Federal Court Upholds Decision on Compensation Classification

OUTCOME: Dismissed

CATCHWORDS INCOME TAX - assessable income - compulsory acquisition by the [NAME] of a capital asset - award of undissected sum "in respect of [NAME]" - compensation calculated in various components - whether incremental factor applied on value of [NAME] up to the date of determination was in the nature of interest - no entitlement to compensation until determination had been made - proper basis required for dissection of income in an award of compensation - effect of omission of words "to the extent to which" in s.25 Income Tax Assessment Act 1936 (Cth) - essential character of payment - incremental factor not in the nature of interest [NAME] [NAME] - statutory interpretation - compensation payable "in respect of [NAME]" vested in the [NAME] - presumption that State legislation will not alienate vested proprietary interests without adequate compensation - whether [NAME]'s discretion to make arrangements for compensation was obligatory - statutory right to compensation not lost by failure to prescribe manner in which right is to be exercised - mandamus would issue to compel exercise of discretion Income Tax Assessment Act 1936, s.25 [NAME] 1981 (NSW), ss.5,6. [NAME] (Compensation) Arrangements 1985 (NSW) Cases Considered: Legislative Construction Commonwealth v [COMPANY] (1945) 70 CLR 293 [NAME] (1960) 103 CLR 353 [COMPANY] v [NAME] (1968) 120 CLR 400 [COMPANY] v [NAME]. (1971) 127 CLR 106 Minister for [NAME] v [NAME] (1993) 47 FCR 151 [NAME] v [COMPANY] (1994) 126 ALR 1 [NAME] v The King [1922] 2 AC 315 Taxation [ADDRESS] Company [COMPANY] v [NAME]. (1930) 44 CLR 24 [COMPANY] v [NAME] (1934) 52 CLR 28 [NAME].) v [NAME] (1936) 55 CLR 144 [NAME] v [COMPANY] (1943) 25 TC 353 [NAME] NL and Tongakah NL v [NAME] (1949) 78 CLR 47 [NAME]) v [NAME] (1952) 5 AITR 424 [NAME] v Commissioner of Taxation (1961) 104 CLR 381 Allsop v [NAME]. (1965) 113 CLR 431 [NAME] v Commissioner of Taxation (1966) 117 CLR 514 [NAME]. v [COMPANY] (1988) 88 ATC 4126 [COMPANY] v Commissioner of Taxation (1989) 20 FCR 288 Hungerfords v Walker (1989) 171 CLR 125 [COMPANY] v The Commissioners of [NAME] (1922) 12 TC 427 [NAME] v [NAME] (1924) 8 TC 595 [NAME] [COMPANY] v Clark [1935] AC 431 -2- [NAME] v [COMPANY] [COMPANY] [1947] AC 390 [NAME] v [NAME] [1970] 2 QB 130 COMMISSIONER OF TAXATION v [RESPONDENT] [COMPANY] No. G795 of 1994 DAVIES, BEAUMONT, EINFELD JJ. SYDNEY 8 AUGUST 1995

IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No G 795 of 1994 ) [APPELLANT] ) On appeal from a single judge of the Federal Court of Australia BETWEEN: COMMISSIONER OF TAXATION Appellant [RESPONDENT] Respondent Coram: Davies, Beaumont & Einfeld JJ. Date: 8 August 1995 Place: [APPELLANT] THE COURT ORDERS THAT: The appeal be dismissed with costs. NOTE: Settlement and entry of orders is dealt with in [APPELLANT] 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No G 795 of 1994 ) [APPELLANT] ) On appeal from a single judge of the Federal Court of Australia BETWEEN: COMMISSIONER OF TAXATION Appellant [RESPONDENT] Respondent Coram: Davies, Beaumont & Einfeld JJ. Date: 8 August 1995 Place: Sydney

