOR Applicant AND: COMMISSIONER OF TAXATION Respondent CORAM: Neaves J. DATE: 31 October 1994 E. NS FOR DGMENT Introduction The applicant, Carmel Charles Borg, has applied to the Court by way of appeal pursuant to s.44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) from _ the decision of the Administrative Appeals Tribunal ("the Tribunal") given on 18 June 1993 upon the review of decisions disallowing, in whole or in part, objections to assessments to income tax in respect of the years of income ended 30 June 1981, 1982, 1983, 1984 and 1985. Those assessments were made under s.167 of the Income Tax Assessment Act 1936 (Cth). The Tribunal set aside the decisions upon the objections but determined that the taxable income of the applicant in respect of each of the years in question was greater than that for which the applicant contended and, in respect of the year ended 30 June 1985, greater than that assessed by the respondent, the Commissioner of Taxation. The table set out below summarises the position: Decision of Tribunal Year of income Taxable Taxable ended 30 June income as income as returned assessed Taxable income Percentage to which additional tax remitted $ $ $ 1981 10,100 19,319 15,452 35% 1982 21,027 31,596 28,497 *The income tax returns lodged by the applicant in respect of the years ended 30 June 1983, 1984 and 1985 showed losses of $10,497, $36,482 and $65,093 respectively. During the relevant years of income the applicant carried on business under a business name. In the earlier of the years in question, the business was carried on under the business name "C C Borg & Associates". In the later years it was carried on under the business name "Specialised Chemical Products". The business was described by the Tribunal in the following terms: "13. The essence of the applicant's business was the mixing and sale of chemicals but the fomenter of the business is said to be found in rights to exploit certain patented appliances for using the chemicals in cleaning carpets and ceilings. The licences to exploit these cleaning processes were obtained from overseas interests. For these rights the applicant paid rent to the overseas interests and in turn charged his customers rent. The appliances created the market for the applicant's chemicals but property in the appliances remained with the overseas owners. 14. The licences exploited in Australia and New Zealand acquired from overseas were purchased by the applicant for something in the vicinity of $25,000 paid in 1976 and $20,000 paid before 1981. The $20,000 was financed by the sale of a home unit owned by the applicant and his wife. 15. Having acquired the Australian and New Zealand rights the applicant then had the right to _ seek international rights to use the processes. He proceeded to do so in relation to Singapore and Hong Kong and was successful in obtaining the rights but less than successful in his penetration of those markets. Exhibit A is a copy of the distributor agreement in relation to Hong Kong. A similar agreement, copy of which is not before the Tribunal, was entered into in relation to Singapore. The consideration paid for the Hong Kong agreement was $US100,000 and $60,000 for the Singapore agreement payable to the applicant." The assessments made by the respondent were based on amounts of taxable income determined on what was described in the material before the Tribunal as "an assets betterment basis". The method by which the amounts of taxable income were determined was as follows. In respect of each of the years ended 30 June 1980 to 1985 inclusive, the assets and liabilities of the applicant were ascertained and, from the figures so ascertained, the increase or decrease in the net assets of the applicant in respect of each of the years ended 30 June 1981 to 1985 was calculated. The amount of the increase or decrease in the applicant's net assets in each year was then adjusted, by making certain additions and subtractions, to arrive at the taxable income in respect of each of those years. The Tribunal determined that certain adjustments should be made to the figures on which the determination of the taxable income of the applicant in respect of each of the years in question was based. The Tribunal declined to make certain further adjustments to those figures which the applicant had sought. njections of Cash to Business The adjustments which the Tribunal made to the figures included an adjustment to increase the liabilities of the applicant in respect of each of the years ended 30 June 1981, 1982 and 1983 by an amount of $2,500, making a total increase in the applicant's liabilities of $7,500 over that period. The Tribunal described the amounts of $2,500 as being unsecured loans. The applicant contends that the Tribunal erred in not increasing his liabilities on that account over the relevant period by a further amount of at least $2,500, making a total of at least $10,000. The Tribunal included the three amounts of $2,500 in the statement of the applicant's liabilities on the basis that those amounts represented the injection, by way of loans, of cash funds into the applicant's business either by his wife, Karin Borg, or by his wife's mother, Alfreda Henrietta Velanvina Dahl. Evidence relevant to this issue was given before the Tribunal by Mrs Borg and by Margaret Jeanne Mansbridge who, during the period from September 1982 until 30 June 1985, was employed by the applicant in the capacity of his private secretary but who became more of a manager, at least when the applicant and his wife were overseas. Mrs Dahl did not give evidence before the Tribunal, her absence being explained on medical grounds. The applicant gave no evidence relevant to the issue. The evidence established that Mrs Borg was employed by Universal Office Cleaners Pty Ltd, a company owned by her mother, her brother and herself. That company undertook cleaning contracts and similar work and was independent of the applicant's chemical manufacturing