High Court Upholds Deduction for Vacating Premises

OUTCOME: Allowed

High Court of Australia [NAME] [COMPANY] v Commissioner of Taxation (Cth) [1966] HCA 15

ORDER Appeal allowed with costs. Case remitted to the Commissioner for him to issue an amended assessment in accordance with this decision. Usual order as to exhibits.

Cur. adv. vult.

March 11 [NAME]. delivered the following written judgment:—

This is an appeal by a [NAME], [COMPANY]., from a decision of a Board of Review under the Income Tax and Social Services Contribution Assessment Act 1936-1961 Cth. The Commissioner disallowed [NAME]'s claim to a deduction. [NAME] objected to the assessment. The Board of Review disallowed the objection. The case now comes to this Court. The question for determination is whether moneys paid by [NAME] to obtain vacant possession of certain premises owned by [NAME] were paid for the surrender of a lease and thus deductible by [NAME] landlord pursuant to s. 88 (1) (b) of the Act.

[NAME] company is a property owner and investment company. In 1958 it purchased two adjoining suburban shops with dwellings attached, Numbers 407 and 408, in [ADDRESS], Chelsea. Its purpose in doing so was that it might demolish them and erect a large new building on the site. To do this it had to obtain vacant possession of both premises. This case concerns [NAME] 408, but it is desirable to notice first what happened in regard to [NAME] 407. [NAME] carried on business there. He held the premises on a weekly tenancy. He did not live there. It seems therefore in 1958 that he was not entitled to the protection that the Landlord and Tenant Act 1958 Vict. gave to tenants of premises let as dwelling-houses. Nevertheless he was reluctant to give up possession of his business premises without some compensation. He was threatened with a notice to quit, but no notice was in fact issued. [NAME] agreed to pay him £1,250 in consideration of his vacating the premises. The money was paid. Having got his money, the tenant vacated the premises. [NAME] claimed that the amount that it had paid (spread over two years pursuant to s. 88 (5)) was deductible by virtue of s. 88 (1) (b). The Commissioner disallowed this. The matter went to the Board of Review along with the question now under appeal. There was an issue before the Board as to whether the amount was paid solely in order to get possession of the premises or, as the Commissioner contended, to obtain the goodwill of the grocery business, there being some reference to this in the correspondence between the parties. This issue was found in favour of [NAME] by the Board. This decision is not challenged, so that [NAME] 407 has no further place in the case except by way of contrast with [NAME] 408.

In 1958 when the premises were purchased by [NAME] 408 was occupied by a [NAME] named [NAME] as a [NAME] and dwelling. He had been there for some years. He lived on the premises. At the time [NAME] acquired the property he was in possession as a weekly tenant at a rental of £6 per week under a tenancy agreement dated 29th March 1954 with [NAME]'s predecessor in title. He continued as tenant of the new owner, [NAME], until 1960 when [NAME], wishing to obtain possession of the premises so that it might proceed with its project of demolition and building, gave him a notice to quit. The notice is dated 28th March 1960. It was served on that day. It required the tenant to quit and deliver up possession at the expiration of thirty-one days from that date. Pursuant to s. 82 (6) of the Landlord and Tenant Act the notice stated as the ground on which it was given that the premises were required by the [NAME] for demolition and reconstruction. [NAME] did not vacate the premises on the expiry of the notice. He remained in occupation, relying on whatever rights he had and intent to make the best bargain he could before he would give up possession. The premises were, or were taken by both the landlord and tenant to be, "prescribed premises" within the meaning of the Landlord and Tenant Act as they included a dwelling-house.