REASONS FOR [NAME] J: It is not in dispute that a sum or sums received as compensation for the compulsory acquisition of property can be dissected or apportioned into capital and income elements if there is an appropriate basis for doing so. [ADDRESS] Co [COMPANY] v [NAME] (1930) 44 CLR 24, the appellant had received compensation for the acquisition of property under the Harbors Act 1913 ([COMPANY]). Section 26 of that Act provided that:- "When any property is acquired by proclamation under this Part, interest at the rate of four pounds per centum per annum, or at such other rate as agreed, computed from the time when the Minister enters into occupation thereof on behalf of the [NAME] to the time when the compensation is paid, shall be added to the amount of any compensation to be paid in respect thereof." [NAME] J held that the sum added by way of interest was assessable income. At 27-28, [NAME] said:- "In truth, sec. 26 does little more than express in precise legislative form the rule established by In re Pigott and Great Western Railway Co. (1881) 18 Ch.D. 146 that an authority compulsorily acquiring land is in the position of a purchaser in the absence of statutory provision to the contrary, and must pay interest upon the compensation as if it were purchase-money, from the date of possession until payment. It is quite clear that interest upon the balance of purchase-money payable upon a sale of real property is income (Hudson's Bay Co. v. Thew (1919) 7 Tax Cas. 206. The observation made by [NAME] [NAME]. in that case (1919) 7 Tax Cas., at p.217 that if the vendors `had collected the money and had been paid it, they would have invested it and got interest,' and that `the purchaser has not paid it, and he therefore pays interest instead until he does pay it,' is a simple proposition which seems equally applicable to the payment of compensation. In my opinion, the character of the interest payable under sec.26 is that of recompense for loss of the use of capital during a period of time in which it would earn income. It represents the annual value of capital. It is paid because the owner has been deprived of a capital asset which he had and has not received the fund which is to be substituted for the capital asset. The interest is the flow of that fund. In my opinion it is income." In the United Kingdom, in earlier days, there was a view that damages by way of interest on a sum not ascertained before the date of the award were not assessable to income tax. [ADDRESS], [NAME] cited from [NAME] on Income Tax, 4th ed., p.179. A similar passage appears in the 12th ed. at para 206 where the [NAME] states "But interest included with damages or compensation in an award may be in truth a part of the damages or of the compensation, and, if so, is not taxable as interest." [NAME] v [NAME] (1924) 8TC 595 and [NAME] [NAME] v Commissioners of [NAME] (1921) 12 TC 427 strongly supported this approach. More recently, in the United Kingdom, the general approach has been to treat interest elements in a damages award as taxable. [NAME] on Income Tax, para 18-07 states, "As a general rule, however, where interest figures as an element in damages, that element is taxable." The change in approach followed from the judgment of the [NAME] in [NAME] v [COMPANY] [COMPANY] [1947] AC 390. In that case, the appellant, [NAME], had obtained a judgment in his favour in a dispute concerning certain shares. [NAME]. had given judgment in the sum of Ł36,295, together with a further sum of Ł10,028 which, in his Lordship's discretion, he awarded as pre-judgment interest under s.3 of the Law Reform (Miscellaneous Provisions) Act 1934 (UK). Their Lordships held that the pre-judgment interest was taxable and that the judgment debtor when paying the judgment debt was entitled to deduct income tax on the award of interest. Their Lordships distinguished [NAME] and [NAME] Union as being cases where, though certain sums were described as interest, in substance a capital sum of compensation was awarded, the element of interest being introduced in modum aestimationis. At 398, Viscount Simon LC said:- "But I see no reason why, when the judge orders payment of interest from a past date on the amount of the main sum awarded (or on a part of it) this supplemental payment, the size of which grows from day to day by taking a fraction of so much per cent. per annum of the amount on which interest is ordered, and by the payment of which further growth is stopped, should not be treated as interest attracting income tax. It is not capital. It is rather the accumulated fruit of a tree which the tree produces regularly until payment." [NAME] was referred to with approval and applied to in [NAME] v [NAME] [1970] 2 QB 130 where Lord Denning MR, delivering the opinion of the Court, expressed the point that interest payable under the Law Reform (Miscellaneous Provisions) Act was not a part of the cause of action. A claim for interest need not be pleaded, his Lordship said, and, in future, defendants making a payment into Court should make a payment sufficient to satisfy the cause of action apart from interest. At 149, his Lordship said:- "Interest being no part of the cause of action, he cannot make a payment in respect of it." It must be kept in mind that, although many principles of taxation which are applied in the United Kingdom are given a like effect in Australia, the general structure of the Income Tax Acts in the United Kingdom are different from those in this country. [NAME] at 25-02 points out that s.329 of the [NAME] 1988 (UK) provides that interest on damages for personal injuries, including the interest element of payments made in settlement of personal injury claims, is not to be regarded as income for income tax purposes. There is no like provision in this country, save s.160ZB of the Income Tax Assessment Act 1936 (Cth) which deals with capital gains. A court in this country would be unlikely to hold that an award of pre-judgment interest, included in an award of damages for personal injury, constituted a receipt in the nature of income. It is therefore unlikely that [NAME] would be applied in this country in terms of the ratio which it propounds. [ADDRESS] has indeed not been referred to any reported instance in Australia where pre-judgment interest has been assessed to tax as income. One basis upon which [NAME] and [NAME] proceeded, namely that the discretionary award of interest included in the damages claim forms no part of the award on the cause of action, was specifically rejected by the High Court of Australia in Hungerfords v Walker (1989) 171 CLR 125. At 148-9, [NAME] and [NAME] pointed out that equity has adopted a broad approach to the award of interest and that the equitable right to interest exists independently of statute. Their Honours referred to the position in Canada where it has been held that there was no longer any reason to retain the common law rule against interest as damages. Their Honours referred also to the admiralty practice, which followed that of equity in including interest in damages. Their Honours said that, in principle, even at common law, damages in the nature of interest could be awarded where it was just compensation for foreseeable loss. An award of compensation or of damages is, moreover, very often an award of a single undissected sum, notwithstanding that various elements are taken into account in the calculation. That is because the award for compensation or damages is not an award dealing with the specific items of loss claimed, but an award compensating for the loss which has occurred. Unless there be a proper basis for dissection so that an element of the award can be identified as an award of income, a dissection or apportionment should not be made. In [NAME] v Federal Commissioner of Taxation (1960) 104 CLR 381, where there had been an acceptance by the appellant of a lump sum in full settlement of his claim, but the list of particulars from which the offer had been calculated was not revealed to the appellant, it was held that the sum received was a single undissected sum accepted in settlement of a claim for unliquidated damages and that no part of it was assessable. In Allsop v Federal Commissioner of Taxation (1965) 113 CLR 431, where the appellant, having sued for a number of matters, some of which if received separately would have had the character of income, but others of which did not have that character, had by deed released his cause of action for a single undissected lump sum which was less than the amount sued for, it was again held that no part of the lump sum was assessable income. The same principle was applied in Federal Commissioner of Taxation v [COMPANY] (1998) 88 ATC 4126 and [COMPANY] v Commissioner of Taxation (1989) 20 FCR 288. It should also be noted that, unlike s.51(1) of the Act, s.25(1) does not contain the words "to the extent to which", words which provide for apportionment or dissection in accordance with the principles which have been enunciated in [NAME] NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 58-60. The [NAME] 1981 (NSW) came into operation on 1 January 1982 and, on that date, operated to vest all [NAME] in the [NAME] discharged from all other interests therein.