and distribution business, although it had purchased certain equipment for the applicant to use as a demonstration kit in his own business. Mrs Borg did not have a legal interest in, nor was she employed by, the business carried on by the applicant. Paragraphs 9 - 12 of the Tribunal's reasons for decision refer to the evidence given by Mrs Borg, she being referred to by the Tribunal by the initial "WwW". Those paragraphs of the reasons for decision read: "9, W gave evidence of money being contributed to the applicant's business by W's mother. Apparently such contributions were made when there was a shortfall of cash to pay employees' wages. Generally the mother gave the money to W on W's request for the money. It does not seem from the evidence that the mother gave money to the applicant direct. The usual course was to channel the cash to W who passed it on to an employee of the applicant. Generally, on the evidence of W, these amounts were $300 - $400 but much was made before me of one occasion when an amount said to be up to $1,600 was passed to an employee of the applicant. 10. It was said that these amounts of cash contributed to the applicant's business were not recorded in the accounts of the business, presumably as loans, but the resultant outgoing satisfied by the cash received was recorded in those accounts. 11. W said during cross-examination that the applicant's business commenced in the family home, moved to Fyshwick in 1983 and then to other premises in Fyshwick in 1984. She said she attended the business premises nearly every day between 10 am and 3 pm. She said the business employed an 'accounts department' and also somebody to mix the chemicals. 12. According to W it was not normal for the applicant to pay domestic expenses. Sometimes he would pay an electricity account but generally all domestic expenses were left to her to pay from her own income. On occasions the electricity account would be paid by the applicant and it seems to have been the case that the applicant normally paid the telephone account. I am satisfied and so find that the applicant only made a very limited contribution to domestic expenses. In this regard it is relevant to note that the applicant and W lived rent free in a house owned by W's mother. I formed the view that W was a witness of truth, that I should accept her evidence as the fact and find accordingly." After dealing with other matters, the Tribunal returned to the subject of cash injections into the applicant's business at par.32 of its reasons for decision. That paragraph reads: "32. The secretary of the business was called by Mr Faulks [who appeared for the applicant]. Her evidence established that she was the office manager of the applicant's business during the relevant period but she was not concerned with keeping the accounts of the business. The functions of bookkeeper were performed by another person. She said that on one occasion W's mother brought $2,000 cash into the office which was deposited in the business bank account to pay wages. MThere were, however, many occasions when W brought money into the office with words such as 'I'm putting money into the business' or 'This is my mother's I'm putting into the business' (page 166 transcript). The witness was, however, unable to accurately quantify the amount of money put in the business by W except to say that it must have been over $15,000. The amounts paid in were all paid in cash. On further reflection while on the stand and as an 'educated guess' the witness said in cross- examination that she thought the amounts paid in were about $5,000 a year. I accept the evidence of the secretary. She presented as a frank witness giving evidence to the best of her recollection. She had not been employed in the business for approximately two years before the hearing. She was, however, uncertain in her evidence as to the actual amounts of cash injected into the business. After taking all the evidence into account I have decided that an arbitrary amount of $2,500 per annum should be allowed for the 1981, 1982 and 1983 years and I so find." The reference to "the secretary of the business" is a reference to Mrs Mansbridge. The applicant submits that the conclusion reached by the Tribunal was arbitrary and perverse bearing in mind the findings the Tribunal made as to the credibility of the witnesses. In considering this submission, some further reference should be made to the evidence of Mrs Borg and Mrs Mansbridge. In her evidence in chief, Mrs Borg said she had been interviewed by officers of the Taxation Department in relation to the applicant's affairs and that she had told those officers that she felt that a total of about $4,000 was contributed by her during the period from 1981 to 1985. She further said that she could no longer identify the amount in any way. She also said that her mother had also contributed money to the family at her, Mrs Borg's, request. She then gave the following evidence: "Q. And were you aware of the amounts that she did contribute? A. At one point, I think it was about 1600 because I asked her to take it to the office in Wollongong Street, and there I do have a witness, a Mrs Jeanne Mansbridge, who took the money and it was in cash. Q. Now, were there any other amounts of money, that you're aware, that your mother may have contributed over that period? A. It would be 300 here, 400 there, amounts all the time. And if I'm not incorrect, I think she paid towards the first trip that Charles had to America. Q. Now, do you know how much at least you and your mother, between you, had paid into the support of all the family - that is, your family - or the business during that period? A. I would say it would be a total of between $10,000 and $12,000." In cross-examination, Mrs Borg said her mother would contribute money whenever she was asked to do so; that such requests were not made on a regular basis but were made when there was a cash flow problem; that when her mother knew