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Re: PETER WILLIAM HEPPLES And: COMMISSIONER OF TAXATION No. G627 of 1989 FED No. 296 Taxation

COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Gummow(2) and Hill(3) JJ.
HRNG
SYDNEY
#DATE 28:6:1990

  Counsel and Solicitors       Mr D H Bloom QC and
  for Applicant:               Mr B J Sullivan instructed by
                               Messrs Clayton Utz

  Counsel and Solicitors       Mr B J Shaw QC and Mr A H
  for Respondent:              Slater instructed by the
                               Australian Government Solicitor
ORDER
  The Court answers the questions on the stated case as follows:
Question A

  Was there, in consequence of the facts recited in the special case, included
in the assessable income of the applicant for the year of income ended 30 June
1986:
    (a) an amount of $40,000; or
    (b) some other amount and if so, what amount,
pursuant to sub-s. 160ZO(1) of the Income Tax Assessment Act 1986?
Answer
    (a) Yes
    (b) This question does not arise for consideration.
Question B

  Who should pay the costs of the proceedings?
Answer

  This question does not arise because counsel for the parties informed us
that it had been agreed by the parties that each party should pay his own
costs of the proceeding before this Court.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal
Court Rules.
JUDGE1
  This case raises for the first time the construction of Part IIIA of the
Income Tax Assessment Act 1936 ("the Act") relating to capital gains and
capital losses and in particular sub-ss. 160M(6) and (7) which concern the
deemed disposal of assets.

2.  The matter comes to this Full Court as a case stated by the President of
the Administrative Appeals Tribunal under s. 45 of the Administrative Appeals
Tribunal Act 1975 which states the following facts as agreed to by the
parties:
    "1. In or about late August or early September
    1985 the Applicant was first employed by Hunter
    Douglas Limited ('Hunter Douglas').  He
    was employed as the Marketing Director/General
    Manager of the Window Furnishing Division of that
    company. On or about 1 September 1985
    the Applicant and Hunter Douglas entered into
    a written agreement (`the Employment Agreement')
    governing the terms and conditions of
    the employment.
    2. In the course of his employment with Hunter
    Douglas the Applicant was responsible for
    management of the operations of the Window
    Furnishing Division of Hunter Douglas. The
    business activities of that Division
    accounted for a very significant proportion
    (approximately two-thirds) of the total
    business activities of Hunter Douglas.
    3. On or about 27 June 1986, the Applicant
    entered into a Deed with Hunter Douglas,
    the purpose of which was recited in the
    Deed as being 'to record the terms upon
    which Hepples has agreed, in consideration
    of the covenants of Hunter Douglas herein
    contained and from and after the date of
    his ceasing to be employed by Hunter
    Douglas, to be restrained from carrying on
    or being interested in any business or
    other undertaking or activity as more
    particularly herein referred to'
    (hereinafter referred to as 'the
    Restrictive Covenant Deed'). A true copy
    of the Restrictive Covenant Deed is annexed
    to this Stated Case and marked 'A'.
    4. It was orally agreed between the Applicant
    and Hunter Douglas that the restraint of
    trade imposed by the Employment Agreement
    should cease to have any effect from the date
    of entry into the Restrictive Covenant Deed.
    5. On or about 27 June 1986, and before 30
    June 1986, Hunter Douglas paid to the
    Applicant an amount of $40,000, pursuant to
    the terms of the Restrictive Covenant Deed.
    6. The taxpayer did not incur any capital loss
    during the year of income ended 30 June 1986."

3.  The Deed, a copy of which is referred to as annexure "A" to the special
case, is between Hunter Douglas Limited and the applicant and it reads as
follows:
    "WHEREAS : -
    (a) Hepples is presently employed by and has
    acted as a Director and General Manager
    Window Covering Products of Hunter Douglas.
    (b) Hepples and Hunter Douglas have agreed
    to enter into this Deed to record the
    terms upon which Hepples has agreed,
    consideration of the covenants of Hunter
    Douglas herein contained and from and
    after the date of his ceasing to be
    employed by Hunter Douglas, to be
    restrained from carrying on or being
    interested in any business or other
    undertaking or activity as more
    particularly herein referred to.
    NOW THIS DEED WITNESSETH as follows:-
    1. In consideration of Hepples entering
    into this Deed and provided that he
    shall at all times observe and fulfil
    all of the terms covenants and conditions
    hereof Hunter Douglas shall pay Hepples
    the sum of FORTY THOUSAND DOLLARS
    ($40,000.00) upon signing of this Deed.
    2. In consideration of Hunter Douglas
    entering into this Deed, Hepples
    covenants with Hunter Douglas or any
    successor, subsidiary or affiliate
    thereof (hereinafter called 'the
    Associated Companies') that for a period
    of TWO (2) years immediately following
    the moment of the termination of his
    employment by Hunter Douglas within the
    territorial limits of Australia, he will
    continue to be bound by the Clauses 2,
    3, 4 and 5 of his Employment Agreement;
    copy of said Clauses are attached to
    this Deed as Schedule 'A'.
    3. During the term hereof, Hepples shall be
    entitled to request Hunter Douglas'
    acknowledgement that the terms of this
    Deed shall no longer apply in relation
    to any products which Hunter Douglas
    and/or its Associated Companies has
    ceased to produce or license which
    acknowledgement shall not be
    unreasonably withheld.
    4. Hepples acknowledges and agrees that
    this Deed has been entered into by him
    not only in favour of Hunter Douglas
    but in favour of each of the Associated
    Companies for their respective rights
    and interests the intent that each of
    the same shall be entitled to enforce
    the obligations of this Deed against him
    to the extent to which the protection of
    the business and assets may require.
    5. Hunter Douglas covenants to pay all
    costs of and incidental to the
    preparation execution and stamping
    hereof and any stamp duty payable hereon.
    SCHEDULE 'A'
    2. Special Processes and Trade Secrets
    (1) The Employee covenants with the Employer and
    each of the Companies that during the
    continuance of his employment and for a
    period of (  ) years after termination
    thereof (from any cause whatsoever):
      (a) he shall not (except in the
      proper course of his duties)
      divulge to any person, firm or
      corporation any information
      concerning the Special Processes,
      (b) he shall not utilise or turn to
      his own account whether or not
      in association or co-operation
      with any other party any of the
      Special Processes.
    (2) The Employee covenants with the Employer and
    each of the Companies that during the
    continuance of his employment and for a
    period of TWO (2) years after termination
    thereof (from any cause whatsoever):
      (a) he shall not (except in the
      proper course of his duties)
      divulge to any person, firm or
      corporation any information
      concerning the Trade Secrets,
      (b) he shall not utilise or turn to
      his own account whether or not
      in association or co-operation with
      any other party any of the Trade Secrets.
    3. Non-Competition
    The Employee covenants with the Employer that
    upon the termination of his employment (from any
    cause whatsoever) and for the period described
    in Schedule VIII and within the territorial
    limits of Australia:
      (1) he will not either on his own behalf or in
      partnership or as an employee directly or
      indirectly engage in any business or
      occupation in which he or his Employer will
      manufacture distribute or sell to any party
      any of the goods or perform any of the
      operations listed in Schedule II.
      (2) . . .
      an independent contractor or consultant or
      . . . or of assistance in such employment or
      engagement by any other party, of any
      person who at any time in the period of the
      two (2) years immediately prior to the
      termination of the Employee's employment
      has been an employee of the Employer.
      (3) he will not by himself or any servant or
      agent canvass or solicit for himself or any
      other person or any firm or corporation any
      customer of the Employer, who was a
      customer or a prospective customer of the
      Employer during the term of the Employee's
      employment and with whom the Employee had
      during the course of his employment
      dealings or negotiations.
    4. Inventions
      (1) The Employee will treat as confidential and
      promptly disclose to the Employer in writing
      any inventions, formulae, special processes,
      techniques, know how and the like (hereinafter
      called 'the Inventions') which are discovered,
      conceived or developed by him, either alone or
      in conjunction with others:
      (a) during the course of his employment,
      (b) or at any time resulting from use or
      utilisation of the Special Processes,
    PROVIDED THAT the Inventions relate to or are useful in
    the business of the Employer.
    (2) The Employee will assign and convey to the
    Employer or as it may direct all his interest
    in the Inventions and perform all such acts (at
    no expense to himself) which the Employer may
    consider necessary or helpful in obtaining or
    maintaining patent or like protection in the
    Commonwealth of Australia and foreign countries
    for all of the said Inventions.
    (3) The Employee hereby irrevocably appoints the
    Employer to be his attorney in his name and on
    his behalf to execute and do any such
    instrument or thing and generally to use his
    name for the purpose of giving to the Employer
    or nominee the full benefit of the provisions
    of this Clause. A certificate in writing
    signed by any director or the secretary of the
    Employer that any instrument or act falls
    within the authority hereby conferred shall be
    conclusive evidence that such is the case.
    5. Severability
    . . .
    THE SCHEDULES HEREINBEFORE MENTIONED
    SCHEDULE 1
    . . ."

4.  The learned President of the Administrative Appeals Tribunal stated the
following questions of law to be determined by the Full Court:-
    "(A) Was there, in consequence of the facts
         recited herein, included in the assessable
         income of the Applicant for the year of
         income ended 30 June 1986 -
         (a) an amount of $40,000; or
         (b) some other amount, and if so, what amount,
         pursuant to sub-section 160ZO(1) of the Income
         Tax Assessment Act, 1936?
     (B) Who should pay the costs of these proceedings?"

5.  The Act was amended by the inclusion of Part IIIA which introduces a tax
on capital gains applying to assets acquired on or after 20 September 1985. In
determining whether a gain has been made on the disposal of an asset that has
been held for at least twelve months the asset's cost base is adjusted for
inflation by reference to the Consumer Price Index. Hence, only gains in
excess of the inflation rate on assets are subject to tax. Assets disposed of
within twelve months of acquisition are subject to the tax if disposed of for
more than the cost base of the asset.

6.  Part IIIA commences with s. 160A and concludes with s. 160ZZS. Broadly
speaking a liability to capital gains tax arises where:
    . an asset which is not exempt was acquired on or after 20
      September 1985;
    . that asset was disposed of on or after 20 September
      1985;
    . the owner of the asset immediately before its disposal
      was a resident of Australia or the asset was a "taxable
      Australian asset"; and
    . the asset is not in the owner's hands trading stock or
      subject to s. 26AAA or other form of excluded asset.

7.  Central to the operation of the capital gains tax provisions are the
concepts of an "asset", "disposal" and "acquisition" of assets. Before turning
to these concepts it is helpful to state in summary form the scheme of Part
IIIA.

8.  Division I of Part IIIA contains a number of definitions. The word "asset"
is defined for the purposes of Part IIIA by s. 160A broadly to mean any form
of property and includes
    "(a) an option, a debt, a chose in action, any
         other right, goodwill or any other form of
         incorporeal property;
     (b) currency of a foreign country; and
     (c) any form of property created or
         constructed, or otherwise coming to be
         owned without being acquired, but does
         not include a motor vehicle of a kind
         mentioned in para. 82AF(2)(a)."

9.  Section 160B defines the terms "personal-use asset", "listed personal-use
asset" and "non listed personal-use asset" for the purposes of the Part.
"Personal-use asset" is defined to include assets owned by a taxpayer and used
or kept primarily for the personal use of enjoyment of the taxpayer or
associates of the taxpayer. "Non listed personal-use asset" is an expression
defined by sub-s. 160B(3) as meaning "a personal-use asset other than a listed
personal-use asset".

10.  Division 2 of Part IIIA states that that Part applies to the disposal of
assets including what is said to constitute the disposal and acquisition of an
asset, the treatment of composite assets, part disposal of assets and the
treatment of deceased estates.

11.  Sub-section 160L(1) ensures that Part IIIA applies to every disposal on
or after 20 September 1985 of an asset wherever situate which immediately
before the disposal was owned by an Australian resident or by a person in the
capacity of a trustee of a resident trust estate or of a resident unit trust
if the asset was acquired by that person on or after 20 September 1985. This
equates the general position under the Act that Australian residents are
subject to income tax on income both within and outside Australia.

12.  Sub-section 160L(2) relates to the disposal of taxable Australian assets
by non-residents and corresponds generally with the position under the Act
that non-residents of Australia are subject to income tax on income from
sources in Australia.

13.  Sub-sections 160L(3)-(7) relate to certain disposals of assets to which
Part IIIA will not apply.

14.  Section 160M contains provisions to determine what will constitute a
disposal and an acquisition of an asset for the purposes of Part IIIA. Broadly
speaking, there is a disposal of an asset and an acquisition of asset when
there is a change in the ownership of the asset (sub-s. 160M(1)). Where a
change occurs in the ownership of an asset, the change is deemed for the
purposes of Part IIIA to have effected the disposal of the asset by the person
who owned it immediately before the change and an acquisition of an asset by
the person who owned it immediately after the change (sub-s. 160M(1)). This is
the general rule which is expressly made subject to other provisions of Part
IIIA.

15.  Sub-section 160M(2) provides that a reference in subsection (1) to a
change in the ownership of an asset means a change that has occurred in any
way including a change by:
    "(a) the execution of an instrument;
     (b) the entering into of a transaction;
     (c) the transmission of the asset by operation
         of law;
     (d) the delivery of the asset;
     (e) the doing of any other act or thing;
     (f) the occurrence of any event."

16.  Sub-section 160M(3) provides that, without limiting the generality of
subsection (2), there are four circumstances where a change shall be taken to
have occurred in the ownership of an asset, namely:
    "(a) by declaration of trust in relation to the
    asset under which the beneficiary is
    absolutely entitled to the asset as against
    the trustee;
    (b) in the case of an asset being a debt, a
    chose in action or any other right, or an
    interest or right in or over property - the
    cancellation, release, discharge,
    satisfaction, surrender, forfeiture, expiry
    or abandonment, at law or in equity, of the asset;
    (c) in the case of an asset being a share in or
    a debenture of a company - by the redemption
    in whole or in part, or the cancellation, of
    the share or debenture; or
    (d) subject to sub-s. (4) where a transaction in
    relation to the asset under which the use
    and enjoyment of the asset was or is
    obtained by a person for a period at the end
    of which the title to the asset will or may
    pass to that person.

