Cliffs International Inc v Commissioner of Taxation

Cliffs International Inc v Commissioner of Taxation - [1979] HCA 8 - HCA 1979 case summary — Zoe

[7]

As at November 1962, Howmet and Garrick Agnew Pty. Ltd. ("the Agnew Co.") were the two major shareholders in the capital of Basic Materials Co. Pty. Ltd. ("Basic"). Howmet owned 50.1 per cent of the shares and the Agnew Co. 49.9 per cent. As at that date Basic had been allotted under the Mining Act, 1904, as amended W.A., temporary reserves for a period of two years from 1st April 1962. The reserves were subject to stated conditions and covered Crown lands "within a total area of 246 square miles as shown" on a specified plan. By the approval of the reserves, Basic had a right to occupy the described lands for the sole purpose of prospecting for iron ore. Amongst the stated conditions upon which the right of occupancy had been granted were the conditions - (1) that the occupant should "forthwith" commence operations prospecting for iron ore and should continue them to the satisfaction of the Minister for Mines; (2) that no transfer of the authority to occupy would take place without the antecedent approval of the Minister; (3) that the occupant would periodically and at the expiry of the occupancy report its operations and their result, including details of the manner of exploration, geological and geophysical work and the results of assays of material extracted; (4) that when it is shown to the satisfaction of the Minister for Mines that iron ore has been discovered on the reserve in payable quantities, the Minister, after negotiation with the occupant regarding the mining, treatment, processing and marketing of the ore (including conditions as to royalties, quantities, volume, rate, location and methods), will (subject to the provisions of any contract which the Minister may require the occupant to make with the State Government) offer to grant to the occupant, for the mining of iron ore, mining tenements under the Mining Act, 1904 and the regulations thereunder (as amended from time to time) on such conditions as the Minister determines and on acceptance will (subject to the Act and regulations) make such accordingly. If the occupant rejects or within a reasonable time (not exceeding ninety days) fails to accept the offer, the Minister may make any similar grants on the same or less favourable conditions to any other or others, but will not, for a period of at least two years after the original offer is made, grant to any other or others for the mining of iron ore from the reserve any similar mining tenements on more favourable conditions without first giving to the occupant the prior right and opportunity to accept such a grant on those more favourable conditions.

[48]

The advantage sought by the payments was of a capital nature. That is so, whether one looks at the "true legal character" of the expenditure or at what it was "calculated to effect from a practical and business point of view". The sources of those phrases are the authorities cited in Federal Commissioner of Taxation v. South Australian Battery Makers Pty. Ltd. [8] , where the familiar distinction between expenditure of a capital nature and expenditure of a revenue nature was recently discussed. The true legal character of the expenditure was that of the purchase price of the shares in Basic, as Franki J. held in the Federal Court. From a business and practical point of view the appellant sought to acquire Basic's rights in relation to the temporary reserves - the actual right to occupy and use them for a short period, and the contingent right to obtain, or the possibility of obtaining, mineral leases of the land in the reserves. In the Federal Court Bowen C.J. held that the payments were made for the acquisition of the shares and the rights to which they gave access, and Brennan J. held that the payments were incurred with a view to obtaining the net assets of Basic. However the matter is stated, what was purchased - whether it was the shares, or the rights and the possibilities inherent in them, or all of these - was an asset or advantage of an enduring, although not perpetual, kind, an asset or advantage that was to form part of the organization set up by the appellant for the earning of profit. The deferred payments were made to acquire this asset or advantage - there was nothing else that Howmet and Mt. Enid had to give for which they could have been paid. In other words, the deferred payments should properly be regarded as expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which was a condition of carrying on the business of mining at all, within the test stated in Robert Addie & Sons' Collieries Ltd. v. Commissioners of Inland Revenue [9] , in the passage cited in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [10] . The rights acquired were of a permanent character within this test, notwithstanding that a mineral lease is a wasting asset, for "When the words "permanent" or "enduring" are used in this connection it is not meant that the advantage which will be obtained will last forever." (Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [11] per Latham C.J.; see also per Dixon J. [12] ; and Ralli Estates Ltd. v. Commissioner of Income Tax [13] .)

