CATCHWORDS INCOME TAX - exempt income - sale, transfer or assignment of mining tenements - agreement for sale of the right to mine included provisions for payment of royalty in respect of any mining operations commenced - payment of royalty not stated to be part of purchase price of tenements - tenements transferred - new contract for payment of royalty between transferee and prospectors - meaning of "income" and "derived from" - whether royalty payments income - sub-s.23(pa), Income Tax Assessment Act 1936. INCOME TAX - Federal Court - jurisdiction of on appeal from A.A.T. - appeal limited to questions of law. Administrative Appeals Tribunal Act 1975 s.44 Income Tax Assessment Act 1936 Pt III, Div 10; s 25; sub-ss 23(pa), 25(1) Parsons, Income Taxation in Australia Cliffs International v. F.C.T. (1979) 142 C.L.R. 140 Collector of Customs v. Pozzolanic Enterprises Pty. Ltd. (1993) 43 F.C.R. 280 Colonial Mutual Life Assurance Society Ltd. v. F.C.T. (1953) 89 C.L.R. 428 Commissioner of Inland Revenue v. N.V. Philips Gloeilampenfabrieken [1955] N.Z.L.R. 868 Commissioner of Taxation v. Kirk [1900] A.C. 588 Cowell Electric Supply Company Ltd. v. Collector of Customs (1995) 54 F.C.R. 1 Egerton & Warburton v. F.C.T. (1934) 51 C.L.R. 568 Egerton-Warburton v. Deputy Federal Commissioner of Taxation (1934) 51 C.L.R. 568 F.C.T. v. Cooper (1991) 29 F.C.R. 177 F.C.T. v. Inkster (1989) 24 F.C.R. 53 F.C.T. v. Myer Emporium Ltd. (1987) 163 C.L.R. 199 F.C.T. v. Roberts (1992) 37 F.C.R. 246 F.C.T. v. Thorogood (1927) 40 C.L.R. 454 Harding v. F.C.T. (1917) 23 C.L.R. 119 Just v. F.C.T. (1949) A.L.R. 438 Kidston Goldmines Ltd. v. F.C.T. (1991) 30 F.C.R. 77 McCauley v. F.C.T. (1994) 69 C.L.R. 235 Minister of National Revenue v. Spooner [1993] A.C. 684 Moneymen Pty. Ltd. v. F.C.T. (1990) 21 A.T.R. 581 T.N.T. Skypack International (Aust.) Pty. Ltd. v. F.C.T. (1988) 82 A.L.R. 175 BARRY NICHOLAS IVANAC V. DEPUTY COMMISSIONER OF TAXATION WAG5 OF 1995 LEE J. CANBERRA 26 OCTOBER 1995 IN THE FEDERAL COURT) OF AUSTRALIA ) WESTERN AUSTRALIA ) DISTRICT REGISTRY ) GENERAL DIVISION ) NO. WAG5 OF 1995 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL B E T W E E N: BARRY NICHOLAS IVANAC Applicant and DEPUTY COMMISSIONER OF TAXATION Respondent MINUTE OF ORDER JUDGE MAKING ORDER: LEE J. DATE OF ORDER: 26 OCTOBER 1995 WHERE MADE: CANBERRA THE COURT ORDERS THAT: The appeal be dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT) OF AUSTRALIA ) WESTERN AUSTRALIA ) DISTRICT REGISTRY ) GENERAL DIVISION ) NO. WAG5 OF 1995 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL B E T W E E N: BARRY NICHOLAS IVANAC Applicant and DEPUTY COMMISSIONER OF TAXATION Respondent CORAM: LEE J. DATE : 26 OCTOBER 1995 PLACE: CANBERRA REASONS FOR JUDGMENT This is an "appeal" pursuant to s.44 of the Administrative Appeals Tribunal Act 1975 ("the A.A.T. Act") from a decision of the Administrative Appeals Tribunal ("the Tribunal") which affirmed objection decisions made by the respondent ("the Commissioner") disallowing objections by the applicant ("Ivanac") to income tax assessments issued to Ivanac for the years of income ended 30 June 1991 and 30 June 1992. The questions of law on which the "appeal" relies for the purpose of s.44 of the A.A.T. Act concern the meaning of the words "derived from" and "income" as used in the Income Tax Assessment Act 1936 ("the Act") in particular, in sub-s.23(pa) of the Act, the proper construction of that sub-section, and whether facts as found by the Tribunal come within the sub-section properly construed. Counsel for the Commissioner submitted that the "appeal" raised questions of fact not law on the principal issues. As has been stated by this Court on like submissions in past cases the meaning of words such as "income" and "derived" as used in the Act and the proper construction of a provision of the Act in which those words are used are accepted questions of law. Whether found facts may fall within the terms of the Act so construed will be a question of law if it involves a matter of degree. That is to say the question whether the facts as found may admit different conclusions as to whether the criteria of the Act have been satisfied is a question of law although the question whether the correct conclusion has been drawn will be a question of fact. If the proper construction of the Act permits only one conclusion to be made on the facts as found and the contrary conclusion is drawn that will present a question of law. (See: T.N.T. Skypak International (Aust.) Pty. Ltd. v. F.C.T. (1988) 82 A.L.R. 175 per Gummow J. at 178-182; F.C.T. v. Inkster (1989) 24 F.C.R. 53 per Lee J. (Gummow J. agreeing) at 75-76; F.C.T. v. Cooper (1991) 29 