17.  Sub-section 160M(4) contains a proviso to the operation of para.
160M(3)(d) to the effect that if the period for which a person referred to in
that paragraph had the use and enjoyment of an asset terminates without title
in the asset passing to that person, no change of ownership will be taken to
occur.

18.  Sub-section 160M(5) provides for four situations in which, for the
purposes of Part IIIA, assets are to be taken to have been acquired being:-
    "(a) an issue or allotment of shares in a company
    constitutes an acquisition of those shares
    by the person to whom they were issued or
    allotted but does not constitute a disposal
    of the shares by the company;
    (aa) an issue of shares in a unit trust by the
    trustee of the unit trust constitutes an
    acquisition of the units by the person to
    whom they were issued but does not
    constitute a disposal of units by the
    trustee of the unit trust;
    (b) the construction of an asset by or for a
    person constitutes the acquisition of the
    asset by the person; and
    (c) the creation of an asset by or for a person
    constitutes the acquisition of the asset by the person."

19.  Sub-section 160M(6) and (7) are the crucial provisions for present
purposes. Sub-section (6) is in the following terms:
    "160M(6) A disposal of an asset that did not
    exist (either by itself or as part of another
    asset) before the disposal, but is created by the
    disposal, constitutes a disposal of the asset for
    the purposes of this Part, but the person who so
    disposes of the asset shall be deemed not to have
    paid or given any consideration, or incurred any
    costs or expenditure, referred to in paragraph
    160ZH(1)(a), (b), (c) or (d) or (3)(a), (b), (c)
    or (d) in respect of the asset."

20.  Sub-section 160M(7) also applies, but subject to the other provisions of
Part IIIA, to situations where there is a disposal of an asset created by the
disposal. It deems a disposal of an asset to have occurred where a taxpayer
receives or becomes entitled to receive an amount of money or other
consideration for the forfeiture or surrender of a right or for refraining
from exercising the right or receives consideration for the use or
exploitation of an asset. The sub-section is in the following terms:
    "160M(7) Without limiting the generality of
    sub-section (2) but subject to the other
    provisions of this Part, where -
      (a) an act or transaction has taken place
      in relation to an asset or an event
      affecting an asset has occurred; and
      (b) a person has received, or is entitled
      to receive, an amount of money or
      other consideration by reason of the
      act, transaction or event (whether or
      not any asset was or will be acquired
      by the person paying the money or
      giving the other consideration)
      including, but not limited to, an
      amount of money or other consideration -
        (i) in the case of an asset being a
            right - in return for forfeiture
            or surrender of the right or for
            refraining from exercising the right; or
       (ii) for use or exploitation of the asset,
            the act, transaction or event constitutes a
            disposal by the person who received, or is
            entitled to receive, the money or other
            consideration of an asset created by the disposal
            and, for the purposes of the application of this
            Part in relation to that disposal -
      (c) the money or other consideration
      constitutes the consideration in
      respect of the disposal; and
      (d) the person shall be deemed not to have
      paid or given any consideration, or
      incurred any costs or expenditure,
      referred to in paragraph 160ZH(1)(a),
      (b), (c) or (d), (2)(a), (b), (c) or
      (d) or (3)(a), (b), (c) or (d) in
      respect of the asset."

21.  Sub-sections 160M(8), (9), (10) and (11) apply in cases where a resident
taxpayer, resident trust estate, resident unit trust, or resident partnership
ceases to be a resident of Australia. As mentioned earlier resident taxpayers
are liable to tax on capital gains on the disposal of assets wherever situated
whilst non-residents are liable to tax on capital gains of a disposal taxable
Australian assets only. These provisions are inserted to ensure that tax on
gains on assets other than taxable Australian assets that accrued while the
owner was a resident of Australia cannot be avoided by the owner acquiring
non-resident status. This objective is achieved by the sub-sections deeming
there to have been a disposal of all the assets owned by the taxpayer (sub-s.
(8)), resident trust estates (sub-s. (9)), resident unit trusts (sub-s. (10))
and resident partnerships (sub-s. (11)), other than taxable Australian assets
or assets acquired before 20 September 1985 to which Part IIIA does not apply,
at the time when the taxpayer, trust estate, unit trust or partnership ceases
to be resident. Hence, where a resident taxpayer ceases to be a resident of
Australia on or after 20 September 1985 para. 160M(8)(a) deems every asset
owned by the taxpayer immediately before the relevant time, other than taxable
Australian assets as defined in s. 160T, assets acquired by the taxpayer
before 20 September 1985 and assets to which sub-ss. (9), (10) or (11)
applies, to have been disposed of at the time when the taxpayer ceases to be a
resident.

22.  Paragraph 160M(8)(b) applies so that every asset deemed to have been
disposed of by the operation of para. 160M(8)(a) is deemed to have been
disposed of for consideration equal to the market value of the asset at the
relevant time.

23.  Sub-sections 160M(12), (13), (14) and (15) apply to cases where a
non-resident taxpayer and certain other persons become residents of Australia.
The sub-sections apply to deem every asset owned by the non-resident taxpayer
to have been acquired by the taxpayer at the time of becoming resident.

24.  Section 160N deals with the situation where assets are lost or destroyed
in whole or in part; it deems the loss or destruction to constitute a disposal
of the asset or the relevant part of the asset as the case may be.

25.  Section 160R provides that for, the purposes of Part IIIA, a reference to
a disposal of an asset includes, unless the contrary intention appears, a
reference to a disposal of part of an asset.

26.  Section 160U specifies the rules which govern the ascertainment of the
time of acquisition or disposal of an asset for the purposes of Part IIIA.
Sub-section 160U(6) applies in relation to the creation of assets and it
provides:
    "160U(6) Where the asset was created by a person
    otherwise than pursuant to a contract under which
    the person created the asset for another person,
    the asset shall be taken to have been acquired by
    the first-mentioned person -
      (a) if the asset did not exist (either by
      itself or as part of another asset)
      before the disposal - immediately
      before the asset was disposed of; or
      (b) in any other case - at the time of
      commencement of work on, or of work that
      resulted in, the creation of the asset."

27.  Sub-section 160U(6) does not apply where an asset is created by a person
pursuant to a contract for another person. In those circumstances the date of
acquisition of the asset is determined in accordance with sub-s. 160U(3).

28.  The final provision to which reference need be made is s. 160ZO which
requires a net capital gain realised by a taxpayer in any year to be included
in the taxpayer's assessable income for that year. It is s. 160ZC which
determines whether there is a net capital gain in relation to the taxpayer in
a year of income. Sub-section 160ZO(2) provides:
    "160ZO(2) A net capital loss that was incurred by
    a taxpayer in respect of a year of income shall be
    taken into account in accordance with section
    160ZC but is not otherwise allowable to the
    taxpayer as a deduction under this Act in respect
    of any year of income."

29.  I turn to the definition of "asset" in s. 160A the terms of which are set
out earlier. This definition was taken substantially from s. 19 of the Capital
Gains Tax Act 1979 (U.K.). The reference to "any other right" in para. 160A(a)
is in my opinion to be construed as a reference to other rights of a
proprietary nature; c.f. The Commissioner of Stamp Duties (New South Wales) v.
Yeend (1929) 43 CLR 235 with respect to the word "property" in s. 3 of the
Stamp Duties Act 1920 (NSW); and McCaughey v The Commissioner of Stamp Duties
(NSW) (1945) 46 SR NSW 192 which concerned s. 102(1)(a) of the Stamp Duties
Act 1920 (NSW). Jordan C.J. said in McCaughey at 201:
    "The word property is used in different senses.
    It may denote either objects of proprietary
    rights, such as pieces of land, domesticated
    animals and machines; or the proprietary rights
    themselves . . . In common parlance it is usually
    employed in the former sense but in the language
    of jurisprudence the latter."
See also McClure's Case (1947) SR NSW 93 and Commissioner of Stamp Duties v
J.V. (Crows Nest) Pty. Ltd. (1986) 17 NSWLR 529. But in O'Brien v Bensons
Hosiery (Holdings) Limited (1980) AC 562, which concerned the Capital Gains
Tax Act 1979 (UK), the House of Lords, in overruling the Court of Appeal, held
that the rights of an employer under a contract for personal services were
"property" and "assets" for the purposes of the United Kingdom capital gains
tax legislation.

30.  An interesting question arises whether the expression "any other right"
in para. 160A(a) can encompass a concept such as a "human right" or a "right
to work". See "Income Taxation: an Institution in Decay" (1986) 3 Australian
Tax Forum p 233, a paper presented by Professor Ross Parsons to the Australian
Tax Forum Workshop in October 1986. Notwithstanding the wide definition given
to the word "asset" in s. 160A in my opinion the expression "any other right"
in para. 160A(a) is to be understood as encompassing rights of a proprietary
nature and not a broader concept such as a right to work.

31.  The notion of "disposal" is critical to the operation of Part IIIA but,
curiously, the term is not defined in the Act. The word "disposal" in relation
to an asset is of wide import and includes the act or process of transferring
something to or providing something for another. It is a very comprehensive
term.

32.  The word "disposal" according to its ordinary meaning presupposes that
there is some proprietary right vested in the disposer at the time of the
disposal. Ordinarily the creation of an asset must precede its disposal and
would not generally comprehend property which was created by the act of
disposal. One talks of disposing of something that one has.

33.  In Kirby (Inspector of Taxes) v Thorn E.M.I. plc (1988) 1 WLR 445 the
taxpayer was a holding company which had a wholly owned subsidiary which in
turn owned all the issued share capital in three companies that carried on
business. A United States company sought to acquire all the issued shares in
the capital of the three trading companies and an agreement was entered into
between the taxpayer, its wholly owned subsidiary and the United States
company whereby the taxpayer agreed to procure the sale of the shares in the
three companies by its wholly owned subsidiary to the United States company
and to enter into a covenant in favour of the United States company that none
of the companies in the relevant group would compete with the three companies
for a period of five years. The United States company agreed to pay to the
taxpayer in consideration for this covenant the sum of $575,000 separately
from the payment of the purchase price to the wholly owned subsidiary for its
shares in the three trading companies.

34.  The relevant statutory provision was s. 22 of the Finance Act 1965
(U.K.), now s. 20 of the Capital Gains Tax Act 1979 (U.K.), which provides
that:
    "(a) there is for the purposes of this Act a
    disposal of assets by their owner where any
    capital sum derived from assets
    notwithstanding that no asset is acquired by
    the person paying the capital sum and this
    sub-section applies in particular to . . .
    (c) capital sums received in return for
    forfeiture or surrender of rights or for
    refraining of exercising rights; and
    (d) capital sums received as consideration for
    the use or exportation of assets."

35.  The learned primary Judge (Knox J. (1986) 1 WLR 851) held that s. 22(c)
applied only to assets which existed at the time of disposal and did not apply
to disposals of assets which consisted of an act of creation of the assets. As
the covenant did not exist before the making of the contract it could not be
an asset for the purposes of the U.K. Capital Gains Tax Act. His Lordship said
at 859:
    "The freedom of commercial activity of a person or
    a company is not in my judgment such an asset as
    is contemplated by (s. 22). There is no
    discernible chose in action in such a freedom.
    Nor is there any other right capable of being
    directly enforced against any other legal person."

36.  On appeal to the Court of Appeal Nicholls L.J. said at 450:
    "Thus the basic structure of the tax is of a charge
    on gains accruing to a person on disposal of an
    asset by him. There is no statutory definition of
    disposal but, having regard to the context, what
    is envisaged by that expression is a transfer of
    an asset (i.e. of ownership of an asset) as widely
    defined, by one person to another. The act
    presupposes that, immediately prior to the
    disposal, there was an asset and that the disponor
    owned it. Section 22(2)(a) then deals with the
    case where only part of an asset is disposed of,
    and section 22(2)(b) covers the case where,
    although the disponor owned an asset before the
    disposal, what he did by the disposal was not to
    transfer that asset but to carve or create out of
    it a right in favour of another. The grant of an
    easement over land is an obvious example. That
    also is stated to be a part-disposal. In that
    instance also the disponor owned a relevant asset
    prior to the disposal. Consistently with this
    basic structure of an existing asset owned by the
    disponor, section 22(3) provides that, where a
    capital sum is derived from assets, there is a
    disposal of assets 'by their owner'."

37.  As to the view that disposal ordinarily assumes or involves the notion of
a dealing with property remaining in existence and is used in the sense of
alienation see Re Levin (Earl) (Deceased) Inland Revenue Commissioners v
William Deacon's Bank Limited (1954) 3 All ER 81.

38.  Part IIIA contains a number of provisions that deem a disposal to have
taken place. The general provisions are found in s. 160M, predominantly
subsections (1), (2), (3), (6), (7) and (8) mentioned earlier. There are also
a number of specific provisions which deem a disposal to have occurred in
relation to particular types of assets, for example, s. 160ZS which applies to
leases, s. 160ZZC(3) (options), s. 160ZZD(3) (industrial property) and s.
160ZZI(4) (life assurance policies).

39.  I turn to sub-ss. 160M(6) and (7).

40.  Subsection 160M(6) is a very obscure statutory provision; but I will do
the best I can with it. Read literally, the subsection is concerned with the
disposal of an asset that did not exist, either by itself or as part of
another asset, before the disposal. The asset is created by the disposal. An
asset thus created then falls within the definition of "asset" in para.
160A(c) as "any form of property created or constructed, or otherwise coming
to be owned without being acquired". There is then a deemed disposal of such
an asset for the purposes of the capital gains tax provisions of the Act. The
asset is deemed to have a nil cost because sub-s. 160M(6) excludes from s.
160ZH all the acquisition costs to the taxpayer of the disposal of the asset.

41.  The essential difficulty with subsection (6) is that the word "disposal"
where first used cannot be literally construed in the same sense as it is last
used. It must bear either its ordinary meaning or one which can be derived
from other provisions of the Act.