Accordingly, there was a divestment of all the relevant [NAME] interests of [RESPONDENT[COMPANY] ("[RESPONDENT]") on that day. There was not, however, on 1 January 1982 any right to compensation. Section 6(1) of the Act empowered the [NAME] to make arrangements for the examination of the cases, if any, in which compensation would be payable and for the determination of the amount and method of payment of any such compensation. It was not until 21 June 1985, that the [NAME] (Compensation) Arrangements1985 were published in the Gazette and it was not until the following day that they took effect. Even subsequent thereto, there were negotiations between interested persons and the Government. Subsequently, the [NAME] (Compensation) Arrangements were amended by instrument dated 27 June 1990 which was published in the Gazette on 29 June 1990. The amendments were substantial. Clause 19, under which [RESPONDENT]'s claim was assessed, was significantly changed. It was after that amendment that the Board determined [RESPONDENT]'s claim at $6,473,793. It is an important element in the present case that there was no entitlement to the compensation as it was determined as at 1 January 1982 until a little over a month before the date of the determination. Nor was any entitlement to interest expressed in the [NAME]. The term "interest" was not mentioned therein save in clause 24(1) which provided for interest on the amount determined from the date on which the determination was made up to and including the date of payment. Clause 3(1) of the [NAME] defined the "base date" as "the date on which [NAME] vested in the [NAME] pursuant to s.5 of the [NAME] 1981". Section 3 defined "relevant period" as "the period of six months beginning with 1st January 1982 or subsequent period of 12 months beginning with 1st July". It was on this basis that clause 19(1) operated so as to require the Board to estimate the number of tonnes of saleable [NAME] "which has been or, in its opinion, will be extracted" from the holding to which the claim related, during each relevant period beginning with the base date and ending with the last day of the relevant period within which saleable [NAME] within the colliery had or would become exhausted.

Because of this provision and the provisions of clause 19(2), the Board was required first to estimate the likely productivity from the relevant holding and then to undertake a discounting calculation both in relation to the rent component of the compensation and the saleable [NAME] component. In relation to [RESPONDENT]'s saleable [NAME] component, it was estimated that production would have commenced in 1991, that there would be a break of 4 years after the year 2006 so as to permit the reorganisation of the mine and that mining would commence again in the year 2011 and continue until the year 2026. The estimated production figures were then discounted so as to arrive at a value as at 1 January 1982. The rental component was likewise discounted back to that date. The total of the discounted sums was $2,095,248.86. Clauses 19(3) & 3A of the [NAME], both of which were inserted by the amendments on 27 June 1990, then applied so as to require the total arrived at to be multiplied by "the appropriate incremental factor", which was an incremental factor taking the matter up to and including the date on which the Board made its determination. The effect of these provisions was to assess the compensation as at the date of the determination. This was entirely consistent with the point that the [NAME] did not itself express an entitlement to compensation but merely empowered the [NAME] to make arrangements for determining the cases in which compensation was to be payable and for the determination of the amount and method of payment. In 1985, the [NAME] established the New South Wales [NAME] which was to exercise the functions conferred upon it under the [NAME]. Clauses 9, 10, 11 and 12 of the [NAME] provided for the lodgment of claims. Clauses 18 and 19 provided for the calculation of compensation. Clause 19 was the relevant provision in the present case. Clause 17 of the [NAME] provided that the [NAME] should consider and determine claims and that, on the making of a determination in respect of a claim, the [NAME] should cause a notice in writing setting out the determination to be served on the claimant. Clause 25 then provided:- "(1) Where an amount of compensation has been determined in respect of a claim that has been finally determined, the [NAME] shall transmit the determination to the Minister who, on receipt of the determination, may authorise payment of the amount of compensation specified in the determination." It may be that clause 25 should be read as conferring both a power and a duty on the Minister. [COMPANY] v Federal Commissioner of Taxation (1971) 127 CLR 106. But at least until the time when the [NAME] made a determination, [RESPONDENT] had merely a right to lodge a claim and to have it determined in accordance with the [NAME]. And the [NAME] themselves were not brought into their final form until the execution of the instrument of 27 June 1990. In the circumstances, although the compensation was calculated by multiplying the discounted rent component and saleable [NAME] component, which were precise sums, by the appropriate incremental factor, which itself was a factor fixed by reference to returns on investment, the sum so calculated was not interest or in the nature of interest. It was merely a figure which brought the calculation of compensation up to the date of the determination of the [NAME]. An award of interest presupposes an entitlement to a sum and an award of interest or in the nature of interest made by reason of the late payment thereof. [RESPONDENT] had no such entitlement going back to 1 January 1982 and the [NAME] did not purport to award interest to any claimant. I agree with the trial Judge who said:- "... the present case, like [NAME], is merely one involving a single payment made and received by way of compensation. It does not involve a payment of a single undissected amount in satisfaction of multiple claims nor does it involve a payment capable of apportionment into different elements. The payment here was made and received as compensation for the [NAME] interest forfeited to the [NAME]. That being its character it was received as capital and not income." In the present case, the amount added by multiplying the total of the rent and saleable [NAME] components by the appropriate incremental factor was a step taken in the calculation of the compensation awarded. It was not a sum added on by way of interest to an award of compensation.

I would dismiss the appeal with costs. I certify that this and the 9 preceding pages are a true copy of the reasons for judgment of the Honourable Justice Davies. Associate: Date: 8 August 1995

IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G.795 of 1994 ) [APPELLANT] )

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION Appellant AND: [RESPONDENT] [COMPANY]. Respondent

CORAM: [RESPONDENT], BEAUMONT AND EINFELD JJ. DATE: 8 AUGUST 1995 REASONS FOR JUDGMENT

BEAUMONT J. INTRODUCTION This is an appeal from a judgment of [NAME]. allowing the respondent [NAME]'s objection against an assessment of income in the sum of $2,919,029 described in the adjustment sheet, in respect of the year of income ended 30 June 1991, as an amount "included in payment received from the [NAME]". The respondent was, prior to its compulsory acquisition by the [NAME] under the [NAME] 1981 (NSW) ("the Act"), the beneficial owner of a two-thirds undivided interest in all [NAME] and other minerals located in the [NAME] (which was operated by another party), lying under certain lands near Ellalong, NSW known as the Ellalong Mine. It was common ground that its interest was a capital asset. The question for the learned primary Judge was whether one part of the amount received by the respondent under the [NAME] established upon the resumption taking effect was assessable under s.25(1) of the Income Tax Assessment Act (1936) as income in ordinary concepts. [NAME]. held that it was not. The Commissioner now appeals from that judgment.

THE

BACKGROUND There was no dispute about the background matters. (a) The relevant provisions of the Act By s.5 of the Act, as from its commencement on 1 January 1982, all [NAME] that, but for the Act, would have been vested in the [NAME] or any person other than the [NAME], was vested in the [NAME] freed and discharged from all outstanding interests. By s.6(1) of the Act, the [NAME] may make arrangements (a) for the determination of the cases, if any, in which compensation is to be payable as a result of the enactment of the Act; and (b) if there are any such cases - for the determination of the amount and method of payment of any such compensation.