that she, Mrs Borg, was in trouble, "she would give us money"; that the amounts, she believed, were always in cash; that on one occasion Mrs Dahl took an amount of between $1,200 and $1,600 to the office and gave it to Mrs Mansbridge; that the rest of the time Mrs Dahl gave the money to her, Mrs Borg, and that on most occasions she then gave it to her husband although sometimes she, Mrs Borg, paid it into her bank account and drew a cheque for a corresponding amount. Mrs Borg, on being ] asked whether it was during the whole of the period from 1981 to 1985 that she asked her mother to contribute, answered: "It was even a longer stretch. It went up to 1989". Mrs Mansbridge gave evidence that, on one occasion when Mr and Mrs Borg were in Singapore, she, at Mrs Borg's suggestion, telephoned Mrs Dahl requesting money that was required to pay the wages of employees of the applicant's business; that Mrs Dahl gave her $2,000 in cash; and that on other occasions Mrs Borg would bring money in in cash and say: "I'm putting money into the business", or "This is my mother's I'm putting into the business". Mrs Mansbridge also gave the following evidence: "Q. Did she [Mrs Borg] on occasions to your knowledge contribute money from her own account? A. She was always putting money in, whether it be $5 or $10 here and there, if you had to go and buy tools or $50 for office supplies or money to cover wages or a bill that had to be paid or a_ telephone account, different things like that. Q. Were there any large amounts that she paid? A. Yes, often it would be - I can't remember exact figures but you'd often would be talking about $1000 or $800 as well as the 20s or the 50s or the 5s. Q. Over the period of time we were talking about, would you be able to make a reasonably informed estimate as to how much money Mrs Borg might have contributed? A. I never ever added it up. That's very difficult. I'd say it would be over 15,000. I wouldn't like to put a cap on it. I really don't know what the exact figure would be but I know it would have to be over that." In cross-examination, Mrs Mansbridge said that it was only on the morning of the day on which she gave evidence that she was first asked to recall the making of the payments of which she had _ spoken. She also gave the following evidence: "Q. So that when you're describing to the Tribunal the fact that these amounts were paid over a period of time, I imagine you find it rather difficult to pin it down as to whether it was 1983 or 1986 or that sort of thing? A. No, I think - no, because there were two quite different periods. It was quite a small business up until 1985. It was a much smaller, closer-knit company in one _ respect. Towards the end the accounts area was quite separate. It was run by somebody quite separately and I didn't really have a lot to do with the accounts at that stage. And also when Mr Borg would go overseas at that stage, Mrs Borg was still there and she was running the accounts. So in that respect I didn't really have the same feel for what was happening out there. I was aware it happened but not as much. Q. When you said 'towards the end' what did you mean? A. Before it went into liquidation. Q. So that's going forward to about 1989 or 1990? A. Yes. Q. So that by that stage, by 1989 or 1990, it'd become quite a different sort of operation? A. Yes, it had. Q. So that through the early 1980s you've described as this small, fairly close-knit office. When did it sort of really cease to be that? A. I guess about 1987, 1988. About that time the accounts area became - I'm not really sure of the dates. Right? The accounts went on to computer and became a different set-up in that respect. All right. So some time up until somewhere around 1987, what you've been describing to the tribunal went on? Yes, I suppose it did. Yes, you did an educated guess I think about the total of these payments? I did it by way of trying to think - if it was over a three year period 15,000 would be about $5000 a year. Right? And I could see that she would easily have put that amount of money in. It could well have been more. Right? I don't know. It was an educated guess and that's the way I worked it out. Well, how did you work out that it might be 5000 for one year? Well, that's an average for three years, but - just by the amounts. It would be, you know, $1000 here for a chemical bill and money to cover wages and just the odd bits of money here and there. It's an educated guess. Yes, It's not - it is a guess. But it is an educated guess? Yes, it is an educated guess. I said that I really couldn't put a total figure on it." The submission on behalf of the applicant amounts to this - that the Tribunal, having formed the view that Mrs Borg was a witness of truth and that it should accept her evidence as the fact (see par.12 of the reasons for decision) and having said that it accepted the evidence of Mrs Mansbridge (see par.32 of those reasons), the Tribunal was bound to conclude that at least $10,000 had been contributed to the business in cash by way of loan. I am unable to accept that submission. The issue for the Tribunal was whether the applicant had discharged the onus of showing that the relevant assessments were excessive. The evidence given by Mrs Borg and Mrs Mansbridge was vague and uncertain in a number of respects, as a reading of it clearly demonstrates. In particular, it was inconclusive as to the amounts that were from time to time contributed to the business in cash by Mrs Borg and Mrs Dahl and the periods during which the amounts were contributed. The Tribunal clearly accepted that cash had been injected into the business by way of loan but it was unable, on the evidence, to make a positive finding as to the years of income in which the contributions were made or the amount of those contributions. In those circumstances and having regard to the onus that rested on the applicant, it was, in my opinion, reasonably open to the Tribunal to conclude that the