42.  Doubtless the draftsman of sub-s. (6) sought to overcome the problem to
which reference was made by Whiteman and Wheatcroft on Capital Gains Tax 3rd
ed para. 6-50 where the learned authors said:
    "Where, however, the asset did not exist (either by
    itself or as part of another asset) before the
    disposal but is created by the disposal, it is
    submitted in the absence of special provisions
    that there is no disposal for capital gains tax.
    The word 'disposal' must, it is suggested, involve
    there being some proprietary or beneficial right
    in the disposer at the time. Hence there will be
    a distinction between the creation of a
    contractual right in B's favour, which will not
    involve a disposal by A, and the creation in
    favour of B of a right in or over an asset owned
    by A, which will be a part disposal of that asset.
    . . . "
See also the 4th edition at para. 7-07 to 7.10.

43.  It is possible that the draftsman of subsection (6) intended to say that
the creation of an asset that did not exist is deemed to be a disposal of that
asset by its creator. But this is not what the subsection says.

44.  There are certain provisions in the Act which deem certain acts or events
to be deemed disposals even though there are no pre-existing assets. For
example, s. 160ZS deems the grant of a lease to constitute the disposal by the
lessor to the lessee of an asset, namely, the lease. An asset did not exist
before the disposal but is created by the disposal.

45.  Section 160ZZC deals with options and provides that the grant of an
option shall be deemed to have constituted a disposal of the option at the
time when the grant took effect and the option shall be deemed to have been
owned by the grantor immediately before the disposal took place (sub-s.
160ZZ(C)(3)).

46.  There is something to be said for the view that sub-s. 160(M)(6) will
apply only if another provision of the Act deems there to be a disposal of an
asset that did not exist before the disposal but is created by the disposal.
That work is not done by sub-s. 160M(6) itself or any other provision of the
Act (including in my view s. 160R and s. 160U) save those provisions mentioned
relating to leases and options. Since, apart from leases and options, the word
"disposal" where first read in the subsection must bear its ordinary meaning
it cannot mean the creation of anything; it can only refer to the disposal of
something which already exists.

47.  The explanatory memorandum accompanying the bill which became Part IIIA
sheds little light on this question, though it does say that sub-section (6)
    "would apply for example, to deem there to be a
    disposal of an asset by a person granting a lease,
    or giving an option to another person to buy an
    asset at a future date. The lease or option is an
    asset created by such a transaction. . . . "

48.  These are the only two examples given in the memorandum, and, so far as
my study of the Act reveals, are the only two examples of provisions of the
Act that deem there to be a disposal of an asset that did not exist before the
disposal, but were created by the disposal. I should say that I find no
assistance in resolving this question by sub-s. 160M(5) which deals with the
deemed creation of assets, not their disposal.

49.  I have sympathy with the view that sub-section (6) is incomprehensible.
Certainly it is not for the courts to redraft sections of Acts. But as Lord
Reid said in Amp Incorporated v Utilux Pty. Limited (1972) RPC 103 at 109, of
a definition in the Registered Designs Act 1949 (U.K.):
    "It seems improbable that the framers of this
    definition could have intended to insert a
    provision which has virtually no practical effect,
    so I look to see whether any other meaning
    produces a more reasonable result."

50.  Approaching sub-section (6) with these remarks in mind and reading the
sub-section in the context of Part IIIA as a whole it seems to me that the
draftsman of the sub-section was endeavouring to provide principally that,
where the same act or event both creates and disposes of an asset which
emerges from a larger asset previously in existence, there is a notional
disposal of the new born asset for the purpose of Part IIIA. But there must be
an asset in existence before the occurrence of the act or event which gave
birth to the new asset. So far as I can see this is the principal work which
sub-section (6) can perform. Thus, to mention one example, the grant of an
easement may perhaps fall within the sub-section.

51.  Sub-section (6) cannot apply in this case because the covenants given by
the applicant did not emerge from any previously existing asset.

52.  In my opinion sub-s. 160M(6) does not support the inclusion in the
assessable income of the applicant of the sum of $40,000 or any other sum
pursuant to sub-s. 160ZO(1) of the Act.

53.  Although this is the first case to consider these provisions they have
attracted the attention of learned writers, including "Capital Gains Tax - The
Framework" by Mr. K.J. Burgess, Taxation in Australia, May 1987 651; "Capital
Gains Tax" by D.G. Cominos, Taxation in Australia, November 1986; "Capital
Gains Tax Review" by G. Leahmann, Taxation in Australia, April 1987 601;
Taxation of Capital Gains in Australia by M.P. Dominic assisted by N. Russell;
Australian Capital Gains Tax by G.S. Cooper and M.W. Inglis 1986; and see
generally with respect to the United Kingdom Act 1979 Whiteman and Wheatcroft
on Capital Gains Tax, 4th edition.

54.  I turn to sub-s. 160M(7), the terms of which appear earlier.

55.  Like sub-s. 160M(6), sub-s. 160M(7) excludes from s. 160ZH all the
acquisition cost of the relevant asset and allows to be claimed as a cost only
the incidental cost to the taxpayer of the disposal of the assets, reduced or
indexed as appropriate.

56.  For sub-s. 160M(7) to apply there must be:
    . an existing asset;
    . an act or transaction in relation to that asset or an
      event effecting that asset;
    . a person receiving or being entitled to receive money or
      other consideration by reason of the act, transaction or event.

57.  If these conditions are satisfied, the act, transaction or event
constitutes a disposal by the person who received or is entitled to receive
the money or other consideration.

58.  Although there must be an existing asset before sub-section (7) can
operate, it is not the asset in respect of which the act or transaction took
place which is treated by the sub-section as having been disposed of. An asset
is deemed to have been created by the disposal and it is that asset which is
treated as having been disposed of. The sub-section thus constitutes a deemed
disposal and a deemed creation at the same time that it deems the created
asset to have been immediately disposed of and to have no base cost.

59.  Sub-section 160M(7) has excited much interest amongst the writers of
learned articles including those to which I referred earlier and the paper by
J.W. de Wijn's on "Capital Gains Taxation in Australia", editor R. Krever, Law
Press, Monash University.

60.  Sub-section (7) is similar to s. 20 of the United Kingdom Capital Gains
Tax Act. I need not refer to the similarities and differences. They are
discussed in Taxation of Capital Gains in Australia by Dominic and Russell at
pp 34-36. I do not see any useful purpose in discussing all the possible sets
of facts that could be encompassed by sub-section (7). They will fall to be
determined from time to time as various cases arise. The explanatory
memorandum gives a number of examples of the acts, transactions or events
which it says will be affected by sub-s. (7) including "an amateur sportsman
who receives a payment on becoming a professional, the receipt of
consideration for entering into exclusive trade tie agreements or restrictive
covenants or in connection with the variation, cancellation or breach of
business contracts or agency agreements". I do not propose to discuss whether
these beliefs of the draftsman correctly reflect the legislation as properly
construed and shall confine my observations to the facts of the present case.

61.  I cannot accept the submission of counsel for the applicant that the
existing asset on which sub-s (7) operates, as distinct from the deemed asset
which emerges at the end of the operation of the deeming provisions, eo
instantur with its own disposition, must be the asset of the person who
receives or is entitled to receive the money or other consideration. The
sub-section itself does not state that this is a requirement. On the contrary,
the words used are perfectly general and on their face are intended to
encompass the situation of an asset owned by someone other than the person
receiving the money subject to taxation. The only indication on the face of
the subsection pointing to this restriction is the fact that the examples
provided in paras. 160M(7)(i) and (ii) are circumstances in which the asset
may be owned by the taxpayer. Plainly these examples are not intended to be
exhaustive. If the section was intended to be confined in the manner suggested
it would have been simple for the legislature to have said so.

62.  To read into the section a restriction that the asset must be owned by
the taxpayer can only be justified if, without it, the section is unworkable,
leads to absurd results or otherwise offends what must be the clear intention
of the legislature. In my opinion there is not sufficient reason to imply this
restriction.

63.  It was argued on behalf of the appellant that one consequence which would
be avoided by reading into sub-s. 160M(7) the suggested restriction is the
possibility that sub-s. 160ZA(4) would be ineffective in ensuring that the
taxpayer is not subjected to double taxation.

64.  Generally sub-s. 160ZA(4) operates to ensure that amounts which are
taxable under a section of the Act other than Part IIIA are not also subject
to capital gains tax. However, the wording of sub-s. 160ZA(4) is such that the
section only comes into play if the amount included in assessable income under
a provision of the Act other than Part IIIA was so included "as a result of
the disposal of the asset". The argument seems to turn on the possibility that
sub-s. 160M(7) could, if interpreted without the restriction, subject to
capital gains tax amounts which are also assessable income under ordinary
concepts but which cannot properly be said to have arisen as a result of the
disposal of the asset.

65.  Once it is recognised that the word "disposal" as used in sub-s. 160ZA(4)
must have the same meaning as it does in other sections of Part IIIA the
substance of this submission falls away. The act, transaction or event which
creates a liability to taxation both under sub-s. 160M(7) and some other
section is deemed by sub-s. 160M(7) to constitute a disposal. Thus the
pre-condition for the operation of sub-s. 160ZA(4) is satisfied and there is
no real threat of double taxation sufficient to support the adoption of a
restricted interpretation of sub-s. 160M(7).

66.  Sub-section (7) assumes the existence of an asset, whether it be owned by
the person who receives or is entitled to receive the money or other
consideration or any other person.

67.  I do not find it necessary to discuss in detail whether a relevant asset
is an asset of proprietary nature or may be a human right or a right to work
or a right to trade. I am satisfied that, like sub-section (6) that precedes
it, sub-section (7) is talking about rights of a proprietary nature: see Kirby
v Thorn E.M.I. above and see also Forbes v N.S.W Trotting Club Limited (1979)
143 CLR 242 at 260.

68.  In the present case Hunter Douglas employed the applicant as the
Marketing Director/General Manager of its Window Furnishings Division. There
was a written contract of employment made on or about 1 September 1985; and on
or about 27 June 1986 the applicant and Hunter Douglas entered into the deed
by which Hunter Douglas agreed to pay the applicant $40,000 in consideration
of his covenant to observe certain restrictive covenants contained in his
earlier written employment contract for the period of two years after the
cessation of his employment with Hunter Douglas.

69.  The asset of which para. 160M(7)(a) speaks (i.e. the asset in relation to
which the relevant asset or transaction is said to have taken place) consists
of the trade secrets and trade connections and the goodwill attaching to the
business of Hunter Douglas. These were not the assets of the applicant. In my
opinion that does not prevent the operation of the sub-section for the reasons
already given. The special case does not refer to the existence of goodwill in
Hunter Douglas or any of its subsidiaries but it is obvious that goodwill in
fact exists and this Court may draw inferences both of fact and of law (Order
50 rule 3 of this Court's Rules).

70.  The grant of the restrictive covenant by the applicant to Hunter Douglas
under the deed constitutes an act or transaction that took place in relation
to an asset of Hunter Douglas and was also an event that occurred affecting
that asset.

71.  The applicant received and was entitled to receive $40,000 under the deed
in consideration for his giving the restrictive covenants. The deeming
provisions of sub-s. 160M(7) then operate so as to constitute the giving of
the restrictive covenant a disposal by the applicant of an asset created by
the disposal. The $40,000 is therefore to be treated as the base cost from
which only the incidental cost to the applicant of the disposal of the asset,
reduced or indexed as the case may be, may be taken into account.

72.  For these reasons the applicant succeeds with respect to the argument
before the Court on sub-s. 160M(6) but the respondent succeeds with respect to
sub-s. 160M(7).

73.  I would answer the questions submitted to this Full Court as follows:
Question A

74.  Was there, in consequence of the facts recited in the special case,
included in the assessable income of the applicant for the year of income
ended 30 June 1986:
    (a) an amount of $40,000; or
    (b) some other amount and if so, what amount,
pursuant to sub-s. 160ZO(1) of the Income Tax Assessment Act 1986?
Answer
    (a) Yes
    (b) This question does not arise for consideration.
Question B

75.  Who should pay the costs of the proceedings?
Answer

76.  This question does not arise because counsel for the parties informed us
that it had been agreed by the parties that each party should pay his own
costs of the proceeding before this Court.
JUDGE2
  Section 45 of the Administrative Appeals Tribunal Act 1975 ("the AAT Act")
provides that the Administrative Appeals Tribunal ("the Tribunal") may refer a
question of law arising in a proceeding before the Tribunal to this Court,
which shall exercise its jurisdiction sitting as a Full Court. Order 50 of the
Federal Court Rules provides that questions referred by the Tribunal under s.
45 of the AAT Act shall be in the form of a special case. The Court may draw
from the facts stated and the documents annexed in the special case any
inference, whether of fact or law, which might have been drawn from them if
proved at a trial: Order 50 Rule 1 (3).

2.  The question of law referred to the Full Court in these proceedings is
whether, in consequence of the facts recited in the special case, the sum of
$40,000 or some other, and if so what amount, was included in the assessable
income of the applicant for the year of income ended 30 June 1986, pursuant to
sub-s. 160ZO (1) of the Income Tax Assessment Act 1936 ("the Act").

