Avco Financial Services Ltd v FCT

As part of this strategy the Bank has introduced the concept of segmentation. This means directing the Bank's marketing strategy towards particular segments of the community who are likely to produce the most valuable long term relationships for the Bank. An example is targeting University campuses with financial services packages tailored to the needs of tertiary students. The Bank has branches on approximately 27 campuses throughout Australia, including Melbourne University. Home loans are a key relationship product between a bank and its customers, because the purchase of a home is generally a customer's most significant and long term purchase. Once a bank has acquired a customer as a home loan customer, it is more likely that the bank will have successful opportunities to provide other products to that customer. Against this general background, the opportunity to gain exclusive access to the segment of the market constituted by ADF borrowers was seen by the Bank as completely consistent with its strategy. In 1990 there were about 70,000 members of the ADF. Another advantage was that ADF members are by and large located at Army, Navy and Air Force bases throughout Australia and other Defence establishments. Therefore specialised products for this segment of the market can be provided at a limited number of branches. Training, administration and other costs which would be required if products had to be available throughout the entire Australian branch network are considerably reduced. The Bank also engages in advertising and sponsorship to raise and broaden its profile so that it can continue to attract customers. Some of these activities have direct commercial benefit to the Bank, such as its sponsorship of the Institute of Chartered Accountants through the Institute's seminars, conferences and newsletter. But the Bank also engages in sponsorship with less immediate tangible commercial benefit, such as the purchase of a valuable sculpture for the National Gallery of Victoria and support for Australian Commonwealth and Olympic Games bids. A final aspect of the Bank's business said to be relevant to the present case is the dealing of its Treasury Department in bonds and derivative instruments. The latter include floating rate agreements, interest rate swaps and options. I do not think it is necessary to go into detail on these matters. Suffice to say they form an important part of the Bank's business and with many of them the Bank has to estimate the possible income flows from the acquisition of a particular product or a particular right. It must make a judgment about future income flows based on the information available to it at a particular time, place a dollar figure on that income stream and then pay out that dollar figure to another party. Was the Payment Capital? The most recent authoritative pronouncement is that of the High Court in GP International Pipe Coaters Pty Ltd v FCT (1990) 170 CLR 120 at 137:

(T)he character of expenditure is ordinarily determined by reference to the nature of the asset acquired or liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid. See also Mount Isa Mines Ltd v FCT (1992) 176 CLR 141 at 149. The answer "depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process": Hallstroms Pty Ltd v FCT (1946) 72 CLR 634 at 648. In the present case, the advantage sought was the exclusive right to make home loans to a significant segment of the market for home loan borrowers, that segment being members of the ADF who were or would become eligible for subsidised loans under the HLA Act. So viewed, the right obtained was in the nature of a monopoly over that particular class of business. Moreover, access to those borrowers was calculated to gain not only profits of the subsidised loans, the subject of the monopoly, but the profits on the top-up loans and other Bank products such as personal loans and credit cards which could be reasonably expected to be sought by the subsidised borrowers. I do not understand the passage in Hallstroms cited above to mean the Court should not undertake an examination of the legal rights obtained by the Bank under the Agreement of 5 November 1990 and the HLA Act. In any event, in the present case those rights are not especially arcane and may reasonably be supposed to have been in the actual contemplation of the parties. First, the Bank would be entitled to injunctive relief to restrain the Commonwealth from breaching the agreement by giving loan subsidies to ADF members borrowing from any other bank or lending institution: Metropolitan Electric Supply Co Ltd v Ginder [1901] 2 Ch 799, James Jones & Sons Ltd v Earl of Tankerville [1909] 2 Ch 440, O'Keefe v Williams (1910) 11 CLR 171 at 191, 211. Secondly, the Bank's rights and obligations under the agreement can be assigned. True it is, the agreement on its face requires the Commonwealth's consent to any such assignment and there is no contractual stipulation that such consent not be unreasonably withheld. However, it is possible that remedies might be available under the Administrative Decisions (Judicial Review) Act 1977 (Cth) if a refusal of consent disclosed some error of law: see James Richardson Corporation Pty Ltd v Federal Airports Corporation (1992) 117 ALR 277. More importantly, practical considerations suggest that if for any reason the Bank wished to give up its rights there would be every reason for the Commonwealth to keep the scheme running and to agree to a smooth transition to an appropriate assignee with whom the Bank had reached an agreement. And since assignment of rights under the agreement is lawful - indeed expressly contemplated by statute -there is no reason in law why the Bank should extract a price from the assignee. The rights the Bank obtained were comparable to acquisition of goodwill. There was an