FEDERAL COURT OF AUSTRALIA TAXATION - assessable income - payment made by lessor as contribution to cost of fitting out premises to be leased by a newly merged firm of solicitors - transaction not in the ordinary course of the merged firm's business - whether contribution received as part of a business operation or commercial transaction in circumstances in which the firm's purposes in engaging in the transaction included the making of a gain from the contribution received in the transaction. Selleck v Commissioner of Taxation (1996) 96 ATC 4903 Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199, considered G P International Pipecoaters Pty Limited v Commissioner of Taxation (1990) 170 CLR 124, distinguished Commissioner of Taxation v Cooling (1990) 22 FCR 42, considered Rotherwood Pty Limited v Commissioner of Taxation (1996) 64 FCR 313, distinguished Lister Blackstone Pty Ltd v Commissioner of Taxation (1974) 134 CLR 457, distinguished Moana Sand Pty Ltd v Commissioner of Taxation (1988) 88 ATC 4897, distinguished Montgomery v Commissioner of Taxation (1997) 97 ATC 4287, distinguished Lees & Leech Pty Limited v Commissioner of Taxation (Hill J, 26 May 1997, unreported), considered and applied Dickenson v Commissioner of Taxation (1958) 98 CLR 460, considered and applied HENRY FRANCIS HOWDEN SELLECK v THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA VG 619 of 1996 VG 620 of 1996 VG 621 of 1996 BLACK CJ, LOCKHART, BEAUMONT JJ MELBOURNE 20 AUGUST 1997 IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG 619 of 1996 ) VG 620 of 1996 GENERAL DIVISION ) VG 621 of 1996 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: HENRY FRANCIS HOWDEN SELLECK Appellant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: BLACK CJ, LOCKHART and BEAUMONT JJ. PLACE: MELBOURNE DATED: 20 AUGUST 1997 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The appeals be allowed, with costs. 2. The orders of the primary judge be set aside and in lieu thereof there be orders as follows. 3. The appeals against the decisions on the objections be allowed, with costs. 4. The Commissioner's decisions disallowing the objections be set aside. 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 619 of 1996 ) VG 620 of 1996 GENERAL DIVISION ) VG 621 of 1996 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: HENRY FRANCIS HOWDEN SELLECK Appellant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: BLACK CJ, LOCKHART and BEAUMONT JJ. PLACE: MELBOURNE DATED: 20 AUGUST 1997 REASONS FOR JUDGMENT BLACK CJ: I have had the advantage of reading the reasons for judgment of Lockhart J and Beaumont J. I agree, for the reasons given by Lockhart J, that these appeals should be allowed. I agree with the orders proposed by Lockhart J. I certify that this is a true copy of the reasons for judgment of the Honourable Chief Justice Black. Associate: Dated: 20 August 1997 IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) No VG 619 of 1996 ) No VG 620 of 1996 GENERAL DIVISION ) No VG 621 of 1996 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: HENRY FRANCIS HOWDEN SELLECK Appellant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent COURT: BLACK CJ, LOCKHART and BEAUMONT JJ. PLACE: MELBOURNE DATE: 20 AUGUST 1997 REASONS FOR JUDGMENT LOCKHART J. The facts and the arguments of counsel are set out in the reasons for judgment of Beaumont J, so I need not recite them. I agree with his Honour's analysis of the cases, in particular GP International Pipecoaters Pty Limited v The Commissioner of Taxation (1990) 170 CLR 124; Rotherwood Pty Limited v The Commissioner of Taxation (1996) 64 FCR 313; Montgomery v The Commissioner of Taxation (1997) 97 ATC 4287; Lees & Leech Pty Limited v Commissioner of Taxation, Hill J, 26 May 1997, unreported. The central question is whether the appellant's share in the benefit to Arthur Robinson & Hedderwicks ('AR&H'), Solicitors (of which he was a member), arising from the payment in 1985 and 1986 of the sums of $1,000,000 and $66,000 by AR&H's landlord, Australian Mutual Provident Society Limited ('AMP') as a contribution to the cost of fitting out the leased premises, forms part of the appellant's assessable income. The learned primary Judge (Drummond J) held that this incentive payment of $1,066,000 was assessable income in the hands of AR&H and, therefore, the appellant's share of it was assessable income in his hands. His Honour correctly found that the incentive payment received from the AMP to fit out the premises was not income under the first two principles which he derived from Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199 as applied by the Full Court of this Court in Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42and Westfield Limited v Federal Commissioner of Taxation (1991) 28 FCR 333, namely, that the incentive payment was not a gain made by AR&H from a transaction which formed part of the ordinary course of its business; nor was it a gain made from a transaction that was an ordinary incident of the business activity of the firm. His Honour did, however, find that the payment was assessable income under the third principle, namely, that it was realized in a business operation in circumstances in which the taxpayer had the not insignificant purpose of making a profit. His Honour made several key findings of fact to support his conclusion that the contribution to the fit out was assessable income of the partners of AR&H and therefore the appellant. His Honour found that, although it was clear that the partners of AR&H did not directly receive the moneys paid by the AMP, the scheme which AR&H entered into was one to enable the partners individually to receive a substantial cash contribution indirectly from the AMP contribution, namely, by the sale and lease back of the fit out to Westpac. His Honour found that the sale and lease back generated cash which was used and intended to be used by the partners to make a substantial cash contribution to themselves. This finding of fact was seriously challenged by counsel for the appellant. The facts require close analysis. The total cost to AR&H of the fit out was $2.5m, which was paid for partly from the AMP contribution of $1,066,000 and partly by a temporary overdraft from Westpac of $1.5m for the balance. The proceeds of the sale and lease back of the fit out to Westpac were used and were intended to be used to discharge the temporary overdraft. The partners individually did not receive any part of the $1.5m from the sale. That money was used to repay the firm's temporary overdraft from Westpac. Initially AMP offered either a six month rent free period or a contribution to fit out. Mr Robinson, the managing partner of AR&H, decided to opt for the contribution to fit out rather than the rent free period. His reasons in summary form were that the new fit out had to be financed, and it was felt that the contribution of $1m from AMP would reduce the need for borrowings. Another reason for accepting the contribution to fit out was that the benefit of the fit out would endure for the firm and its partners over the term of the lease. There was a third reason, namely, that increased borrowings would have incurred interest which would have represented a substantial expense for the firm over the period of the loan. Having examined the evidence carefully, in my opinion it is impossible to draw the inference that AR&H regarded the AMP offer of a cash contribution to fit out as giving it the opportunity to make a substantial cash distribution to the partners. It was Mr Robinson who made the decision to choose the contribution to fit out rather than the rent free period; but it was never put to him in cross-examination (or otherwise in his evidence) that a reason for this decision was that it would enable the firm to make a substantial cash contribution to the partners. Nor was it put to any other witness that the option to take the AMP's cash contribution to fit out was due to a desire to make a substantial cash distribution to the partners. The effect of what was put to other witnesses, but not Mr Robinson, concerning the tax-free nature of the payment from AMP was simply that they thought at the time that it was of a capital, not revenue, nature (it is to be remembered that the relevant events occurred and the decisions of AR&H to move premises and arrange the necessary finance were made before the decision of the High Court in Myer). The payments from AMP were therefore credited to a capital suspense account of the partnership (the AMP Suspense Account), on the basis that the amount of the credit would be appropriated to each partner in equal amounts over the period of the lease, subject to the qualifications mentioned in the reasons for judgment of Beaumont J. The evidence does not establish that it was intended to make immediate cash distributions to the partners of the $1,066,000 contributed by AMP towards the cost of the fit out to the partners of AR&H. The primary Judge also inferred that a further consideration governing the form of the arrangement made by AR&H with AMP and Westpac was that, in addition to the partners of AR&H receiving an amount equal to the $1,066,000 which the firm received from AMP, AR&H would have: 'the benefit of tax deductions in respect of the fit out costs that were probably additional to the deductions which it would have had if it had not entered into this sale and finance lease.' Counsel for the appellant submitted that this finding is erroneous. In my opinion the submission is correct. Leaving aside depreciation, there was no tax deduction available to the partners or the partnership in respect of fit out costs because they were of a capital nature. If the partnership had borrowed the money for the fit out and owned the assets constituting the fit out, they would have been able to depreciate the fit out over a period of five years. What in fact happened was that AR&H financed that part of the fit out that was not paid for by AMP by way of lease from Westpac and under the lease the partners wrote off 99% of the costs of the fit out over eight years. A crucial consideration in determining the true character of the monies received by AR&H from AMP is that AR&H was a new firm created by the merger of two well established firms of Melbourne solicitors. His Honour found that the merger was of two firms with different areas of expertise and practice into a firm offering a service significantly different from that offered by the two component firms. The new firm had to be accommodated in the one set of premises. The decision to move and seek new premises was not influenced by any contribution to be made by AMP in incentive payments. Various possible buildings were considered by AR&H; but the only two that were seriously considered were the AMP Tower and the Rialto. His Honour correctly found that neither the decision to move and find new premises nor the decision to choose the AMP Tower in preference to the Rialto was influenced by or had as a purpose the receipt by the partnership of the $1m contribution by AMP to the fit out. The only purpose of AR&H entering into the lease with the AMP was to obtain premises from which the new firm would conduct its legal practice. It is clear from both Myer and Cooling that whether a gain is assessable depends on the circumstances of the case. The facts of Cooling are different. In Cooling the relevant firm had not decided that it was essential