CATCHWORDS TAXES AND DUTIES - Income tax - Ascertainment of assessable income - What is income derived by a taxpayer - Firm of solicitors moving to new premises - Whether payment by lessor of new building as an incentive to firm to take lease is income received by firm - What deductions allowable in respect of obtaining incentive payment Income Tax Assessment Act 1936, ss.25(1) 51(1) Commissioner of Taxation v Cooling (1990) 22 F.C.R. 42 Lister Blackstone Pty Ltd v Federal Commissioner of Taxation (1976) 134 C.L.R. 457 Paul Montgomery -v- Commissioner of Taxation of the Commonwealth of Australia (No. VG 209 of 1994) Paul Montgomery -v- Commissioner of Taxation of the Commonwealth of Australia (No. VG 210 of 1994) Judge: Jenkinson J Date: 8 April 1997 Place: Melbourne IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY No. 209 of 1994 GENERAL DIVISION B E T W E E N: PAUL MONTGOMERY Applicant - and - COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: Jenkinson J DATE: 8 April 1997 PLACE: Melbourne MINUTES OF ORDER The Court orders that: 1. The appeal be allowed. 2. The objection decision the subject of the appeal be set aside. 3. The matter of the objection be remitted to the respondent to be considered and decided according to law. The Court declares that: The sum of $136,562 specified in the applicant's notice of objection is assessable income of the applicant. And the Court further orders that: 4. Each party be at liberty to file and serve within 14 days written submissions as to the costs of the appeal. 5. Consideration of the said costs be adjourned to a date to be fixed. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY No. 210 of 1994 GENERAL DIVISION B E T W E E N: PAUL MONTGOMERY Applicant - and - COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: Jenkinson J DATE: 8 April 1997 PLACE: Melbourne MINUTES OF ORDER The Court orders that: 1. The appeal be allowed. 2. The objection decision the subject of the appeal be set aside. 3. The matter of the objection be remitted to the respondent to be considered and decided according to law. The Court declares that: The sum of $955,596 specified in the applicant's notice of objection is assessable income of the applicant. And the Court further orders that: 4. Each party be at liberty to file and serve within 14 days written submissions as to the costs of the appeal. 5. Consideration of the said costs be adjourned to a date to be fixed. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 209 of 1994 GENERAL DIVISION B E T W E E N: PAUL MONTGOMERY Applicant - and - COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 210 of 1994 GENERAL DIVISION B E T W E E N: PAUL MONTGOMERY Applicant - and - COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: Jenkinson J DATE: 8 April 1997 PLACE: Melbourne REASONS FOR JUDGMENT 1. Appeals from decisions by the respondent on objections to income tax assessments in respect of the years of income ended 30 June 1991 and 1992. 2. The objections related to the inclusion in the applicant's assessable income of his interest in what the respondent determined to be the net income of a partnership in which he was at material times a partner. The firm, called Freehill Hollingdale & Page ("the firm"), was and is a large and prominent partnership of solicitors which from 1977 until July 1991 had its principal place of practice in about five floors of leased premises, at the corner of William and Bourke Streets Melbourne, known as BHP House. On 9 August 1989 the partners resolved that the firm would accept an offer of a lease of a number of floors in premises to be built at 101 Collins Street Melbourne, which were expected to become available for occupation in 1991. The resolution was expressed to be conditional on the firm's inability to procure an extension beyond 11 August 1989 of the time limited by the offeror for acceptance of the offer. Having failed to procure any extension, the members of the firm accepted the offer and on or about 14 August 1989 caused Plurimus Holdings Pty Ltd ("Plurimus") to execute, as their nominee, an agreement for a lease to that company of a number of floors in 101 Collins Street, and another agreement, of even date, for payment to that company of certain sums of money. When those sums were paid to the lessee, and by the lessee to the firm, the respondent treated them, for the purposes of Division 5 of Part III of the Income Tax Assessment Act 1936, as assessable income of the partnership. And the respondent did not, for those purposes, treat certain expenses incurred by the partnership as allowable deductions in the calculation of the net income of the partnership. The applicant's objections to his assessments, which the respondent wholly disallowed, were based on the contentions that the sums paid to the firm were not income, but capital, and that, if the sums paid to the firm were income, the expenses were allowable deductions in the calculation of the net income of the partnership. 3. The agreement for lease specified six floors of leased space, numbered 42 to 47, at a rent at the rate of $660 per square metre per annum for the lowest floor, numbered 42. The rate increased by $5 per square metre in respect of each higher floor. By the other agreement it was provided: "2.1 As an inducement for the Lessee to enter into the Agreement for Lease, the Lessor agrees to pay to the Lessee the Inducement Amount." The expression "Inducement Amount" is defined to mean "the total amount payable by the Lessor to the Lessee pursuant to this Agreement". It was provided that on the later occurring of two specified dates what was called the "Commencement Payment" should be paid to the lessee. Those dates were the date of completion of the building of 101 Collins Street and the date on which the period of 12 weeks during which the lessee was required to perform fitting out work in respect of the demised premises (called "Lessee's Work") should expire. The "Commencement Payment" is defined to mean, in effect, the balance