3.  Section 160ZO appears in Division 4 of Part IIIA of the Act. Part IIIA is
headed "Capital Gains and Capital Losses" and provides for what has become
popularly known as the capital gains tax. Division 4 is headed "Treatment of
Gains and Losses" and s. 160ZO provides:
    "160ZO (1) Where a net capital gain accrued to a
    taxpayer in respect of the year of
    income, the assessable income of the
    taxpayer of the year of income
    includes that net capital gain.
    (2) A net capital loss that was incurred
    by a taxpayer in respect of a year of
    income shall be taken into account in
    accordance with section 160ZC but is
    not otherwise allowable to the
    taxpayer as a deduction under this
    Act in respect of any year of income."
As will be apparent, s. 160ZO is to be read with a number of other provisions
of Part IIIA, but it is sufficient for immediate purposes to refer to sub-s.
160Z (1). This provides:
    "160Z (1) Subject to this Part, where an asset
    other than a personal-use asset has
    been disposed of during the year of income -
      (a) if the consideration in
          respect of the disposal
          exceeds the indexed cost base
          to the taxpayer in respect of
          the asset - a capital gain
          equal to the excess shall be
          deemed for the purposes of
          this Part to have accrued to
          the taxpayer during the year
          of income; or
      (b) if the reduced cost base to
          the taxpayer in respect of the
          asset exceeds the consideration
          in respect of the disposal - a
          capital loss equal to the
          excess shall be deemed for the
          purposes of this Part to have
          been incurred by the taxpayer
          during the year of income."
The expression "personal-use asset" is defined in s. 160B; nothing turns upon
it for the purposes of this case. Central to the operation of s. 160Z, and
thus to s. 160ZO, is the disposition or disposal of an "asset" during the
relevant year of income. Put broadly, the issue that arises in the present
proceedings is whether in the year of income ended 30 June 1986, a capital
gain accrued to the applicant by reason of a relevant disposition of an asset
within the meaning of the Act.
The Hunter Douglas Agreements

4.  In late August or early September 1985, the applicant was first employed
by Hunter Douglas Limited ("Hunter Douglas") as the Marketing Director/General
Manager of Hunter Douglas' Window Furnishings Division. The business
activities of that Division amounted to a very significant proportion
(approximately two-thirds) of the total business activities of Hunter Douglas.
The applicant was responsible for the management of the operations of that
Division.

5.  On or about 1 September 1985, the applicant and Hunter Douglas entered
into a written agreement governing the terms and conditions of his employment.
That document ("the 1985 Agreement") was not attached to the special case, so
its precise terms remain undisclosed. However, on or about 27 June 1986, the
applicant and Hunter Douglas entered into a deed ("the 1986 Deed") which
recited the applicant's existing employment and an agreement between the
parties to record the terms upon which he had agreed to be restrained from
carrying on or being interested in any business or other undertaking or
activity from and after the date of his ceasing to be employed by Hunter
Douglas.

6.  It appears that the 1985 Agreement imposed upon the applicant what in the
special case is described as a "restraint of trade" and that it was agreed
orally between the parties that that restraint should cease to have any effect
from the date of entry into the 1986 Deed. On or about 27 June 1986, that is
to say before 30 June 1986, Hunter Douglas paid to the applicant $40,000
pursuant to the terms of the 1986 Deed. The applicant did not incur any
capital loss during that year of income.

7.  Clauses 1, 2, 3 and 4 of the 1986 Deed were in the following terms:
    "1. In consideration of (the applicant) entering
    into this Deed and provided that he shall at
    all times observe and fulfil all of the
    terms covenants and conditions hereof Hunter
    Douglas shall pay (the applicant) the sum of
    FORTY THOUSAND DOLLARS ($40,000.00) upon
    signing of this Deed.
    2. In consideration of Hunter Douglas entering
    into this Deed, (the applicant) covenants
    with Hunter Douglas or any successor,
    subsidiary or affiliate thereof (hereinafter
    called 'the Associated Companies') that for
    a period of Two (2) years immediately
    following the moment of the termination of
    his employment by Hunter Douglas within the
    territorial limits of Australia, he will
    continue to be bound by the Clauses 2, 3, 4
    and 5 of (the 1985 Agreement); copy of said
    Clauses are attached to this Deed as Schedule 'A'.
    3. During the term hereof (the applicant) shall
    be entitled to request Hunter Douglas'
    acknowledgment that the terms of this Deed
    shall no longer apply in relation to any
    products which Hunter Douglas and/or its
    Associated Companies has (sic) ceased to
    produce or license which acknowledgment
    shall not be unreasonably withheld.
    4. (The applicant) acknowledges and agrees that
    this Deed has been entered into by him not
    only in favour of Hunter Douglas but in
    favour of each of the Associated Companies
    for their respective rights and interests to
    the intent that each of the same shall be
    entitled to enforce the obligations of this
    Deed against him to the extent to which the
    protection of the business and assets may require."

8.  Clause 2 of the 1985 Agreement is headed "Special Processes and Trade
Secrets". The term "Special Processes" apparently was defined elsewhere in a
portion of the document not before the Court. The same is true of the term
"Trade Secrets". Clause 2 was expressed as a covenant between the applicant,
Hunter douglas and each of six named companies and of various unnamed
"Subsidiary Companies" of Hunter Douglas and of Hunter Douglas Holdings
Limited. I infer that all these corporations were included in the expression
"the Associated Companies" in clause 2 of the 1986 Deed.

9.  Clause 2 of the 1985 Agreement placed several obligations upon the
applicant. During the continuance of his employment, he was not, except in the
proper course of his duties, to divulge any information concerning the Special
Processes; nor was he to utilise or turn to his own account any of the Special
Processes. Further, during the continuance of his employment and also for a
period of two years after the termination thereof, from any cause, he was not,
except in the proper course of his duties, to divulge any information
concerning the Trade Secrets, nor was he to utilise or turn to his own account
any of the Trade Secrets.

10.  Clause 3 was headed "Non-Competition". It was a covenant between the
applicant and Hunter Douglas imposing obligations effective upon the
termination of the applicant's employment, from any cause whatsoever, and
effective within the territorial limits of Australia and for a period which
does not appear from the materials before us. He was obliged not to engage in
any business or occupation in which he or his employer manufactured,
distributed or sold to any party any of certain goods or performed any of
certain operations. (The identity of the goods and operations again does not
appear from the materials before the Court.) Nor was the applicant to canvas
or solicit for himself or any other person any customer of Hunter Douglas who
was a customer or prospective customer of Hunter Douglas during the term of
employment of the applicant, and with whom the applicant had dealings or
negotiations during the course of that employment.

11.  Clause 4 was headed "Inventions". It operated in respect of any
"inventions, formulae, special processes, techniques, know how and the like"
which together were defined as "the Inventions", provided that they related to
or were useful in the business of Hunter Douglas and provided that they were
discovered, conceived or developed by the applicant alone or in conjunction
with others either during the course of his employment or at any time if, in
the latter case, the Inventions resulted from use or utilisation of the
"Special Processes". The applicant was obliged to assign and convey to Hunter
Douglas, or as it might direct, all his interest in the Inventions, and to
perform all such acts, at no expense to himself, which Hunter Douglas might
consider necessary or helpful in obtaining or maintaining patent or like
protection for the Inventions in this country and foreign countries. In aid of
these obligations, the applicant appointed Hunter Douglas his attorney.

12.  Clause 5 was a severability clause designed to save as much of the
restrictions and limitations imposed upon the applicant by the Deed from the
ravages of any invalidity.

13.  Putting to one side any issues arising concerning unpatentable know-how,
it may be observed that clause 4, as regards future inventions, puts Hunter
Douglas irrevocably and for value in the position of the assignee of the
actual inventor, giving it standing to apply for grant of a standard patent or
petty patent pursuant to the provisions of the Patents Act 1952 ("the Patents
Act"); see paras. (b), (fa) of sub-s. 34 (1) of the Patents Act, and George C.
Warner Laboratories Pty Ltd v Chemspray Pty Ltd (1967) 41 ALJR 75. Further,
even if, in a given case, the application were made by the applicant rather
than Hunter Douglas, s. 64 of the Patents Act would produce the result that
the patent should be granted to Hunter Douglas because, within the terms of
that section, the applicant apparently had agreed in writing to assign the
patent when granted.

14.  It does not appear from the materials before the Court whether during his
employment and before 30 June 1986, the applicant had made any invention upon
which clause 4 of the 1985 Agreement operated so as to vest forthwith in
Hunter Douglas the right to make an application for a grant to it of a patent
under the provisions of the Patents Act. As is illustrated by George C. Warner
Laboratories Pty Ltd v Chemspray Pty Ltd (supra), the right to apply given by
para. (b) of sub-s. 34 (1) extends to an assignee from an assignee of the
actual inventor. The result is that upon the hypothesis presently under
consideration, Hunter Douglas would have acquired assignable rights to apply
for an obtain a patent. The rights of a patentee are personal property capable
of assignment and of devolution by operation of law (sub-s. 152 (1) of the
Patents Act). If such invention had been made before 30 June 1986, the result
of the operation of clause 4 of the 1985 Agreement would have been to vest in
Hunter Douglas what in my view would properly have been described as presently
existing proprietary rights, namely the right, to the exclusion of the
applicant, to apply for and obtain a patent grant.

15.  But this is not suggested by either side to have been the fact, and
clause 4 was drawn into the 1986 Deed, the crucial instrument in this
litigation, by clause 2 thereof. The result of the 1986 Deed was that clause 4
of the 1985 Agreement was to be read, as at 30 June 1986, as operating only in
respect of the future, namely from two years following the termination of the
applicant's employment by Hunter Douglas. Thus, at best, clause 4 would be
described as effecting what is generally described as an assignment of future
property, such that as and when an invention was made thereafter, it would be
effective to vest the necessary title in Hunter Douglas. In the meantime, and
in particular as at 30 June 1986, there was no presently effective assurance
of any property. The effect given in equity to an agreement for value to
assign property to be acquired by the assignor in the future is discussed by
Windeyer J. in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at
24-25, and more recently by Mason C.J. in Booth v The Commissioner of Taxation
of the Commonwealth of Australia (1987) 164 CLR 159 at 165-166.

16.  The other obligations imposed by the 1986 Deed would not ordinarily be
described as the disposition by the applicant of any asset. In general terms,
the 1986 Deed would not appear to disclose the disposal, in the relevant year
of income, of an asset other than the $40,000 paid by Hunter Douglas to the
taxpayer.

17.  Nevertheless, counsel for the Commissioner submitted that, pursuant to
sub-s. 160ZO (1), the sum of $40,000 should be included in the assessable
income of the applicant for the year ended 30 June 1986. Counsel for the
Commissioner prayed in aid sub-s. 160M (6) and sub-s. 160M (7) as providing
alternative or cumulative support for this conclusion. The term "asset" is
central to the operation of both provisions, and it is to this that one should
first turn.
Section 160A

18.  Section 160A provides:
    "160A In this Part, unless the contrary intention
    appears, 'asset' means any form of property and includes -
      (a) an option, a debt, a chose in action,
          any other right, goodwill and any
          other form of incorporeal property;
      (b) currency of a foreign country; and
      (c) any form of property created or
          constructed, or otherwise coming to
          be owned without being acquired,
    but does not include a motor vehicle of a
    kind mentioned in paragraph 82AF (2) (a)."
The term "assets" is frequently used to identify that which may be turned to
account in order to discharge liabilities; an example of such use is found in
sub-s. 215 (3) of the Act; see also Page v The International Agency and
Industrial Trust (Limited) (1893) 62 LJ Ch 610 at 612-613. When used in that
sense, "assets" readily may be seen as encompassing both proprietary and
personal rights.

19.  However, s. 160A proceeds in a different fashion by stating that, in the
absence of a contrary intention, "'asset' means any form of property" and
includes the subject matter of paras. (a), (b) and (c). The expression "any
form of property" is central to the definition. There are various
classifications of the forms of property which have had, and have, currency.
Real and personal property, movable and immovable property, corporeal and
incorporeal property, are but three such classifications. See Salmond,
"Jurisprudence", 12th Ed., 1966, 411-424; Paton, "Jurisprudence", 4th Ed.,
1972, 505-516, 531-538; Dias, "Jurisprudence", 5th Ed., 1985, 293-298. All of
these forms of property are "assets" for the purposes of s. 160A.

20.  Section 160A uses the expression "means. . . and includes" rather than
simply "means", or "includes". As a general proposition, the use of the
expression "means and includes" indicates an exhaustive explanation of the
meaning which for the purposes of the statute must be attached to the term the
subject of the definition, and conveys both the idea of enlargement and
exclusion: Dilworth v The Commissioner of Stamps (1899) AC 99 at 105-106; Y.Z.
Finance Company Pty Limited v Cummings (1964) 109 CLR 395 at 398-399, 401-402,
405. But, in a given context, the draftsman may have used "include" not so
much to extend the ordinary meaning of the defined term as to specify as
falling within the definition that which might otherwise have been in doubt:
Lillyman v Pinkerton (No. 2) (1982) 71 FLR 135 at 138.

21.  This, in my view, is the function served by paras. (a), (b) and (c) of s.
160A. Paragraph (c) makes it clear that the assets with which Part IIIA is
concerned extends to those which were created or constructed rather than
acquired from another. The reference to currency of a foreign country removes
any doubts that might arise from the circumstance that where Australian
currency was the money of payment for a transaction, foreign currency would
not be proper tender; cf. Re Ikin; Ex parte Same and Lamborghini Tractors of
Australia Pty Ltd (1985) 4 FCR 582 at 584, and sub-s. 160K (5) of the Act.
Paragraph (a) serves to emphasise that all forms of incorporeal property, that
being one form of property, are included within the definition of "asset".

22.  I would not read the expression "any other right" in para. (a) as drawing
within the definition merely personal rights, still less "rights" in some
popular non-technical sense. One may speak of "the right to work" (Nagle v
Feilden (1966) 2 QB 633 at 644-647) or "the right to know" (British Steel
Corporation v Granada Television Ltd (1981) AC 1096 at 1168). Constitutional
or statutory guarantees may be couched in such terms and a breach of them may
give rise to individual rights of action, as in Bivens v Six Unknown Named
Agents of Federal Bureau of Narcotics 403 US 388 (1971) (which is qualified by
United States v Stanley 97 L Ed 2d 550 (1987). But such terms otherwise have
significance in the legal system principally to assist identification of the
objects or purposes sought to be served by particular detailed statutory
provisions or particular causes of action under the general law.