[APPELLANT] was thus, after the expiry of the notice to quit, in occupation under what is commonly called a statutory tenancy. [NAME] as landlord could recover possession only by an order of a court and after the delays and difficulties that that process usually involved. [NAME] caused the necessary summons to issue to put proceedings in train; but, being advised by its solicitor that a more sure way of obtaining possession would be to buy [NAME] out, the summons was not served and negotiations with him were begun. After some weeks of bargaining an agreement was reached. [NAME] then, on 27th September 1960, executed a document in the following terms:

I, [NAME], [NAME], [NAME], of [ADDRESS], Chelsea, do herein irrevocably agree to vacate the above premises, now held by me from week to week, on or before the tenth day of October, one thousand nine hundred and sixty, on the consideration of the sum of three thousand five hundred pounds (£3,500), being paid to my solicitor, Mr. [COUNSEL]. Payne of Parkdale, on possession of the premises being given to Mr. [NAME] on behalf of [COMPANY]. Such sum to include all fittings, fixtures, refrigerator, scales and equipment necessary for the carrying on of a greengrocery business, as per schedule attached hereto.

The schedule was a list of certain equipment and fittings upon the premises. No separate price was put on these; but [NAME], in the course of the negotiations, had said he wanted to sell them, and it had been agreed that [NAME] should take them over "as part of the deal". In fact they were sold by [NAME] to a buyer, whom [NAME] found, for the sum of £95. The sum of £3,500 was duly paid to [NAME]. He thereupon vacated the premises and [NAME] demolished the building and erected a new building in its place which it let as an income-producing asset.

[NAME] treated the sum of £3,405 (that is £3,500 less £95) as the amount that it had paid to gain vacant possession of the premises. It is this sum that it claims is, within the meaning of the Income Tax and Social Services Contribution Assessment Act s. 88 (1), "a premium in respect of land used for the purpose of producing assessable income paid for the surrender of the lease". [NAME] gave notice that it elected pursuant to s. 88 (5) and (6) to treat "the period of the lease unexpired at the date when the premium was paid" as two years. The deduction that [NAME] claimed should be allowed in arriving at its taxable income is thus in respect of the nine months of the year in question: that is to say, it is 9/24ths of £3,405—that is £1,277.

All "premiums", as defined by s. 83 of the Act, which (in accordance with Pt III Div. 4 which deals with "Leases") are allowable deductions, are not outgoings that would upon general principles be treated as being on income account. The statutory provisions are artificial and the general distinction between capital and income expenditure provides little aid in their interpretation. Section 88 (1) as I read it, and counsel did not suggest any other interpretation, deals (notwithstanding its side-note) with deductions allowable to lessees and lessors—by pars. (a) and (b) respectively. The word "premium" includes a sum paid by a [NAME] to his [NAME] as the consideration for his surrendering his term, and also a sum paid by [NAME] to his [NAME] as consideration for his acceptance of his surrender of an onerous lease. A surrender by deed of a particular estate of freehold becomes effective at once and does not await formal acceptance: [NAME] v. [NAME] [1] . But this of course is not so of a leasehold. [NAME] cannot at will divest himself of a lease. [NAME]'s assent is required, except in the case of a tenancy at will. A tenancy at will can be abandoned, but not surrendered for there is no term to surrender.

1. (1698) 2 Salk. 618 [91 E.R. 523].

The question in this case turns upon a technical and narrow point. It is said for the Commissioner that, [NAME] contractual tenancy having been determined by notice to quit, the money paid him to induce him to relinquish his statutory right to remain in occupation was not, within the meaning of the Act, paid "for the surrender of a lease" (s. 88 (1))—with any enlargement of that phrase that is imported by the words in the definition of premium "for or in connexion with the surrender of a lease". At the time when the money was agreed to be paid [NAME] was in occupation under a statutory tenancy, and the abandonment of rights as statutory tenant is, it was argued, not aptly described as a surrender of a lease. The Act itself, it was said, indicates this, because it assumes in s. 88 (1) (b) that the lease surrendered is an interest that might have been transferred. This argument makes a distinction between the payments to the [NAME] and the payment to [NAME]. [NAME] had been given a notice to quit before he was paid to give up possession, whereas the [NAME] was paid money without having been first given a notice to quit. In each case the money was paid by [NAME] to obtain vacant possession of the premises; but it is said that one case falls within the words of the Act, the other does not.