(b) The provisions of the [NAME] made by the [NAME]'s Instrument The [NAME] made arrangements under s.6(1) by Instrument published in the Gazette dated 21 June 1985. In Part II of the Instrument (cl.4), a [NAME] ("the Board") was established. Part III dealt with "compensation". The relevant provisions of this Part are as follows: By cl.8, it was provided: "Compensation in respect of [NAME] referred to in cl.9(1) ... is payable in accordance with the provisions of this instrument and not otherwise." (Emphasis added)

By cl.9(1), it was provided that any person was eligible to make a claim (in this case under cl.11 - see below) if (a) saleable [NAME] was, immediately before the base date (i.e. 1 January 1982), vested in that person; and (b) that [NAME] was situated within a colliery holding at any time during the period beginning with the base date and ending with 1 January 1986. Clause 11 dealt with claims for compensation by [NAME] who, as here, were not holders of relevant colliery holdings. Such claims were to be lodged with the Board before 30 April 1986 (cl.11(1)(d)).

Consideration of claims and their determination by the Board were dealt with by cl.17. By cl.17(1), it was provided that, as soon as practicable after a claim was made, the Board was to proceed to consider and determine it in accordance with cl.18, 19, 20, 21 or 22, as the case warranted. Clause 19 (which was amended by an Instrument made by the [NAME] published in the Gazette on 29 June 1990) dealt with the calculation of compensation in respect of claims made under cl.11. By cl.19(1), the Board must - "estimate the number of tonnes of that saleable [NAME] which has been, or in its opinion, will be extracted ... during each `relevant period' [defined [cl.3(1)] to mean the period of six months beginning with 1 January 1982, or a subsequent period of 12 months beginning with 1 July] beginning with the base date and ending with the last day of the relevant period within which saleable [NAME] ... has or will, in its opinion, become exhausted." By cl.19(2), it was provided that, in respect of each relevant period, the Board was to proceed to determine an amount, which was in essence, the value as at 1 January 1982 of future rent and [NAME] from the [NAME] interest, calculated in accordance with the following formula: "v(p) = [(n(p) x h) x d(p)] + [(r x t(p)) x e(p)] 1000 1000 where - 'v(p)' represents the amount to be determined, expressed in dollars and, where appropriate, a fraction of a dollar;

`n(p)' represents, in relation to the first relevant period `(p)', the figure 2 and, in relation to each subsequent relevant period `(p)', represents the figure 4; `h' represents the area, measured in hectares, of that part of the colliery holding containing the [NAME] that is the subject of the claim; `d(p)' represents the amount, applicable to the symbol `n(p)', which, if invested on the base date on terms (including terms as to a rate of interest) determined by the [NAME] in relation to the particular case, would produce the sum of $1,000 at the median date of the relevant period `(p)'; `r' represents ... 0.9 of a dollar ... `t(p)' represents the number of tonnes of saleable [NAME] estimated under subclause (1) in respect of the particular relevant period `(p)'; and `e(p)' represents the amount, applicable to the symbol `t(p)', which, if invested at the base date on terms (including terms as to a rate of interest) determined by the [NAME] in relation to the particular case, would produce the sum of $1,000 at the median date of the particular relevant period `(p)'." (As [NAME] J. observed, this formula contemplates two components: (1) "Rent" (at $4 p.a. per hectare, except in respect of the initial six month period beginning with 1 January 1982, where the "rental" rate was $2 p.a. per hectare); and (2) "[NAME]", calculated at the rate of 90 cents per tonne of the saleable [NAME] estimated to be extracted from 1 January 1982 until exhaustion.) Sub-clauses 19(3) and (3A), which are central to this litigation, dealt with the calculation of an "appropriate incremental factor", in the event that no interim payment of compensation had been made.

By cl.19(3), the Board was to calculate the total amount to be paid in respect of the claim: "(a)by ascertaining for all relevant periods to which subclause (1) applies the total of the amount represented by `v(p)', as determined in accordance with subclause (2); and (b) by multiplying that total by the appropriate incremental factor." Clause 19(3A) defined "the appropriate incremental factor" as -

"... a number equivalent to the amount of money that would be accumulated from and including the base date up to and including the day before the date on which the [NAME] makes its determination in respect of the claim if $1 were invested on terms (including terms as to a rate of interest) determined by the [NAME] for the purposes of this clause." A claim was regarded as finally being determined, where no appeal to the Compensation Review Tribunal was lodged under cl.27 at the conclusion of 30 days after notification of the determination (cl.23(a)). Interest on the amount of compensation was dealt with by cl.24. By cl.24(1), interest at a rate determined by the [NAME] was payable from the date of the determination up to the date of payment. There is no issue about this item as it is not disputed that this amount is income for taxation purposes. Payment of compensation was dealt with by cl.25. On being notified that the Minister had authorised payment, the Board was to pay to the claimant the amount of compensation determined, together with any interest payable (cl.25(2)). (c) The Board's determination of the respondent's claim for compensation By a determination made on 15 August 1990, the Board calculated that the total amount of compensation to be paid in respect of the claim was $6,473,793. The manner in which that amount was calculated was indicated as follows:

"CALCULATION OF [NAME] 4329 PERIOD ENDING COMPENSATION INCREMENTAL FACTOR v(p) 2095248.855884 31-Dec-82 2423783.8764866 1.1568 31-Dec-83 2711487.0226256 1.1187 31-Dec-84 3019511.9483958 1.1136 31-Dec-85 3464588.0095894 1.1474 31-Dec-86 4025262.2871812 1.16183 31-Dec-87 4557240.9510551 1.13216 31-Dec-88 5097274.0037551 1.1185 31-Dec-89 5936198.6511152 1.164583 15-Aug-90 6473793.3498088 1.09056 AMOUNT OWING $6,473,793.35"