evidence did not satisfy it that the amounts contributed exceeded, in total, the amount of $7,500 that the Tribunal allowed. Non Business Credit Card Expenditure The Tribunal also adjusted the figures on which the determination of the taxable income of the applicant in respect of each of the years in question was based by reducing by 50% the amounts which, under the heading "Non Business Credit Card Expenditure", had been added, in respect of each of the years of income, to the increase or decrease in the applicant's net assets in respect of the relevant year. The amounts taken into account by the respondent and by the Tribunal in calculating the applicant's taxable income in the relevant years were: Year ended Amount _ included Amount included 30 June by respondent by Tribunal $ $ 1981 2,734 1,367 1982 1,197 598 1983 5,708 2,854 1984 10,392 5,196 1985 3,032 1,516 The applicant contends that the Tribunal erred in including any amount under the heading "Non Business Credit Card Expenditure" as the expenditure was incurred as part of the applicant's business and was not expenditure for private purposes. In its reasons for decision, the Tribunal said: "29. The applicant used credit cards issued by Carte Blanche, ANZ Bankcard, CBA Bankcard, Diners Club, Westpac Gold Card and various American Express Cards. These cards were said to be generally used for travel, accommodation, meals, and materials for demonstrations while travelling including travel to Hong Kong and Singapore. In the course of cross-examination the applicant said he operated other charge cards for private expenditure which he referred to as 'shopping cards'. 30. Part of the differences which have arisen in this case relate to purchases of goods which at first blush appear to represent private expenditure such as jewellery and perfume. However, the applicant explained in the course of cross-examination that goods of this nature were purchased as gifts for Magic operators who achieved set targets in their turnover. There is nothing before me to suggest that this explanation is not plausible and true. I therefore accept the applicant's evidence that he did provide gifts to operators who achieved pre- determined targets. 43. It is essential in this matter that I form a view as to whether the applicant was a frank and truthful witness. This is because the evidence about' the character of the expenditure by way of the credit cards was only given by the applicant. After careful consideration I have come to the conclusion that the applicant is a witness of truth and I should generally accept his evidence where such evidence is uncontroverted. In particular I have concluded that I should accept his evidence about the character of the outgoings incurred by way of credit cards although I cannot accept that all of the expenditure incurred was allowable as a deduction under the Act. Items such as 'Peacocks' and clothing purchases must be treated as not deductible until a basis for deduction is established. 44. At page 43 of the transcript the applicant said he did not normally use credit cards for items of personal use. He was cross-examined about these charge cards but was unshaken in his evidence. I am therefore satisfied that I should accept the applicant's evidence about the credit cards, bearing in mind that certain items of expenditure which at first blush appear to be personal, were in fact purchased for prizes. I have resolved the question as to how much of the amounts incurred are allowable deductions by reducing the respondent's adjustment by 50%. That is an arbitrary adjustment made because no other more certain basis present itself." On behalf of the applicant it is submitted that the conclusion of the Tribunal was arbitrary and perverse bearing in mind the finding the Tribunal made as to the credibility of the applicant. Peter James Dwyer, a taxation auditor employed in the Australian Taxation Office, gave evidence that the amounts included by the respondent under the heading "Non Business Credit Card Expenditure" were ascertained by him by an analysis of the credit card statements provided to him by the applicant's accountant. In making that analysis, he said, he accepted that much of the expenditure recorded was expenditure properly allowable as a deduction for income tax purposes, as being expenditure incurred in carrying on the applicant's business. The amounts recorded on the Assets Betterment Statement, he said, represented expenditure of a non- deductible nature. He was not cross-examined in relation to particular items of expenditure. In his evidence in chief, the applicant was asked whether it was the case that the amounts claimed in relation to his credit cards were in any part attributable to private expenditure. His answer was: "I don't believe so". In cross-examination, he gave the following evidence: "Q. And do you say that in this financial year [1983-84], no private expenses were included on the Diners Club? A. I don't think I can give a sweeping statement and say, 'No, none were put on the Diners Club'.... What about buying things like perfume: did you buy any perfume? Yes. During the period we're talking about, the 1984 financial year, what was that for? Perfume was one of the things that was purchased on an ongoing basis and given to Magna-Dry operators or their wives for achieving certain targets. So you say that those items were ....? No, I didn't say that. I say there's a possibility, I don't know. Do you know of a place called Peacocks in Canberra? No. You never heard of such an operation or company or organisation? Not that I'm aware of. Do you recall paying any vouchers for expenses of some kind occurred at premises in MacKay Gardens under the name of Peacocks? No, I don't recall. You don't recall that at all? So if on the analysis of the credit card vouchers, there appear items asserting charges from Peacocks, you don't know now what those would have been for? No, I don't. Did you ever use the credit cards