The effect of a notice to quit and the nature of the right that, under legislation such as the Landlord and Tenant Act, the tenant of prescribed premises nevertheless has to remain in possession have been considered in many cases. In [NAME] v. [NAME] [1] this Court ([NAME] and [NAME] JJ.) said: "A body of judicial decision exists for the view that, after a valid notice to quit has been given and expires, a tenancy is brought to an end , but nevertheless the [NAME] remains protected against dispossession by the [NAME] whether by peaceable re-entry or otherwise unless and until an order for possession is made by a court of competent jurisdiction under the statutory provisions and the time for the execution of the order expires, the tenant being liable to pay the rent and observe the other obligations of the tenancy, so far as applicable, in the meantime". References were then given to a [NAME] of cases in support of that proposition. In [APPELLANT] v. [APPELLANT] [1] , [NAME]. described the tenant's possession after the notice to quit by saying "His possession or occupancy however involves no more than a personal right and it does not pass by assignment to a stranger to the former tenancy". His Honour referred to [NAME] v. [NAME] [1] ; see too [NAME] v. [NAME] [2] . In [NAME] v. [NAME] [3] Sargant L.J. remarked that "the statutory tenant has no estate or property as tenant at all, but has a purely personal right to retain possession of the property". It was said for the Commissioner that, strictly understood, a surrender involves the giving up of a proprietary as distinct from a personal right; and that for two reasons the abandonment of the statutory right to continue in occupation cannot be a surrender of a lease: first, the statutory tenant has no interest in the land, and secondly, that such right of occupation as he has does not arise from the lease, but from the statute. These propositions may conveniently be considered separately.

1. (1951) 84 C.L.R. 310, at p. 320. 2. (1957) 99 C.L.R. 462, at p. 466. 3. (1950) 50 S.R. (N.S.W.) 250; 67 W.N. 149. 4. (1952) 86 C.L.R. 223. 5. [1928] 2 K.B. 117, at p. 131.

[NAME] words, "a surrender properly is a yielding up of an estate for life or years to him that hath an immediate estate in reversion or remainder wherein the estate for life or years may drown by mutual agreement between them": Co. Litt. 337 b. It seems to me that it really begs the question to say that after the notice to quit [NAME] had no estate or interest in the land. He had in the ordinary sense no proprietary right, because he could not assign his right to remain in occupation. He had of course no estate in the feudal sense. What we now call a tenancy was not a tenure. Not until the end of the fifteenth century could it be said that a termor had an estate in land. Thereafter it could be, because the action of ejectment secured the tenant in his possession. What rights did the law actually give to [NAME]? That, rather than their description, is the essential question. It gave him a right to continue in occupation subject to his performing in favour of [NAME] [NAME] what had formerly been his contractual obligations under the lease, to pay rent and so forth. Until he should be ordered by a competent court to give up possession, he had a right to exclusive possession as against all others including [NAME]. Such a right, when it flows from contract with the landlord, is the very essence of tenancy. It creates an interest in land: [NAME] v. [NAME] [1] . It seems to me that this same right when it flows from statute rather than from contract is an interest in relation to the land, if not, in a technical sense, an estate in the land. It is true that this statutory tenancy does not fit into the earlier known categories. It is a new creation. Its incidents are its own. It is true that the statutory tenant cannot assign his right of occupation. It is a personal right although in some cases it descends upon his death. Doubtless a right to assign the term to a stranger is an incident of an ordinary leasehold, although it may be restricted by the provisions of the lease. But this seems to me to be of itself inconclusive. I see no reason why the word "surrender" should not be thought appropriate to describe an abandonment in favour of [NAME] of a statutory tenant's rights to possession. The landlord recovers his estate unrestricted by them. [NAME]. observed in [NAME] v. [NAME] [1] that in the field of statutory tenancies the use of terms cannot be given its former significance. We must, it seems to me, look at the nature of the rights and see whether they cannot be said to be surrendered. [NAME]. found no difficulty in [NAME] v. [NAME] [2] , in this use of the word in the Act there under consideration. And I find no difficulty here. Some parts of the language of the Income Tax and Social Services Contribution Assessment Act might have surprised Sir [NAME]. For example, the opening words of s. 88, "a premium in respect of land, premises or machinery", when referred back to the definition in s. 83 show that a premium for the surrender of a lease includes a price paid for putting an end to a lease of machinery. The rights of [NAME] under a lease of machinery are not I would think ordinarily an assignable proprietary interest in the machinery. A lease of machinery is not a demise. It is a hiring. The proprietary interest remains in the owner. The hirer gains a legal right of possession and during the period of the hiring the true owner is debarred from resuming possession against the hirer's will. The word "reversion" seems to me inapt to describe the ownership of chattels let on hire.