or even important to move. The real estate agents acting for AMP in Cooling initiated the attempt to have the firm move premises, and the agents recommended to AMP that they offer an inducement to make the move more attractive. The firm chose to have the incentive paid to the individual partners rather than to the firm. The partners used the funds they received individually to fund the fit out; but notwithstanding this, there was no requirement for them to do so. The proceeds of the sale and lease back were paid back to the partners, unlike the present case. In Cooling the promised receipt by the partners individually of the incentive payment was a not insignificant purpose in the firm's decision to move to the AMP premises. In Cooling the decision to leave the firm's old premises and take up a lease with the AMP was influenced by the incentive payment to a not insignificant degree. In the present case the primary Judge correctly found that the decision to take up the premises with the AMP rather than Rialto was not influenced by the payment from the AMP. The need to find new premises for the new firm was a capital occasion. This could not be transformed into a revenue occasion because AR&H desired the AMP contribution to the fit out to be higher than had been first offered. In my opinion AR&H did not have any relevant purpose of profit-making when entering into the lease with AMP. In my opinion the appeals should be allowed with costs. The orders of the primary Judge should be set aside. The appeals against the decisions on the objections should be allowed with costs. The Commissioner's decisions disallowing the objections should be set aside. I certify that this and the preceding three (3) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart. Associate Dated: 20 August 1997 IN THE FEDERAL COURT OF AUSTRALIA ) ) VG 619 of 1996 VICTORIA DISTRICT REGISTRY ) VG 620 of 1996 ) VG 621 of 1996 GENERAL DIVISION ) ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: HENRY FRANCIS HOWDEN SELLECK Appellant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: BLACK CJ, LOCKHART and BEAUMONT JJ. PLACE: MELBOURNE DATED: 20 AUGUST 1997 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The appeals be allowed, with costs. 2. The orders at first instance be set aside; and in lieu thereof, the appeals against the decisions on the objections be allowed with costs; the Commissioner's decisions disallowing the objections be set aside; and in lieu thereof, it be determined that the objections be allowed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. ) IN THE FEDERAL COURT OF AUSTRALIA ) VG 619 of 1996 VICTORIA DISTRICT REGISTRY ) VG 620 of 1996 ) VG 621 of 1996 GENERAL DIVISION ) ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: HENRY FRANCIS HOWDEN SELLECK Appellant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: BLACK CJ, LOCKHART and BEAUMONT JJ. PLACE: MELBOURNE DATED: 20 AUGUST 1997 INDEX TO REASONS FOR JUDGMENT BEAUMONT J. INTRODUCTION.................................................................................................................... 1 THE APPELLANT'S CASE AT FIRST INSTANCE............................................................... 2 The background facts alleged by the appellant............................................................................. 2 The appellant's contentions at the trial on the questions of law..................................................... 7 THE COMMISSIONER'S CASE AT THE TRIAL.................................................................. 7 THE DECISION AT FIRST INSTANCE................................................................................. 8 THE APPELLANT'S GROUNDS OF APPEAL.................................................................... 10 THE COMMISSIONER'S ARGUMENT ON THE APPEAL................................................ 11 CONCLUSIONS ON THE APPEAL..................................................................................... 11 As to the facts.......................................................................................................................... 11 As to the legal questions........................................................................................................... 17 ORDERS PROPOSED........................................................................................................... 29 IN THE FEDERAL COURT OF AUSTRALIA ) ) VG 619 of 1996 VICTORIA DISTRICT REGISTRY ) VG 620 of 1996 ) VG 621 of 1996 GENERAL DIVISION ) ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: HENRY FRANCIS HOWDEN SELLECK Appellant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: BLACK CJ, LOCKHART and BEAUMONT JJ. PLACE: MELBOURNE DATED: 20 AUGUST 1997 REASONS FOR JUDGMENT BEAUMONT J. INTRODUCTION In his assessments of the appellant's income in the years ended 30 June 1985, 1986 and 1987, the Commissioner included amounts which represented the appellant's share in the benefit to the firm of Arthur Robinson & Hedderwicks ("AR&H"), solicitors, of which he was a member, arising from the payment in 1985 and 1986 of the sums of $1,000,000 and $66,000 respectively by the firm's landlord, the Australian Mutual Provident Society Limited ("AMP"), as a contribution to the cost of fitting out the leased premises. The appellant objected to the inclusion of these amounts in his assessable income. The Commissioner decided to disallow the objection. The appellant appealed to this Court against the Commissioner's decision. The sole issue tendered for determination by the Court was whether the amount of $1,066,000 formed part of the assessable income of the AR&H partnership. A Judge of the Court held that the amount was received by AR&H as income. Accordingly, his Honour ordered that the appeals be dismissed (see 96 ATC 4,903). These are appeals from those orders. In order to understand the questions that arose at the trial and now arise in the appeals, it will be necessary first to describe the case sought to be made by the appellant at the trial. As will be seen, the background facts were complex. THE APPELLANT'S CASE AT FIRST INSTANCE The appellant's evidence, which was not seriously challenged in any material respect, was summarised in his Statement of Facts, Issues and Contentions as follows: The background facts alleged by the appellant · AR&H was formed on 30 July 1984 by the merger of the law firms Arthur Robinson & Co ("AR&Co") and Hedderwicks Fookes & Alston ("HF&A"). · AMP made the following payments to AR&H: Amount Date upon which payment received by AR&H $75,000 28 March 1985 $200,000 26 April 1985 $300,000 31 May 1985 $350,000 4 July 1985 $75,000 7 August 1985 $19,000 9 May 1986 $47,000 29 December 1986 · The payments received by AR&H in 1985 were made by AMP pursuant to an agreement made in 1984 and 1985 (the "First Agreement"), which was partly in writing, partly oral and partly implied. · The terms of the First Agreement were as follows: AR&H would take a lease of premises on levels 19 to 23 in the AMP Tower ("the Tower"); AMP would procure, at its own cost, some refurbishment of those premises and common areas within the Tower; AR&H would procure the fitting out of the space to be let on levels 19 to 23 in the Tower; AMP would pay AR&H $1 million as a contribution towards the costs of AR&H fitting out those premises ("the First Contribution"); the First Contribution would be paid by instalments calculated by reference to AR&H's expected progress payment schedule for the fitting out of levels 19 to 23 in the Tower; AR&H would provide AMP with details of the application of the First Contribution payments towards the fit-out costs after AR&H's receipt of those payments; and AR&H's obligation to pay rental (and other outgoings) under the lease was not to commence until a reasonable period had elapsed within which AR&H could fit-out the premises. · The payments received by AR&H in 1986 were made by AMP pursuant to an agreement made in 1985 ("the Second Agreement"), which was partly in writing, party oral and partly implied. · The terms of the Second Agreement were as follows: AR&H would take a lease of premises on levels 18 and 24 in the Tower; AMP would procure, at its own cost, the refurbishment of a fire stair linking levels 18 and 24 of the Tower with levels 19 and 23; AR&H would procure the fitting out of the space to be let on levels 18 and 24; AMP would pay AR&H $66,000 as a contribution towards the costs of AR&H fitting out of those premises ("the Second Contribution"); and the Second Contribution would be paid by instalments calculated by reference to AR&H's expected progress payment schedule for the fit-out of levels 18 and 24. · By way of background, AR&Co, which was originally formed in 1914, initially occupied premises at Collins House, 360 Collins Street, Melbourne. In 1925, AR&Co moved to Collins Gate, an adjunct of Collins House. In 1936, AR&Co moved back to Collins House. In June 1965, AR&Co moved to premises in the National Mutual Centre, 447 Collins Street. In 1980, AR&Co completed a substantial refurbishment of its premises in the National Mutual Centre with a view to AR&Co remaining in those premises until at least the end of the century. The initial term of AR&Co's lease of premises at the National Mutual Centre was to have expired in 1990. However, AR&Co had options to renew the lease for a term which would not expire until 2000. AR&Co also held options to take a lease of two further contiguous floors up to the year 2000, subject to National Mutual Life Assurance ("NMLA") not requiring the space for its own occupation. AR&Co remained at the National Mutual Centre until its merger with HF&A. · HF&A, which was originally formed in the 1880s, occupied premises at the corner of William and Little Collins Streets, Melbourne from 1907. In 1970 HF&A moved to the St James Building, 121 William Street, where the firm remained until its merger with AR&Co. · In 1983, earlier merger discussions between the firms were reactivated. The idea of merging AR&Co and HF&A was considered attractive (in principle) by the respective partners for the following reasons: (i) The merger would produce a new firm on an entirely different scale from either of the two merged firms; the new firm was expected to be one of the largest firms of solicitors in Melbourne; it was expected to be able, by its size, to market its services to businesses Australia-wide in competition with all of its present and prospective competitors, and to forge alliances with major interstate firms; and it was expected to be equipped to offer to business (clients) a wide range of services by reason of the complementary strengths brought to the merged firm by the two old firms; (ii) commercial transactions were increasingly becoming bigger and more complex, often requiring the input of several lawyers over a long period of time; and a larger firm would have the flexibility to put a team together at short notice to work on a substantial project; (iii) a larger firm would assist in the further development of specialist skills; and (iv) each firm held the other in high regard, and it was felt that good inter-partner relationships could be maintained in the merged firm. · It was then contemplated that it would be a condition of the merger that the merged firm would: (a) adopt a partnership structure similar to that of AR&Co; and (b) be accommodated entirely on consecutive floors of one building, although