23.  Thus, in Nokes v Doncaster Amalgamated Collieries Limited (1940) AC 1014
at 1020, Viscount Simon L.C. approached the construction of s. 154 of the
Companies Act 1929 (U.K.) by asking whether it provided a statutory exception
to "a fundamental principle of our common law - the principle, namely, that a
free citizen, in the exercise of his freedom, is entitled to choose the
employer whom he promises to serve, so that the right to his services cannot
be transferred from one employer to another without his assent". See also the
remarks of Lord Atkin, supra at 1026. On the other hand, in Victoria Park
Racing and Recreation Grounds Company Limited v Taylor (1937) 58 CLR 479 at
496, Latham C.J., when considering the law of torts as it then stood, said
that no "general right of privacy exists"; cf. Privacy Act 1988, Part III.

24.  The point was made in Kirby (Inspector of Taxes) v Thorn EMI plc (1988) 2
All ER 947 at 953 by Nicholls L.J., when dealing with the predecessor to the
Capital Gains Tax Act 1979 (U.K.):
    "I agree that the liberty or freedom to
    trade, enjoyed by everyone, is not a form
    of 'property' within the meaning of s 22.
    This liberty, or freedom, is a 'right' if
    that word is given a very wide meaning,
    as when we speak of a person's 'rights'
    in a free society. But in s 22 the words
    used are 'assets' and 'property'.
    'Property' is not a term of art, but
    takes its meaning from its context and
    from its collocation in the document or
    Act of Parliament in which it is found
    and from the mischief with which that Act
    or document is intended to deal. . . The
    context in the instant case is a taxing
    Act which is concerned with assets and
    with disposals and acquisitions, gains
    and losses. I can see no reason to doubt
    that in s 22 'property' bears the meaning
    of that which is capable of being owned,
    in the normal legal sense, and that it
    does not bear the extended meaning that
    would be needed if it were to include a
    person's freedom to trade."
See further, Stone, "Legal System And Lawyers' Reasonings", 1964, pp 138-139.

25.  Whilst if the terms of a statute plainly impose a tax they should be
given effect, liability should not be inferred from ambiguous words if there
is revealed no clear intention to impose the tax: Western Australian Trustee
Executor and Agency Company Limited v Commissioner of State Taxation of the
State of Western Australia (1980) 147 CLR 119 at 126-127 per Gibbs J., with
whom Mason, Aickin and Wilson JJ. agreed; cf. Cooper Brookes (Wollongong)
Proprietary Limited v The Commissioner of Taxation (1981) 147 CLR 297 at 323
per Mason, Wilson JJ. The terms which appear in s. 160A of the Act, "option",
"debt", "chose in action", "goodwill" and "incorporeal property" are technical
and legal terms and must have their legal effect unless the contrary is made
clear: Brett v Barr Smith (1919) 26 CLR 87 at 93 per Isaacs J., speaking of s.
54 of the Income Tax Assessment Act 1915 (Cth), the forerunner of s. 261 of
the Act.

26.  The present case requires construction of provisions of taxation
legislation wherein the term "property" is used; a different approach might
well be required if what fell for interpretation was the expression "(t)he
acquisition of property on just terms" in s. 51 (xxxi) of the Constitution
because this extends to innominate and anomalous interests not recognised as
proprietary either at law or in equity, so that the concept of "property" here
is not narrowly confined: Bank of New South Wales v The Commonwealth (1948) 76
CLR 1 at 349-350; The Commonwealth v Tasmania (1983) 158 CLR 1 at 246-247.

27.  In my view, the words "any other right" appearing in para. (a) of s. 160A
are not to be understood as referable to "rights" in some popular and
non-technical sense.

28.  Nor is it sufficient to attract para. (a) of s. 160A that there is a
legal right, but one which is personal rather than answering the description
of a "form of incorporeal property". Nor should the term "a chose in action"
in para. (a) be understood as referring to rights of action which are personal
in character in the sense that they are not assignable or transmissible.

29.  In Bailey v The Uniting Church in Australia Property Trust (Qld) (1984) 1
Qd R 42 at 58, McPherson J. referred to definitions of the word "right" as
meaning a capacity residing in one to control the actions of others, with the
assent and assistance of the state. This is apt to deal with both proprietary
and personal rights, but it is perhaps defective in that it does not allow for
the vindication of rights in the legal system by defensive rather than
offensive action.

30.  In that case, a statute which defined the term "property" as including
(not as "meaning", or as "meaning and including"), inter alia, "any other
right or interest", was construed as including the right, given pursuant to
statute, to the General Assembly of The Presbyterian Church in Queensland to
appoint five members to the Council of Emmanuel College within the University
of Queensland. On the other hand, in Nokes v Doncaster Amalgamated Collieries
Limited (supra), a definition (in sub-s. 154 (4) of the Companies Act 1929
(U.K.)), that "property" included "rights and powers of every description",
was read by Viscount Simon L.C. (at 1024) as not including contractual rights
which could not be bought, sold, or given away, and by Lord Atkin as adding
nothing to the word "property" standing by itself (at 1033). More recently,
Gibbs C.J. has warned against confounding ownership with obligation: Daly v
Sydney Stock Exchange Limited (1986) 160 CLR 371 at 379.

31.  In my view, the content of para. (a) of sub-s. 160A is all forms of
incorporeal property, not personal rights which do not answer that
description. Further, "incorporeal property" plainly is a technical term and
that consideration supports the conclusion that it is not attached to the
expression "any form of property" in s. 160A so as to stretch the reach of
that expression to personal rights.

32.  Thus, an equity to have the Court rectify a written contract of personal
services would not ordinarily be understood to be a form of incorporeal
property. Nor would the right to maintain an action for recovery of
unliquidated damages in tort for personal injury. Nor property which by virtue
of statute cannot be effectively assigned; see the list in Starke,
"Assignments of Choses in Action in Australia" (1972), p 61. Nor the benefit
of a contractual obligation where the identity of the person in whose favour
the obligation is to be discharged is a matter of importance to the party on
whom the obligation rests, as in a contract for personal services; see
Tolhurst v The Associated Portland Cement Manufacturers (1900) Limited (1902)
2 KB 660 at 668-669; Bruce v Tyley (1916) 21 CLR 277 at 285, 289-292; Nokes v
Doncaster Amalgamated Collieries Limited, supra at 1018-1019.

33.  In the case of a contract for the provision of personal services the
person for whom the services were to be tendered might, in the case of breach,
have a right to damages or, in a particular case, seek an injunction to
restrain breach of a negative covenant (even though the contract was not
properly the subject of an order requiring specific performance in any direct
sense). But one would treat the plaintiff in such a case as pursuing legal and
equitable rights which fell short of any form of incorporeal property and fell
outside para. (a) of s. 160A, and thus outside the definition of "asset". Cf.
Rapistan Canada Ltd v Minister of National Revenue 48 DLR (3d) 613 at 616-617
(1974); The Federal Commissioner of Taxation v United Aircraft Corporation
(1943) 68 CLR 525 at 534-537, 539, 546-548.

34.  I should add that in Bailey v The Uniting Church in Australia Property
Trust (Qld), supra at 57-58, McPherson J. treated the decision of the High
Court in The Commissioner of Stamp Duties (New South Wales) v Yeend (1929) 43
CLR 235, a case concerned with the interpretation of the Stamp Duties Act 1920
(N.S.W.), as not simply involving the proposition that the word "right" was to
be read as confined to a right in the nature of property as ordinarily
understood, but as depending upon the interpretation of the expression
"conveyances of any property", viewed as a composite whole. In my view, what
was said by McPherson J. is consistent with the proposition in this case that
whilst the expression "any other right" is susceptible of meaning personal or
proprietary right, in its particular setting in the definition in s. 160A, it
is concerned only with proprietary rights. Further, those rights must exist at
the time at which one asks, in applying the provisions of Part IIIA, whether
there was an "asset". So called "future property" not yet acquired or in
existence would not then be "assets", nor would purely contingent interests
which had not yet vested (whether in interest or in possession); cf.
Commissioner of Stamp Duties (N.S.W.) v Bryan (1989) 89 ATC 4529 at
4532-4533.
"Any Form of Property"

35.  What then is the content of the expression in s. 160A "any form of
property", and, in a given case, how is one to ascertain whether the statutory
description is answered?

36.  In discussions in the authorities of what is meant by "property" when
used in a statute, reference is often made to the statement by Lord Langdale
M.R. in Jones v Skinner (1835) 5 LJ Ch 87 at 90; see, e.g. Bailey v The
Uniting Church in Australia Property Trust (Qld) (supra at 58); The
Commissioner of Stamp Duties (Queensland) v Donaldson (1927) 39 CLR 539 at
550. The Master of the Rolls said that the word "property" was the most
comprehensive of all the terms that might be used by a testator, as it was
indicative of every possible interest which the testator could have. So it was
that a devise of "all property which I am possessed of, which is not settled
by either of my marriage settlements", passed a reversion in fee of an estate
limited to the testator by one of his marriage settlements; the debate had
been as to whether the general form of words in the devise was sufficient to
pass the reversion. Nothing can be imagined less supportive of a proposition
that when used in a statute, "property" is readily to be understood as
embracing legal rights which are non-proprietary in character. This must be so
when what is used is a phrase, indicative of fundamental legal concepts, such
as "form of property".

37.  In some judgments, the term "property" is treated as if it identified
only rights which were "good against the world". Two examples, dealing with
know-how and secret processes, are provided by De Beer v Graham (1891) 12
NSWR(E) 144 at 146, per Owen C.J. in Eq., and The Commissioner of Taxation v
Sherritt Gordon Mines Limited (1977) 137 CLR 612 at 630, per Jacobs J. But a
distinguishing feature of equitable proprietary rights is that they are not
good against all the world, given the division between legal and equitable
titles and the well known rules as to priorities: DKLR Holding Co. (No. 2) Pty
Ltd v Commissioner of Stamp Duties (1980) 1 NSWLR 510 at 518, per Hope J.A.

38.  In McCaughey v The Commissioner of Stamp Duties (1945) 46 SR (N.S.W.) 192
at 201, Jordan C.J. said:
    "The word 'property' is used in different
    senses. It may denote either objects of
    proprietary rights, such as pieces of
    land, domesticated animals, and machines;
    or the proprietary rights themselves
    . . . In common parlance it is usually
    employed in the former sense, but in the
    language of jurisprudence in the latter
    . . . Property, in the sense of
    proprietary rights, may exist in relation
    to physical objects, or to intangible
    things such as debts or patent rights.
    Each separate piece of property consists
    of a bundle of proprietary rights
    relating to a particular object,
    including rights of administration and
    rights of enjoyment, the totality of
    which may be vested in a single person,
    or may be divided amongst a number of
    persons, as for example when they are
    shared by several who together own them
    all, jointly or in common. It is common
    also in English law to find the rights of
    administration divorced from the rights
    of enjoyment, the former being vested in
    an executor or administrator who holds in
    auter droit or in a trustee who holds in
    trust, and the latter being vested in
    beneficiaries. Where such a division
    exists, the personal representative or
    trustee is, for most purposes, treated as
    the absolute owner by a court of common
    law engaged in enforcing common law
    rights, whilst, in the contemplation of a
    court of equity, the beneficiaries are
    regarded as entitled to the beneficial
    rights and to the enjoyment of so much of
    them as is for the time being available."
See to much the same effect the paper by Professor Honore, "Ownership" in
Oxford Essays in Jurisprudence, (Ed. Guest), 1961, p 108ff. More prosaic, but
illustrative of the distinction drawn by Jordan C.J. in the opening passage of
the above quotation, was the submission by Bagnall QC (as he then was) in In
re Holmden's Settlement Trusts (1966) Ch 511 at 526, "It is a fallacy to talk
of an interest as if it were a piece of cheese".

39.  In the capital gains tax provisions of the Act, the term "asset" is used
in both senses of the word "property" to which Jordan C.J. referred. The
collection of chattels which are "listed personal-use assets" within the
meaning of para. 160B (2) (a) provides simple examples of the use of the term
"assets" to denote objects of proprietary rights. Likewise, the reference in
s. 160R to disposal of part of an asset, a provision to which I will return.
On the other hand, s. 160V, dealing with assets held on bare trust and by way
of security, proceeds on the footing that any such "asset" is a bundle of
proprietary rights, not all of which may be in the same ownership.

40.  In modern times, the pervasive effect of statute law has meant that the
content of the term "property" frequently involves consideration of rights
derived, not from the general law, but from statute. A recent example is
provided by the decision of this Court in Sonenco (No. 77) Pty Ltd v Silvia
(1989) 89 ALR 437 at 446-447, 454-458. This was the context in which the High
Court decided The Queen v Toohey; Ex parte Meneling Station Proprietary
Limited (1982) 158 CLR 327. The question was whether the holder of a grazing
licence under the Crown Lands Act 1931 (N.T.) had "an estate or interest" in
the land within the meaning of the definition of "unalienated Crown land" in
sub-s. 3 (1) of the Aboriginal Land Rights (Northern Territory) Act 1976. The
High Court held that the holder of such a licence did not have an estate or
interest in the land the subject of the licence, so that such land was
"unalienated Crown land" within the meaning of the definition in the federal
statute. Mason J. (supra at 342-343) approved the dictum of Lord Wilberforce
in National Provincial Bank Ltd v Ainsworth (1965) AC 1175 at 1247-1248:
    "Before a right or an interest can be
    admitted into the category of property,
    or of a right affecting property, it must
    be definable, identifiable by third
    parties, capable in its nature of
    assumption by third parties, and have
    some degree of permanence or stability."
Mason J. added that whilst in all circumstances assignability was not an
essential characteristic of a right of property, by statute some forms of
property being expressed to be inalienable, nonetheless it was generally
correct to say that a proprietary right must be capable in its nature of
assumption by third parties. The High Court (Murphy J. dissenting) spoke to
the same effect in Dorman v Rodgers (1982) 148 CLR 365 at 367, 369-370, 371,
372-374, 378, 381, 382 and did so again in Kelly v Kelly (1990) 64 ALJR 234 at
236. Cf. Government of Malaysia v Selangor Pilot Association (1978) AC 337 at
345-346, 357-358; The Minister of State for the Army v Dalziel (1944) 68 CLR
261 at 290.