undrawn at the time the payment was made of $15,890,000 (called the "Specified Amount"), which Specified Amount, less any amounts from time to time drawn down, the agreement provided, was to be "compounded at sixteen point five percent (16.5%) per annum with monthly rests" from the date of the agreement until the date of commencement of the lease, being the day after the date for making the Commencement Payment. Before that latter date the lessee might draw down so much of the Inducement Amount as was proved to be required to defray "Authorised Expenses", which expression was defined to mean "the following categories of expense: (a) the Lessor's costs with respect to the Agreement for Lease payable pursuant to Clause 4.2 of the Agreement for Lease; (b) stamp duty on the Agreement for Lease and Lease; (c) up to $3,000,000 in respect of expenses properly incurred with relation to the early termination of the Lessee's lease from Australian Mutual Provident Society of premises in BHP House, 140 William Street, Melbourne; (d) reasonable expenses with regard to the design and documentation of the Lessee's Works; and (e) reasonable consultants' and contractors' fees with respect to the Lessee's Works or relating to the Agreement for Lease." 4. By a deed dated 14 August 1989 between lessor, lessee (called "the Nominee" in the deed) and most of the members of the firm (called "the Principals" in the deed) the Principals covenanted "to meet all obligations of the Nominee pursuant to the Transactions Documents". The recitals to the deed read: "The Principals are some of the partners of the Melbourne firm of Freehill, Hollingdale & Page practising from its offices at 140 William Street and 80 Collins Street, Melbourne (`the Partnership'). The Principals have requested the Nominee to enter into certain documents comprising an Agreement for Lease, a Lease and Car Parking Licence and certain other documents with the lessor relating to space in the tower building being constructed at 101 Collins Street, Melbourne (`the Transaction Documents' which expression shall include all documents or agreements contemplated pursuant to the Transaction Documents including (without limitation) any variation or renewal of the said Lease, any notice under any other Transaction Document or any other agreement in connection with the Transaction Documents) as nominee for the Principals." The deed contains an acknowledgment by the Principals that "they are liable pursuant to the Transaction Documents to the same extent as if they had executed the Transaction Documents in their own names in lieu of the Nominee." There are in the deed warranties and representations by the Principals as to the Nominee's authorisation by the Principals to enter into the Transaction Documents and as to the binding effect on the Principals of the Transaction Documents. Clause 7 of the deed provides: 7.1 Subject to the provisions of Clause 7.2, any liability of a Principal shall be released upon written notification being given to the Lessor of the retirement or resignation of that Principal from the Partnership, but no such release shall release any other Principals. 7.2 No less than twenty (20) Principals shall remain liable hereunder at all times. 7.3 The Principals shall procure any new member of the Partnership to acknowledge in a form acceptable to the Lessor that he or she is bound by this Deed as a Principal as if he had executed it on the date hereof." The Applicant was one of the Principals who executed the deed and he remains a member of the firm. 5. The firm later agreed to take a lease of two additional floors numbered 48 and 49. By an agreement dated 25 July 1990, wherein it was recited that the lessor and lessee had "agreed as an inducement for the Lessee to include levels 48 and 49 to vary the terms" of the agreement dated 14 August 1989 "concerning the inducement", that earlier agreement was varied by substituting "$21,490,000" for "$15,890,000", as the "Specified Amount" in that earlier agreement. By a deed also dated 25 July 1990 recording the agreement to take the two additional floors it was also provided that in certain specified circumstances the floor numbered 50 should be substituted for the floor numbered 42 as a subject of the lease to Plurimus, and in the agreement of even date it was provided that if that substitution occurred, as later it did, the "Specified Amount" should be, and should be treated as if it had in the earlier agreement been, $21,770,000. 6. In consequence of the operation of the provision in the earlier agreement for compounding of the "Specified Amount", the "Inducement Amount" payable to the lessee became $29,351,530. The amount was paid, as to $5,000 during the year ended 30 June 1990, as to $2,994,784 during the following year and as to the balance of $26,351,746 during the year ended 30 June 1992. 7. In Commissioner of Taxation v Cooling (1990) 22 F.C.R. 42 at 56-57 Hill J, in whose reasons for judgment the other two members of that Full Court concurred, observed of a payment made as an inducement to a prominent firm of solicitors to take a lease of floors in a new city building: "What then is the result of the facts of the present case? If the transaction can properly be said to have been entered into by the firm in the course of carrying on its business and if it can be said that the arrangement is a profit-making scheme in the sense that those words are used by the High Court in Myer then it will follow that the amount received by the parties will be income and it will matter not that vis a vis the firm, the transaction was extraordinary. For the respondent it was submitted that the partnership business was the performance of professional services and not the receipt of incentive payments. In my view this submission, while in one sense true, disguises the true nature and extent of the firm's business. It is true that the firm's business includes the rendering of professional services but the firm does not cease business when it moves