Case: Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375
Outcome: applied
In determining whether an amount paid or payable to the taxpayer has the character of income, it is necessary: (a) to have regard to the quality of the amount in the hands of the taxpayer and not to the character of the expenditure to the payer : Federal Commissioner of Taxation v McNeil [2007] HCA 5 ; (2007) 229 CLR 656 at [20] and [55]; G.P. International Pipecoaters Pty Ltd v Federal Commissioner of Taxation [1990] HCA 25 ; (1990) 170 CLR 124 at 136; (b) to have regard to the whole of the surrounding circumstances or factual matrix, and not just to the contract under which the amount is paid or payable: Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375 at 385; Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 53; (c) as an elaboration of the previous paragraph, to consider the substance rather than the form of the transaction, particularly where an amount is paid as part of a wider, composite transaction: Dickenson v Federal Commissioner of Taxation [1958] HCA 62 ; (1958) 98 CLR 460 at 482, 491; Reuter v Federal Commissioner of Taxation 93 ATC 5030 at 5036 5037; Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 45 ATR 507 at [50]; Macquarie Finance Ltd v Federal Commissioner of Taxation (2004) 57 ATR 115 at [61], [64] per Hill J, on appeal [2005] FCAFC 205 ; (2005) 146 FCR 77 at [109] [111] per French J, [169] [170] and [187] per Hely J, and [251] [253] per Gyles J; Customs &amp; Excise Commissioners v Diners Club Ltd [1989] 1 WLR 1196 at 1207; see also Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684; and (d) to disregard the labels used by the parties: Federal Commissioner of Taxation v Krakos Investments Pty Ltd (1995) 61 FCR 489 at 495; Vincent v Federal Commissioner of Taxation (2002) 124 FCR 350 at [64] [72]. 104 There is much force in BARM's contention that alternative (1) does not involve taxation by reference to economic equivalence. Generally speaking, that doctrine has been relied on to seek re-characterisation of a receipt or outgoing where there is more than one way to achieve the desired economic result and the taxpayer chooses the way which is the most tax effective. Anti-avoidance provisions aside, the courts have consistently rejected the doctrine of taxation by reference to economic equivalence, that is, by reference to the ways in which the transaction could or might have been done, as an aid to characterisation. As was said in the joint judgment of Gaudron, McHugh, Kirby and Hayne JJ in Federal Commissioner of Taxation v Orica Ltd [1998] HCA 33 ; (1998) 194 CLR 500 at [70] : '[L]ittle or no guidance is offered by considering what other transactions the taxpayer might have made to achieve a commercial result substantially the same as the commercial result said to flow from the making of the Principal Assumption Agreement. No doubt the taxpayer might have taken the amount of $62,309.546 which it paid to MMBW and instead of paying it to MMBW under the Principal Assumption Agreement have invested it in Commonwealth Bonds maturing at or about the same time as its debentures were to mature. If it had done that it would have derived income which it might then have applied in satisfaction of most, if not all, of its liabilities to debenture holders. Similarly, it might have invested the same amount as it paid to MMBW on more speculative investments and it might then have obtained returns greater than the amount necessary to pay the debenture holders. Examination of those other transactions does not reveal whether or when the taxpayer derived income as a result of the making of the Principal Assumption Agreement. In particular, the characterisation of the gains or receipts obtained in accordance with hypothetical transactions of the kind described is of little, if any, assistance in characterising the nature of the benefits identified as flowing from the making of the Principal Assumption Agreement.' In many ways, this is no more than an echo of what was said over twenty years before by Sir Nigel Bowen in Federal Coke Co Pty Ltd v F C of T (1977) 34 FLR 375 at 386 387: 'His Honour appears to have considered that he could approach the characterisation of the receipts in the hands of the taxpayer by treating them as if they were received by Bellambi or the Bellambi group. On the other hand, if they were treated as received by Federal, his Honour thought that they were received by Federal just as much as compensation for the contraction of the contract to supply coke as if the payee had been the parent rather than the subsidiary. One may have some sympathy with an approach of this kind. However, in taxation matters, the court is obliged to have regard to the actual facts and not to their equivalents. In cases where it is appropriate the court may apply a statutory provision such as s 260 to get rid of a contract, agreement or arrangement and deal with the case in disregard of that element, but, where there is no statutory warrant for doing so, the court cannot disregard certain of the facts or re-arrange the facts or decide the case according to its view of the substance of the matter. It is not legitimate to disregard the separateness of different corporate entities or to decide liability to tax upon the basis of the substantial economic or business character of what was done.'