AR&Co had accepted that it may not be possible to obtain sufficient space for the merged firm in the National Mutual Centre. · In late 1983 and early 1984, detailed negotiations took place between representatives of AR&Co and HF&A. On 18 April 1984 the two firms entered into an Agreement entitled "Memorandum of Understanding" which provided that the merger be effected on 1 August 1984 and that the name of the new firm was to be "Arthur Robinson & Hedderwicks". · In the months leading up to the execution of the Memorandum of Understanding, AR&Co had been unable to obtain a final commitment from NMLA, despite repeated attempts, that sufficient space would be available in the National Mutual Centre for the merged firm. When it became apparent that the merged firm may not be offered sufficient space in the National Mutual Centre and that the St James Building would not be suitable, AR&Co and HF&A formed a joint "occupancy committee" in or about May 1984 to: (a) recommend how the existing office space leased by the respective firms could best be used until the merged firm could be located in single premises; and (b) investigate what suitable office space would be available, which could accommodate the entire merged firm, in the event that sufficient space could not be secured in the National Mutual Centre. · By the time of the merger on 30 July 1984, it was doubtful whether space could be obtained for the whole of the merged firm in the National Mutual Centre. The St James Building was not considered suitable accommodation by AR&Co because of the particular attributes of the building (floor plan size and configuration, outlook, light, etc.). Alternative accommodation opportunities were therefore investigated. AR&Co and HF&A regarded it as absolutely fundamental that the whole of the merged firm be accommodated in the one premises in the shortest possible time. It was agreed that until common accommodation could be found, half of the AR&Co partners and staff would move to the premises occupied by HF&A in the St James building, and half of the HF&A partners and staff would move to the National Mutual Centre. This distribution of partners and staff of the merged firm amongst the two premises was put into effect on 30 July 1984. · On 21 August 1984, NMLA informed AR&H that NMLA was not in a position to give the commitment which AR&H had sought for further space at the National Mutual Centre. Therefore, AR&H believed that it was left with no alternative but to investigate what suitable further accommodation would be available to it. · The investigations of the joint occupancy committee revealed that the Tower and the Rialto, 525 Collins Street ("the Rialto") were the only two high quality premises within reasonable distance of the courts and barristers' chambers and with sufficient space for the merged firm. · The decision to move premises was not prompted by any contribution to fit-out being offered by potential landlords. Having made the decision to shift premises to accommodate the merged firm, AR&H was not influenced in its choice of the Tower by AMP's agreement to contribute to fit-out costs. AR&H had been approached in about July 1984 by the developers of premises at 575 Bourke Street offering space for AR&H with a $1.5 million rent free/fit-out assistance package. · The Tower was chosen by AR&H ahead of the Rialto for the following reasons: (a) there was certainty of availability at an early date; (b) the Rialto was still being built and there was serious concern that delay in completion would defer the time in which the newly merged firm could be located in single premises; (c) options to obtain space for expansion were more easily obtained; (d) the rental was slightly lower; (e) the Tower was owner-occupied and had been well maintained for many years; and (f) AMP was also the landlord of HF&A's space at the St James Building and accordingly, there were no financial complications in vacating those premises. · AR&H made a decision to move to the Tower on 26 September 1984. AR&H formally accepted AMP's offer to lease the Tower by letter dated 8 October 1984. AR&H moved to the Tower on 1 August 1985, occupying levels 19 to 23 inclusive. · Under its lease with AMP, AR&H was granted options over space on levels 18 and 24. In or about March 1985, AR&H exercised its options, agreeing to commence tenanting level 24 from about 1 August 1985 and level 18 from 1 January 1987. · Pursuant to the Second Agreement, AMP agreed to contribute to AR&H's costs of fitting out levels 18 and 24 on the same proportional basis as the contributions for the fitting out of levels 19 to 23 inclusive. · The decision of AR&H to exercise its options to take further space in the Tower on levels 18 and 24 was not influenced by AMP's willingness to contribute $66,000 to the fitting out costs. AR&H was already committed to levels 19 to 23 and required the additional space on contiguous floors as a result of the continuing expansion of the firm. · In March 1985, AR&H made an assessment as to when progress payments would need to be made in relation to the fitting out of the premises to be occupied on levels 19 to 23. In accordance with that assessment and the terms of the First Agreement, AR&H requested AMP by letter dated 15 March 1985, to pay the First Contribution by instalments as follows: Amount Date $75,000 31 March 1985 $20,000 30 April 1985 $300,000 31 May 1985 $350,000 30 June 1985 $75,000 31 July 1985 $820,000 · The total cost of the fit-out of levels 19 to 23 was $2,257,559, made up as follows: Walls, partitioning and all other fixed or semi-fixed items $1,272,405 Chattels (including furniture and curtains) $775,154 Fees (including design, installation, electrical mechanical and plumbing) $210,000 $2,257,559 · As has been noted, the First Contribution payments were received by AR&H on 28 March, 26 April, 31 May, 4 July and 7 August 1985 respectively, in the amounts set out in its letter dated 15 March 1985. · In March 1986, AR&H made an assessment as to when progress payments would need to be made in relation to the fitting out of the premises to be occupied on levels 18 and 24. In accordance with that assessment and the terms of the Second Agreement, AR&H requested AMP by letter dated 28 April 1986, and orally in about December 1986, to pay the Second Contribution by instalments of $19,000 and $47,000. · The total cost of the fit-out of levels 18 and 24 was approximately $205,000 made up approximately as follows:- Walls, partitioning and all other fixed or semi-fixed items $115,000 Chattels (including furniture and curtains) $80,000 Fees (including design, installation, electrical mechanical and plumbing) $10,000 $205,000 · The Second Contribution payments were received by AR&H on 9 May and 29 December 1986 respectively, in the amounts specified in AR&H's letter to AMP dated 28 April 1986 and the conversation in about December 1986. · On receipt, each of the First Contribution and Second Contribution payments was banked by AR&H into its general operating account. · Invoices received by AR&H in relation to the fit-out of the premises to be occupied by AR&H at the Tower were paid by AR&H from AR&H's general account as and when the invoices became due and payable, regardless of whether or not sufficient funds had been received from AMP by way of First Contribution or Second Contribution payments. The amounts paid by AR&H in relation to the fit-out were drawn from the normal working capital of the firm (held in the firm's general account) which, during the period of payments for the fit-out, included (from time to time) the amounts received from AMP. · On 20 December 1985, AR&H entered into an Agreement with Westpac Banking Corporation ("Westpac") whereby Westpac purchased from AR&H the demountable partitioning and built-in joinery acquired by AR&H as part of the fit-out of its premises on levels 19 to 23, and then leased those assets back to AR&H. This was designed to achieve an orderly allocation of the expense of the fit-out over the reasonable (useful) life of the assets acquired. As the AR&H partners' share of profit entitlements change over the years (given AR&H's partnership structure), it was AR&H's policy at the time to try to apportion the expenses and cash flow evenly over the reasonable (useful) life of the assets acquired in the fit-out. Furthermore, the leasing transaction with Westpac was considered in the context of the overall financing requirements of AR&H, including overdraft accommodation, equipment leasing and otherwise. · There was no direct payment to the partners of AR&H of the amounts received from AMP at the time the payments were received. · In accounting for the payments received from AMP, it was assumed by AR&H that the payments from AMP were of a capital nature and accordingly, they were credited to a capital suspense account of the partnership, known as the AMP Suspense Account, with the intention that the credit would be appropriated to each of the then partners by equal instalments over the ten year period of the lease of the premises at the Tower, subject to the following qualifications: (a) the partners of AR&H agreed that there would be a separate income adjustment to make allowance for those partners who did not hold a full complement of units in the partnership at the time of the receipt of the capital sums from AMP and for those partners who were to be appointed in the future; (b) the partners further agreed to allocate fully to the partners of AR&H at the time, the balance of monies then held in the AMP Suspense Account and the further monies to be received from AMP; and (c) the partners at the time next agreed to forego amounts of income in future so that new partners of AR&H would receive a higher amount of income to compensate for their not receiving the benefit of the capital receipt from AMP, which was to have been spread over the term of the lease of the premises of the Tower. · The appellant's account in the books of the AR&H partnership was credited with capital receipts of $21,362 as at 30 June 1985, $15,492 as at 30 June 1986 and $1,701 as at 30 June 1987. The appellant's contentions at the trial on the questions of law It was then contended by the appellant in his Statement that the payments made by AMP were not received by AR&H as part of that firm's assessable income for the following reasons: (i) The move by AR&H to the Tower arose from the necessity for premises sufficiently ample to accommodate the new firm which had been established on the merger of AR&Co and HF&A, each of which was then a large and long established firm of solicitors. That merger was a major restructuring, creating a new firm at that time which needed new premises. The move to the Tower was, accordingly, entirely different from the ordinary relocation of a business working from leased premises on the expiry of the term of one of its regular leases. Neither AR&Co nor HF&A would have moved in 1985 had it not been for the merger. The move to the Tower was not accomplished by AR&H in the course of any business activity of the firm, but as one of the initial steps in setting up its new business. (ii) The move by AR&H to the Tower was not made in order to obtain any part of AMP's contribution to AR&H's fit-out costs or, to any extent, for the purpose of obtaining a commercial profit by way of that contribution. The arrangements between AMP and AR&H should not be characterised as a profit-making