41.  We were referred in argument to the decision of the House of Lords in
O'Brien v Benson's Hosiery (Holdings) Ltd (1980) AC 562. That case is
authority for the proposition that a sum received by the corporate taxpayer in
consideration of releasing its sales and merchandise director from the five
years remaining of his seven year service contract was a chargeable gain which
accrued to the taxpayer for the purposes of the capital gains tax provisions
of the Finance Act 1965 (U.K.), the predecessor of the Capital Gains Tax Act
1979 (U.K.). Sub-section 22 (1) of the 1965 statute provided that "(a)ll forms
of property" should be relevantly "assets" including:
    "(a) options, debts and incorporeal property
         generally, and
     (b) any currency other than sterling, and
     (c) any form of property created by the person
         disposing of it, or otherwise coming to be
         owned without being acquired."
Some affinity to s. 160A will be apparent. However, what Lord Russell
described as "the battle ground" lay in para. 22 (3) (c) of the statute. This
stated that there was a disposal of assets by their owner, notwithstanding
that no asset was acquired by the person paying the capital sum, where any
capital sum is derived from assets, and that the sub-section applied in
particular to capital sums "received in return for forfeiture or surrender of
rights, or for refraining from exercising rights". As will be later apparent,
sub-para. 160M (7) (b) (i) of the Act is concerned not simply with sums
received in return for forfeiture or surrender of rights, but with inter alia
forfeiture or surrender, "in the case of an asset being a right". By the use
of the term "asset", one is referred back directly to the definition in s.
160A.

42.  The central passage in the speech of Lord Russell (with whom the other
Law Lords agreed) is as follows (supra at 573):
    "It was contended for the taxpayer that
    the rights of an employer under a
    contract of service were not 'property'
    nor an 'asset' of the employer, because
    they cannot be turned to account by
    transfer or assignment to another. But
    in my opinion this contention supposes a
    restricted view of the scheme of the
    imposition of the capital gains tax which
    the statutory language does not permit.
    If, as here, the employer is able to
    exact from the employee a substantial sum
    as a term of releasing him from his
    obligations to serve, the rights of the
    employer appear to me to bear quite
    sufficiently the mark of an asset of the
    employer, something which he can turn to
    account, notwithstanding that his ability
    to turn it to account is by a type of
    disposal limited by the nature of the asset."
There is force in the suggestion by Mr. Muir in his article "Section 160M (6):
Fundamental Misconceptions in Legal Theory", (1988) 17 AT Rev 176 at 182, that
Lord Russell determined the case on the basis that para. 22 (3) (c) indicated
that the statute was to have a wider application than merely to property that
could be turned to account by transfer or assignment to another. See also the
discussion by Warner J. in Zim Properties Ltd v Proctor (1984) 58 TC 371 at
389-390.

43.  In any event, what was said in the House of Lords as to the British
legislation should not control the meaning of the Australian legislation. In
the Act, there is not the same inter-relation between the relevant sections as
there was between ss. 19 and 22 of the British legislation.

44.  In my view, rights which are not proprietary in character (in the sense
described earlier in these reasons), whether because they are personal rights
or because they are "rights" merely in some popular sense, are not "assets"
within the meaning of s. 160A of the Act.

45.  It is true that sub-s. 160ZB (1) provides, inter alia, that where a
taxpayer has obtained a sum by way of compensation or damages for any wrong or
injury to the person of the taxpayer, a capital gain shall not be taken to
have accrued to the taxpayer within the meaning of s. 160Z. Section 160Z
postulates disposal of an "asset". Whilst the sum recovered would be an asset,
the cause of action for personal injury which it satisfied would be personal
in nature. But I would regard sub-s. 160ZB (1) as included for more abundant
caution rather than as throwing any clear light upon the meaning of the
definition of "asset" in s. 160A.

46.  The definition in s. 160A, of course, applies "unless the contrary
intention appears". It is necessary then to turn to the two principal
provisions upon which the Commissioner relied, each of which hinges upon the
term "assets", namely sub-s. 160M (6) and sub-s. 160M (7). I turn first to
consider the second of these provisions.
Sub-section 160M (7)

47.  Sub-section 160M (7) is in the following terms:
    "160M (7) Without limiting the generality of
    sub-section (2) but subject to the
    other provisions of this Part, where -
      (a) an act or transaction has
          taken place in relation to an
          asset or an event affecting an
          asset has occurred; and
      (b) a person has received, or is
          entitled to receive, an amount
          of money or other consideration
          by reason of the act,
          transaction or event (whether
          or not any asset was or will
          be acquired by the person
          paying the money or giving the
          other consideration) including,
          but not limited to, an amount of
          money or other consideration -
          (i) in the case of an asset
              being a right - in return
              for forfeiture or
              surrender of the right or
              for refraining from
              exercising the right; or
         (ii) for use or exploitation
              of the asset,
          the act, transaction or event
          constitutes a disposal by the
          person who received, or is
          entitled to receive, the money
          or other consideration of an
          asset created by the disposal
          and, for the purposes of the
          application of this Part in
          relation to that disposal -
      (c) the money or other consideration
          constitutes the consideration
          in respect of the disposal; and
      (d) the person shall be deemed not
          to have paid or given any
          consideration, or incurred any
          costs or expenditure, referred
          to in paragraph 160ZH (1) (a),
          (b), (c) or (d), (2) (a), (b),
          (c) or (d) or 3 (a), (b), (c)
          or (d) in respect of the asset."
Section 160ZH is concerned with a determination of the indexed cost base to
the taxpayer of an asset, an essential integer in the computation of the
determination of the amount of any capital gain pursuant to sub-s. 160Z (1).

48.  It will be apparent that use in sub-s. 160M (7) of the emphasised words
in the expressions "an act or transaction has taken place in relation to an
asset or an event affecting an asset has occurred" and "a person has received,
or is entitled to receive, an amount of money or other consideration by reason
of the act, transaction or event . . . ", and "in return for forfeiture . . .
or for refraining . . . or for use or exploitation . . . ", has the
consequence that there will be involved, on the facts of each case,
consideration of matters of nexus or connection. Accordingly, caution is
required when testing the construction of the sub-section by reference to
hypothetical situations where of necessity there is postulated an artificially
constricted set of facts. Each case will very much have to be considered as it
arises.

49.  Section 160M appears in Division 2 of Part IIIA of the Act. Division 1 is
headed "Interpretation", Division 2 "Application", Division 3 "Determination
of Capital Gains and Capital Losses", and Division 4 "Treatment of Gains and
Losses". The first section in Division 2 is s. 160L. The marginal note to this
section reads "Part applies in respect of disposal of assets" and the marginal
note to s. 160M is "What constitutes a disposal or acquisition". The marginal
notes may be considered to determine the meaning of provisions which are
ambiguous or obscure: Acts Interpretation Act 1901, sub-s. 15AB (2) (a) and
cf. Re Application of The News Corp Ltd (1987) 15 FCR 227 at 252-254. The
concepts of disposal and acquisition are central, inter alia, to the operation
of s. 160L. This provides that Part IIIA applies in respect of every
"disposal" on or after 20 September 1985 of "an asset" that was "acquired" on
or after that date.

50.  Sub-section 160M (1) makes the disposition and acquisition of an asset
turn upon the occurrence of a change in the ownership of that asset. The term
"deemed" is used, but to indicate the meaning given by the Parliament to the
words "disposal" and "acquisition", not to import a fiction; see the
discussion by Windeyer J. in Hunter Douglas Australia Pty Limited v Perma
Blinds (1970) 122 CLR 49 at 65-67. Sub-section 160M (2) spells out the ways in
which a change in the ownership of an asset may be effected. Sub-section 160M
(3) takes the matter further by stating that without limiting the generality
of sub-s. (2), a change "shall be taken" to have occurred in the ownership of
an asset by the taking of various steps, such as the making of a declaration
of trust whereunder the beneficiary is absolutely entitled to the asset in
question, the release of a debt, and the redemption of a debenture. Like
sub-s. 160M (3), sub-s. 160M (7) is expressed to operate "(w)ithout limiting
the generality" of sub-s. (2), but unlike sub-s. 160M (3) it is expressed also
as being "subject to the other provisions of this Part".

51.  Sub-section 160M (1), (2) and (3) are as follows:
    "160M (1) Subject to this Part, where a change
    has occurred in the ownership of an
    asset, the change shall be deemed,
    for the purposes of this Part, to
    have effected a disposal of the asset
    by the person who owned it
    immediately before the change and an
    acquisition of the asset by the person
    who owned it immediately after the change.
    (2) A reference in sub-section (1) to a
    change in the ownership of an asset
    is a reference to a change that has
    occurred in any way, including any of
    the following ways:
      (a) by the execution of an instrument;
      (b) by the entering into of a transaction;
      (c) by the transmission of the
          asset by operation of law;
      (d) by the delivery of the asset;
      (e) by the doing of any other act or thing;
      (f) by the occurrence of any event.
    (3) Without limiting the generality of
    sub-section (2), a change shall be
    taken to have occurred in the
    ownership of an asset by -
    (a) a declaration of trust in
        relation to the asset under
        which the beneficiary is
        absolutely entitled to the
        asset as against the trustee;
    (b) in the case of an asset being
        a debt, a chose in action or
        any other right, or an
        interest or right in or over
        property - the cancellation,
        release, discharge, satisfaction,
        surrender, forfeiture, expiry
        or abandonment, at law or in
        equity, of the asset;
    (c) in the case of an asset being
        a share in or debenture of a
        company - the redemption in whole
        or in part, or the cancellation,
        of the share or debenture; or
    (d) subject to sub-section (4), a
        transaction in relation to the
        asset under which the use and
        enjoyment of the asset was or
        is obtained by a person for a
        period at the end of which the
        title to the asset will or may
        pass to that person."

52.  Where sub-s. 160M (7) applies, the act, transaction or event in question
is treated as constituting a disposal by the recipient of the money or other
consideration of an asset "created by the disposal". The sub-section
postulates that the occurrence of an act, transaction or event "in relation
to" or "affecting" an asset, being an asset in existence before the occurrence
of the act, transaction or event in question. The sub-section further
postulates that the act, transaction or event does not bring about a change in
the ownership of that asset within the meaning of sub-s. 160M (2); therefore
there is no disposal of the asset by the person who owned it immediately
before the act, transaction or event in question. Rather, there is an act,
transaction or event "in relation to" or "affecting" that asset and the impact
or consequence of that act, transaction or event is treated as if there was an
asset both created and disposed of by the recipient of the money or other
consideration. In this way, what sub-s. 160M (7) does is to give to that act,
transaction or event the character it would have if it were one of the ways in
which a change in ownership might be effected within the meaning of sub-s.
(2), and thus was a means of effecting a disposal within sub-s. (1).

53.  What then is the subject matter of this disposal? As I have indicated, it
is not the asset affected by the event in question, or in relation to which
the act or transaction takes place. Further, I do not accept the applicant's
submission that on its proper construction the sub-section requires this asset
to have been owned by the recipient of the money or other consideration. The
person who received (or is entitled to receive) an amount of money or other
consideration by reason of the act, transaction or event, is treated as having
disposed of an asset not previously in existence, namely "an asset created by
the disposal". It is this "notional" asset which is attributed to the
recipient of the money or other consideration. For the purposes of the
application of Part IIIA to the "disposal" of that notional asset, the money
or other consideration constitutes the consideration in respect of the
disposal, and for the purposes of the cost base provisions in s. 160ZH, the
person who has received the money or other consideration shall be deemed not
to have paid or given any consideration or incurred any costs or expenditure.

54.  Thus, I agree with what was said by Hill J. in his reasons for judgment
in Commissioner of Taxation v Cooling, to the extent that the asset created by
what sub-s. 160M (7) treats as a disposal is not the asset referred to in
para. (a) of sub-s. (7), but a fictitious asset. Further, in my view, in
stating that the act, transaction or event constitutes a disposal of an asset
created by that disposal, sub-s. (7) is to be read with sub-ss. (2) and (1),
so as to produce the result that the person in question is deemed to have
owned the asset immediately before the disposal. I do not rely for this result
upon sub-s. 160M (5) (c), which speaks of the creation of an asset "by or for
a person", and states that this constitutes the acquisition of the asset by
that person. Nor, in my opinion, is sub-s. 160U (6) in point.

55.  Where sub-s. (7) comes into operation, there is an act, transaction or
event which constitutes a disposal by the person who received or is entitled
to receive money or other consideration by reason of that act, transaction or
event. The asset is "created" by deemed operation of law, by that which it is
said also constitutes a disposal, and is not created by a person in any
ordinary sense. To deem an asset to have been created and disposed of by a
person, involves the putative disponor first having acquired, by dint of the
deemed creation, the asset in question. The date of the act, transaction or
event in question will fix the date of the deemed acquisition and disposal.

56.  In the present case, the Commissioner submitted that the giving of the
covenants in the 1986 Deed in exchange for $40,000, the covenants to have
effect in the two years after the termination of the applicant's employment
with Hunter Douglas, was a transaction in relation to an asset or an event
affecting an asset, within the meaning of sub-s. 160M (7). The "asset" was
said to be (i) Hunter Douglas' goodwill, (ii) Hunter Douglas' trade
connections and trade secrets and (iii) the rights of Hunter Douglas under the
existing 1985 Agreement. Accordingly, it was said, the covenants were deemed
to constitute a disposal by the applicant of an asset created by the disposal,
the $40,000 being the consideration in respect of the disposal and there being
no cost base. The result was said to be that pursuant to s. 160Z, there was a
capital gain and no disclosure of a capital loss, so that by reason of s.
160ZO the net capital gain was included in the assessable income of the
applicant.

57.  I accept the Commissioner's submission that while the stated case did not
deal specifically with the existence of goodwill in Hunter Douglas or for that
matter in its related corporations, it may be inferred from the facts I have
set out earlier in these reasons that such goodwill did in fact exist.

58.  Of goodwill, Isaacs J. said (The Bacchus Marsh Concentrated Milk Company
Limited (In Liquidation) v Joseph Nathan and Company Limited (1919) 26 CLR 410
at 438:
    "Goodwill is property, but, as such, is
    inseparable from a particular 'business'
    in the sense of a particular going
    concern. It is an asset of that
    business, and enhances its value."
See also Ranoa Pty Limited v B.P. Oil Distribution Limited (1989) 91 ALR 251
at 256-257.