F.C.R. 177 per Hill J. at 193-194; F.C.T. v. Roberts (1992) 37 F.C.R. 246 per Hill J. at 251-252; Collector of Customs v. Pozzolanic Enterprises Pty. Ltd. (1993) 43 F.C.R. 280; Cowell Electric Supply Company Ltd. v. Collector of Customs (1995) 54 F.C.R. 1 per Hill J. (Burchett J. agreeing) at 10.) This "appeal" raises questions of law within the compass described above and, therefore, the Court has jurisdiction to determine the matter defined by those questions. (See: T.N.T. Skypak per Gummow J. at 181.) The relevant facts of the case found by the Tribunal were as follows. Ivanac and his partner ("the prospectors") were "'bona fide' prospectors" within the meaning of that phrase as used in sub-s.23(pa) of the Act. As at 15 April 1985 Ivanac, either alone or with his partner, was a registered proprietor of several gold-mining leases ("the mining tenements"). On 15 April 1985 the prospectors entered into an agreement ("the Option Agreement") with Altus Corporation Pty. Ltd. ("Altus") under which Altus was granted an option to purchase the mining tenements for a price of $150,000. The Option Agreement provided further that Altus would pay to the prospectors a "royalty" of $1 per tonne of ore from the tenements mined, crushed and treated. The rights of either party under the Option Agreement were able to be assigned subject to the consent of the other and the proposed assignee entering a suitable deed of covenant. Also on 15 April 1985 the prospectors and Clackline Refractories Limited (now Herald Resources Ltd. ("Herald")) made a deed ("the Deed of Acknowledgment") under which the prospectors acknowledged that they were "aware" that Altus, not a party to the Deed of Acknowledgment, had granted option rights to Herald. In the Deed of Acknowledgment the prospectors agreed to keep the mining tenements safe for Herald and Herald agreed to hold to the prospectors' order - to the extent of any moneys due to the prospectors by Altus under the Option Agreement - any moneys due to Altus by Herald "in respect of the (mining tenements)". According to other material before the Tribunal the agreement pursuant to which an option was granted to Herald by Altus was dated 1 June 1985. That agreement was not before the Tribunal. On or about 11 June 1986 Altus and Herald exercised their respective options. Herald became registered as the proprietor of the mining tenements on 4 December 1986. On 26 June 1987 Herald sold the tenements to Goldfan Limited ("Goldfan"). The sale agreement, dated 26 June 1987, was not before the Tribunal. At that point no deeds of covenant had been made. There was an indirect covenant from Herald to the prospectors that Herald would meet the liability of Altus to pay a royalty to the proprietor if directed to do so by the prospectors subject to Herald being liable to pay that money to Altus. There was no covenant from Goldfan to the prospectors that Goldfan would assume the liability of Altus to pay a royalty to the prospectors. On 5 July 1989 Goldfan and Altus made a deed ("the Deed of Surrender"). The recitals to the Deed of Surrender stated that: pursuant to the terms of an "option agreement" dated 1 June 1985 Herald had "granted" to Altus a royalty of $2 per tonne of "all ore crushed and treated from the (t)enements"; by a sale agreement dated 26 June 1987 Herald had sold the tenements to Goldfan; by a "deed of assumption and consent" made between Herald, Goldfan and Altus in 1989 Goldfan had assumed the obligation to pay the royalty; and by another "option agreement" made between Altus and Goldfan on 21 February 1989 Altus had granted Goldfan an "option", exercisable after 30 June 1989, to "cancel" the royalty by Altus "surrendering" to Goldfan its rights thereto. The Option Agreement dated 21 February 1989 was not before the Tribunal. Pursuant to the terms of the Deed of Surrender Altus purported to "surrender" and "convey" to Goldfan its right to, and interest in, the royalty with the intent that the liability of Goldfan to pay the royalty ceased and was "cancelled". In its reasons the Tribunal stated that on 26 June 1987, contemporaneously with the sale of the tenements to Goldfan by Herald, Goldfan, Herald and Altus made a deed of assumption and consent under which Goldfan assumed the obligation of Herald to pay the royalty to Altus. In fact it appears that the "deed of assumption and consent" between those parties was made contemporaneously with the Deed of Surrender on 5 July 1989. The "deed of assumption and consent" was not before the Tribunal. Also on 5 July 1989 the prospectors and Goldfan made a deed ("the Royalty Deed") under which Goldfan purported to undertake a liability to pay to the prospectors