The Board further indicated that the [NAME] had supplied the following interest rates, which had been used to calculate the "appropriate incremental factors": "Period Interest Rate 1/1/82 - 31/12/82 15.68% 1/1/83 - 31/12/83 11.87% 1/1/84 - 31/12/84 11.36% 1/1/85 - 31/12/85 14.74% 1/1/86 - 31/12/86 16.183% 1/1/87 - 31/12/87 13.216% 1/1/88 - 31/12/88 11.85% 1/1/89 - 31/12/89 16.4583%" By letter to the respondent dated 3 October 1990, the Board enclosed a copy of its determination dated 15 August 1990, and annexed calculations, together with a cheque for $6,599,732.32, representing $6,473,793 for compensation as determined on 15 August plus interest of $125,939.32 thereon from that date. (As has been noted, it was common ground that this amount of interest was assessable income.) THE BASIS OF THE COMMISSIONER'S ASSESSMENT In his assessment, the Commissioner sought to identify two separate components in the amount of compensation: (1) The sum determined under cl.19(2), being, in effect, the value as at 1 January 1982 of future rent and [NAME] from the [NAME] interest (i.e. "V(p)" in the formula). The Commissioner did not attempt to claim that this was income. (2) The sum being the incremental factor determined under cl.19(3). This is the amount now in dispute. The Commissioner assessed this amount as income upon the footing that its character was, in effect, interest on the compensation, being, it was said, an amount to compensate the [NAME] [NAME] for not having received the worth of the [NAME] when it was acquired by the [NAME] on 1 January 1982. THE REASONING AT FIRST [NAME]'s reasons for concluding that the assessment should be set aside were, in essence, as follows: . This was not a case, as was, for instance, [ADDRESS] Company [COMPANY] v [NAME] (1930) 44 CLR 24, of provisions for a statutory right to compensation and an independent right to interest calculated upon that compensation. There, the right to interest was a payment on account of the person (whose property had been confiscated) being kept out of the compensation from the date of acquisition to the date of payment. But there was no independent right of compensation here. Rather, the "incremental" element of the compensation, as calculated under cl.19(3), was but a component of an overall calculation, rather than an independent right to interest calculated by reference to some other amount owing. . Whether the "incremental" component was to be treated as income must be determined by reference to its essential character (that is, the nature of the payment, or "what

it is for"), regard being had to all the circumstances which give rise to the receipt, without placing a disproportionate emphasis upon the form in which the transaction was structured. The question here as to the nature and quality of the payment in the hands of the respondent must be determined by reference to the [NAME]'s Instrument, which created, for the first time, an eligibility to claim compensation for [NAME] which had been forfeited. But the integers in the formula, including that described in cl.19(3), are of no assistance in determining the essential character of the receipt, which remains that of compensation for a capital asset. CONCLUSIONS ON THE APPEAL Although the proceeding raised some difficult questions, I am not persuaded that any error, of principle or application of principle, in the approach taken by the primary Judge, or in the decision arrived at, has been demonstrated. (a) The construction of ss.5 and 6 of the Act At the outset, questions arise as to the true interpretation of ss.5 and 6 of the Act; in particular, the question arises whether the Act conferred upon the respondent any right to claim compensation.

In construing the Act, it should be borne in mind that, as [NAME] J. said in [COMPANY]. v [NAME] (1968) 120 CLR 400 (at 406), there is a - "...firmly established rule of law that a statute will not be read as authorizing the expropriation of a subject's goods without payment unless an intention to do so be clearly expressed."

That is, even where the Federal Constitutional guarantee of "just terms" is not available, State legislation is presumed not to alienate vested proprietary interests without adequate compensation (see Statutory Interpretation in Australia by [NAME].[NAME]. [NAME] and [NAME].S. [NAME], 3rd ed. at 101-2). At the same time, as the Privy Council has noted (see [NAME] v The King [1922] 2 AC 315 at 322): "Compensation claims are statutory and depend on statutory provisions. No owner of lands expropriated by statute for public purposes is entitled to compensation, either for the value of the land taken, or for damage, ... unless he can establish a statutory right."

It will be convenient next to set out in full the terms of ss. 5 and 6: "5. [NAME] that, but for this Act, would be vested in - (a)an instrumentality or agency of the [NAME]; or (b)any person other than the [NAME], is vested in the [NAME] freed and discharged from all trusts, leases, licences, obligations, estates, interests and contracts.

6. (1) The [NAME] may make arrangements - (a)for the determination of the cases, if any, in which compensation is to be payable as a result of the enactment of this Act; and (b)if there are any such cases - for the determination of the amount and method of payment of any such compensation. (2) Except in the cases, if any, and to the extent, determined under subsection (1), compensation is not payable as a result of the enactment of this Act."

It is clear that ss. 5 and 6 of the Act were intended to be read together, but a question then arises whether the use of the word "may" in s.6(1) ("The [NAME] may make arrangements ...") is a true or real discretion, in the sense that it is purely facultative, on the one hand, or, on the other whether, in certain situations it means "must" so that it is then mandatory to exercise the discretion and to make the arrangements (see [NAME] v [COMPANY]. (1994) 126 ALR 1 at 7, 26, 33). In my view, given the present context and the legislative presumption in this area, it was intended that the [NAME] should make appropriate arrangements in those cases where, in the [NAME]'s opinion, compensation ought to be paid. In this way the apparent discretion was rendered obligatory (see [NAME]. [COMPANY]. v [NAME]. (1971) 127 CLR 106). If the discretion were not exercised, mandamus would go (see [NAME] at 26).