59.  In Smith Kline and French Laboratories (Australia) Limited and Ors v The
Secretary to the Department of Community Services and Health (16 May 1990,
unrep.), I concluded that the degree of legal protection afforded by the legal
system (especially in equity) to confidential information (and this would be
true particularly of trade secrets) makes it appropriate to describe such
confidential information as having a proprietary character, not because this
is the basis on which that protection is given, but because this is the effect
of that protection. I do not repeat the reasons for that conclusion.

60.  In Herbert Morris, Limited v Saxelby (1916) 1 AC 688 at 710, Lord Parker
said:
    "In Mason v. Provident Clothing and
    Supply Co. (1913) AC 724 it was argued,
    apparently for the first time in this
    class of case, that an employer might
    reasonably say 'I will not have the skill
    and knowledge acquired in my employment
    imparted to my trade rivals,' and that
    the validity of the restraint did not
    depend upon personal contact with the
    employer's customers, but upon the fact
    that the employee gained that general
    knowledge which put him into a position
    to compete with his master and made him a
    source of danger, against which the
    master was entitled to protect himself.
    This argument was rejected by your
    Lordships' House, and the restraint in
    question was held bad, as being wider
    than was necessary to protect the
    employer from injury by misuse of the
    employee's acquaintance with customers or
    knowledge of trade secrets. In fact the
    reason, and the only reason, for
    upholding such a restraint on the part of
    an employee is that the employer has some
    proprietary right, whether in the nature
    of trade connection or in the nature of
    trade secrets, for the protection of which
    such a restraint is - having regard to the
    duties of the employee - reasonably necessary."
See also Drake Personnel Ltd v Beddison (1979) VR 13 at 19, another
employer-employee case.

61.  The rights of Hunter Douglas (and, as to clause 2, certain other related
corporations) pursuant to the 1985 Agreement, were, in my view, essentially
non-proprietary in character. Contrary to the Commissioner's third submission,
I would not regard the rights of Hunter Douglas under the 1985 Agreement as
constituting an "asset" for the purposes of the definition in s. 160A.
Further, I would not regard the operation of sub-s. 160M (7), in identifying
the asset in relation to which the act or transaction has taken place or which
was affected by an event, as involving a use of the term "asset" in other than
the sense specified in s. 160A.

62.  Clause 2 of the 1985 Agreement imposed prohibitions upon the divulging of
information concerning the Special Processes and the Trade Secrets. Clause 3
imposed a restraint upon competition. I have set out the substance of these
clauses earlier in these reasons. Clause 4 had a potential operation in
relation to property by providing for the assignment of future inventions
which related to or were useful in the business of Hunter Douglas. But, as I
have indicated, as at the end of the relevant year of income on 30 June 1986,
there had been no presently effective assurance of any proprietary rights,
pursuant to this provision.

63.  The Commissioner submitted, inter alia, that the assumption of
obligations by the applicant in the 1986 Deed in exchange for the payment of
$40,000, was a transaction in relation to an asset or an event affecting an
asset, namely (i) the Hunter Douglas' goodwill and (ii) the trade connections
and trade secrets of Hunter Douglas. Further, as I have indicated, the
goodwill, trade secrets and trade connections of Hunter Douglas were of a
proprietary character and therefore "assets" within the meaning of the
definition in s. 160A. I also have expressed my view that, contrary to the
applicant's submission, the asset in relation to which the act or transaction
takes place or which is affected by an event, within the sense of sub-s. 160M
(7), need not be an asset which is owned by the applicant before the act or
transaction takes place or the event occurs. I should add that I agree with
what is said by Lockhart J. in his judgment in dealing with the applicant's
submission as to apprehended double taxation, if his submission as to the
construction of sub-s. 160M (7) were not accepted.

64.  No doubt the applicant received money by reason of the act, transaction
or event in question, namely the entry by him into the 1986 Deed. The question
then becomes one whether that act or transaction took place "in relation to"
the assets I have described, or whether there was an event "affecting" those
assets.

65.  In the 1986 Deed, the applicant covenanted with Hunter Douglas and "the
Associated Companies" that for a period of two years immediately following the
termination of his employment by Hunter Douglas, he would continue to be bound
by clauses 2, 3, 4 and 5 of the 1985 Agreement. Clause 2 was concerned with
protection of "Special Processes" and "Trade Secrets". The obligations of the
taxpayer not to divulge information concerning that subject matter "related
to" that subject matter and also, in my view, "affected it" within the meaning
of sub-s. 160M (7). I would read the expression "affecting an asset" as
touching or concerning the asset, but without necessarily altering its nature
or character; cf. Shanks v Shanks (1942) 65 CLR 334 at 336; Ford v Ford (1947)
73 CLR 524 at 527, 533, 539, 541-542.

66.  Clause 3, inter alia, obliged the taxpayer not to canvass or solicit any
person who was a customer of Hunter Douglas or prospective customer of Hunter
Douglas during the term of his employment, and with whom the taxpayer had had
dealings or negotiations during the course of his employment. Clause 3 thus
was designed as protective of the goodwill and trade connections of Hunter
Douglas. For this reason also one might accurately describe the entry into the
1986 Deed, as the taking place of an act or transaction in relation to an
asset or as an event affecting an asset, within the sense of s. 160M (7).

67.  Finally, clause 4 operated upon inventions discovered, conceived or
developed by the applicant either during the course of his employment or at
any time if, in the latter case, they resulted from use or utilisation of the
Special Processes. Clause 4 thus operated in relation to the Special Processes
of Hunter Douglas and affected them. Throughout the 1985 Agreement and the
1986 Deed, a distinction is drawn between Trade Secrets and Secret Processes.
I would infer, however, that taken together, both concepts were treated by the
parties as "trade secrets" in the sense in which that term was used by Lord
Parker and in the other authorities to which I earlier referred. This then is
another footing on which sub-s. 160M (7) applies.

68.  The result is that the act, transaction or event is treated as having
constituted a disposal, by the applicant who received the $40,000, of an asset
created by the disposal, and for the purposes of the application of Part IIIA,
the $40,000 constitutes the consideration in respect of the disposal. The
applicant is deemed not to have paid or given any consideration or incurred
any costs or expenditure in the sense of the cost base provisions in s. 160ZH.
It follows that I would answer in the affirmative the question of law referred
to the Full Court by saying that the sum of $40,000 was included in the
assessable income of the applicant for the year of income ended 30 June 1986,
pursuant to sub-s. 160ZO (1) of the Act.

69.  This conclusion makes it unnecessary to decide whether an alternative or
further basis of assessability is to be found in sub-s. 160M (6). But in the
light of the detailed submissions that were made, I should express my views on
the matter.
Sub-section 160M (6)

70.  This sub-section provides as follows:
    "160M (6) A disposal of an asset that did not
    exist (either by itself or as part of
    another asset) before the disposal,
    but is created by the disposal,
    constitutes a disposal of the asset
    for the purposes of this Part, but
    the person who so disposes of the
    asset shall be deemed not to have
    paid or given any consideration, or
    incurred any costs or expenditure,
    referred to in paragraph 160ZH (1)
    (a), (b), (c) or (d), (2) (a), (b),
    (c) or (d) or (3) (a), (b), (c) or
    (d) in respect of the asset."
The reference to existence of part of another asset is to s. 160R. This
provides that reference to disposal of an asset includes, unless the contrary
intention appears, a reference to a disposal of part of an asset. As I have
earlier indicated, in my view, the term "asset" here is being used to denote
the objects of proprietary rights, a "piece of property", rather than the
bundle of proprietary rights relating to a particular object; the "part" of
the asset is part of that "piece of property" which is the object of
proprietary rights, and does not identify a sub-classification or division of
a bundle of proprietary rights, as a legal abstraction.

71.  The difficulties in construction of sub-s. 160M (6) are discussed by Hill
J. in his judgment in Commissioner of Taxation v Cooling, and by Lockhart J.
in his judgment in this case. I accept that the sub-section should be read as
confined in its operation to those cases where proprietary rights are created
out of or over existing assets, in circumstances where the asset affected by
the rights created continues to exist. One begins with the proposition that an
asset, within the meaning I have given the definition in s. 160A, may be
created by a "disposal". There are various instances of property (corporeal or
incorporeal) which has no prior existence but which is the product of a
dealing with a pre-existing asset. Examples are given by Hill J. in his
judgment in Cooling's Case. In that sense, it is apt to speak of an asset as
having been created by a disposition. This creative activity is then, by dint
of s. 160M (6), itself treated, ipso facto, as a disposition of that which has
just been created.

72.  to construe sub-s. 160M (6) in this way is to remove a lacuna which might
be thought otherwise to be found in s. 160M. Sub-sections (1) and (2) explain
what amounts to the change in ownership of an asset; sub-s. (3) deems a change
to have occurred in ownership of an asset by the taking of certain steps such
as the declaration of a trust, and the cancellation, release, discharge or
abondonment of an asset. Paragraphs (b) and (c) of sub-s. (5) deal with
construction and creation of assets, in my view, in a physical sense. None of
these provisions deals with the creation of a fresh set of proprietary rights
out of a greater bundle of pre-existing proprietary rights, so as to leave a
residue of such rights but to treat what has happened as the creation of a new
asset. Sub-section (6) then goes further by deeming the asset so created as
having been ipso facto disposed of, without payment of consideration by the
disponor and with the same position as to cost base as is set up under sub-s.
(7).

73.  It was submitted for the Commissioner that the entry into the 1986 Deed
vested in Hunter Douglas rights, including the right to restrain the applicant
from the conduct specified therein, and that these rights were an "asset"
within the meaning of s. 160A, and thus for the purposes of s. 160M (6). It
follows from what I have said that I do not accept that proposition. The
result is that the submission for the Commissioner breaks down at this point.

74.  I should state that the submission continued by asserting that the rights
in question were not before in existence, that they were created by entry into
the 1986 Deed, that the creation of the rights was deemed to be a disposal
thereof, and that by virtue of sub-s. 160M (6) the asset so disposed of is
deemed to have been acquired at no cost. The final step in the argument was
that a net capital gain had accrued to the applicant which was included in his
assessable income pursuant to s. 160ZO. It follows from what I have said that
I reject this argument.

75.  However, as I have indicated, the Commissioner has succeeded on other
grounds. I would answer the questions referred to this Full Court in the
manner set out by Lockhart J. in his Reasons for Judgment.
JUDGE3
  On 6 September 1989 Hartigan J., sitting as President of the Administrative
Appeals Tribunal at the request of both the applicant, Peter William Hepples
and the respondent, Commissioner of Taxation, referred two questions of law
arising in proceedings before that Tribunal to the Full Court of this Court
for decision. In accordance with O.50 r.1 of the Federal Court Rules the
questions for consideration of the Court took the form of a special case in
which the learned President set out the facts agreed to by the parties as
being relevant to the questions of law. Accordingly the facts hereafter set
out are a summary of the facts set out in the special case.

2.  The applicant commenced employment with Hunter Douglas Limited ("Hunter
Douglas") in around late August or early September 1985, having been employed
as the Marketing Director/General Manager of the Window Furnishings Division
of that company. He entered into a written employment agreement with Hunter
Douglas on or about 1 September 1985, the whole terms of which were not before
the Court but it seems clear that the employment was still continuing when on
or about 27 June 1986 the applicant entered into a deed with Hunter Douglas
pursuant to which he became entitled to receive the sum of $40,000 upon the
deed being signed.

3.  The deed recited the employment of the applicant as a Director and General
Manager (window covering products) of Hunter Douglas and the agreement of the
applicant with Hunter Douglas to enter into a deed to record the terms upon
which the applicant had agreed from and after the date of his ceasing to be
employed by Hunter Douglas to be restrained from carrying or being interested
in any business or other undertaking or activity of a kind referred to in the
deed. The operative clause of the deed provided as follows:
    "1. In consideration of Hepples entering into this
    Deed and provided that he shall at all times
    observe and fulfil all of the terms covenants
    and conditions hereof Hunter Douglas shall pay
    Hepples the sum of FORTY THOUSAND DOLLARS
    ($40,000) upon signing of this Deed.
    2. In consideration of Hunter Douglas entering
    into this Deed, Hepples covenants with Hunter
    Douglas or any successor, subsidiary or
    affiliate thereof (hereinafter called "the
    Associated Companies") that for a period of
    two (2) years immediately following the moment
    of the termination of his employment by Hunter
    Douglas within the territorial limits of
    Australia, he will continue to be bound by the
    Clauses 2, 3, 4 and 5 of his Employment
    Agreement; copy of said Clauses are attached
    to this Deed as Schedule "A".
    . . .
    4. Hepples acknowledges and agrees that this Deed
    has been entered into by him not only in
    favour of Hunter Douglas but in favour of each
    of the Associated Companies for their
    respective rights and interests to the intent
    that each of the same shall be entitled to
    enforce the obligations of this Deed against
    him to the extent to which the protection of
    the business and assets may require."

4.  There was scheduled to the Deed the provisions said to be contained in
clauses 2, 3, 4 and 5 of the Employment Agreement; clause 2 dealt with trade
secrets and special processes. Clause 3 was a covenant in wide terms against
competition with Hunter Douglas. Clause 4 required the applicant to treat as
confidential formulae, know how etc obtained by him during the course of his
employment. Clause 5 contained a severability clause, no doubt in case the
restrictions upon the applicant were too wide and contrary to the public
interest.

5.  Pursuant to this Deed the applicant was paid by Hunter Douglas on or about
27 June 1986 an amount of $40,000. He did not incur any capital loss during
the year of income ended 30 June 1986.

6.  The questions referred to the Court for determination were as follows:
    (A) Was there, in consequence of the facts recited
        herein, included in the assessable income of the
        applicant for the year of income ended 30 June
        1986 -
        (a) an amount of $40,000; or
        (b) some other amount, and if so, what amount,
        pursuant to sub-section 160ZO(1) of the Income Tax
        Assessment Act 1936?
    (B) Who should pay the costs of these proceedings?