a royalty of $1 per tonne in consideration of the prospectors "surrendering" to Goldfan all their interest in the royalty payable to them by Altus and releasing Altus, Herald and Goldfan from any liability in respect of the prospectors' entitlement thereto. Neither Altus nor Herald was a party to the Royalty Deed. In its terms the Royalty Deed did not assign to Goldfan the prospectors' entitlement to the royalty payable to them by Altus. It is necessary to set out in full the recitals to the Royalty Deed and the relevant substantive clauses: "A. By an agreement dated the 15th day of April 1985 between the (prospectors) as vendors and (Altus) as purchaser ('Vendor Agreement'), Altus was granted an option to acquire the right title and interest of the (prospectors) in Mining Leases 15/6176 and 15/6520 ('Tenements') for the consideration therein referred to which included without limiting the generality of the foregoing the payment of a royalty of One (1) Dollar per tonne of ore crushed and treated from the Tenements ('Royalty'). B. By an option agreement dated the 1st day of June 1985 between Altus as vendor and (Herald) as purchaser ('Altus Agreement'), Herald was granted the option to acquire amongst other things the Tenements for the consideration more particularly referred to in the Altus Agreement. C. A condition to the assignment of the right and interest of Altus under the Vendor Agreement was that any proposed assignee was by virtue of Clause 9 of the Vendor Agreement obliged to enter into a deed of covenant agreeing to be bound by the provisions of the Vendor Agreement (sic). D. By a deed of acknowledgement dated the 15th day of April 1985 between Herald and the (prospectors) Herald agreed to pay the Royalty to the (prospectors). E. By notice dated the 11th day of June 1986 Herald exercised the option referred to in Recital B hereof and became the registered proprietor of the Tenements after paying the consideration referred to in the Altus Agreement. F. By a Sale Agreement dated the 26th day of June 1987 Herald sold and Goldfan purchased the Tenements amongst other things and by a deed of assumption and consent of even date herewith between Herald Goldfan and Altus, Herald assigned and Goldfan assumed all of the rights and obligations of Herald to pay the Royalty (sic) and by its execution of the deed Altus consented to this assignment and assumption. G. Pursuant to an option agreement of even date herewith (sic) between Altus as grantor and Goldfan as grantee, ('Royalty Option'), Goldfan was granted the option exercisable at any time after the 30th June 1989 to cancel a royalty which was payable to Altus, part of which sum was to be paid directly to the (prospectors) in satisfaction of the Royalty and it was agreed that Altus and Herald would use their best endeavours to have the (prospectors) cancel the royalty and in consideration enter into this Deed pursuant to which they are granted a royalty similar in all material respects to the Royalty. H. The (prospectors) have agreed with Goldfan to enter into this Deed on the terms and conditions hereinafter appearing. ... 1. SURRENDER AND RELEASE In consideration of the (prospectors) agreeing to surrender all their right and interest in the Royalty to Goldfan and to release Goldfan, Herald and Altus from all actions, claims, demands and liabilities whatsoever arising out of the entitlement of the (prospectors) to the Royalty, Goldfan shall pay to the (prospectors) the royalty referred to in Clause 2 hereof and subject to the provisions of Clause 3 hereof, this Deed may be pleaded by Goldfan, Herald or Altus as a bar to any such action, claim, demand or liability relating either directly or indirectly to the Royalty. 2. ROYALTY Goldfan shall pay to the (prospectors) a royalty of ONE DOLLAR ($1.00) per tonne of all ore from the Tenements crushed and treated. Goldfan shall by the 30th day of September in each year produce to the (prospectors) an audited statement of royalty due to the previous 30th day of June together with payment thereof and the (prospectors) may have reasonable access upon giving reasonable notice to Goldfan, to Goldfan's records for the purpose of checking those statements." The recitals appear to be inaccurate in several respects. In recital D it is stated that by the Deed of Acknowledgement dated 15 April 1985 "Herald agreed to pay the Royalty to the (prospectors)". In fact Herald agreed to hold moneys payable by Herald to Altus and to pay to the prospectors from that sum moneys as directed by the prospectors. In recital F it is stated that by a deed of assumption and consent "Goldfan assumed all of the rights and obligations of Herald to