from one set of leased premises to another as the decision of the High Court in Lister Blackstone Pty Ltd v Commissioner of Taxation (Cth) (1974) 134 CLR 457 at 459 makes clear. That case held that the cost of moving from leased premises to other premises acquired when the first premises became inadequate, to the extent that it was necessary to move stock and plant, was an allowable deduction to a distributor of imported agricultural equipment. The real issue in that case was not whether the expenditure in question was necessarily incurred in carrying on a business, but whether it was capital in nature. It was held that it was not on the facts of the case. Where a taxpayer operates from leased premises, the move from one premises to another and the leasing of the premises occupied are acts of the taxpayer in the course of its business activity just as much as the trading activities that give rise more directly to the taxpayer's assessable income. Once this is accepted, the evidence established that in Queensland in 1985 it was an ordinary incident of leasing premises in a new city building, at least where the premises occupied were of substantial size, to receive incentive payments of the kind in question. Why then should a profit received during the course of business where the making of such a profit was an ordinary incident of part of the business activity of the firm not be seen to be income in ordinary concepts? Another way of analysing the facts of the present case is 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 itself 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. It should however be noted that on the facts of that case the obtaining of working capital was possible only if the profit contemplated by the taxpayer was made. ... 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 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 smaller 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." Uncontradicted evidence, which I accept, was adduced that in 1988 and 1989 it was an ordinary incident of renting premises in a new building in the centre of Melbourne to receive incentive payments of the kind in question. The respondent's principal submission was that the decision of the Full Court in Cooling's Case,special leave to appeal from which the High Court refused on the ground that the decision, so far as it was based on s.25 of the Income Tax Assessment Act 1936, was not attended with sufficient doubt to justify special leave, required the conclusion that the payments to Plurimus constituting the "Inducement Amount" were income, in ordinary concepts, of the firm for the purposes of Division 5 of Part III of that Act. 8. Mr Archibald Q.C., who appeared with Mr Murphy for the applicant, made the formal submission that Cooling's Case, so far as it concerned s.25, was wrongly decided. He submitted also that Cooling's Case did not compel the conclusion for which the respondent contended because the facts of this case were distinguishable from the facts in Cooling's Case. 9. One basis of distinction proposed by Mr Archibald was that in Cooling's Case the decision to enter into the transaction of which the incentive payment was an incident was the outcome of a free choice between remaining as a tenant of the premises then occupied by the firm of solicitors of which Mr Cooling was a member and taking the tenancy offered in the new building with the intention, and having as one purpose, to gain the incentive payment, whereas in the case under present consideration the evidence established, according to Mr Archibald's submission, that the decision to enter into the transaction of which the incentive payment was an incident was virtually forced on the firm by circumstances not of their making. 10. The leases under which Plurimus held tenancies of the floors in BHP House which the firm occupied were to expire either on 31 March 1993 (two floors) or on 28 February 1994. (From 1982 until the move to 101 Collins Street the firm had also occupied premises in a building known as Nauru House, where its practice in industrial relations law was carried on.) In June 1987 the firm commenced, and in May 1988 completed, a refurbishment of its premises in BHP House, at a cost of $3,763,378. The cost was met by the firm, the members of which at that time intended that those premises would be occupied by the firm at least until the expiration of the leases and probably for the term of a further lease from 1994. They thought it very probable that any need the firm might have before 1994 for more space would be satisfied by the grant of additional leases in BHP House. In October 1987 the firm had expressed to the manager and principal tenant of that building, BHP Pty Ltd, its concern about rumours that a refurbishment of the whole building was contemplated by the lessor. The manager's written response was that "a study directed at the refurbishment of BHP House" was being undertaken, that the elevator system, air conditioning, electrical services and toilet and lift lobbies were subjects of the study, that advice about "the direct impact on your refit program" could not at the time of writing be given, but that "landlords must have concern for tenant inconvenience and disruption should relocation be deemed necessary". In May 1985 a memorandum, from the manager to all the tenants of BHP House, setting out procedures to be followed as a means of protecting workers, engaged in work within a ceiling space or removing ceiling tiles, from asbestos prompted the firm to take advice from an industrial hygienist, which reported that the levels of asbestos in the air were not such as to give cause for concern. In September 1988 the owner of the building, the Australian Mutual Provident Society ("AMP") took over management of BHP House and informed the firm that all levels of BHP House were to be gutted and cleansed of asbestos. In the same month the firm constituted a premises committee of four partners and the firm's managing director, Robert