[53]

There have been a number of cases in which expenditure made for the purpose of acquiring a capital asset has been held to be expenditure of a capital nature, notwithstanding that the moneys have been paid over a period of many years, and have been fixed by reference to the income received by the person making the payments. In Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [19] , land was sold to an insurance company, in consideration of promises by the company to erect a building upon it, to use its best endeavours to lease certain shops in the building and to collect the rents therefrom, and to pay to the vendors for fifty years an amount equal to 90 per cent of all rents as and when received from lessees or tenants of those shops. Money paid under the agreement was held to be a capital outlay. Fullagar J. (with whom Kitto and Taylor JJ. agreed) said [20] : For it is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. One of the authorities relied on by the members of the Court in that case was Tata Hydro-Electric Agencies, Bombay v. Income Tax Commissioner, Bombay Presidency and Aden [21] . The facts of that case, as summarized by Williams A.C.J. in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [22] were as follows: There the appellant company, which carried on the business of managing agents of A. company, had acquired the agency from B. company under an assignment whereby B. company transferred to the appellants their whole rights and interest as agents of A. company, subject, however, to the obligations of B. company to pay to both D. and E. companies twelve and one-half per cent of the commission earned by B. company under their agency agreement with A. company. The Judicial Committee held that the commission was not expenditure incurred "solely for the purpose of earning profits or gains". Lord Macmillan said [23] : In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business. Williams A.C.J. said [24] that this was "another way of saying that the expenditure was of a capital nature"; see also per Fullagar J. [25] . 1. (1938) 61 C.L.R., at p. 362. 2. (1938) 61 C.L.R., at p. 363. 3. (1934) 18 Tax Cas. 691. 4. 1928 S.C. 738; 14 Tax Cas. 34. 5. (1930) 15 Tax Cas. 390. 6. (1953) 89 C.L.R. 428. 7. (1953) 89 C.L.R., at p. 454. 8. [1937] A.C. 685. 9. (1953) 89 C.L.R., at p. 444. 10. [1937] A.C., at p. 695. 11. (1953) 89 C.L.R., at p. 445. 12. (1953) 89 C.L.R., at p. 435.

[58]

In the present case, the expenditure, although recurrent, and apparently intended to be paid out of the proceeds of mining the lands, was, as I have said, made as the consideration for the acquisition of an advantage which had the character of capital. Although there was evidence, which was accepted, that the parties regarded the payments as in the nature of royalties, the payments did not in truth have that character. The payees had no interest in the mineral leases, and could not either give or withhold permission to mine them. The payments could not properly be said to have been made for the right to mine the ore, since the mining operations could be continued whether or not the payments were made. The case falls within the principle on which Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [31] and Ralli Estates Ltd. v. Commissioner of Income Tax were decided. It is true that in the latter case, and in In re Income Tax Acts [No. 2], there was an obligation to pay a fixed total sum, of which the payments could be regarded as instalments, and that this circumstance may distinguish those cases from the present. In Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation there was no specified total sum; the obligation there was limited to a fixed period, and in the present case continues indefinitely, but this circumstance does not seem to me to be material, since in each case the expenditure was the consideration paid for a capital advantage. I do not regard the fact that in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation the asset acquired was freehold rather than leasehold as providing any distinction in principle from the present case, since, as I have said, it is not a necessary characteristic of a capital asset that it should endure in perpetuity. In my opinion the present case is indistinguishable fromColonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation. The facts also appear to me to be indistinguishable from those in Tata Hydro-Electric Agencies Bombay v. Income Tax Commissioner, Bombay Presidency and Aden [32] , although of course that case was decided on a statute containing words different from those of s. 51 (1).