scheme. The appellant then contended that, as the payments from AMP to AR&H could not be characterised as assessable income in the hands of AR&H, the sums of $21,362, $15,492 and $1,701 distributed by AR&H to the appellant could not themselves be characterised as the appellant's assessable income. THE COMMISSIONER'S CASE AT THE TRIAL According to his Statement of Facts, Issues and Contentions, it was the Commissioner's case that the "lease incentive" payments were income according to ordinary concepts and assessable under s.25(1); and the payments arose from a business operation or commercial transaction entered into in the ordinary course of the carrying on of the partnership business and with a profit element in mind. Thus, the Commissioner said, the payments were income according to ordinary concepts. THE DECISION AT FIRST INSTANCE The learned primary Judge accepted (at 4,905) that the merger of the two firms was "considered attractive by all involved" for a number of reasons, including those mentioned in the appellant's Statement of Facts, Issues and Contentions. His Honour said (at 4,907): "AR&H made a deliberate decision 'around August [1984]', ie, before the agreement with AMP was entered into, to choose the cash lump sum payment rather than the extended rent-free period, the two options offered by the AMP. Robinson, as managing partner, played a central role in this decision, for which he gave a number of reasons, including: (a) The cost of the fit out was estimated at approximately $2.5M and there was concern about indebtedness if the firm had to borrow that whole amount. Robinson spoke of both component firms being traditionally very 'conservative', in respect of their financial arrangements, hence the attraction of a $1M contribution, which would reduce the borrowings required to fund the fit out. (b) A rent-free period would benefit only those who were partners in the year of the rent holiday and would have to be paid for by the future partners as the years unfolded, whereas all who were partners during the term of the lease would benefit from a $1M cash contribution expended on fit out. These are valid reasons for the election to take the lump sum contribution. Although he did not mention it in his evidence, there was another consideration that I think also caused Robinson to favour the cash contribution: he told Gill [AR&H's general manager], prior to finalisation of the agreement with AMP, that he had decided the firm should take the cash contribution rather than the rent holiday and it was in that context that he mentioned to Gill his view that the lump sum payment would be a tax-free capital receipt in the hands of the partners. Donaldson, a member of the Occupancy Committee, said that he understood at the time that that would be the position. I think that, by that early stage, AR&H saw the AMP offer of a cash contribution to fit out as giving it the opportunity to make a substantial cash distribution to the partners, a course that was especially attractive to it because it then believed such a cash distribution would be tax-free." (Emphasis added). His Honour went on to say (at 4,909-10): "In December 1985, a few months after the fit out was complete and AR&H had moved into the AMP Tower, AR&H entered into a contractual arrangement with Westpac under which it sold the fit out to the bank and then leased it back from the bank, effectively receiving, in the form of the sale proceeds, $1.5M in cash. The firm was able, by this means, to ensure that it was in a position to distribute to the partners an amount equal to the whole of the $1,066,000 it received from AMP, as well as having the benefit of tax deductions in respect of the fit out costs that were probably additional to the deductions which it would have had if it had not entered into this sale and finance lease. I accept that the decision to move premises was not prompted by a desire by the partners to obtain a cash payment from the landlord: the decision to move necessarily followed from the decision to merge. But the partners were not indifferent to the opportunity, presented by the need to move, to obtain a contribution from the landlord. Incentives having been offered to move to 575 Bourke Street ($1.5M), to the Rialto ($1M) and to the AMP Tower (initially $0.5M), the need to move presented the firm with this opportunity and it set about maximising the amount of the incentive it could extract from the landlord of the AMP Tower, its preferred premises. The negotiating strategy the firm followed to persuade the AMP to increase its incentive offer from $500,000 to $750,000 and then to $1M and then to make that contribution in the form of a cash payment to the firm and then to agree to the firm, rather than AMP, having title to the property bought with those moneys confirms that the firm saw the necessity to move as also presenting an opportunity to obtain a cash payment from the landlord that would generate assets over which it would have control, an opportunity it took advantage of to the maximum extent it could. I infer that, at the time AR&H entered into its agreement with AMP in September 1984, it intended, by an arrangement of the kind it ultimately entered into with Westpac, to be able to distribute, by what it believed to be tax-free capital payments, an amount equal to the whole of the fit out contribution to be received from AMP." His Honour then analysed the relevant authorities, specifically Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199 and G P International Pipecoaters Pty Limited v Commissioner of Taxation (1990) 170 CLR 124, and, in this Court, Commissioner of Taxation v Cooling (1990) 22 FCR 42 and Rotherwood Pty Limited v Commissioner of Taxation (1996) 64 FCR 313. (I will refer to these authorities and his Honour's analysis of them below, when expressing my own conclusions). His Honour (at 4,914) was of the opinion that, in order to determine the character of the $1M receipt for taxation purposes, regard must be had to these facts and circumstances: · It was received as part of the consideration to the merged firm in return for its agreement to take the lease. · The firm was obliged under that contractual agreement to expend the $1M on acquisition by the firm of the fit-out, a capital asset. · One of the firm's purposes in entering into the contract was to utilise the $1M receipt to enable it to make cash distributions of equal amount to the partners. · The firm ensured that the contract was structured so as to enable it to meet that particular purpose by ensuring that the firm had title to the fit-out. · The firm promptly set about implementing this purpose by opening discussions with Westpac soon after entry into the contract, which discussions produced the funds used to make the cash distributions to the partners, even though the firm could not use the $1M itself for that particular purpose. · The receipt was a gain to the firm because, but for that receipt, the firm would have had to find the means to pay the entire cost of the fit-out from its own resources, including its capacity to borrow, and also because it provided the firm with the means to enable the cash distributions to be made to the partners, which the firm would not otherwise have made. His Honour then expressed his conclusion as follows (at 4,914): "This evidence shows that the contribution payments, in the hands of AR&H, were not merely moneys demanded, received and used to acquire a capital asset for the firm. They were, in addition, always intended by AR&H to be the means of enabling a cash distribution to be made to the partners. And the firm promptly carried that purpose into effect. In my opinion, this shows that the $1M contribution paid by AMP to the firm was income in the hands of the firm because it was a gain generated from a commercial, as opposed to a private, recreational, charitable or other non-business transaction entered into by the firm for a number of purposes, one not insignificant one being to make that gain from the $1M received in that transaction." THE APPELLANT'S GROUNDS OF APPEAL In contending, in his notice of appeal, that the Court should have held that the receipt was on capital account, the appellant submits that his Honour erred in making the findings - (i) that there was "a substantial cash distribution" to the partners; (ii) that one of AR&H 's purposes in entering into the lease contract with AMP was to utilise the $1 million receipt to enable it to make cash distributions of equal amount to the partners; (iii) that AR&H ensured that the lease contract was structured to enable it to use the $1 million receipt to make cash distributions of equal amounts to the partners by ensuring that AR&H had title to the fit-out; (iv) that AR&H promptly set about implementing this purpose of making a cash distribution to the partners by opening discussions with Westpac soon after entry into the contract, which discussions produced the funds used to make the cash distributions to the partners, even though AR&H could not have used the $1 million itself for that particular purpose; (v) that AR&H entered into the sale and lease-back arrangements with Westpac to obtain funds which would enable it to make a distribution to the partners of an amount equal to the whole of the $1,066,000 it received from AMP; (vi) that the receipt was a gain to AR&H because it provided AR&H with the means to enable the cash distributions to be made to the partners, which the firm would not otherwise have made; (vii) that receipt of the $1,066,000 was a gain generated from a transaction entered into by AR&H for a number of purposes, one not insignificant one being to make that gain; (viii) that the evidence showed that the contribution payments, in the hands of AR&H, were not merely moneys demanded, received and used to acquire a capital asset for the firm, but that they were, in addition, always intended by AR&H to be the means of enabling a cash distribution to be made to the partners; and (ix) that the firm promptly carried that purpose into effect. The appellant contends that these findings were unsupported by the evidence, that his Honour should have found, as a fact, that no cash distribution was made to the appellant or any of the partners of AR&H; and that no part of the amount of $1,066,000 was received by AR&H for this purpose. The appellant also challenges his Honour's conclusions, first, that an extraordinary transaction, i.e. one not occurring in the ordinary course of the taxpayer's business, will be capable of generating a gain that is assessable income, if the taxpayer entered into the transaction with a number of purposes, one of which (though not a dominant purpose, but a "not insignificant" purpose) was to make the gain, and if the transaction was a business transaction, in contrast to a private, recreational, charitable or other non-business activity; and secondly, that any such principle could relevantly be extracted from Myer, G P Pipecoaters, Cooling or Rotherwood, or could be applied in the present circumstances. THE COMMISSIONER'S ARGUMENT ON THE APPEAL The Commissioner now contends that the primary Judge was right to hold that the incentive payment was assessable income in the hands of AR&H. The Commissioner says that this conclusion was compelled by the decisions in Cooling and Rotherwood; and that the fact the incentive payment was intended to be, and was, applied by AR&H to the purchase of "fit-out", in no way detracts from the conclusion that the receipt was in the nature of income. CONCLUSIONS ON THE APPEAL As to the facts The appellant's main argument is that his Honour was not justified in reaching the conclusion that, inferentially, one of the firm's purposes in entering into the AMP arrangement was to utilise the receipt of the $1M so as to enable it to make cash distributions of equal amounts to the partners. In my opinion, there is substantial force in the argument. It is, and was, common ground that the payment of $1,066,000 from AMP was made on condition that it be used by the firm, and was so used, to pay for part of the fit-out of the Tower premises which the firm had agreed to lease. His Honour accepted that "neither the applicant nor any of the other partners of AR&H shared directly in any of the moneys received from AMP" (at 4,909). The total cost of the fit-out was about $2.5M. His Honour said (at 4,909): "prior to entry into the agreement with AMP, one element of which involved the payment of $1M, the firm formed the intention of utilising that payment to enable it to make a substantial cash distribution to the partners. A reason why it could not distribute the AMP moneys directly to the partners was AMP's insistence that those moneys be expended on payment of the fit out costs incurred by the firm. But the firm was able to carry its intention into effect indirectly." The "indirect" means which his Honour had in mind was the sale and lease-back of the fit-out to Westpac by which means the firm raised $1.5M (but not $2.5M). His Honour said (at 4,909): "In December 1985, a few months after the fit out was complete and AR&H had moved into the AMP Tower, AR&H entered into a contractual arrangement with Westpac under which it sold the fit out to the bank and then leased it back from the bank, effectively receiving, in the form of the sale proceeds, $1.5M in cash. The firm was able, by this means, to ensure that it was in a position to distribute to the partners an amount equal to the whole of the $1,066,000 it received from AMP, as well as having the benefit of tax deductions in respect of the fit out costs that were probably additional to the deductions which it would have had if it had not entered into this sale and finance lease." I agree with the appellant's submission that this finding formed the basis of his Honour's identification of the relevant scheme, the profit and the means by which the partners were to "capture" the benefit of the alleged profit. The learned Judge identified the purpose of the scheme by a process of inference, saying (at 4,910): "I infer that, at the time AR&H entered into its agreement with AMP in September 1984, it intended, by an arrangement of the kind it ultimately entered into with Westpac, to be able to distribute, by what it believed to be tax-free capital payments, an amount equal to the whole of the fit-out contribution received from AMP." (Emphasis added). His Honour went on to say (at 4,910): "While the lump sum contribution was not the only and not even the most important factor leading to AR&H's acceptance of the AMP Tower proposal and while the $1M contribution did not influence the final choice of AMP over the Rialto, I consider that one of the firm's purposes in negotiating the final form that its agreement with AMP took and one of its purposes in entering into that agreement was to take advantage of the offer of the cash contribution by AMP to enable the firm to distribute to the partners by one means or another an amount equalling that cash contribution." (Emphasis added). I also accept the appellant's submission that there can be no doubt that his Honour thought that there had been, and was intended to have been, a cash distribution to the partners of an amount equivalent to the AMP payment out of the proceeds of the sale of the fit-out to Westpac. The primary Judge said (at 4,907): "I think that, by that early stage [i.e. around August 1984 at which stage the AMP offer was to contribute $500,000 only] AR&H saw the AMP offer of a cash contribution to fit out as giving it the opportunity to make a substantial cash distribution to the partners, a course that was especially attractive to it because it then believed such a cash distribution would be tax-free." (Emphasis added). But the partners did not receive payment out of the proceeds of the sale and lease-back, nor was it ever intended that they receive any such payment. The total fit-out in fact cost about $2.5M which, as his Honour found (at 4,909) was paid for by the AMP contribution of $1,066,000 and the temporary overdraft from Westpac for the balance. The "proceeds" of the sale and lease-back were used, and were always intended to be used, to discharge the temporary overdraft. The partners individually did not see any part of this $1.5M; it simply went to convert the temporary overdraft into obligations under the lease. The unchallenged evidence is that the proposal to finance part of the fit-out through Westpac was contemplated by the firm in December 1984; that the fit-out cost was originally estimated at $2M, but that this estimate increased progressively to about $2.5M (with additional costs and additional floors); and that Westpac confirmed the availability of a temporary overdraft of $1.9M to reduce to $400,000 (the original amount) upon taking up the lease contract by letter dated 21 May 1985. The temporary overdraft and offer of the lease facility was accepted by AR&H by letter dated 24 May 1985. The fit-out was thus financed by AMP contributing $1M and by Westpac "contributing" $1.5M, Westpac's finance being initially provided by way of temporary overdraft and then, later, by sale and lease back. It was never suggested by the Commissioner that the proceeds of the sale of the fit-out to Westpac were used other than as intended, that is, to reduce the temporary overdraft. The firm did not raise more than was needed to discharge the temporary overdraft, by the sale and lease-back. Presumably, had it wished to distribute cash to the partners, it would have sold the whole of the fit-out for its cost of $2.5M. But, in fact, the "sale and lease-back" was effected by two transactions: $1,361,101.82 was received on 30 December 1985, and $193,262 was received on 2 June 1987. It is also clear from the unchallenged evidence that AR&H was a new firm created by the merger of two well-established firms; that the new firm needed to be accommodated in the one set of premises; that the overwhelming preference was that the new firm take up space in the National Mutual Centre, additional to that already occupied by AR&Co. there; that AR&Co. had recently completed a substantial refurbishment of its premises on the 9th and 10th floors of the National Mutual Centre; that the need to find entirely new premises came about solely because of the creation of the new firm and the inability of the merged firm to achieve its preference of being accommodated in the National Mutual Centre; and that the decision itself to move and seek new premises was not motivated by any contribution on offer by AMP or in the market place generally. On behalf of the Commissioner, it is submitted that his Honour's critical finding, that one of the firm's purposes in entering into the contract was to utilise the $1M receipt to enable it to make cash distributions of equal amount to the partners, was open on the evidence. Particular reliance is placed upon the following evidence given by Mr Gill in cross-examination: "Q. Such [a] choice [that is, between a lump sum payment or a rent-free period] as you perceived it, did have some ramifications, did it not? A. Yes. Q. As you understood it, or perceived it, the lump sum payment would be treated as a capital receipt? A. Yes. Q. And thus would be tax free in the hands of a partnership? A. That is the case. Q. That is what you believed to be the case, is it not? A. I believe so, yes. Q. Whereas, if an extended rent free period were taken, there would be no tax-free receipt, would there in the hands of the partners? A. Tax free receipt? No. Q. Did you give any advice to the partners about the sale and lease-back of the assets which formed part of the fit-out of floors 18 to 24 of AMP Tower? A. Yes. Q. Did you recommend to make a recommendation to any of them that the sale and lease-back would be an appropriate method of financing the acquisition of those assets? A. Yes. Q. In forming the view that it would be an appropriate method of financing the acquisition, did you take into account the tax deductibility of the rentals payable under the lease? A. Yes. Q. So that by taking the lump sum from AMP and selling and leasing back the assets which formed part of the fit-out, was it your hope that there would be a tax free payment in the hands of the partners and a deductible outgoing for the cost to the firm? A. I assumed that that would be the case. Q. But, of course if the lump sum payment had not been taken, and there [had] just been the extended rent-free period, there would have been no lump sum receipt and no tax deductible outgoings to the cost of the acquisition, would there? A. No. Q. And, you never discussed those considerations with any of the partners? A. Not that I recall. Q. Well, why was that? A. The deductibility of the rental seemed clear cut and did not warrant discussion. Q. Yes? A. And this was a capital contribution towards the cost of the fit-out which meant that the funding requirements were less. Q. It would be pretty important for the partners to know, would it not, whether or not a receipt was going to be taxable in their hands? A. It would be. Q. So you would want to let them know your view as to whether or not it was taxable, surely? A. I was not expert in the area, so I was unable to provide that view. Q. Well, was expert advice taken? A. The advice was from Michael Robinson. Q. Was he an expert in taxation matters? A. He may have sought other advice. Q. Did he? A. I don't know. I am not aware of his having done so. Q. You seem to be pretty clearly of the view at the time at least, that this lump sum payment would be tax-free in the hands of the partners. Is that fair to say? A. Yes. Q. And what was it that formed that certain view in your mind? A. Discussions with Michael Robinson. Q. So he expressed to you, did he, a clear view that the receipt would be tax free in the hands of the partners? A. That was the conclusion I drew, yes. Q. Well did he express that view to you, or what? A. I am not sure if he expressed it in that way. Q. He left you in no doubt by what he said that he believed that the lump sum payment would be tax free in the hands of the partners? A. That is correct. Q. Tell me, did he do that when he was telling you that he had made a decision in favour of the lump sum as opposed to the extended rent free period? A. I'm not sure, it may have been later. Q. It would seem to be logical that he would start at pretty much the same time as he was explaining his choice to you; would it not? A. It may, but I don't recall him having done so. Q. It is a matter of commonsense; it stands to reason does it not, that in deciding between these two things one would take into account the tax ramifications? A. Yes, it would." But this evidence goes only to the belief that tax ramifications would be taken into account. It is not evidence of the purpose found by his Honour. That this is so may be illustrated by the way the