William Moses, who is not a lawyer, to consider the firm's future accommodation. In November 1988 the firm sought from AMP "specific information" about the asbestos in BHP House and an assurance "that renovation work on other levels will not create airborne asbestos which could flow through the air handling system and endanger our staff and clients". The letter dated 29 November 1988 in response from AMP includes the following: "Prior to addressing your specific questions on asbestos we would like to put the refurbishment strategy planning into perspective. The decision to upgrade the property was taken because of a need to provide accommodation including services and building finishes equivalent with the buildings of the 90's. That decision having been taken it was a natural consequence that any asbestos would be removed at such an appropriate time. As you can see the catalyst to remove the asbestos was in fact the upgrading works and not the presence of asbestos itself. To answer your questions specifically we advise that expert reports obtained by us state that: (a) the type of asbestos is chrysotile (white asbestos) and it is a small part of the fire proofing material sprayed onto the structural steelwork. (b) no demonstrable risk from the fireproofing material exists for building occupants and removal of the material is not warranted on health grounds. (c) removal will be carried out strictly in accordance with current codes and regulations. The Department for Labour and Industry will be monitoring the levels of airborne asbestos and have the power to suspend work in the unlikely event that such action becomes necessary. In summary you can therefore be assured that: 1. the asbestos situation existing in the building has not and does not represent a health hazard to building occupants. 2. asbestos removal on other floors will not create airborne asbestos which could flow through the air-handling system. We hope that this information is sufficiently detailed to enable you to provide a satisfactory report for the partners' meeting but we will be pleased to assist further where we can. Please contact us should you be interested in further discussing our proposal to cater for your future expansion and relocation in the building." In a letter to the firm dated 20 March 1989 AMP stated its intention to commence in September 1989 the proposed work, which it expected to continue for four years, declared that work in the firm's premises would not start before 1991, and offered to locate within BHP House those tenants who wished to remain while work was undertaken in their leased premises. In June 1989 work in a ceiling of one of the firm's floors in BHP House by electrical contractors engaged by AMP brought down dust considered to contain asbestos, as well as causing loud noise. The firm protested strongly to AMP about the disturbance of its members and staff and about the danger of harm by the asbestos. Much of what I have quoted from the November 1988 letter from AMP is repeated verbatim in AMP's response to the June 1989 protest. There was evidence of other occasions in 1988 and 1989 when particles of what was considered to be asbestos were deposited on surfaces in the firm's premises. 11. There was evidence by the applicant and another member of the firm, Denis Davies, that they and other members of the firm were very concerned about the risk to health posed by the presence of asbestos in BHP House while the proposed refurbishment, of which the removal of the asbestos was an essential procedure, should be in progress. Mr Moses gave evidence that, having had experience of the health hazard which the presence of asbestos created, he strove to make the members of the firm aware of the danger to health which occupation of the firm's premises during the refurbishment would involve. 12. It was common ground that the time at which the intention of the members of the firm would be relevant to a determination as to the character of the incentive payments subsequently received - whether income or capital - was the time, on 9 August 1989, when the meeting of partners resolved to accept the offer to take a lease of premises at 101 Collins Street and to receive the incentive payment. 13. In the documents prepared in anticipation of that meeting, and in the documents prepared for the meeting itself, there is no reference to asbestos or to a danger to health during the proposed refurbishment of BHP House. There is reference to "inconvenience" and to "disruption" if the firm were practising in BHP House during the refurbishment. The applicant and Messieurs Davies and Moses gave evidence, which I accept, that the partners' policy was to minimise reference to asbestos in documents written by them, so that in any future litigation against the firm based on damage caused by asbestos in the firm's premises the number of discoverable documents containing such a reference would be small. 14. I accept the evidence of the applicant and Mr Davies that on 9 August 1989 they were worried that asbestos in BHP House might cause physical harm to persons in the firm's premises and that the danger would be increased while the asbestos was being removed. I am prepared to find that a number of other members of the firm had the same concerns on that day. But I am not persuaded that on that day any other partner shared the attitude which Mr Davies expressed in evidence: "unless AMP could satisfy ourselves that the proposed refurbishment had a plan whereby the removal of the asbestos could be undertaken with complete safety to the members of our firm, that is the partners and all staff, then we had no option in terms of staying in that building, we couldn't stay on." Nor can I accept as an accurate recollection of the applicant's state of mind on 9 August 1989 the last sentence of this passage in an affidavit sworn by him on 11 April 1995: "27 . I was aware of concern about the dangers of long term exposure to asbestos. I knew that it could lead to very serious