pay the Royalty". In fact, according to the recitals of the Deed of Surrender, the royalty the subject of the deed of assumption and consent was the royalty payable by Herald to Altus, not "the Royalty" defined in recital A of the Royalty Deed being the royalty payable by Altus to the prospectors. Recital G referred to a "Royalty Option" of "even date" by which Goldfan was granted an "option" to cancel a royalty payable to Altus "part of which sum was to be paid directly to the (prospectors) in satisfaction of the Royalty" and pursuant to which Herald and Altus would use their best endeavours to have the prospectors "cancel" the royalty. In fact, according to the recitals to the Deed of Surrender, the "Royalty Option" was an "Option Agreement" dated 21 February 1989 made between Altus and Goldfan and to which Herald was not a party. As stated earlier the terms of that Option Agreement were not before the Tribunal. In the reasons of the Tribunal the prospectors were described as "partners". No issue was raised as to the correctness of the assumption that one-half of the royalty payments paid by Goldfan represented the income derived by Ivanac as a partner. Ivanac's share of the "partners'" distribution of the royalty received from Goldfan was $40,783 and $337,573 in the respective years of income. Ivanac contends that pursuant to sub-s.23(pa) of the Act the payments received from Goldfan constituted exempt income or, alternatively, that the payments were of a capital nature and not income according to ordinary concepts and, therefore, not assessable income under sub-s.25(1) of the Act. No issue arose as to the extent to which the income said to be derived from the sale of rights to mine exceeded any deductions that had been allowed under Div.10 of Pt.III of the Act in respect of expenditure on exploration or prospecting. It is first necessary to look at sub-s.23(pa) of the Act and the terms of the Option Agreement under which a royalty of $1.00 per tonne became payable to the prospectors by Altus. If such a royalty could not be brought within the proper construction of sub-s.23(pa) the sub-paragraph would have no application to any royalty payments made to the prospectors by Goldfan. This threshold question was not determined by the Tribunal and is the subject of a notice of contention filed by the Commissioner. The relevant part of sub-s.23(pa) is as follows: "23. The following income shall be exempt from income tax:- ... (pa)subject to Division 16H, income derived by a person from the sale, transfer or assignment by the person of his rights to mine, in a particular area in Australia, for gold or for any prescribed metal or prescribed mineral, being a person who is a bona fide prospector,..." The salient provisions of the Option Agreement, namely, Clause 2 - "Offer to Sell" and Clause 3 - "Title" read as follows: "2. Offer to Sell (1) Subject to the conditions set forth in this Agreement the Vendor hereby offers to sell the entire right title and interest in and to the Mining Tenements to the Purchaser for the sum of ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000) which shall be reduced by any sums paid under Clause 2(4) ('the Price'). (2) The offer contained in Clause 2(1) may be accepted by the Purchaser at any time in writing during an Option Period as defined in Clause 2(3). (3) The following shall be Option Periods: (a) From the date hereof until 15th August 1985 ('First Period'). (b) From 15th August 1985 until 15th December 1985 ('Second Period'). (c) From 15th December 1985 until 15th June 1985 ('Third Period'). (4) The Vendor hereby agrees with the Purchaser that: (a) in consideration of the sum of TEN THOUSAND DOLLARS ($10,000) receipt of which is hereby acknowledged the Vendor shall not revoke the offer contained in Clause 2(1) during the First Period; (b) in consideration of the sum of TEN THOUSAND DOLLARS ($10,000) which shall be due and payable on 15th August 1985 the Vendor shall not revoke the offer contained in Clause 2(1) during the Second Period; (c) in consideration of the sum of FORTY THOUSAND DOLLARS ($40,000) which shall be due and payable on 15th December 1985 the Vendor shall not revoke the offer contained in Clause 2(1) during the Third Period. (5) If the offer contained in Clause 2(1) has not been accepted by the end of the Third Period it will expire and without prejudice to any accrued rights including rights of action this Agreement shall be determined and at an end. 3. Title (1) On the date of execution of this Agreement the Vendor shall in exchange for the payment referred to in Clause 2(4)(a) sign execute and deliver to Birman & Ride, Solicitors, 4th Floor, 105 St. George's