that are referred to in this income tax return to pay for anything around the house, for example? A. Not normally, no, but if you could be a bit more specific, I might be able to say something about it. Q. Now, in the other years in question, apart from the 1984 financial year, do you say the situation was the same in relation to your payments to American Express, Diners Club, Bankcard, Gold Card and Fyshwick Travel? In other words, that all of the expenses on that were for business? A. I would assume so, yes. Q. So there's one American Express account. There's a Diners Club account and then there's two Bankcard accounts? A. Yes. Q. And all of those you say were for business use? A. To the best of my knowledge, yes. Q. And you can't recall whether, in relation to those four credit cards, the pattern continued in the other years that only business expenditure was put on them? A. I would assume the pattern would continue. I'm making an assumption. Q. But you simply cannot recall? A. No, I can't recall." The submission on behalf of the applicant is similar to that advanced in relation to the issue concerning the cash injections into the business, namely that the Tribunal, having expressed the view (see par.43 of the reasons for decision) that the applicant was a witness of truth whose evidence should generally be accepted where such evidence was uncontroverted, was not entitled to conclude that any part of the expenditure was not allowable as a deduction for income tax purposes. For reasons similar to those expressed in relation to the adjustments relating to the cash injections into the business, I am unable to accept the applicant's submission. It was, in my opinion, reasonably open to the Tribunal to conclude, on the evidence before it, that it was not satisfied that the whole of the expenditure charged to the relevant credit cards was an allowable deduction as being expenditure incurred in connection with the applicant's business activities. In my opinion, it has not _ been established that, in reaching its conclusion, the Tribunal committed any error of law. ounts Received m ies _in Hong Kong _ and Singapore The applicant also submits that, in relation to the years of income ended 30 June 1984 and 1985, the Tribunal erred in failing to treat certain amounts received by him during those years as receipts of capital. The amounts in question were said to have been received under the terms of agreements between the applicant and companies carrying on business in Hong Kong and Singapore respectively. The Hong Kong company was named as Symindson Trading Limited. The contracting party in Singapore was not otherwise identified than as "a consortium called 'Banluck'". It appears that, as part of his business activities, the applicant marketed the patented "Magna Dry" carpet cleaning process and another process called "Ceiling Clean". There was also a process for cleaning curtains which the applicant marketed but the evidence before the Tribunal relating to that process was scant indeed. According to the applicant's evidence, he acquired certain rights, in relation to the carpet cleaning process, from Fiber Care Corporation of America and, in relation to the "Ceiling Clean" process, from a Mr Papaleo of Ceiling Clean, Las Vegas. The only documentary evidence before the Tribunal concerning the arrangements between the applicant and Fiber Care Corporation of America was a letter dated 21 November 1984 from the company to the applicant. The letter reads: "To facilitate more rapid expansion of the patented MAGNA-DRY carpet cleaning system in Australia, Fiber Care Corporation hereby gives the rights to the patents which have been filed in Australia (#536072) to you personally. For a period of two years from the date of this letter, you shall have unmitigated rights to exploit, use, develop, and defend said patent rights in any manner you deem necessary, so long as such exploitation, use, development, or defense is consistent with the marketing rights agreement which was developed between Fiber Care Corporation of America and yourself in March, 1982. On November 21, 1986, said patent rights shall revert to Fiber Care Corporation unless an extension is granted in writing and by mutual agreement between Fiber Care Corporation and you." The terms of the marketing rights agreement referred to in the letter were not in evidence before the Tribunal. The applicant said, in the course of cross-examination, that "there was no such thing as a written marketing rights agreement" but that there had been personal discussions and an exchange of letters. The letters were in evidence before the Tribunal. There was, therefore, no documentary evidence before the Tribunal as to the arrangements between the applicant and Fiber Care Corporation of America at the date of the "Distribution Agreement" with Symindson Trading Limited, namely 5 March 1984. There was no evidence before the Tribunal as to the arrangements which the applicant may have had in relation to the "Ceiling Clean" process or the curtain cleaning process. There was material before the Tribunal to the effect that "Ceiling Clean" was a trade mark and that the process was not patented. In evidence before the Tribunal was a document headed "Distribution Agreement" which was dated 5 March 1984 and was expressed to be made between Specialised Chemical Products (referred to in the agreement as "the Company") and Symindson Trading Limited, referred to in the agreement as "the Distributor". That document, however, was not a complete copy of the agreement between the parties in that the document produced did not contain the Schedules A, B and C referred to in the body of the agreement. The absence of the Schedules was unexplained. No copy of the agreement between Specialised Chemical Products and the consortium called "Banluck" was in evidence before the Tribunal and, again, its absence was not explained. The Tribunal proceeded on the basis that the agreement with ""Banluck" was in substantially similar terms to, but was more limited in scope than, that between the applicant and Symindson Trading Limited. During the year of income ended 30 June 1984, the applicant claimed to have received from Symindson Trading Limited amounts totalling $71,647.26. In the following year of income, the applicant claimed to have received amounts totalling $4,559.91 from Symindson Trading Ltd and amounts totalling $19,110.87 from "Banluck". Details of the amounts received, as disclosed in the applicant's income tax returns are as follows: Year end ne_ 1984: indson Trading Limited 5 March 1984 $21,083.70 21 March 1984 10,438.41 28 March 1984 2,714.60 18 April 1984 6,330.73 7 June 1984 22,180.33 15 June 1984 15,760.54 $80,692.59* Less reimbursement of amounts expended by Symindson Trading Limited 9,045.33 $71,647.26* Year ended une 1984: indson Trading Limited 16 July 1984 $2,081.00 18 August 1984 2,478.91 4 9.91 Year ended June _ 1 2 "Banluck" 17 July 1984 $1,500.42 25 July 1984 1,500.42 5 September 1984 1,480.52 5 September 1984 1,302.66 26 November 1984 2,900.00 18 December 1984 1,500.00 11 January 1985 1,518.10 15 February 1985 1,654.75 26 March 1985 1,831.75 18 April 1985 1,950.99 3 June 1985 1,871.26 19,110.87* *The totals are those shown in the applicant's income tax returns. The additions, however, are incorrect. The correct totals are $78,508.81, $69,462.98 and $19,010.87. The agreement between Specialised Chemical Products and Symindson Trading Limited stated by way of preamble: "The Company is a licensee of cleaning processes, formulae, and patents, trade and service marks related to those processes and formulae and desires to grant Distributor the right to use such processes, formulae, patents and marks in its business." Clause 1 appointed the Distributor "as the exclusive Distributor" for the products listed on Schedule A and granted the Distributor the right, privilege and licence to use the processes, formulae, patents and marks listed on Schedule B in connection with the distributorship in the Territory which was identified as "The People's Republic of China and/or including the British Territory of Hong Kong". As already mentioned Schedules A and B were not in evidence before the Tribunal. The Distributor was to pay $US100,000.00 expressed to be for the rights granted by clause 1 and the training, operations manual and promotional material supplied by the Company under the agreement (cl.2). The agreement recorded that, of the sum of $US100,000.00, $US20,000.00 had already been paid, that $US30,000.00 was to be paid on or before 1 May 1984 and that the balance of $US50,000.00, free of interest, was to be paid by 24 equal monthly payments of $US2,084.00 the first of which was to be paid on or before 5 May 1985 and the balance on or before the fifth day of each subsequent month. The Distributor was also required to pay to the Company monthly service fees of six per cent. of monthly net sales of chemicals, the service fees being estimated to be five per cent. of turnover (cl.3). Service fees were to be paid on or before the tenth day of each calendar month commencing on 10 July 1984, those payments to be based on net sales for the calendar month just ended. The Tribunal characterised the amounts payable under cl.3 as being, in effect, the payment of a royalty on the gross revenue received by Symindson Trading Limited with respect to the sales of products and services under the terms of the agreement. Clause 4 of the agreement provided: "4.1 The Company will provide initial training with respect to the use of the processes and process apparatus, and one copy of the Company's operation manual and promotional materials (in English). 4.2 The Company will make available the apparatus necessary to carry out the processes for the lump sum lease fee or prices and sale terms listed with respect to such equipment on Schedule C. 4.3 The Company will sell Distributor chemicals, solutions and other products as may be required for use in connection with the distributorship. Such sales shall be at prices, terms and conditions as the Company may determine from time to time." As already mentioned, the agreement in evidence before the Tribunal did not contain Schedule C. It may be accepted, however, that the equipment listed in Schedule C included the special apparatus referred to as "the accumulator" which was the essential element in the "Magna-Dry" carpet cleaning process and which was the subject of patent protection in favour of Fiber Care Corporation of America. The Distributor's obligations included (cl.5) an obligation to use its best efforts to offer, sell and perform within the Territory the services authorized under the agreement; an obligation not to make sales outside the Territory; an obligation not to use any chemical compounds in connection with the processes except chemicals procured from the Company or made as authorized by and according to the formula provided by the Company; and an obligation to offer, sell and perform the services authorized pursuant to the agreement strictly in accordance with its terms. Clause 5.6 required the Distributor to hold in confidence the processes and the information and the know-how contained in the operations manual and that imparted by the training provided under the agreement. Clauses 5.7 and 5.8 provided: "5.7 Distributor shall make no modifications to the apparatus supplied hereunder and shall make no modifications to the processes or formulae licensed hereunder without the prior written approval of the Company. The Distributor's use of the apparatus and processes and formulae shall be carried out strictly in accordance with this Agreement and the operations manual, and Distributor shall not deviate from the operations manual without the prior written consent of the Company. 