lung disease such as mesothelioma and other forms of cancer. I also knew that the symptoms may not show themselves for 20 - 30 years. I had no intention of exposing members of staff, myself or my partners to any risk of death or injury in this horrible way. I reached the view that remaining in BHP House was simply no longer an option." The firm had been hampered in its consideration of its future accommodation by AMP's failure until 2 August 1989 to place before the firm any concrete proposal. In June 1989 AMP had responded to the firm's protest about the presence of asbestos in office spaces with a bland parroting of what had been communicated in November 1988. If the attitude of the members of the firm had been that expressed by the applicant or Mr Davies, they would, as I find, have again sought - as they had in 1985 - expert advice for themselves about the asbestos. The evidence demonstrates that some of the partners were inclined to stay in BHP house if the lessor were able and willing to minimise the disruption of the firm's practice, and to obviate the danger from asbestos, which the refurbishment threatened. The firm could not force AMP to present a proposal concerning the firm's future accommodation in BHP House. But the firm could, and if Mr Davies' attitude or the applicant's attitude had been widely shared no doubt would, have sought expert advice before 9 August 1989 as to whether, and at what cost, the danger from asbestos during refurbishment could be obviated. There was no evidence that after 1985 the firm did take that course before 9 August 1989. 15. The firm's management committee presented to the partners' meeting on 9 August 1989 a document which posed for decision the question whether the offer of a lease of premises at 101 Collins Street should be accepted. The offer had been declared to be available for acceptance only until 11 August 1989. The document stated that five buildings in the centre of Melbourne had been considered. One had been discarded because insufficient space in adjacent floors had been available, and another because the offered incentive payment of about $8 million was considered inadequate. The other three were BHP House, 101 Collins Street and a proposed building called Grand Central at the corner of Bourke and William Streets. In the concluding summation recommending acceptance of the 101 Collins Street offer BHP House and Grand Central were dismissed in these terms: "(b) There is a need to ensure that by the time our BHP lease expires we have in place adequate quality space to meet our anticipated expansion needs not just at that time but through the 1990's. On the basis of current projections, the 101 offer would satisfy that requirement. (c) The 101 offer is good and the only hard offer on the table at present. (d) Too much uncertainty surrounds the other offers. As good as the Grand Central offer and the likely quality of the building are, there are increasing doubts as to if and when that project will proceed. As to BHP, we have no idea how prepared AMP will be to improve their offer and, given the speed at which AMP has moved so far, we may not reach a final position for some time. Furthermore, the proposed refurbishment works have the potential to be very disruptive to our practice. (e) Consequently, a rejection of the 101 offer would run the risk of us not have another opportunity to secure a position in a landmark prestige building by the end of the BHP lease." Under the heading "Financial Evaluation" the observation is made: "A decision on the 101 offer must include an evaluation of the offer itself (that is, is it generous or otherwise or is it no more than we should expect) as well as a comparison with other offers on the table. As to the first point, the Committee is of the view that, by and large, the offer really reflects no more than the firm's importance as a potential tenant to any owner or developer. As to the second issue, there is really nothing to separate the 101 and Grand Central offers." Under that heading the AMP proposal is discussed in these terms: "We have only just received a proposal from AMP for remaining in BHP House. A copy of AMP's letter comprises Appendix 3 and Appendix 5 contains (to the extent that it is currently possible) a comparison of that proposal with the 101 Collins Street and Grand Central positions. Clearly the proposal suffers in financial terms with the other two but it must be stressed that this is probably AMP's starting position. The time pressures, and the August 11 deadline in particular, prevent us from making any proper evaluations of the BHP House option from a financial viewpoint." The document analyses "non-financial considerations" also. Of BHP House it was observed: "Advantages (a) The obvious non-financial advantage in staying in BHP House is that we would not have to leave the building. We have some doubts as to how real this advantage might be as, apart from the actual cost of relocation, it could almost be as disruptive to move from one floor to another as it would be to move from one building to another. (b) Location. One of the most prominent buildings and sites in the city. Disadvantages (a) We would be in the building during the entire period of the refurbishment although, as we have said, it is difficult to assess the extent of any inconvenience which might result. (b) It is difficult to assess, at least at this stage, the quality of the end product. Although AMP are apparently spending something in the order of $100 million and wish to upgrade the building to a quality level comparable with other landmark buildings either proposed or under construction, the extent to which the interior of the building, and the services, can be transformed must be open to question. However, at this stage we have not sighted any design brief or even outline specifications." In the concluding summation the recommendation was made thus: "(a) On the basis of the financial analysis, given our anticipated rate of personnel and client growth and an appropriate use of the incentive package, we are of the view that a move to 101 on the terms offered can and should be made by the firm. ... (f) We consider the advantages of a move to 101 outweigh the disadvantages." The minutes of the meeting throw no further light on the question as to the degree of influence, on the minds of the applicant and his partners, of concern about the harmful effects of asbestos. I am not persuaded that concern about the harmful effects of asbestos during refurbishment of BHP House led the applicant or any other member of the firm to consider himself obliged so to vote at the meeting that the firm would leave BHP House. 