expectation that custom would accrue to the Bank. Goodwill is ... the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. Inland Revenue Commissioners v Muller & Co's Margarine Ltd [1901] AC 217 at 223-224 per Lord Macnaughton. In a way, the present case is stronger, because the Bank acquired the positive right to have the Commonwealth direct this particular class of business to it. There was not merely an expectation that business of a particular kind would accrue, "the probability that the old customers would resort to the old place" (Cruttwell v Lye (1810) 17 Ves 335 at 346 per Lord Eldon LC), but a standing and enforceable obligation on the Commonwealth to direct that business to the Bank. Moreover, there was also a negative element of goodwill in that the agreement excluded competitors from this particular class of business: Sun Newspapers Ltd v FCT (1938) 61 CLR 337 at 363, Broken Hill Theatres Pty Ltd v FCT (1952) 85 CLR 423 at 434, John Fairfax & Sons Pty Ltd v FCT (1959) 101 CLR 30 at 36. As to the payment itself, it was a once and for all payment, not a recurrent payment, or one linked to or conditional on the acquisition of any particular piece of business. A number of analogies which counsel for the Bank sought to make in support of a conclusion that the payment was on revenue account are in my respectful opinion not persuasive. The payment was not comparable to a commission paid on a loan or other business introduced. In such a case there is a direct connection between the commission paid and the income or profit received by the taxpayer as a result of the commission. Here, as subsequent events were to show only too well, the payment of the $42 million did not guarantee or reward any particular piece of business obtained and was not related to any particular transaction or transactions either in number or amount. The comparison with advertising, promotional or marketing expenses in my opinion is not valid since in such cases the customer has a discretion whether to do business with the advertiser. Here, to put it crudely, the custom of this particular segment of the market was bought. Borrowers of subsidised ADF loans had no choice but to deal with the Bank. In any case, as counsel for the Commissioner pointed out, even advertising expenditure can be of a capital nature if it can be regarded as non-recurrent and directed towards the establishment of a market for a new business or new product: Sun Newspapers Ltd v FCT (1938) 61 CLR 337 at 360-361. Counsel for the Bank laid considerable stress on the calculations which led to the payment of $42 million being arrived at. These calculations, I accept, were a genuine and conservative attempt to estimate the profits it was hoped would accrue from the outlay of the sum. But the same may be said of many classes of expenditure which would undoubtedly be on capital account. For example, the potential buyer of a mine might, in working out an offer, estimate the profits that would accrue over the life of the mine. But the purchase price would not be on revenue account. Similarly, the fact that the payment was directed to increasing the Bank's revenue and profit is irrelevant. Section 51 assumes that there will be outgoings incurred in the gaining of assessable income, but which are nevertheless of a capital nature. Virtually any payments made by a company must be assumed to be made, with varying degrees of directness, with a view to obtaining some financial benefit for the company. Were this not so, the shareholders would have cause for complaint. To quote the well-known aphorism of Bowen LJ: The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company. Hutton v West Cork Railway Company (1883) 23 Ch 654 at 673. Similarly while it is no doubt true that, in the case of a bank or money-lender, money is trading stock of the business and forms part of its circulating capital (Avco Financial Services Ltd v FCT (1991-2) 150 CLR 510 at 518, 531), that cannot mean that any payment of money by a bank must be on revenue account. The fact that the Bank initially stipulated for a periodical form of payment is not to the point. If the Bank had wished to acquire the use of premises under a lease, but the owner insisted on sale, the purchase price would not be on revenue account even though rental under the hoped-for lease would have been. Nor is the present case to be seen as the converse of cases such as Commissioner of Taxation (Cth) v Myer Emporium Ltd (1987) 163 CLR 199 and Henry Jones (IXL) Limited v Commissioner of Taxation (Cth) (1991) 31 FCR 64 which hold that a lump sum received for the assignment of an income stream is itself income. Here there was no income stream to which the Commonwealth was entitled and for which the $42 million was exchanged. Put another way, it was not a pre-payment of future obligations on the part of the Bank. Counsel for the Bank argued that the case was on all fours with the decision of the Privy Council in BP Australia Ltd v FCT (1965) 112 CLR 386. This case arose in the context of the change in retail petrol marketing in Australia in the early 1950s to a "solo site service station system". Previously various brands of petrol were sold in competition with each other at each service station, with each petrol company owning particular tanks and pumps at the service station. Under the new system a service station would only stock the one brand. BP and three other oil companies joined together to offer direct financial inducement to retailers to join in a solo site plan in which one site would sell only petrol purchased from the co-operating companies. A lump sum payment was offered to retailers who would tie themselves to the co-operating companies for at least three years. A payment was made of Ł100 for every 1000 gallons per month estimated with a maximum of $1000 for a three years tie. In some