cross-examination of Mr Gill proceeded as follows: "Q. Now, when this lump sum payment was first received by the various instalments which were used to pay it to you, well, it was proposed, was it not that it be distributed to all partners over a period of years? A. Cash distribution, no. Q. Income or profits share entitlement? A. No. Q. Was there not some crediting of the amount to each of the partners, the members of the firm? A. There was an adjustment to income entitlements. Q. Increasing by the amount of, payment from AMP, now the income entitlements of the partners? A. That's correct. Q. So that whether it was done directly or indirectly the amount of the lump sum from AMP was split up and credited to each of the partners in the form of additional partnership income? A. No. Q. How did it work? A. The amount received was used to fund the fit-out cost to the extent of that amount and there was an adjustment between partners which was not a cash distribution at that time it was over subsequent periods. Q. Well, tell us about the adjustment between partners; how was that done? A. The adjustment between partners was done in such a way as to allocate the total amount received to fund the fit-out over the period of the lease, taking into account the fact that it was not taxable, or we assumed it wasn't taxable and that incomes were adjusted in that way. Q. So that for each of the years of the proposed lease each of the partners received as a credit towards their income from the partnership an additional amount representing a share of the lump sum payment made by AMP? A. In effect, yes. Q. Now, originally that was credited to them in an amount which assumed that it was received tax free, am I correct? A. That's correct. Q. Subsequently there was a change in that plan, was not there? A. A change in the plan, no. I don't understand the question. Q. Right. Was it not the position that subsequently the whole of the amount received was distributed amongst the members who were members of the firm at the time of receipt? A. There was a capital account established which showed the allocation of that amount." On behalf of the Commissioner it is also submitted that the evidence of Mr Gill quoted supports his Honour's finding that the receipt was a "gain" to the firm because, but for that receipt, the firm would have had to find the means to pay the entire cost of the fit-out out of its own resources, including its capacity to borrow, and also because it provided the firm with the means to enable the cash distributions to be made to the partners, which the firm would not otherwise have made. Again, I cannot accept the submission. This evidence goes to the different question of the belief of the members of AR&H that the amounts allocated would be tax-free. Then the Commissioner says that there was evidence to support the conclusion that the $1,066,000 receipt was a "gain generated from a commercial... transaction entered by the firm for a number of purposes, one not insignificant one being to make that gain...". In this connection, the Commissioner relies, in particular, upon the progress of the negotiations between the firm and AMP as a result of which AMP increased its lump sum payment from $500,000 to $1M. This increase in amount was, without question, of sufficient size to be significant, and was so acknowledged by the appellant's witnesses (see e.g. the cross-examination of Mr Robinson). But whether the AMP contribution was to be $500,000, or $1M, did not alter the firm's purposes: unless AMP agreed to contribute more to the fit-out cost (i.e. $2.5M), there could be no surplus available for distribution to the partners. It follows from the foregoing, in my view, that the learned primary Judge was not, with all respect, justified in drawing the inference that one of the firm's purposes in making its arrangement with the AMP was to utilise the receipt of the $1M so as (indirectly) to enable the firm to make cash distributions of equal amounts to the partners. As to the legal questions As has been noted, the Commissioner submits that, given the facts found, or inferred, at first instance, his Honour's conclusion was "compelled" by the authorities, in particular in the reasoning in Cooling and in Rotherwood, to which reference will be made below. Since I cannot agree with the critical inference drawn by his Honour, the Commissioner's submission does not, strictly speaking, arise in the form in which it is made. However, the general position may be considered. In Cooling, a payment by way of inducement to partners of a legal firm to rent new premises was held by the Full Federal Court to be assessable income of the partners. Reliance was placed by the Full Court upon the decision of the High Court in Lister Blackstone Pty Ltd v Commissioner of Taxation (1974) 134 CLR 457. Hill J. said (at 56): "For the [taxpayer] 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... 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." But, in my opinion, Lister Blackstone is distinguishable for present purposes. It was concerned with the relocation of stock in trade, a feature which is not present here. There, a taxpayer, who carried on business as a distributor of imported agricultural equipment, incurred expenditure in moving its stock and plant. Gibbs J. said (at 459): "The advantage sought by the expenditure incurred in moving the stock to the new business at Revesby was to have the stock conveniently available, so that the business operations of the taxpayer could be carried on in a normal way and without interruption. This was an advantage which enured to the taxpayer in the continuous process of carrying on its business by using the stock for the purpose of making profits, but it was not an advantage of a lasting character because the stock was turned over in the ordinary course of the business and the advantage of moving that particular stock to Revesby lasted only as long as the stock remained unused. The manner in which the advantage was to be enjoyed was by having ready access to the stock from time to time in the course of trade - there was recurrent access to the stock so long as it remained in use. Both these matters indicate that the expenditure was of a revenue nature. The third matter - the means adopted to obtain the advantage - provides a rather less definite indication one way or the other. On the one hand the expenditure was not made periodically, but no doubt was met more or less at the time of the movement of the stock. On the other hand it took the form of the payment of wages to the employees of the taxpayer and the payment of freight, hire and travelling expenses; that is, it was expenditure of a kind that normally, or at least frequently, is of an income character. When all the circumstances of the case are considered it should be concluded that the expenditure was made in the process of operating the business for the purpose of earning profits rather than in establishing or strengthening the structure of the business itself and should properly be referred to revenue account." (Emphasis added). Jacobs J. said (at 462): "The stock must be looked at separately and when that is done, it is apparent that the removal was for the purpose of the more economical utilization and distribution of that stock. A component of cost which would otherwise have arisen from time to time and attached to the stock was in one move or a limited number of moves incurred in respect of the stock. (Emphasis added). The cost of removal of the stock was in no way an expenditure on the structure within which the profits were to be earned. For the reasons stated above the expenditure was necessarily incurred in the money earning process once the business was moved from St. Peters to Revesby. Although in one way it is true that the moving of the stock was part and parcel of a single activity of relocating the business, there is no more reason why costs should not be dissected between capital and revenue outgoings on a relocation of a business than on an initial location of a business." However, no question arises here of the cost of the relocation of the firm's plant and equipment or of the recoupment of that cost. In Cooling, Hill J. then said (at 56): "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?" (Emphasis added). The learned primary Judge in the present matter held that this approach was not available here, and I respectfully agree with him. His Honour said (at 4,912-3): "I do not think that the $1M was received by the firm in, or as an incident to, its ordinary course of business.... The transaction generating that $1M receipt was not, on the evidence, a transaction in the ordinary course of the merged firm's business, but was, in my opinion, one entered into in respect of what I accept was the establishment by a new business of its first base of operations. The merged firm was, I think a new business: it was the merger of two firms with different areas of expertise and practice into a firm offering a service significantly different from that offered by the two component firms. Hedderwicks abandoned its partnership structure to adopt what was for it a new one, that used by Arthur Robinson. I accept the evidence concerning the reasons for the merger, which also show why the new firm can fairly be regarded, as a matter of fact, as a different business entity from the two merging firms. It is true that for 12 months prior to the location of the entire merged firm in the AMP Tower, the firm carried on business as such, albeit from two separate locations. But that was, I think, always recognised by all concerned as an interim measure only, pending selection and acquisition of premises which the merged firm would be able to use as its sole base of operations. Nor am I prepared to find, on the evidence that six years later the merged firm moved to new premises and that it received a cash incentive to make that move, that its move to the AMP Tower in which, for the first time, the firm had a home for its entire establishment, should be inferred to be but the first of a number of recurring activities engaged in, in the course of its ordinary business. Six years, a quite long period, passed between the two moves; I have the bare fact of the second move; there is no evidence of any subsequent move, actual or planned, and there is evidence that each of the two merging firms rarely moved premises. But even if the move to the AMP Tower could be regarded as an activity engaged in in the ordinary course of the merged firm's business, given the limited evidence as to the extent of the practice of landlords offering cash incentives to prospective tenants at relevant times in the Melbourne market, I do not consider that the payment to the firm of the fit out contribution can be regarded as an ordinary incident of the business activity of the merged firm." As I followed the Commissioner's present argument, this finding and conclusion are not now challenged. In my respectful opinion the learned primary Judge correctly stated the position for present purposes. In Cooling, Hill J. went on to say (at 56-7): "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." (Emphasis added). The facts in Myer, concerned with an assignment of a right to interest under a loan agreement, were far removed from the present case. But, whether it be on capital or revenue account, the High Court was addressing the notion of profit when their