16. But, Mr Archibald submitted, whatever weight the concern about asbestos had, the resolution taken on 9 August 1989 was "precipitated and compelled by the proposed refurbishment program which was an extraordinary phenomenon in the ordinary life of the leases then held by the firm". While it may be true that the disruption attendant on a lessor's refurbishment is a circumstance influencing lessees to move away from a building less common than a number of other circumstances having a similar influence, such as the need for more space, or for a more convenient location, or for a higher, or lower, class of business premises, it was not a circumstance which the evidence showed to have compelled the firm to resolve to move away from BHP House. Both before and after the firm became aware of the lessor's intention to refurbish BHP House its management committee was contemplating as possibilities a purchase of part of a prestigious building, a lease of part of such a building and expansion of its occupancy within BHP House. 17. On 5 April 1989 the partners resolved not further to consider purchase and authorised the management committee to negotiate with AMP and the developers of new buildings. A memorandum dated 29 March 1989 from a group of members and advisers of the firm called the "Facilities Planning Group" to the management committee included the following: "9. Although MP makes mention in its reports of the favourable terms currently being offered to tenants and there are various reports in the press of an expected oversupply of office space over the next few years, we are of the view that the firm needs to make a decision as to its premises plans through the 1990's and beyond as quickly as possible. We say this because there are in fact few buildings which are either presently under construction or planned for the early 1990's which are big enough to accommodate a firm of our size, and adequately provide for future growth. Perhaps because of the forecast oversupply in the next few years, the leasing programmes for all major sites in the western end of the CBD, either under way or planned, are currently well under way. They are all currently attempting to attract major leasings and therefore the inducements are attractive. Once the major precommitment phase has passed we do not believe the inducements will be as attractive nor will we have the same premises options available to us as we currently have. 10. We are therefore of the view that the firm's premises position is one which requires a decision as to its future needs to be made as a matter of urgency." ("MP" is Managed Projects Pty Ltd, a property consultant employed by the firm.) The applicant agreed in evidence that the urgency to which reference is made in the latter of the two paragraphs quoted was occasioned by a desire not "to lose the opportunity for the best financial incentive". The following question, and answer by the applicant, followed: "And indeed that was why on 14 August you entered into the transaction with 101 rather than wait for the AMP proposal to develop, because you did not want to lose the 101 incentive? - Correct." 18. Another point of distinction between the circumstances of the payment under consideration in Cooling's Case and the circumstances of the payment in this case is that in Cooling's Case the firm of solicitors had the option of receiving the incentive payment or enjoying an initial period of occupancy rent free, but in this case the lessors of 101 Collins Street would not in any way reduce the specified rent. In the passage I have quoted from Cooling's Case Hill J adverts to that freedom of choice. It is useful, in my opinion, to consider at the same time the circumstance that the members of the firm resolved on 9 August 1989 that any incentive payments received from the lessor "be maintained for the benefit of the firm as working capital and are not to be regarded as a divisible asset". What was contemplated was that no claim would be made by a partner to a share of the incentive payments on his ceasing to be a member of the firm. The reasons for judgment of the Full Court in Cooling's Case were published on 28 June 1990. In the result provision was made by amendment of the firm's partnership agreement for distribution to be made to a partner, in whose assessable income should be included by the Commissioner of Taxation an amount in respect of a part of the incentive payment, of an amount calculated to enable the tax in respect of the incentive payment component to be paid, and for reimbursement of the amount distributed if upon an amended assessment the amount included in assessable income in respect of a part of the incentive payment were excluded from assessable income and tax paid were in consequence refunded or credited. As the partners had foreseen in August 1989, the move to 101 Collins Street in July 1991 occasioned the firm very substantial expense and, although the cost of fitting out the firm's new premises (estimated in August 1989 at $11 million) was financed by way of lease, the expense of moving and the high rent resulted, as had been foreseen, in a low profit in the early years of the firm's tenancy in 101 Collins Street. By the same agreement, dated 12 December 1990, as had made provision for subvention of partners in discharging their income tax liabilities