cases the sum might be increased to Ł150 for every 1000 gallons provided the tie was for five years. The Privy Council, reversing a majority of the High Court, held that these payments were on revenue account and not capital. Among the dissentients in the High Court was Kitto J who said of the payment (at 412): The purpose was not to create a situation in which to set about selling motor spirit; it was to secure the particular sales which would be necessary for the satisfaction of the service station's requirements of the period. The payment of the money was analogous to expenditure in sending a commercial traveller on his rounds to secure orders; it was part and parcel of the business of effecting sales. The change in the organisation of the whole sale trade in motor spirit from the old system of multiple pump service stations to the new solo system meant inevitably that every oil company, if it wanted to sell motor spirit to service stations in the future, had to accept the necessity of spending money not at the beginning once and for all, but at the beginning and from time to time, to ensure that it would receive from as many service stations as possible the whole of the orders for limited periods. The Privy Council pointed (at 393): There can be no doubt that the only ultimate reason for any lump sum payment was to maintain or increase gallonage. ... The fact that the amounts of the lump sums were influenced or even decided by competition does not greatly affect the matter. Every price or rebate is influenced and largely decided by competition. The trader offers the rebate the competition renders necessary or desirable. So too with lump sums paid to retailers. The more they were based on a particular retailer's gallonage the more closely they were tied to the immediate cost of selling to an individual customer. But even where the overall gallonage rather than the immediate gallonage influenced the sum paid it could still be one of the revenue expenses of marketing. Later their Lordships pointed out (at 395) that BP ... was not achieving a monopoly nor buying off competition nor obtaining any substantial area for its own domain. Although one retailer was tied to BP, the retailer next door could still buy some other brand and the passing motorist could do likewise. And (at 399) their Lordships said that each payment was of a recurrent nature because "it was made to meet a continuous demand in the trade". The Privy Council then turned to deal with the question of the length of the restraint. Their Lordships said (at 399):

What additional indication is given by the actual length of the agreements? That must be a question of degree. Had the agreements been only for two or three year periods that fact would have pointed to recurrent revenue expenditure. Had they been for twenty years, that fact would have pointed to a non-recurring payment of a capital nature. Length of time, though theoretically not a deciding factor, does in practice shed a light on the nature of the advantage sought. The longer the duration of the agreements, the greater the indication that a structural solution was being sought. In this case the periods varied between three and fifteen years, but the average appears to be something just under five years and the predominant number of agreements was for a five-year period. The case was argued before their Lordships as in the Courts below on the footing that five years was the length of the tie and neither side sought to make any differentiation because a few of the ties were very much longer. That length of time appears to be neutral, and in itself indicates neither capital expenditure nor revenue by its mere length. It therefore does not add effectively to the argument either way. The question must be decided by other weights in the balance. The contrast with the present case, where the term was 15 years and might secure loans near the end of that period which extended to the year 2031, is obvious enough. By the end of the relevant tax year (the year ended 30 June 1952) BP had entered into agreements with 791 dealers and it continued thereafter to sign up more: (1961) 110 CLR at 391. A bird's eye view of BP's operations at the time would therefore reveal a continuous signing up of hundreds of dealers, the making of lump sum payments to them, and the selling of petrol to them at a profit which as time went on would return to BP the lump sum payments. As agreements expired, new agreements would be made with further lump sum payments, the sale of more petrol and more recoveries. And new dealers would be continually sought, again with agreements, lump sum payments, the sale of petrol and the recovery of the lump sums. If I may respectfully say so, one is struck with the aptness of Kitto J's analogy of salesmen on the road, all being given advances on expenses, and securing sales which recoup those expenses. In my opinion, the present case is quite different. There was one, very large, once and for all payment which secured a captive market for 15 years with consequent benefits extending up to a further 25 years beyond that. No part of that payment "came back" to the Bank from the Commonwealth in the way that the lump sum came back from BP's dealers in the form of petrol purchases. For those reasons I find that the payment was of a capital nature. The application will be dismissed with costs, including reserved costs. I certify that this and the preceding twenty-three (23) pages are a true copy of the reasons for judgment of the Honourable Justice Heerey. Dated: 12 June 1997 Associate Appearances Counsel for the applicant: Mr D H Bloom QC and Mr J W De Wijn Solicitor for the applicant: Baker & McKenzie Counsel for the respondent: Dr P Buchanan QC and Mr C M Maxwell Solicitor for the respondent: Australian Government Solicitor Date of hearing: 26, 27 and 28 May 1997