Honours (Mason ACJ., Wilson, Brennan, Deane and Dawson JJ.) said (at 215-6): "If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business. And, if it appears that there is a specific profit-making scheme, it is pointless to say that it is unusual or extraordinary in the sense discussed. Of course it may be that a transaction is extraordinary, judged by reference to the course of carrying on the profit-making business, in which event the extraordinary character of the transaction may reveal that any gain resulting from it is capital, not income." Yet, in the present case, not only were the circumstances "extraordinary" (i.e. "not in the ordinary course" as the trial Judge said) but, as has been noted, there was no profit: the fit-out cost exceeded the amount of the AMP contribution. In Cooling, Hill J. next said (at 57): "In Moana Sand Pty Ltd v Commissioner of Taxation (Cth) (1988) 88 ATC 4897, the profit made by a taxpayer on the sale of land acquired with the twofold purpose of working and/or selling surplus sand on it and thereafter holding the land until some time in the future when it became appropriate to sell it at a profit, was held to be income in ordinary concepts. This was so despite a finding that the dominant purpose of the company in acquiring the land was not resale of the land at a profit. The Court (Sheppard, Wilcox and Lee JJ) applied Myer's case in so holding. In my view the transaction entered into by the firm was a commercial transaction; it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial 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." (Emphasis added). It should be noted that in Moana, the Full Court said (at 4,902-3): "In F.C. of T. v. The Myer Emporium Ltd. the High Court said that the important proposition to be derived from the Californian Copper and Ducker cases was that a receipt might constitute income if it arose from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction." Again, Moana can be distinguished here. A profit-making purpose at the time of entry into the transaction is absent from the present circumstances. In my opinion, this aspect of the reasoning in Cooling is distinguishable for our purposes. The fact that the AMP transaction was entered into by parties who are engaged in business, commercial or professional activities is equivocal on the question whether the receipt of the incentive payment here was on capital or revenue account. The possibility of the existence of a purpose of obtaining a profit may have been a material consideration in the determination of the present question if such a purpose had existed, but there was no profit or profit-making purpose in this transaction, only a shortfall. In considering this aspect of Cooling in the present case, the primary Judge said (at 4,913) that this "requires identification of the scope of the transaction in which the firm received the $1M and also identification of the firm's purpose or purposes in engaging in that transaction, in order to determine whether the receipt was on income or capital account". His Honour went on to refer to G P Pipecoaters in this connection. But, the facts in G P Pipecoaters were also far removed from the present case. There, it was held by the High Court "applying 'a business conception to the facts' [that the amount received by the taxpayer]... is seen to be a receipt in the ordinary course of carrying on the taxpayer's business..." (at 141). (Emphasis added). That cannot be said here. Yet it was in this context that the present trial Judge went on to say (at 4,913-4): "In determining the true character of a receipt paid under a contract, as was the $1M, it is also well-established that it is necessary to have regard to the whole context in which the contract was made: cf Cooling at ATC 4481; FCR 53. This rule complements what was said in Pipecoaters as the correct approach for determining whether a receipt under a contract is income or capital in the hands of the payee. It was by placing the lease surrender payment received by the trustee in its factual context that the Court in Rotherwood was able to deny it the character of a mere realisation of a capital asset and identify it as a gain on income account: see pp 4213 rhc-4214 rhc. Whether the relevant transaction is defined narrowly, as limited to the contract between the firm and AMP, but evaluated in its factual context, or whether it is defined widely, as including elements of that context, the result here is the same. In order to determine the character, for taxation purposes, of the $1M receipt by the firm, regard must, in my opinion, be had to the following facts and circumstances." His Honour then (at 4,914) referred to the six facts and circumstances described above. In my opinion, the reasoning in G P Pipecoaters is directed to a different question, that is, the scope of the taxpayer's activities, in order to determine whether the fee was received within "the scope of...[the taxpayer's] business..." (at 138). As the High Court there went on to say (at 145): "The establishment costs were not received as the price of a capital asset nor as a payment dissociated from the taxpayer's business; they were received as part of the remuneration earned by the carrying on of its business which consisted in the performance of the contract, that is, in constructing the plant and coating the pipe required. The establishment costs were therefore received as part of the taxpayer's assessable income." (Emphasis added). But it is not, and could not be, suggested here that the incentive payment was received by the firm as remuneration earned in the conduct of its professional practice. Moreover, Rotherwood is also distinguishable from the instant case because there was in that case a profit-making transaction. As Lee J. there said (at 325): "...upon his Honour being satisfied that the surrender of the lease was a profit-making transaction undertaken in the course of its business, a conclusion open on the facts, the question whether the particular transaction was unusual or extraordinary by reference to transactions in which Chancery Services usually engaged became irrelevant. It was sufficient that it was a profit-making transaction undertaken in the course of its business: see Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 215. In any event, as found by his Honour, the whole transaction was a business operation to carry out a profit-making scheme and either under the concepts of income according to ordinary usage or the express provisions of s 25A of the Act the receipt was assessable income in the hands of Chancery Services." Also, the significant fact that the recipient there, Chancery Services, was itself a leasing company has no counterpart here. Reference should next be made to two recent decisions which were decided after this appeal was argued. In Montgomery v Commissioner of Taxation (1997) 97 ATC 4287, a lease incentive payment made to a firm of solicitors moving to new premises was held, following Cooling, to be assessable income. However, in my view, the case is distinguishable on its own facts. Jenkinson J. said (at 4,291): "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." There is no such evidence relied on by the Commissioner here. Moreover, in Montgomery, unlike here, there was no real need for the solicitors to move. As Jenkinson J. said (at 4,297): "Such a [large leading] firm [in the legal practice in Melbourne] 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." There was no such choice in the present case. Thirdly, as Hill J. observed in Lees & Leech Pty Limited v Commissioner of Taxation, 26 May 1997, unreported, (at 26), in Montgomery the taxpayer was, unlike the present case, under no obligation to expend the money at all. Even in that context, Jenkinson J. felt that it was perhaps confusing to speak in terms of "profit-making". His Honour said (at 4,296): "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 [taxpayer] 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 [whether to move to new premises or not] was one occurring in the course of carrying on its business." In the present case, however, not only was there no choice, but there was a commitment to fit out the premises and this was done at a cost in excess of the contribution received. It is not appropriate then, in our case, to speak in terms of either a "profit" or a "gain". In Lees & Leech, the question was whether a payment received by a lessee from a lessor, by way of partial reimbursement for expenditure incurred by the lessee in fitting out the premises, constituted assessable income of the lessee. Hill J. noted (at 17) that under the contract made (the agreement for lease) the lessee was to receive the amount in question "in consideration of covenanting to cause the... works to be erected and in fact so doing"; that the taxpayer "was not in the business of constructing improvements to shop premises"; so that the payment could not be said to be a payment constituting a profit or gain made by the taxpayer in the ordinary course of carrying on its business, even assuming it were correct to say that a profit or gain was in fact made by it. After citing Myer, Hill J. said (at 18) that the question was "whether, in entering into a transaction designed to achieve that which it did achieve, the [taxpayer] had a profit-making purpose from which it received a profit or gain". After discussing whether "non-demountable" items were lessor's or lessee's fixtures, and their value, if any, Hill J. said (at 24-5): "No case to date has raised the issue presently before the Court. In Cooling there was a straight cash incentive. No question arose as to whether there was a gain to the taxpayer, for there was a cash payment. In Selleck v Federal Commissioner of Taxation (1996) 96 ATC 4903, the facts were closer to the present in that the landlord agreed to make the payment to be applied to a particular fit-out which was to remain the property of the tenant. Immediately after the work had been undertaken, however, the tenant sold the items in question and received a payment of $1M being identical to the cash payment made by the lessor. Thus, on any view of the matter, the taxpayer received a profit or gain of $1M. It is not surprising, therefore, that the lessees were held to have derived assessable income in that amount. There is little discussion of the nature of the lessee's gain, although the following comment of Drummond J indicates that the fact that the fixtures were sold was a not irrelevant consideration. His Honour said (at 4914): '...the receipt was a gain to the firm because, but for that receipt, the firm would have had to find the means to pay the entire cost of the fit-out out of its own resources, including its capacity to borrow, and also because it provided the firm with the means to enable the cash distributions to be made to the partners, which the firm would not otherwise have made.' The reference to 'cash distributions' is a reference to the distributions that were made out of the cash proceeds of sale." However, as I have already concluded, the factual foundation for this conclusion in the present case did not, in truth, exist. Hill J. went on to distinguish Rotherwood and Montgomery as follows (at 25-6): "The issue of gain did not arise in Rotherwood (supra), a case which depended upon rather unusual facts. In that case the profit or gain consisted of the trustee entering into