Where a statute confers a right and provides, as here, that the right is to be exercised in a manner to be prescribed by subordinate legislation, the right is not lost if there is a failure so to prescribe. The law may import a suitable method so that the right may be exercised in any manner that is appropriate and reasonable (see [NAME] (1960) 103 CLR 353 per [NAME]. at 362). As [NAME]. there pointed out, a distinction is drawn, as a matter of statutory construction, between cases where the existence of the right is itself dependent upon the occurrence of the prescription of the methods of its exercise, on the one hand, and, on the other, cases where the statutory right is, as it were, free-standing or independently created. In the latter class of case, the failure to prescribe cannot destroy that right (cf. in the federal context, Commonwealth v [COMPANY] (1945) 70 CLR 293 at 309, 312, 316-7, 330; see also Minister for [NAME] v [NAME] (1993) 47 FCR 151 at 166-7). In my opinion, when the Act is read as a whole, nothing appears which would contradict the ordinary presumption that the acquisition of the [NAME] was not to take place except upon the basis that adequate compensation would be paid in those cases where justice so required. It is true that s.6(1)(a) speaks of "the cases, if any, in which, compensation is to be payable... ." (My emphasis.) But, in my view, this is consistent with the construction previously mentioned, that is, that the [NAME] was bound to provide machinery for the payment of adequate compensation in those instances where it was just to do so. The statutory arrangements were, in fact, made, and it is common ground that their provisions were within power. Certainly, though, the transaction was not a "voluntary" one, in the sense that the outcome was compelled by the terms of the applicable legislation. But it must be noted, for present purposes, that entitlement to require the [NAME] to exercise a discretion to make suitable arrangements is one thing; it is a different thing to say that, upon the enactment of the Act, the respondent was entitled to a particular sum of money, or even to the market value of the [NAME]. Strictly speaking, there was no entitlement to any particular amount until the conclusion of the 30 day period after notification of the determination of the claim (see cl.23(a)), that notification not occurring here until 3 October 1990. (b) Interpretation of the [NAME]'s Instrument It will be recalled that, by cl.8 of the Instrument, it was provided that compensation was payable "in respect of [NAME] ... ." It follows, in my view, that compensation was paid for the [NAME], that is, for its acquisition. It may be accepted that cl.8 went on to provide, as has been seen, that the compensation was to be payable in accordance with the provisions of the Instrument. But, in my opinion, this did not detract from the circumstance that the compensation was payable "in respect of", i.e., for the [NAME]. (c) The application of the relevant taxation principles It is settled, as [NAME] J. noted, that whether an amount should be treated as income must be determined by reference to its "essential character. That is only another way of saying that ... [the answer] will depend upon the nature of the payment or what it is for ... [and] the quality of that amount in the hands of the recipient [is important]." (See, for instance, [NAME] v Commissioner of Taxation (1966) 117 CLR 514 at 526.) In [COMPANY] v The Commissioners of [NAME] (1922) 12 TC 427, a railway company exercised its statutory powers to require part of the [NAME]'s [COMPANY] to be left unworked on payment of compensation. It was held that the amount received was not a profit earned in the course of the [NAME]'s trade as the manufacturer of [COMPANY] goods and as merchants of raw [COMPANY], but was a capital receipt, being a payment made for the sterilisation of a capital asset. In the Court of Session, the Lord President ([NAME]) said (at 448-9): "... prima facie the sterilisation of parts of [the [COMPANY]] seems to me to imply a capital loss, and the payment of compensation to repair the injury to the Company's undertaking which flowed from that sterilisation seems to me to be a restoration of capital. It was argued that the compensation payable to the Company, being measured by the present value of the profits which the Company might, and in all reasonable probability would, have made if the leasehold had not been interfered with, was really a consideration or substitute for profits. But, even so, it is a consideration or substitute, not for profits earned or capable of being earned, but for profits irretrievably lost and incapable of being ever earned. The taxing acts deal with profits made, not with profits lost - with actual, not with hypothetical profits - and it is by the words of the taxing acts that we are bound. As paid to and received by the Company, the compensation was the equivalent of a destroyed portion of one of its fixed assets: I do not think it was a profit which arose from the Company's trade or business at all."

In the [NAME], Lord [NAME] said (at 463-4): "In truth the sum of money is the sum paid to prevent the [COMPANY] obtaining the full benefit of the capital value of that part of the mines which they are prevented from working by the Railway Company. It appears to me to make no difference whether it be regarded as a sale of the asset out and out, or whether it be treated merely as a means of preventing the acquisition of profit that would otherwise be gained. In either case the capital asset of the Company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum of Ł15,316 was paid. It is unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned. That, no doubt, is a perfectly exact and accurate way of determining the compensation, for it is now well settled that the compensation payable in such circumstances is the full value of the minerals that are to be left unworked, less the cost of working, and that is, of course, the profit that would be obtained were they in fact worked. But there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test. I am unable to regard this sum of money as anything but capital money ..." (Emphasis added) (See also [NAME] [COMPANY] v Clark [1935] AC 431 at 442; [NAME].) v [NAME] (1936) 55 CLR 144 at 156). In my view, the approach taken in [NAME] was equally applicable in the present case. Whatever be the position with respect to what is, in truth, interest (see, e.g. [ADDRESS] Company [COMPANY]. v [NAME]. (1930) 44 CLR 24 at 28; [NAME] v [COMPANY], [COMPANY]. [1947] AC 390 at 403, 409; [NAME].) v [NAME] (1952) 5 AITR 424 at 426, 433), the compensation in the present case was payable, as cl.8 of the Instrument provided, "in respect of [the] [NAME]". The provisions of cl.8 are, in material respects, consistent with the Act. It will be recalled that the Act (s.6) provided that compensation would be payable, if at all, by reason of its enactment, having previously provided (s.5) for the acquisition of all interests in the [NAME].

Accordingly, it was appropriate that cl.8 state that compensation would be payable in respect of the [NAME]. That is to say, compensation was not payable in respect of any claim for loss of profits or of any other form of income. Nor, apart from the operation of cl.24 (an item not in issue here) was there any suggestion in the statutory scheme that a [NAME] receive interest as a component of a compensation package. As has been noted, no entitlement to any compensation monies accrued before October 1990, whatever rights may have previously existed to enforce the performance of other public duties. It must follow that the "incremental factor" was not compensation for loss of the use of those monies. It may be accepted that it is possible, in some circumstances, for the Commissioner to apportion a sum paid by way of compensation into two distinct segments, one representing a capital item, the other representing a [NAME] item. But such an apportionment is not open here (cf. [NAME] v Commissioner of Taxation (1961) 104 CLR 381; and see, for instance, [COMPANY] v Commissioner of Taxation (1989) 20 FCR 288 at 313). This compensation (notwithstanding the presence of the incremental factor in its computation) was paid in respect of a single capital asset, the [NAME]. Specifically, the calculation of the "incremental factor" was no more than an abstract, or hypothetical, exercise which could not, and did not, purport to be an award of an amount by way of interest on monies then due. It must follow, in my view, that, however calculated, the essential character of the compensation payment was an amount paid for the acquisition of a capital asset.