provision was made for "topping up", at the discretion of the committee of management, "ordinary income in 1991/92 and future years" to offset, by recourse to the incentive payment, the effect on partners' incomes of the move in the first years of the tenancy at 101 Collins Street. But I am satisfied that in August 1989 the members of the firm were resolved not to take for their immediate benefit - as the partners in Cooling's Case did - each a share of the incentive payment, but intended that the moneys received should be retained as working capital of the firm. In those circumstances it may be said that the members of the firm had no choice but to take the money which an entity such as their firm would inevitably be offered to commit the prestige of the firm's name as tenants of an expensive building under construction in the centre of Melbourne. The amount of the sum to be offered they might seek to influence by negotiation. But the offer of some large amount was an occurrence independent of any action of theirs. While the incentive payment offered them was important, if not essential, to the financial viability of so expensive a lease for the firm, they had not the alternative means of lessening the burden of the rent, by seeking to persuade the owners to accept a lower rent. And, it might be said, in those circumstances there was not disclosed a "purpose of ... obtaining ... a commercial profit by way of incentive payment". According to the submission of Mr Archibald the reasoning in Cooling's Case ordains that a receipt is assessable only if a transaction which generates the receipt "can properly be said to have been entered into by the firm in the course of carrying on its business and ... the arrangement is a profit making scheme in the sense that those words are used by the High Court in Myer". (Cooling's Case 22 FCR at 56.) In this case, in Mr Archibald's submission, not only did the circumstances concerning the proposed refurbishment of BHP House place the firm in the extraordinary situation of a tenant, of recently refurbished premises held under a lease which was to run for more than another four years, compelled, or at least strongly motivated, to move, but also the terms of the available transactions being offered under which a move might be made afforded no occasion for the formation by the firm of a profit making purpose. 19. The expression "profit-making scheme" is perhaps confusing in application to a transaction the taxpayer's gain from which cannot be described in terms of cost compared with receipt on disposal of something conceivable as property of the taxpayer. In this case the receipt of the incentive payment by the firm was consideration for the firm's public commitment in August 1989 to take the lease of premises in 101 Collins Street. While it is not easily expressed as a profit, the receipt is rightly described as a gain. And one purpose of the applicant and his partners in entering into the transaction was to secure that gain. That in my opinion brings this case within the operation of the principles expounded in Cooling's Case. While the circumstances in which the transaction occurred can be seen to have included some which were not so common as others which attend a change of business premises, the decision which was required of the members of the firm on 9 August 1989 was one occurring in the course of carrying on its business. As one of the small number of large leading firms in legal practice in Melbourne the firm had to keep under review the adequacy of its accommodation to house, comfortably and efficiently, its numerous work force, and to project to its clients and those who might decide to become clients a conception of the firm which would attract the class of client which suited the firm's practice. Such a firm may by good fortune or good planning be able to stay in the same premises for a substantial period, but there remains always a likelihood that such a firm will as part of its conduct of its business have to decide whether or not to move. During the years when a move from BHP House was under consideration incentive payments of the kind which was involved in the move to 101 Collins Street were common in respect of large new buildings in the centre of Melbourne, they being the buildings most likely to suit the requirements of the large leading firms of solicitors. I find that the applicant and his partners did not think themselves devoid of choice on 9 August 1989 between staying in BHP House and leaving it. On the contrary, they were, as I find, set upon making a choice between the alternatives placed before them in the papers prepared for the meeting. And one substantial purpose of their making the decision to choose 101 Collins Street was to obtain the incentive payment which that choice could secure. To each of them who remained a partner in 1990, 1991 and 1992 the payment was in my opinion a gain which he had sought and obtained, notwithstanding his participation in the resolution that no part of the payment would be distributed to a partner. The resolution for commitment of the incentive payment to the firm's working capital was in law a direction under the partnership agreement to apply each partner's share of the payment in a particular way. When the payments were received in 1990, 1991 and 1992 they were received in my opinion as income, and therefore as assessable income for the purposes of Division 5 of Part III of the Income Tax Assessment Act 1936. 