Terrace, Perth two (2) proper and registrable executed transfers of each Mining Tenement free of all encumbrances together with any Certificate or Certificates of Title then issued in respect of the Mining Tenements to be held in escrow until acceptance of the offer contained in Clause 2(1) whereupon the same shall be released to the Purchaser unconditionally. One registrable transfer shall have been executed by the Vendor. (2) Upon acceptance of the offer contained in Clause 2(1) the Vendor shall execute and deliver to the Purchaser all such assurances transfers assignments consents and documents as are necessary or desirable in order effectually to vest legal and beneficial ownership of the Mining Tenements in the Purchaser. (3) The Vendor shall on the execution of this Agreement deliver to the Purchaser all plans maps records and documents which may be in or which may hereafter come into the Vendor's possession and relate in any way to the Mining Tenements and in particular will make available to the Purchaser copies of all such data and records in the Vendor's possession and as relate to work done on or upon the Mining Tenements. (4) If the Purchaser acquires the Mining Tenements pursuant to the offer contained in Clause 2(1) it shall pay the Vendor a royalty of ONE DOLLAR ($1.00) per tonne of all ore from the Mining Tenements crushed and treated. The Purchaser shall by the 30th day of September in each year produce to the Vendor an audited statement of royalty due to the previous 30th day of June together with payment thereof and the Vendor may have reasonable access upon giving reasonable notice to the Purchaser to the Purchaser's records for the purpose of checking those statements of royalty." It is apparent from the foregoing that completion of the sale of the mining tenements, following acceptance of the irrevocable offer of the prospectors to sell the mining tenements to Altus, did not depend upon either crystallization, or performance, of the obligation undertaken by Altus to pay a royalty to the prospectors. The price for the sale of the tenements (which tenements, inter alia, included rights to mine on that land) was as set out in Clause 2 of the Option Agreement. The royalty was not part of that price. Under the Option Agreement Altus also agreed to pay a royalty to the prospectors if mining operations were undertaken on the tenements. By that further agreement Altus undertook to give the prospectors an interest in the exploitation of the tenements by providing that a royalty be paid on ore extracted, crushed and treated. In the hearing before the Tribunal it was agreed by the parties that "the receipts in question arose ultimately, but not necessarily directly, as a consequence of (the) disposal" of the rights to mine for gold. The question to be answered is whether it can be said that a royalty paid pursuant to the Option Agreement would have been "derived from" the sale of the prospectors' rights to mine for the purpose of sub-s.23(pa) of the Act. According to the Shorter Oxford English Dictionary the verb "to derive" has the meaning of to draw, fetch, obtain from; to come from something as its source; to trace or show the derivation origin or pedigree of; to state a thing to be derived from. When used with the word "income" it has no technical meaning and connotes "arising or accruing". (See: Commissioner of Taxation v. Kirk [1900] A.C. 588 at 592; Harding v. F.C.T. (1917) 23 C.L.R. 119 per Isaacs J. at 133.) The mode of derivation would ordinarily be a receipt but an item derived is not necessarily actually received. (See: F.C.T. v. Thorogood (1927) 40 C.L.R. 454 per Isaacs A.C.J. at 458.) Derivation, so defined, is an element of the notion of income by ordinary concepts or usage as applied by s.25 of the Act. The concept of derivation permits an item to be characterized as income by identifying a gain that has "come-home" to the party obtaining it being a gain that has a source in an obligation undertaken by another, or in a payment of money or transfer of property by another. (Parsons, Income Taxation in Australia paras.2.7-2.13; 2.24; 2.28.) Having regard to the foregoing, and the requirement of sub-s.23(pa) that the income be derived from the sale, transfer, or assignment of rights to mine gold, it may be said that the sub-section will be satisfied if the item said to be income has "come-home" as a gain arising, or accruing, from such a sale, transfer, or assignment. The source of the gain must be the sale, transfer, or assignment of the rights to mine and the characterisation of the gain as income must be established by the circumstances of that event. In the present case the item the prospectors