7.  The case was heard immediately following the argument in the case of
Cooling v. Federal Commissioner of Taxation, the judgment in which was given
immediately preceding the present judgment. In these circumstances I am
relieved of the need to discuss in great detail the provisions of Part IIIA of
the Income Tax Assessment Act 1936 as amended ("the Act") which include in
assessable income a net capital gain made by a taxpayer. Accordingly, this
judgment should be read together with my reasons in Cooling.

8.  As in the case of Cooling so too in the present case the Commissioner
relied upon the provisions of s.160M(6) and s.160M(7) to submit that on the
present facts the applicant had, within the meaning of Part IIIA, disposed of
property for a consideration of $40,000 with the consequence that the whole of
the $40,000 was to be included in his assessable income pursuant to the
provisions of s.160ZO(1) of the Act.

9.  For the reasons which I have outlined in some detail in my judgment in
Cooling I am of the view that s.160M(6) has no application on the facts of the
present circumstances, that sub-section being limited to the class of case
where there is created out of existing property of the taxpayer a right in
respect of that property and in circumstances where the property otherwise
continues to be owned by the taxpayer. That is not the present case and in my
view s.160M(6) has no application.

10.  The Commissioner submitted that the asset to which the opening words of
s.160M(7) referred was, in the present circumstances, either the goodwill of
Hunter Douglas and perhaps its associated companies, their trade connections
and trade secrets or the pre-existing employment contract. Although the stated
case does not deal specifically with the existence of goodwill in Hunter
Douglas or for that matter in its subsidiaries, it may be readily inferred
from the special case that such goodwill did in fact exist and it is clear
that the Court is entitled by virtue of O.50 r.3 of the Federal Court Rules to
draw inferences both of fact and law.

11.  Reliance was placed by the applicant upon the decision of the Court of
Appeal in the United Kingdom in Kirby (Inspector of Taxes) v. Thorn EMI Plc
(1988) 1 WLR 445. In that case the taxpayer company was a holding company
which owned, through its holding of the share capital of a subsidiary, all the
share capital in three companies that carried on a business of repairing
electrical motors and manufacturing industrial lifting magnets. In 1977 as a
consequence of an American company wishing to acquire the entire share capital
of the three companies, a tripartite agreement was entered into between the
taxpayer, its immediate subsidiary and the American company under which the
taxpayer agreed to procure the sale of the three companies by its subsidiary
to the American company and to covenant in favour of the American company that
no company in its group of companies would compete with the three companies
for a period of five years. In consideration of this restrictive covenant the
American company subsequently paid to the taxpayer the sum of $575,000 in
addition to the purchase price for the shares in the company. The taxpayer was
assessed to tax on the basis that a chargeable gain had arisen to it by virtue
of s.22 of the then Finance Act 1965 (UK). It was held that the relevant
provisions of the Finance Act applied only to assets in existence at the time
of their disposal with the consequence that s.22(1)(c) of that Act did not
operate to make the creation of the rights in the American company a disposal
for capital gains tax purposes. It was further held that the "right" or
"freedom" to carry on business in the market place was not an asset within the
scope of s.22 of that Act and could thus not be the subject matter of any
disposal by the taxpayer company so as to bring the capital sum received by it
into the charged tax. However, it was held that the property to which s.22 of
that Act referred did include goodwill and that the covenant given by the
taxpayer to the American company whereby it agreed to restrict its own future
trading activities together with those of its subsidiaries amounted to a
disposal of goodwill and the amount received was accordingly within the charge
for tax.

12.  The relevant statutory provision which is set out in the judgment of
Nicholls L.J. at p 450 was in the following terms:
    "'(1) All forms of property shall be assets for
    the purposes of this Part of this Act, whether
    situated in the United Kingdom or not, including -
    (a) options, debts and incorporeal property
    generally. . . and (c) any form of property created
    by the person disposing of it, or otherwise coming
    to be owned without being acquired. (2) For the
    purposes of this Part of this Act - (a) references
    to a disposal of an asset include, except where the
    context otherwise requires, references to a part
    disposal of an asset, and (b) there is a part
    disposal of an asset where an interest or right in
    or over the asset is created by the disposal, as
    well as where it subsists before the disposal, and
    generally, there is a part disposal of an asset
    where, on a person making a disposal, any
    description of property derived from the asset
    remains undisposed of. (3). . . there is for the
    purposes of this Part of this Act a disposal of
    assets by their owner where any capital sum is
    derived from assets notwithstanding that no asset
    is acquired by the person paying the capital sum,
    and this sub-section applies in particular to -. . .
    (c) capital sums received in return for forfeiture
    or surrender of rights, or for refraining from
    exercising rights.'"

13.  The basic scheme of the English legislation, and in my opinion the same
can be said of the Australian legislation, was described by Nicholls L.J. at p
450 as follows:
    "Thus the basic structure of the tax is of a charge
    on gains accruing to a person on disposal of an
    asset by him. There is no statutory definition of
    disposal but, having regard to the context, what is
    envisaged by that expression is a transfer of an
    asset (i.e. of ownership of an asset) as widely
    defined, by one person to another. The Act
    presupposes that, immediately prior to the
    disposal, there was an asset and that the disponor
    owned it. Section 22(2)(a) then deals with the
    case where only part of an asset is disposed of,
    and section 22(2)(b) covers the case where,
    although the disponor owned an asset before the
    disposal, what he did by the disposal was not to
    transfer that asset but to carve or create out of
    it a right in favour of another. The grant of an
    easement over land is an obvious example. That
    also is stated to be a part-disposal. In that
    instance also the disponor owned a relevant asset
    prior to the disposal. Consistently with this
    basic structure of an existing asset owned by the
    disponor, section 22(3) provides that, where a
    capital sum is derived from assets, there is a
    disposal of assets 'by their owner'".

14.  The judgment then refers to certain exceptions to the basic structure not
presently relevant.

15.  It will be observed that s.22(2)(b) of the United Kingdom legislation
broadly corresponds to s.160M(6) and s.22(3) broadly corresponds to s.160M(7).

16.  It may be noted that in the course of the judgment Nicholls L.J.
expressed the view that the liberty or freedom to trade enjoyed by everyone is
not a form of property within the meaning of s.22. That presumably may explain
the reason why the Commissioner did not seek to argue that in s.160M(7) the
relevant asset was the taxpayer's right to trade after the expiration of his
employment. Hence it does not become necessary to determine for the purposes
of the present case whether the example given in the Explanatory Memorandum of
a restrictive covenant could possibly fall within the words of s.160M(7).

17.  The decision of the Thorn EMI case was ultimately that the sum of
$575,000 was derived from the taxpayer company's goodwill. The taxpayer had
turned to account its goodwill by giving the covenant which it did and
accordingly the provisions of the Act applied to it. I have no doubt that such
a case would also fall within the provisions of s.160M(7) of the Australian
Act.

18.  However, the difficulty involved in the Commissioner's submission on
s.160M(7) so far as he relies upon the goodwill of Hunter Douglas and its
subsidiaries and its trade secrets and the like, is that which was also
involved in the Cooling case, namely that the asset upon which the
Commissioner relies to found a submission under s.160M(7) is not an asset of
the taxpayer but is an asset of the payer of the money. But even if I were
wrong in my view that the asset referred to in s.160M(7) must be an asset of
the taxpayer it would not follow that the questions of law referred to this
Court should be answered in favour of the Commissioner.

19.  The difficulty seems to me to be that para.(a) of s.160M(7) requires
either that there be a real relationship between the act or transaction on the
one hand and the asset on the other or that the event affect, in the sense of
adversely affect, the asset. In my view it would be a strange characterisation
of a grant by an employee of a covenant in restraint of trading after the
termination of his employment to describe that transaction as one that takes
place in relation to his employer's goodwill. It rather is a transaction which
takes place in relation to the right of the employee to trade. Similarly it is
difficult to see how the transaction in any way affects the employer's asset.
Rather the employer's goodwill remains perfectly intact and unaffected by the
transaction except perhaps in a monetary sense that the goodwill may become
more valuable as a result of the transaction.

20.  In the alternative the Commissioner relied upon the employment contract
as the relevant asset for the purposes of s.160M(7). It was not entirely clear
whether he regarded the employment contract as an asset of Hunter Douglas or
as an asset of the applicant or both. To the extent that he regarded it as an
asset of Hunter Douglas the argument fails because on the view I have taken
the relevant asset must be an asset of the taxpayer.

21.  There is a difficulty in regarding the personal rights and obligations
under a contract of employment as an asset of the employee, even if it may be
possible to regard such an employment contract as an asset of the employer. In
O'Brien (Inspector of Taxes) v. Benson's Hosiery (Holdings) Ltd (1980) AC 562,
a case arising under the provisions of the Finance Act 1965, s.22, an employer
was paid a sum of money by an employee to be released from the obligations
under the service contract. A question arose as to whether the contract was an
asset of the employer which had been disposed of.

22.  Lord Russell of Killowen delivering the judgment of the House of Lords
said at 573:
    "it was contended for the taxpayer that the rights
    of an employer under a contract of service were not
    'property' nor an 'asset' of the employer because
    they cannot be turned to account by transfer or
    assignment to another. But in my opinion this
    contention supposes a restricted view of the scheme
    of the imposition of the capital gains tax which
    the statutory language does not permit. If, as
    here, the employer is able to exact from the
    employee a substantial sum as a term of releasing
    him from his obligations to serve, the rights of
    the employer appear to me to bear quite
    sufficiently the mark of an asset of the employer,
    something which he can turn to account,
    notwithstanding that his ability to turn it to
    account is by a type of disposal limited by the
    nature of the asset. In this connection I would
    also refer to the provisions of section 22(3)(a)
    which appear to me apt to cover a case where
    damages are recovered by an employer from a third
    party for wrongful procurement of breach by the
    employee of his contract of service."

23.  It may be remarked that in the paragraph immediately preceding the one I
have quoted, his Lordship referred to the wide generality of language of s.19
and s.23 of the Finance Act 1965. The former section was the charging section.
It imposed the tax in respect of "chargeable gains computed in accordance with
this Act and accruing to a person on the disposal of assets".

24.  O'Brien's case was subsequently considered in the Chancery Division in
Zim Properties Ltd v. Proctor (H M Inspector of Taxes) (1984) 58 Tax Cas 371.
In that case the taxpayer sued its solicitor for damages for negligently
preparing a contract as a result of which the prospective purchaser had
repudiated the contract. The claim in negligence was compromised and the
taxpayer received the sum of 69,000 pounds in instalments of 60,000 pounds and
9,000 pounds as a result of the settlement. It was held that the receipt was
an asset that was disposed of. In so deciding Warner J regarded as the ratio
decidendi of O'Brien the proposition that "those rights (i.e. the rights under
the employment agreement) were an asset for capital gains tax purposes because
they were something that could be turned to account". This language echoes the
opening words of s.22(3) of the Finance Act namely that:
    "Subject to subsection (6) of this section, and to
    the exceptions in this Part of this Act, there is
    for the purposes of this Part of this Act a
    disposal of assets by their owner where any capital
    sum is derived from assets. . ." (emphasis added)

25.  The judgment of Warner J. continued at 390:
    "Thus the House of Lords treated as virtually
    irrelevant the use by s.22(1) of the word
    'property'. It held to be dominant in ss.19 and 22
    the words 'asset' and 'disposal'. There are, it
    seems to me, two possible ways in which their
    Lordships may have reached that result. One was to
    take the view that s.22(1) was not intended to
    provide an exhaustive definition of 'assets' but
    merely to enact that, whatever else might be
    comprised in that concept, it included 'all forms
    of property'. On that view 'assets' was a wider
    concept than 'property' and included any right that
    could be turned to account, even though a lawyer
    might not regard it as 'property'. The other
    possibility is that their Lordships agreed with the
    approach of Fox J. whose decision at first instance
    they were restoring. His view was that the word
    'property' was not a precise term but one of which
    the meaning might vary with the context (see page
    251 of the report). That of course is true of
    almost any word, and it is interesting that, as was
    pointed out to me, there are passages in the
    judgment of Oliver L.J. (with which Bridge L.J. agreed)
    in Trendtex Trading Corporation v. Credit Suisse
    (1980) 3 All ER 721, in which he used the phrases
    'right of property' and 'property right' in
    relation to a right to litigate in a context such
    that he clearly regarded it as irrelevant whether
    litigation embarked upon in exercise of that right
    would succeed.
    Either way it would in my view be inconsistent with
    the decision in O'Brien v. Benson's Hosiery
    (Holdings) Ltd 53 TC 241 to hold that a right to
    bring an action to seek to enforce a claim that was
    not frivolous or vexatious, which right could be
    turned to account by negotiating a compromise
    yielding a substantial capital sum, could not be an
    'asset' within the meaning of that term in the
    capital gains tax legislation. I propose, for the
    sake of convenience, to refer to the right that Zim
    had, in that sense, to bring an action against
    Austin and Co as its 'right to sue' Austin and Co."

26.  Whether such a wide interpretation of the word "asset" should be adopted
in respect of the Australian legislation having regard to the general context
of that legislation need not be decided in this case. For even if it be
correct to describe an employment contract as being an asset of an employee
(and it would not ordinarily be so described, particularly as it imposes
obligations as well as benefits) it is hard to see, as a matter of fact that
the entry into the restrictive covenant was an act or transaction which took
place in relation to the employment contract. It is not suggested in the
special case that the employment contract was to be amended or indeed that
there was any connection at all between the restrictive covenant and the
employment contract save that the latter preceded the former. No such
inference can be drawn from the facts of the case. Nor can it be suggested
that the service contract was in any way affected by the entry into of the
restrictive covenant.

27.  In my opinion it is torturing the language of s.160M(7) to bring the
present transaction within it.

28.  Accordingly I would answer the questions referred to the Court as
follows:
    (A) No.
    (B) In accordance with the agreement of the parties,
    there should be no order as to costs.