an arrangement to receive $6M for the surrender of a head lease in circumstances where that head lease was worthless. The lease had no marketable value at the time of surrender (see at 4211). The case was not a mere surrender of a lease for a capital amount which could have involved no gain to the taxpayer. Finally, Montgomery v Federal Commissioner of Taxation (Jenkinson J, 8 April 1997) (unreported) again involved the receipt by a taxpayer of a cash amount where the taxpayer was under no obligation to expend the amount at all." I respectfully agree with this analysis by Hill J. Hill J. then expressed his conclusion as follows (at 26): "I am conscious of the warning emanating from GP International Pipecoaters (supra) that the character of a receipt is not to be determined by reference to outgoings which a taxpayer may be required to make. But that is not the point here. The point here is that the taxpayer covenanted to effect improvements which operated to benefit, one may assume, both the landlord and itself on the basis that it was to be reimbursed to the extent of $40,000. The work which the applicant undertook and for which it was in part reimbursed, produced no direct gain to it other than what appears to be a valueless right at the expiration of the lease to remove a washbasin and taps for scrap. The payment was a part reimbursement of the cost of the work. The payment was not, either in form or in substance, a cash incentive to encourage the applicant to take the lease, although it is clear that without the agreement of Burns Philp to contribute to the fit-out the applicant would not have entered the lease. Although I think it is clear enough on the evidence that there was no substantial gain to the applicant, there is no finding to this effect by the Tribunal. The matter would have to go back to the Tribunal for determination whether there was a gain and, if so, the extent of that gain, unless the parties agreed that the quantum of any gain in the circumstances was nominal, thereby avoiding the necessity for the matter to be remitted to the Tribunal." The Commissioner's case at first instance in the present matter was that the lease incentive payments themselves were income. The learned primary Judge held that the cash distributions to the partners were assessable income. It has never been suggested that a valuation exercise of the kind contemplated in Lees & Leech should be undertaken here. Rather, the Commissioner's case has always centred on the lease incentive payments. (See also the discussion of the decision at first instance in the present case by L J Nethercott "Section 25(1) : More Myer Problems" (1997) 26 AT Rev 28). In my opinion, a lease incentive payment should be treated, in principle, as prima facie on capital account by reason of its character, that is, as a payment made, in the nature of a premium, in consideration of a prospective lessee agreeing to accept the burdens (along with the benefits) of the proposed lease. The payment is an inducement to a prospective tenant to enter into the leasing transaction. As a separate and collateral arrangement, the agreement to pay this premium or incentive stands apart from, and necessarily precedes, the operation of the lease itself. In conveyancing terms, the incentive payment is an incident of the agreement for lease, rather than of the lease instrument itself. Although a payment made to a prospective lessor is perhaps more readily identified as a premium, and thus prima facie on capital account, for present purposes there can be no distinction in principle between a payment to a prospective lessee or to a prospective lessor as an inducement to take, or to grant, respectively, a lease. In either case the amount is, I think, paid as a "price" for the grant of the lease; it is a premium in that sense (see Chelsea Investments Pty Limited v Commissioner of Taxation (1966) 115 CLR 1 per Windeyer J. at 8). It is the "purchase money which the [prospective lessee or prospective lessor] pays for the benefit which he gets under the lease" (see King v Cadogan [1915] 3 KB 485 per Warrington LJ. at 493; Nixon v Doney (1961) SR (NSW) 311 at 316). A premium is treated, prima facie, as on capital account so as to provide for three possible exceptions, where what appears to be a "premium" may, in truth, be received on revenue account. None of these exceptions has any application here since, in my view, the "incentive" payments were really that; in other words, they were, in truth, paid to the firm in consideration of its acceptance of the lease and its promise to undertake the fit-out. The exceptions are as follows. First, the "sham" transaction. This is not suggested here. Secondly, whilst not perhaps a "sham", there may be a "disguised" rent in the form of a "bonus" where a lump sum is, in truth and substance, a compounding of rent (see Nixon v Doney, above, at 316-7; Ford v Centenary Investments Pty Ltd [1957] VR 288 at 292). This is not the present case. Thirdly, where the payment or receipt of a premium occurs regularly in the case of a particular taxpayer, this may indicate that the transaction was on revenue account (see Jeff Waincymer, "If at first you don't succeed... reconceptualising the income concept in the tax arena" (1994) 19 MULR 977 at 1008). There may be other explanations for this, as here, where the progress payments were understandably linked to the progress of the fit-out. In substance, we are dealing here with a lump sum payment rather than a series of periodic payments made on a regular basis. The important point is that the present payments were non-recurring. The possible operation of specific tax avoidance provisions in the present context does not arise for consideration in the present case. Even if, contrary to my view, the receipt of the incentive payments here should not be seen as analogous to the receipt of a premium and on capital account for that reason, the payments should, I think, be viewed as analogous to a sum received by a trader in consideration of a trading restriction of the kind considered in Dickenson v Commissioner of Taxation (1958) 98 CLR 460 and on capital account for that reason. In Dickenson, the taxpayer received a payment, held to be on capital account, in consideration of his agreement to sell only one particular brand of petroleum products. Here, the firm received a payment, as it were, in consideration of its agreement to deal with a particular landlord. In Dickenson, Dixon CJ said (at 474): "It appears to me that the sum or sums were paid as the quid pro quo for an effective tie of the appellant's business to one wholesale vendor of petrol. The appellant's business constituted a profit-yielding organisation of a definite structure under his control and he received the money as part of an inducement to change a feature in it. The feature to be changed was the use of a plurality of petrols and oils, and this was replaced by a restriction to the purchase and sale of the products of one company. The same inducement caused him to limit himself in what he might do elsewhere than at his then present business site. At the same time, of course, the business obtained some assurance of a supply from the single source. It may be that in a sense the sum of Ł4,000 was compensatory for the loss of future profits which the restriction might involve. It may be that it was meant as present payment by way of incentive to promote sales of the product derived from the single source. But if either or both of these elements formed part of the rationale of the payment, it amounted to a capitalisation of these elements. It is true that the restrictions were to operate only over limited periods but, once he had bound himself, a modification or readjustment of his business was effected." (Emphasis added). In my view, the present inducement should be seen as having the character of capital, for similar reasons. Williams J. said (at 483): "Where a person agrees to restrict his personal activities and the use of his capital, the consideration he receives for doing so may be income or capital. If the consideration takes the form of recurring payments, these payments may well be considered to be a quid pro quo for the profits the covenantee would have made if he had not withdrawn from such activities and be income.... But where the consideration takes the form of a lump sum, so that it appears to represent a quid pro quo for giving up a substantial sphere of activity which would otherwise be open to the covenantee, it would prima facie be capital.... In the present case there is nothing to indicate that the Ł4,000 was compensation for the additional profits the appellant would have made if he had continued to sell other brands than Shell. On the contrary, both the appellant and Shell probably hoped that the appellant would be able to sell more motor spirit and other petroleum products by selling a single brand than he had previously sold when he was selling all brands. But at least it can be said that the appellant was dubious about this and there is nothing to show that the true consideration for the Ł4,000 was not his promise not to sell or to be interested in selling other brands." (Emphasis added). As has been said, the present payments should be seen, in substance, as a lump sum. They were non-recurring. Kitto J. said (at 492): "But a lump sum payment for a restriction of a garage and its proprietor to one brand of petroleum products for a period of ten years, effectuated by means of a lease and sub-lease of the premises as well as by personal covenants, seems in the nature of a sale price for a substantial and enduring detraction from pre-existing rights. The restriction does not strike my mind as an obligation undertaken incidentally to the carrying on of the business. Rather does it take a substantial piece out of the ordinary scope of the business activities to which otherwise the appellant might apply himself and for which he might use his premises.... The consideration for it was paid to the appellant in two sums but was otherwise non-recurring. Although the two deeds of covenant related to an aggregate period of only five years, there is nothing in the case to suggest any likelihood that at the end of that period further payments would be made in consideration of further similar covenants. All things considered, the two payments savour much more of capital than of income." (Emphasis added). In my view, similar reasoning can be applied here, leading to the conclusion that neither the incentive payments, nor the cash distributions, were on revenue account. I would, accordingly, allow the appeals. ORDERS PROPOSED I propose the following orders: 1. Appeals allowed, with costs. 2. Set aside the orders made at first instance; in lieu thereof, order that the appeals against the decisions on the objections be allowed with costs; that the Commissioner's decisions disallowing the objections be set aside; and that in lieu thereof, it be determined that the objections be allowed. I certify that this and the preceding twenty-eight (28) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Beaumont Associate: Dated: 1997 Counsel for the Appellant: B Shaw QC with J De Wijn Solicitor for the Appellant: Arthur Robinson & Hedderwicks Counsel for the Respondent: G Nettle QC with A Richards Solicitor for the Respondent: Australian Government Solicitor Dates of Hearing: 14 March 1997 Date of Judgment: 20 August 1997