are entitled to receive from the sale, transfer, or assignment of their rights to mine gold is the price set out in Clause 2 of the Option Agreement. The transaction by way of sale, transfer or assignment is defined by the payment and receipt of a price and the delivery and receipt of the title to the mining tenements. Unlike Cliffs International v. F.C.T. (1979) 142 C.L.R. 140 the payment of a royalty was not stated by the Option Agreement to be part of the price of the property to be acquired upon exercise of the option. (See also: Minister of National Revenue v. Spooner [1993] A.C. 684; McCauley v. F.C.T. (1944) 69 C.L.R. 235.) In Cliffs International the taxpayer was granted an option to purchase the whole of the shares in a company the holder of a right to occupy a mining tenement for the purpose of prospecting for iron ore. The Option Agreement stated that the purchase price payable upon exercise of the option was an Initial Payment of US$200,000 "plus Deferred Payments" of 15˘ (US) per tonne of iron ore extracted from tenements in the event that the taxpayer became involved in the mining of iron ore on the tenement. The case was not concerned with the character of the Deferred Payments in the hands of the vendor of the shares but with the character of those payments as made by the taxpayer. The taxpayer submitted, successfully, that the payments were outgoings necessarily incurred in the gaining of income from the mining of iron ore. The Commissioner had submitted that the Deferred Payments were part of the purchase price payable to acquire the shares, a capital asset and, therefore, represented an outgoing on capital account. Usually moneys paid as part of the price payable to acquire a capital asset pursuant to the terms of a contract between the payer and the payee will be an outgoing of capital on the part of the payer, notwithstanding that the payments may be periodical and uncertain in amount. (See: Colonial Mutual Life Assurance Society Ltd. v. F.C.T. (1953) 89 C.L.R. 428 per Fullagar J. at 454.) The same payments in the hands of the payee, however, may bear the character of income. (See: Just v. F.C.T. (1949) A.L.R. 438; Egerton-Warburton v. Deputy Federal Commissioner of Taxation (1934) 51 C.L.R. 568.) In Cliffs International the character of the Deferred Payments made by the payer fell to be determined according to the circumstances in which they were paid. Although the description applied to the payments by the parties, namely, the deferred payment of part of the purchase price for the shares, was entitled to some weight, it was not determinative of the character of the payments made by the payer which, it was held, bore the stamp of an outgoing on revenue account. In the instant case the Option Agreement distinguished the payment of the purchase price for the mining tenements from the payments to be made by way of royalty. There was mutuality of consideration involved in the irrevocable offer to sell the mining tenements and the promise to pay a royalty but the royalty was not payable as part of the price to be paid to acquire the mining tenements. The sale of the mining tenements, of course, was a sine qua non to the Altus undertaking to pay a royalty bearing fruit but the actual transaction of sale was neither the object nor the source of the royalty payment. Clause 3.4 of the Option Agreement formed a separate obligation by Altus to make a payment to the prospectors. As stated earlier the obligation undertaken by Altus was to the effect that if it purchased the mining tenements it would provide the prospectors with an interest in any mining operation undertaken by Altus on those tenements by paying a royalty to the prospectors in respect of that operation. The reasons of Barwick C.J. in Cliffs International provide assistance in explaining the distinction (pp.148-151): "The proper conclusion in each case in this particular area of the law is peculiarly dependent upon the particular facts and circumstances of that case. ... But I ought at once to point out that the description 'deferred payments' is quite obviously inapt. Clause 5 itself created no present debt for the amounts to be paid. It did not merely provide a manner of discharge in the future of a debt presently incurred. From any point of view, no conclusion could be founded upon or, in my opinion, could be aided by the description 'deferred payments' applied by the parties to the sums which might thereafter become due pursuant to the appellant's promise in cl. 5. I say 'might become due' because none of the payments might ever be due. The appellant did not undertake to mine iron ore. Indeed, there was then no certainty that the