I would dismiss the appeal, with costs. I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment herein of [NAME]. Associate Dated: 8 August 1995

IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 795 of 1994 [APPELLANT] ) ON APPEAL from a single judge of the Federal Court of Australia Between: COMMISSIONER OF TAXATION Applicant [RESPONDENT] Respondent Davies, Beaumont and Einfeld JJ SYDNEY 8 AUGUST 1995

REASONS FOR

JUDGMENT EINFELD J: The relevant facts and statutory and regulatory provisions are set out in the judgments of [NAME] which I have had the opportunity to read. There is no need to repeat them, but I wish to add some remarks of my own. [NAME] found that there was no independent right to compensation and interest on the compensation. The significance of this finding is that [ADDRESS] was able to distinguish cases such as [ADDRESS] Co [COMPANY] v Federal Commissioner of Taxation [1930] 44 CLR 24, [NAME] v [COMPANY] [COMPANY] [1947] AC 390 and [NAME]) v [NAME] [1952] 5 AITR 424, all of which had in substance held that interest paid on compensation was assessable income. [NAME] said at AB 76 - 77: The incremental component of the compensation, as calculated under cl.19(3), is but a component of an overall calculation rather than, as was the case in [ADDRESS], an independent right to interest calculated by reference to some other amount owing. The appellant submitted that [NAME] erred in this finding and in the conclusions that followed. His submissions were twofold: a) there was an independent right to interest; and b) even if there was not, the essential character of the increment had to be separately considered and should be found to be income. As mentioned in the judgment of Justice Beaumont, interest as calculated pursuant to cl. 24 is not the subject of contention. Hence any reference to interest should be taken as a reference to the incremental component of the calculations in cl.

19. The amount the appellant wished us to view as interest is the increment on the compensation amount. Was there an independent right to interest? Section 6 of the [NAME] 1981 provided for the making of [NAME]. The appellant contended that this is both a power and a duty. If that were correct, the respondent's right to compensation would have come into existence on the date of proclamation of the Act. If compensation was indeed due and payable from that day, that may have lent weight to the appellant's submission that there was a separate right to interest, accruing from the delay between the occasion of the debt and its payment. The language of the section is permissive - the [NAME] `may'- and whilst it appears from the second reading speech of the [NAME] (1981) that the Government always intended paying compensation (Legislative Council "Hansard" 2 December 1981, page 1245), it cannot be inferred that they had a duty to pay compensation. Additionally, the use of the words `if any' in section 6(1)(a) points to an interpretation that compensation is payable at the [NAME]'s discretion. This Act serves to vest significant assets in the [NAME]. The Government knew that ownership of [NAME] would transfer out of the possession of companies and individuals and that they would suffer a pecuniary loss as a result. The reference `if any' cannot therefore be taken to mean `if there are any claims for compensation'. The words must be taken to mean, `if any compensation is to be offered the [NAME] may make arrangements for their determination'. The appellant conceded that this may not be a significant point since compensation was actually paid pursuant to the Instrument of 1985 as amended in 1990. Additionally, even if the section is read as a duty on the [NAME], this does not determine that interest on the amount was separately due. On balance it is more likely that the section created a power and not a power and a duty. Thus at the time of vesting, no right to compensation accrued to the [NAME], let alone a separate right to interest. The right to compensation dawned with the implementation of the arrangements set out in the Instrument in 1985. The next issue must then be whether the [NAME] received at that time a separate right to payment of interest on the compensation sum. It appears not. The [NAME] was entitled to the equivalent of the result of the calculations. Certainly, had the Government made a mistake in their addition, or performed only half of the calculations stipulated, the [NAME] would have had recourse to the full amount. However, this is not the same as saying that it had a separate right to interest on the compensation. Clearly, the legislature had the option of providing separately for interest and it chose not to do so. The [NAME] received no separate right to interest on the compensation amount. Was the incremental component nonetheless income? [ADDRESS] was well aware that determining that there was no separate right to interest did not answer the question of whether or not the incremental component was income. At AB 77 - 78, [NAME] said: The question whether the incremental component on the present case is to be treated as income, must, I agree, be determined by reference to its essential character. That is only another way of saying that the question whether the payment is income or capital will depend upon the nature of the payment or what it is for. What is important is that the question whether the amount is income or capital will depend upon the quality of that amount in the hands of the recipient: [NAME] v Commissioner of Taxation (1966) 117 CLR 47 at 526; [NAME] v Commissioner of Taxation (1956) 96 CLR 47 at 55; [COMPANY] v Federal Commissioner of taxation(1977) 34 FLR 375 at 402 per [NAME] J; Commissioner of Taxation v [NAME] (1990) 22 FCR 42 at 50. In considering the character of the receipt in the hands of the recipient the Court will have regard to all the circumstances which give rise to the receipt without disproportionate emphasis upon the form in which the transaction is structured: [COMPANY] v Federal Commissioner of Taxation (1993) 41 FCR 282 at 295; [NAME] v Federal Commissioner of Taxation (1993) 111 ALR 716 at 727-730, affirmed on appeal: (1993) 93 ATC 5030. With regard to the circumstances, [NAME] concluded that the sum was capital. At AB 80: The incremental factor remains what it is, namely, an integer in a formula used by the authority to assess a lump sum compensation which is to be paid for the forfeiture of the interest of a person as at 1 January 1982. It follows, in my view, that the essential character of a payment remains that of compensation for a capital asset appropriated by the [NAME] rather than two elements; one compensation for that capital asset and the other interest. The formula in question is calculated by reference to three distinct components. The appellant asked us to view the formula in the following way. The first component is a notional rent estimated over the period then discounted back to present value at the date the [NAME] vested in the [NAME]. The discount rate employed in that case is a flat rate of 7%. The second component is a notional [NAME] calculated along the same lines. The amount of [NAME] is estimated and then discounted back to produce the present value of the cash flow stream at the date of vesting. The discount rate is not fixed, but it appears that it varies period by period in accordance with the statutory interest rates provided by the [NAME]. In the appellant's submission, these two present values are then added together to achieve the present value on 1 January 1982 of the estimated future income streams and it is on this sum that the final calculation is performed. The appellant contended that this sum represents the amount of compensation that would have been paid by the [NAME] at the time of vesting if compensation had been paid at that date. The appellant further argued that the final calculation serves to increase the sum to compensate the respondent for the lack of the use of the funds and therefore is in the nature of interest. The final calculation effectively increases the sum at a rate which varies from period to period between 9% and 16%. The appellant's submission may have been and possibly is one explanation of the intention behind the formula, but it was nonetheless hypothetical as the [NAME] did not pay compensation at the date of vesting. The question remains whether the incremental payment was or was not part of the overall compensation. The primary Judge considered the authorities advancing that there is no necessary connection between the measure used to calculate an amount, its nomenclature or form, and the quality of the receipt: see [NAME] v Commissioners of [NAME] [1922] SC (HL) 112 at 115; [NAME] [COMPANY] v Clark [1935] AC 431 at 442; Commissioner of [NAME] (Victoria) v [NAME] [1935] 55 CLR 144 at 156; and also [[COMPANY]) v Federal Commissioner of Taxation [1934] 52 CLR 28 at 46, 49 and 51. The appellant did not seek to challenge the general proposition but contended that the purpose and circumstances of the provision of the increment demonstrate that it is interest, whereas the respondent argued that the incremental sum was merely part of the compensation for a loss of a capital asset. There is no definitive clause in the Instrument to demonstrate which interpretation is in fact the correct one. In these circumstances it is necessary to look to the calculation and the surrounding circumstances. In [NAME] v [NAME] & Son [COMPANY] [1943] 25 TC 353, a loan was made with provision for interest at a commercial rate, a discount and a premium. In determining the nature of the various elements, Lord [NAME] MR set out some of surrounding circumstances that may be helpful at 367: (1) Where a loan is made at or above such reasonable commercial rate of interest as is applicable to a reasonably sound security, there is no presumption that a "discount" at which the loan is made is a premium at which it is payable is in the nature of interest. (2) The true nature of the "discount" or the premium as the case may be, is to be ascertained from all the circumstances of the case and, apart from any matter of law which may bear upon the question (such as the interpretation of the contract), will fall to be determined as a matter of fact by Commissioners.