20. During the hearing of the appeals over a period of more than 5 days the parties devoted less than an hour to a consideration of the applicant's contention that, if the incentive payment were assessable income of the partnership, certain expenses should be included in the deductions allowable in the calculation of the "net income" of the partnership for the purposes of Division 5 of Part III. Counsel for the parties agreed that the items of expense particularised - if that be not too flattering an expression - in paragraphs 11 and 12 of the applicant's affidavit sworn 3 October 1996 were those which had been comprehended by the applicant's objections to his assessments. Those paragraphs read: "11. The firm incurred expenditure in relation to the negotiations leading up to the receipt of the payments and the move from BHP House to 101 Collins Street which has not been claimed as a deduction. In the year of income ended 30 June 1991: (a) Managed Projects - lease negotiations and fit-out consultancy $392,000 (b) WT Partnership - cost management and verification services 55,520 (c) Idee - interior design consulting 5,100 (d) 101 Collins Street - architectural services 15,569 (e) 101 Collins Street - engineering services 23,991 Total $492,180 12. In the year of income ended 30 June 1992: (a) Managed Projects - lease negotiations $77,860 (b) WT Partnership - cost management and verification services 5,040 (c) Idee - interior design consulting 12,540 (d) J Wilson Removals - moving furniture etc. 8,119 (e) Woollahra Art Removals - moving paintings 1,154 (f) IBM - moving IBM equipment 11,277 (g) Nauru House - final clean 312 (h) Nauru House - reinstatement costs 19,723 Total $136,025" If any further relevant information about those items is to be found in the evidence, my attention was not drawn to it by counsel. Mr Archibald submitted that Managed Projects Pty Ltd, by its agent Mr Holdsworth, had worked to enable the firm to gain what I have held to be assessable income and that accordingly the firm's outgoings by way of remuneration of the company were incurred in gaining that income and are allowable deductions. He claimed support from the observation in the passage I have quoted from Cooling's Case in paragraph 7 hereof that a firm of solicitors does not cease business when it moves premises from one set of leased premises to another and from the reasoning of Gibbs J in Lister Blackstone Pty Ltd v Federal Commissioner of Taxation (1976) 134 C.L.R. 457 at 459. 21. In the latter case it was conceded that the cost of preparing the new premises to which the taxpayer moved because its existing premises were too small, and the cost of moving plant and equipment to the new premises, were outgoings of a capital nature. So far as appears, the items (c), (d) and (e) in paragraph 11, and the items (c), (d), (e) and (f) in paragraph 12, of the applicant's affidavit are in my opinion outgoings of a capital nature. The character of the advantages sought by the expenditure specified in those items is the establishment or adaptation to the firm's needs of what is seen to be part of the "profit yielding subject" - the premises in which, and the artifacts by the operation of which, the business of the firm is to be carried on. The manner in which the premises and the artifacts are to be used bespeak expenditure upon assets and advantages for the enduring benefit of that business. And the means adopted to obtain the advantages sought were final payments so as to secure future use. 22. I was not directed to evidence which would throw light on the nature of the expenditure to which reference is made in either item (b) or in either of the items (g) and (h) in paragraph 12 of the affidavit. 23. Both items (a), it may be safely inferred, include outgoings referable to certain work which the evidence showed that Managed Projects Pty Ltd had done. That company, by Mr Holdsworth, had negotiated with representatives of the lessors of 101 Collins Street to procure as large an incentive payment as could be gained. The cost of that work to the firm was in my opinion an outgoing incurred in gaining assessable income. I infer that some part of each of the sums specified in items (a) were charged in respect of that work. And I am accordingly persuaded that each assessment is excessive in that the amount of the assessment includes as the applicant's individual interest in the net income of the partnership a sum greater than that interest calculated according to law, that is calculated on the footing that the net income of the partnership was ascertained after allowing as a deduction the amount charged in respect of that work. What that latter amount is the evidence does not disclose. 24. I infer from the evidence that Mr Holdsworth and other agents of Managed Projects Pty Ltd advised the firm as to the actions of the firm best calculated to gain as great an incentive payment as could be gained, as well as themselves negotiating for such a payment. I would be inclined to think that the charges for that work would also be allowable deductions under s.51(1) of the Income Tax Assessment Act 1936. But the evidence and the submissions on the questions of deductibility of expenditure were so exiguous that I express no concluded opinion. 25. Each appeal will be allowed, the objection decision the subject of the appeal set aside and the matter of the objection remitted to the respondent to be considered and decided by him according to law. In the proceeding No. 209 of 1994 there will be a declaration that the sum of $136,562 specified in the applicant's notice of objection is assessable income of the applicant. In the proceeding No. 210 of 1994 there will be a declaration that the sum of $955,596 specified in the applicant's notice of objection is assessable income of the applicant. 26. Liberty will be granted to each party to file written submissions as to the costs of the appeals within 14 days. My present impression is that in each appeal the applicant should be ordered to pay all but $1,000 of the respondent's costs of the appeal. I certify that the preceding twenty-six (26) pages are a true copy of the reasons for judgment of the Honourable Justice Jenkinson Dated: Associate Appearances Counsel for the applicant: Mr A C Archibald QC and Mr T Murphy Solicitor for the applicant: Freehill Hollingdale & Page Counsel for the respondent: Mr A H Goldberg QC and Dr S C Kenny Solicitor for the respondent: Australian Government Solicitor Dates of hearing: 28, 29, 30 and 31 October, 1 and 4 November 1996