appellant would ever have or control the right to do so. It was only in the eventuality that iron ore was drawn from the temporary reserves by or at the instance of the appellant that cl. 5 would be activated so as to result in an obligation to make the stipulated payments. ... It is proper to point out, and to do so with emphasis, that by making the recurrent payments the appellant acquired nothing which it did not already have. The question is not of what relevant quality was the thing or right acquired by the payments: for nothing at all was thus acquired. It is, of course, true that, if it mined or procured the mining of iron ore from the area of the temporary reserves, the appellant was contractually bound to make the payment. It is also true that its promise to make the payments and the events which occurred formed part of the consideration given for the acquisition of the shares. But they were acquired without making the payments in question. The recurrent payments were not made for the shares though it might probably be said that they were paybale as a consequence of the purchase of the shares. Whilst there is a sense in which the promise to pay an amount rated to the tonnage of iron ore extracted from the temporary reserves in events then contingent and uncertain could be regarded as part of the cost to the appellant of the shares, I cannot think that the payments when made, having become payable because of supervening events can properly be regarded as part of the purchase money for the shares in Basic. As I have indicated, the fact that the promise to make the payments formed part of the consideration for the transfer of the shares does not mean that, when made, they were paid for the shares. ... The matter may be approached in another, though perhaps not so dissimilar a way. The vendors for the transfer of their shares took a cash price and stipulated for a share of the proceeds of mining iron ore, if that eventuated. For its part, the appellant by agreeing to make the recurrent payments was prepared to admit the vendors of the shares to participation in the result of the mining of the iron ore...It does not seem to me to matter greatly what description is applied to such recurrent payments by the appellant. That they were in the nature of royalties I have no doubt." The obligation of Altus to pay a royalty was a future obligation conditioned upon Altus commencing a mining operation as proprietor of the mining tenements. Unless Altus began such an operation no entitlement to a royalty would accrue or arise to the benefit of the prospectors. The source of the entitlement would be a combination of the contractual obligation to pay the royalty and the commencement of a mining operation. The item for payment by way of a royalty would "come-home", or be derived by Ivanac, at the point of receipt of the payment, assuming that the "partnership" operated on a cash receipts basis. It follows, therefore, that sub-s.23(pa), properly construed, had no application to any royalty payments that might have become payable to the prospectors by Altus and, ergo, as determined by the Tribunal, the sub-section had no application to the royalty payments actually paid to them by Goldfan. Whatever character royalty payments under the Option Agreement may have had, upon that contractual arrangement being terminated and replaced by a new contract with Goldfan under which a royalty was payable to the prospectors by Goldfan, the character of that royalty was to be found in the new contract the terms thereof describing what the royalty was paid for. The undertaking of Goldfan to pay a royalty to the prospectors was provided for the consideration expressed in the Royalty Deed, namely, the "surrender" by the prospectors to Goldfan of the royalty payable to the prospectors by Altus. The royalty payable by Goldfan had no proximal relationship to the sale of the mining tenements to Altus by the prospectors and could not be said to be derived from that sale. (See Kidston Goldmines Ltd. v. F.C.T. (1991) 30 F.C.R. 77 at 82; Commissioner of Inland Revenue v. N.V. Philips Gloeilampenfabrieken [1955] N.Z.L.R. 868.) For income to be derived from the sale, transfer, or assignment of rights to mine it is necessary to determine what are the circumstances under which the income has accrued or arisen. That is to say, what has the money, in the nature of income, been paid for. The first step in the resolution of that question is an examination of the contractual provisions under which the payments had been made. If the sum paid is part of the price payable under the contract for the sale, transfer, or assignment of rights to mine, it may be said to accrue