[79]

That this is so is shown by many cases, of which it is enough to cite those of the highest authority and of relatively recent date. In Ralli Estates Ltd. v. Commissioner of Income Tax [41] Lord Denning, speaking for their Lordships, said of a price paid "in order to acquire a capital asset", of which he instanced freehold land or a long lease, that it was incurred not "in the production of income, but in the production of capital. It is not deductible as revenue expenditure, no matter whether the price or premium is paid by a lump sum or by instalments. And this is true even when the lease is of a wasting asset". In Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [42] Viscount Radcliffe described as "as illuminating a line of distinction as the law by itself is likely to achieve" that "demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself ". In B.P. Australia Ltd. v. Federal Commissioner of Taxation [43] Lord Pearce applied the classic tests enunciated by Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation [44] , the first of which his Lordship described as involving "the character of the advantage sought, and in this both its lasting qualities and the fact of recurrence may play their parts. Under this head one might also take account of the nature of the need or occasion which calls for the expenditure - Dixon J. in Hallstroms' Case" [45] . In Strick v. Regent Oil Co. Ltd. [46] , Lord Reid said, "If the asset which is acquired is in its intrinsic nature a capital asset, then any sum paid to acquire it must surely be capital outlay. And I do not see how it could matter that the payment was made by sums paid annually". Lord Morris [47] , emphasized the importance of "the nature of that for which payment has been made" and said "If the nature of what is acquired makes it a capital asset the payment for it will be a capital payment". The present significance of the two most recent decisions of their Lordships to which I will refer, Inland Revenue Commissioner v. Europa Oil (N.Z.) Ltd. [48] and Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner [49] is succinctly expressed in a passage from the judgment of Gibbs J. in Federal Commissioner of Taxation v. South Australian Battery Makers Pty. Ltd. [50] . His Honour there said of these two decisions that they "both proceeded on the basis that it is the advantage which the taxpayer seeks and gains from the outgoing that has to be considered in deciding whether the outgoing is of a revenue or of a capital nature".

[87]

So far as concerns the criterion of recurrence, here represented by the indeterminate future periodicity of the deferred payments, what art. 5 of the agreement provided for was a consideration consisting of a purchase price promised once and for all, performance of that promise consisting in part of a lump sum payment and in part by payment at half-yearly intervals thereafter. What would dictate the extent of that performance would be the gradually revealed worth of the advantage which the exercise of the option procured for the taxpayer, a worth which could only be measured by the future yield of iron ore. That future yield would, as time passed, come to reflect, ever more perfectly, the value of the advantage. This was, then, no case of continuing expenditure to meet a continuous demand in the sense referred to by Rowlatt J. in Ounsworth v. Vickers Ltd. [61] , the purpose of the expenditure was not such as to bring it within that class of things which in the aggregate form the constant demand to be met out of the returns of the trade. The relevance of recurrence is for the light it casts upon the advantage obtained; it provides no test and is no more than "a consideration the weight of which depends upon the nature of the expenditure" per Dixon J. in the Sun Newspapers Case [62] . Where the expenditure is in the nature of a purchase price for a capital asset its recurrent nature is of little significance, as is shown by the judgments in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [63] . In that case, especially in the judgment of Fullagar J., with whose judgment Kitto and Taylor JJ. agreed, whatever view to the contrary might have been thought to have arisen from the earlier case of Egerton-Warburton v. Deputy Federal Commissioner of Taxation [64] was laid at rest, the latter decision being explained as confined to its very special facts, the transaction with which it was concerned not being an ordinary business transaction but "in substance a family settlement" involving no true price at all [65] . The other two members of the Court, Williams A.C.J. [66] and Webb J. [67] expressed like views as did Kitto J. in the later decision of Cooper v. Federal Commissioner of Taxation [68] and see alsoA.J.C. Investment v. Federal Commissioner of Taxation [69] , per Jenkinson J.

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Judgment (129 paragraphs)

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