5.8 Distributor agrees to comply with all of the policies, requirements, procedures and directives as set forth in the operations manual as currently constituted or hereafter amended." The agreement was expressed to expire on 31 May 1989 with provision for its renewal by the Company thereafter for successive terms of three years (cl.6). The agreement was expressed to be non-assignable by the Distributor without the prior written consent of the Company (cl.7). Paragraphs 13, 14 and 15 of the Tribunal's reasons for decision have been set out earlier in these reasons. Following those paragraphs, the Tribunal referred to the terms of the agreement with Symindson Trading Limited, noting that the agreement with "Banluck" was in substantially similar terms, and to certain of the oral evidence given by the applicant. The Tribunal then said: "24. The consideration payable under the Hong Kong and Singapore agreements was determined by the applicant's principals in the United States of America. They determined the amount to be remitted to the USA and also the total amount to be charged by the applicant for the licence agreement. It is clear on the material before me, and I so find, that the applicant's interest in the licence agreements was to establish markets into which to sell his manufactured chemicals. The applicant's primary business was not to license operators but to sell cleaning chemicals to Magic licensed operators. He was controlled by his principals in relation to the grant of licences and there is nothing before me that suggests that the granting of licences was intended to be other than an ancillary part to the business of selling cleaning chemicals and I so find. The applicant also said in evidence, and I accept his evidence, that there was no worthwhile profit on the sale of equipment. The emphasis was clearly on the sale of cleaning chemicals." Later in its reasons for decision, the Tribunal said: "58. I turn now to the transactions for sale of the distribution licences to companies in Hong Kong and Singapore, as evidenced by Exhibit A relating to the Hong Kong transaction. The agreement provided for the distributor (the Hong Kong company) to be granted the right, privilege, and licence to use certain processes, formulae, patents and trade marks in the People's Republic of China and Hong Kong. However, the applicant was not the owner of any relevant patents or trade marks. They belonged to a resident of the United States of America which had granted the applicant a licence to exploit the rights in Australia (cf. Exhibit 1) and Hong Kong and Singapore. The basis for this arrangement was the leasing of the specialised equipment by the USA corporation to the applicant and then sub-let to the applicant's customers. Because the applicant held the rights to exploit the patent in Australia and New Zealand he was also granted access to the Singapore and Hong Kong markets. Exactly how this was done has not been explained to me. The essential feature is, however, that the applicant was seeking to create a market for his chemicals. By arranging for cleaning contractors in defined areas to have the rights to the specialised process, the applicant thereby created a market for his own products. 59. Mr Faulks, no doubt relying on the decision in Elsner v Macomber (1919) 252 US 189, submitted that the applicant had sold the rights to operate the special process in Hong Kong and Singapore. By selling that right he excluded himself from that market although as Mr Faulks frankly admitted, the applicant sold the rights so that he then had a market to sell the 'fertiliser' (the chemicals) so necessary to make the tree produce fruit. His business was selling the chemicals but to do so he had to create the markets. 60. Although the word was not used before me, what the applicant was doing was franchising the cleaning process to operators in Australia, New Zealand, Hong Kong and Singapore for the purpose of creating a market for the applicant's chemicals. 61. The reality is and I so find that the applicant did not sell any rights to exploit patents and trade marks. What he sold were rights to use the specialised equipment. That equipment belonged to the USA Corporation and could not be sold by the applicant. As Mr Faulks said it is difficult to see what it was that the applicant sold when you look at the terms of the agreement (Exhibit A). In any event, so it is said, the sale was of a capital item and therefore it follows that the proceeds of the Hong Kong and Singapore transactions were on capital account. Further, if that be incorrect, then the arrangements for establishing the distributorships in Hong Kong and Singapore were profit- making undertakings or schemes and because of the outgoings incurred in establishing the distributorships then no profit was realised. The factual basis for this latter proposition is the applicant's evidence that his costs were such that no profit was made on the sale of the distributorships. That proposition is not, however, consistent with the applicant's evidence that the purpose of the agreements for sale of the distributorships was to establish a market for the cleaning chemicals. As to the quantum of the outgoings incurred in the sale of the distributorships in Hong Kong and Singapore I do not know and have been left to speculate as to the amounts which should be excluded if I accept that the sales were of a capital nature. The applicant's evidence suggests that in fact no profit was made on the sale of the distributorships in Hong Kong and Singapore. 62. The business of the applicant was to sell cleaning chemicals. For this purpose he promoted cleaning systems which required the use of his chemicals. In the course of promoting such systems he sub-leased specialised equipment which belonged to the USA Corporation and which he leased from that Corporation. By promoting the cleaning systems in Australia and New Zealand he expanded the market for his chemicals. 