or arise from that sale, transfer, or assignment. That is not to say that the sum payable under a contract which includes provisions for the sale, transfer, or assignment of rights to mine upon the exercise of an option granted under that agreement, necessarily will be income which accrues or arises from the sale, transfer, or assignment of those rights. It may be said to arise or accrue from the contract but not necessarily from the contractual provisions relating to the sale of the rights to mine. Counsel for Ivanac submitted that sub-s.23(pa) of the Act was intended to be of beneficial effect to encourage the search for gold. Therefore, it was said, the proper construction of sub-s.23(pa) required the Court to take a "broad approach, not one that is narrow or pedantic", and that the application of the sub-section to Ivanac's circumstances should be determined "as a matter of substance not as a matter of form". The submission sought to propound a broader than usual meaning for the word "derived" to give the sub-section a "practical" application. Unless the context requires a contrary conclusion it should be assumed that the word "derived" as used in sub-s.23(pa) has a meaning consistent with the use of that word in other parts of the Act to which the sub-section has necessary connection, to wit sub-s.25(1) of the Act. In sub-s.25(1) of the Act the assessable income of a taxpayer includes the gross income derived, directly or indirectly, from all sources not being exempt income. Sub-section 23(pa) does not refer to income derived "directly or indirectly" from a source. It specifies income "derived from" the sale of "rights to mine" and whatever meaning is to be given to the words "directly or indirectly" for the purpose of sub-s.25(1), the notion of exempt income in sub-s.23(pa) is income, according to ordinary concepts and usages, gained or acquired from the sale of rights to mine. There are no words in the sub-section which suggest that other than the ordinary meaning of derived is to be applied. (See: Kidston per Hill J. at 79-80.) Counsel for Ivanac submitted in the alternative, albeit with less force, that the royalty payments received from Goldfan were not income within the meaning of sub-s.25(1) of the Act being payments of a capital nature. That submission depended upon the argument that the payments described by the parties to the Royalty Deed as a royalty were in substance part of the purchase price payable for the sale of the mining tenements. First, as stated earlier the obligation undertaken by Altus under the Option Agreement to pay a royalty to the prospectors was not to give effect to the payment of the balance of the price agreed to be paid for the sale and purchase of the mining tenements. It was an undertaking by Altus to grant the prospectors an interest in any mining operation commenced on the mining tenements by Altus by providing the prospectors with the right to receive a royalty from that operation. Second, it may be said that in the Royalty Deed the prospectors agreed to "surrender" the right in futuro to receive a royalty from Altus and received in consideration for that "surrender" a covenant from Goldfan to pay to the prospectors a royalty from any mining operation conducted on the tenements by Goldfan. The payment, when made, had to be characterized according to those facts, none of which supported a submission that the payments received from Goldfan were stamped with the character of capital as part payment of the purchase price for the sale of the tenements to Altus by the prospectors. Furthermore, a capital sum directed to be paid by way of a royalty would bear the character of income in the hands of the recipient and not a capital sum paid by instalments. (See: Egerton & Warburton v. F.C.T. (1934) 51 C.L.R. 568 at 572; Moneymen Pty. Ltd. v. F.C.T. (1990) 21 A.T.R. 581; F.C.T. v. Myer Emporium Ltd. (1987) 163 C.L.R. 199 at 215; Cliffs International per Barwick C.J. at 150-151; Just v. F.C.T. (1949) A.L.R. 438.) For the reasons set out above it has not been shown that the decision of the Tribunal to affirm the Commissioner's decisions disallowing Ivanac's objections to the income tax assessments issued to him should be set aside. The appeal must be dismissed. I certify that this and the preceding twenty-three (23) pages are a true copy of the Reasons for Judgment of his Honour Justice Lee. Associate: Date: APPEARANCES Counsel for the Applicant: R.L. Le Miere Q.C. Solicitors for the Applicant: Messrs Solomon Brothers Counsel for the Respondent: W.F. Martin Q.C. Solicitors for the Respondent: Australian Government Solicitor Date of Hearing : 29 May 1995 Date of Judgment : 26 October 1995