1. (1959) 101 C.L.R. 209. 2. (1957) 99 C.L.R., at p. 475. 3. (1952) 86 C.L.R., at pp. 249, 250.

I think that when [NAME] gave up his possession and right to remain in occupation he could quite properly be said to have surrendered it to [NAME]. And the money paid him could quite properly be described as the consideration for his doing so.

But then it is said this was not a surrender of a lease. A lease strictly means a species of conveyance, the grant of a right to the exclusive possession of land for a term less than that which the grantor has. But by a usage that is apparently metonymical in origin the word "lease" can describe not only the grant but that which is granted, namely the term. The surrender of a lease thus properly means the surrender of the term granted. A lease in this context extends not only to a demise for a fixed term, but also to a periodic tenancy, for that can be surrendered. The difficulty that it was said faces [NAME] is that, the contractual tenancy having been determined by notice to quit, and no new tenancy created by grant express or implied, the statutory tenancy cannot be called a lease. Therefore, it is said, the surrender of the statutory tenant's statutory rights cannot be said to be the surrender of a lease. If the provisions of the Income Tax and Social Services Contribution Assessment Act were noteworthy for an exact use of legal language more weight might be given to this than I am disposed to give it. The question is not one relating to the rights as between themselves of landlord and tenant and persons claiming under them. It arises in a very different setting. In that setting it seems to me that the critical matter is that the "statutory tenant" has the rights that the statute gives him—and that those rights are given to him because he had been the tenant of [NAME] holding under a lease, including in that expression a periodic tenancy. The condition of his enjoyment of his statutory right is his continued performance of obligations under the lease. In this sense he is still bound by the lease and his obligations under it continue while he continues in the occupation that the statute provides for. [NAME] is still [NAME]. It seems to me, therefore, that money paid as the price for a person relinquishing possession of premises is, in the sense of the income tax law, a premium upon the surrender of a lease whether the [NAME] was in possession as a tenant under the lease or was in possession by virtue of the statute giving him rights which arise from the fact of his being or having been [NAME].

As to the argument based on the reference to a transfer of a lease in s. 88 (1) (b), this I think was based on a misapprehension. I confess that I have not understood why that paragraph is expressed in the involved form that it is; and counsel could not offer any satisfactory explanation. Whatever the explanation of it, it seems to me that to seek to extract from it a clear statement that only a term which could be transferred by a tenant to a third party is capable of being surrendered is to misread it. It assumes that the [NAME] is a person capable of taking by transfer the interest surrendered. It may involve a faulty analysis of the legal nature of a surrender, for a surrender operates by merger, not by assignment. But, accepting what appears to be the hypothesis, the provision deals with the hypothetical consequences of the surrender of an interest which is assumed to be transferable: it does not postulate that it must be transferable. It is not I think inconsistent with a relinquishment by a statutory tenant in favour of [NAME] of whatever rights he, the tenant, had.

It was suggested by counsel for the Commissioner, although with no great enthusiasm, that the £3,500 agreed to be paid was not simply for vacant possession but, in part at all events, as the price of the goodwill of the [NAME]'s business. There was no basis at all for this proposition. So far as appears [NAME] did not propose to set up in business as a [NAME] or to acquire the goodwill of [NAME]'s business for any purpose.

For these reasons I consider that [NAME]'s contention that the assessment is excessive should be upheld, the appeal from the Board of Review allowed with costs, and the matter remitted to the Commissioner to issue an amended assessment.