63. The sale of distributorships in Hong Kong and Singapore was but an extension of the Australian and New Zealand business and was also for the purpose of expending the market for the cleaning chemicals. The proceeds from the sale of the distributorships were therefore derived in the course of carrying on the applicant's business and therefore income according to ordinary concepts. No capital assets were sold. The rights to use the specialised equipment depended upon the sub-lease of the equipment. All the distributor agreement did was grant such a sub-lessee exclusive rights in a defined area. As I said earlier the applicant was in effect granting franchises to operate the system in part of the area in which the applicant had the right to lease the specialised equipment. 64. Even if I be wrong in characterising the amounts received under the distributor agreements as income I am unable to determine the outgoings incurred in the course of making the agreement. In view of the applicant's evidence that he thought that the outgoings may equal the amounts derived and as those outgoings have, in the main, been accepted as allowable deductions, I could not be satisfied that the assessments are excessive in regard to the amounts derived from the distributorship agreements including the consideration for the agreement." The Tribunal then discussed the decision of the Supreme Court of Queensland in Kwikspan Purlin System Pty Ltd v Federal Commissioner of Taxation 84 ATC 4282. The Tribunal distinguished that decision on the basis that the applicant in the present case did not own the patents and trademarks but merely had the right to exploit the patents and trademarks in Australia, New Zealand and, presumably, the South West Pacific. The Tribunal concluded: "Because he exploited those rights in the course of his business it must be accepted that the amounts derived under the distributor agreements are correctly characterised as being on revenue account." For the applicant it is submitted that the rights which he acquired from Fiber Care Corporation of America, whatever those rights were, were assets of the business carried on by him, that those assets were capable of being sold or realised, and that the amounts in question were the proceeds of the realisation of those assets and not proceeds of the applicant's business. Reliance is placed on a number of circumstances which may be summarised as follows: ° The finding of the Tribunal that the applicant's primary business was not to license operators but to sell cleaning chemicals to licensed operators. . The circumstance that the agreements with Symindson Trading Limited and "Banluck" were not part of the applicant's general business but were isolated business transactions. . The assertion by the applicant that it was not part of his purpose "to make a profit from the sale to them [Symindson Trading Limited and 'Banluck'] of the rights to operate in those two places". . The provision in cl.1 of the agreement between the applicant and Symindson Trading Limited that that company was appointed "exclusive Distributor" for the products listed on Schedule A in relation to the defined Territory. . The circumstance that the amount of $US100,000.00 payable by virtue of cl.2 of the agreement between the applicant and Symindson Trading Limited was not expressed to have been calculated by reference to the anticipated user of the cleaning processes by the Distributor. It may be accepted that the matters upon which reliance is placed by the applicant are matters relevant to the determination of the question whether the particular amounts received by the applicant are properly to be characterised as receipts on income or capital account. However, those matters, whether taken in isolation or together, cannot be decisive. The question must be answered upon a consideration of the whole of the material that was before the Tribunal and, so far as this Court is concerned, upon the findings of fact made by the Tribunal unless those findings themselves reflect an error of law on the part of the Tribunal. Having read and re-read the whole of the material before the Tribunal, I am satisfied that the Tribunal considered all of the matters referred to, that it did not misdirect itself as to the approach to be taken in determining whether the receipts in question were receipts on revenue or capital account and that it did not otherwise err in law in reaching the conclusion that the amounts were properly to be treated as income receipts for the purpose of the calculation of the applicant's taxable income in respect of the years ended 30 June 1984 and 1985. In my opinion, there was evidence before the Tribunal upon which it could properly find that the applicant's business included the promotion of cleaning systems which required the use of his chemicals, that his interest in the agreements with Symindson Trading Limited and "Banluck" was to establish markets for his chemicals, that in the course of promotion those systems and establishing those markets he sub-leased specialised equipment which he had himself leased from Fiber Care Corporation of America, and that the entering into the distributor agreements was an integral, albeit ancillary, part of his overall business activities. I am also satisfied that the Tribunal did not err in law in concluding that the agreement is not properly to be characterised as an agreement for the sale by the applicant of any part of the assets of his business. Upon those findings and that conclusion, it is inescapable that the amounts in question were received by the applicant on revenue and not on capital account. Conclusion For the reasons set out above, the application is dismissed. The applicant must pay the respondent's costs of the application. I certify that this and the preceding 30 pages are a true copy of the Reasons for Judgment herein of the Honourable Jygtice Neaves. Dated: 31 October 1994 Counsel for the applicant s Mr R. Mildren Solicitors for the applicant Counsel for the respondent Phillips Fox Mr T.M. Howe Solicitor for the respondent : Australian Government Date of hearing Solicitor 16 February 1994