(3) In deciding the true nature of the "discount" or premium, in so far as it is not conclusively determined by the contract, the following matters together with any relevant circumstances are important to be considered, viz., the term of the loan, the rate of interest expressly stipulated for, the nature of the capital risk, the extent to which, if at all, the parties expressly took or may reasonably be supposed to have taken the capital risk into account in fixing the terms of the contract. In this summary I have purposely confined myself to a case such as the present where a reasonable commercial rate of interest is charged. Where no interest is payable as such, different considerations will, of course apply. In such a case a "discount" will normally, if not always, be a discount chargeable under para (b) of Rule 1 to Case III. Similarly a "premium" will normally, if not always, be interest. But it is not necessary or desirable to do more than point out the distinction between such cases and the case of a contract similar to that which we are considering. [ADDRESS] correctly identified that the answer to the question must come from the Instrument itself, [NAME] concluding (at AB 80) that no particular assistance in characterisation could be gleaned from the integers in the formulae because in this case appearances are deceiving. Calculations required by the formulae to determine notional rent and notional [NAME], which at first glance might be considered of an income nature, are treated by the Commissioner as capital, possibly for the reason that the amount, notwithstanding its method of calculation, represents compensation for the loss of a capital asset. [NAME] rightly highlighted that the appearance of an integer in the formulae as interest does not necessarily mean that it is interest. On the one hand, despite the Government's declared intention in 1981 to provide compensation and the significant delay before doing so, no interest other than the increment was provided for between the years of appropriation and determination. Additionally, the calculation, though notional, appears to have tried to approximate a market value. The [NAME], in making its determination, looked at the size and nature of the holdings and as the formulae called for, made an estimation of production rates. Furthermore, the increment was expressed in percentages that varied from period to period, appearing to match commercial interest rates that may have been available to the [NAME] if it had had the use of its money and had chosen to invest it during that period. The increment was time dependent. The time period was that between the date of vesting and the date of determination. Interest was payable pursuant to clause 24 for the time after determination. On the other hand, the increment may not have been for the purpose of compensating the [NAME] for being out of funds for the period, but merely to reflect the Government's intention to effect reasonable compensation and its attempt to bring the compensation for the asset up to the value of the day. With this in mind some of the pertinent elements of the transaction should be noted:

1. This case is not dealing with an investment or proposed investment by the [NAME]. In fact the [NAME] had no say at all in the transaction. It was not expecting interest on monies lent, nor had it entered into a sale of an asset whereby delayed settlement might mean it could expect interest to accrue.

2. The Government did not view the transaction as a commercial agreement. It had the option of providing for interest separately as was the case in [ADDRESS], but did not exercise it.

3. Moreover, the appropriation of the asset occurred in 1981, yet a right to compensation did not arise until many years later. These factors tend to indicate that the increment was not in the nature of interest, merely an aspect of the formulae, more specifically, a form of indexation, marking the compensation up to the value of the day. I therefore agree with [NAME] and [NAME] that the increment represents capital. The nature of the payment was to compensate the [NAME] for the loss of a capital asset. The incremental component cannot be viewed as compensation for lack of use of monies, rather it was part of one capital sum. I agree with the [APPELLANT] proposed.

Counsel and Solicitors Mr. [COUNSEL]. [NAME]., with for Appellant: [redacted] Australian Government Solicitor Counsel and Solicitors Mr. [COUNSEL]. [COUNSEL] Q.C. with for Respondent: [redacted] [COUNSEL] of hearing: 23 May 1995 Date Judgment delivered: 8 August 1995