25 Over the years in which the need to distinguish income from capital has been discussed, colourful analogies have been employed in an attempt to elucidate the principle underlying the distinction. So in the well-known passage in Eisner v Macomber 252 US 189 at 206-7 (1920) (cited recently by the majority of the High Court (Gaudron, Gummow, Kirby and Hayne JJ) in the context of the question whether a receipt or advantage derived was capital or income in Commissioner of Taxation v Montgomery (unreported) [1999] HCA 34 at 23-24), Pitney J of the Supreme Court of the United States said:
"The fundamental relation of 'capital' to 'income' has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measure by its flow during a period of time."
26 Dixon J in Sun Newspapers at 359 referred to the distinction:
"between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and the returns representing profit or loss".
27 However, as his Honour pointed out at 360, there is a practical difficulty in drawing a clear distinction between what Lord Blackburn in United Collieries Ltd v Inland Revenue Commissioners (1930) SC 215 at 220 had referred to as "the profit-yielding subject" on the one hand and the process of operating it on the other. As his Honour said:
"The basal difficulty … lies in the fact that the extent, condition and efficiency of the profit-yielding subject is often as much the product of the course of operations as it is of a clear and definable outlay of work or money by way of establishment, replacement or enlargement."
Indeed, it is that difficulty which, as we shall shortly explain, besets the present case.
28 In Hallstroms Dixon J at 647, summarised the distinction between capital and income in the context of business outgoings, in the following words:
"… the contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it."
29 Another matter, often relevant to the distinction between income and capital will be whether the expenditure is made "once for all" on the one hand, when it will usually be capital, or is "repeated, recurrent or continual" when it will usually be on revenue account: cf Sun Newspapers at 361. As is clear enough, there are certain sorts of outgoings, interest and rent being the most obvious, which through their recurrence are clearly deductible, at least in the usual case: cf Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 at 468. The majority of the High Court in Steele v Deputy Federal Commissioner of Taxation (1999) 99 ATC 4242, however, left open the question whether there could be a case where interest was to be regarded as being on capital account. But whether this is so, the difficulty of applying the degree of recurrence as a test is that a revenue outgoing may never recur or be likely to recur, and in that sense be a once off outgoing. Similarly, a series of purchases of capital assets will nevertheless be on capital account, though repeated.
30 One thing is clear, and that is that recurrence will be an aid to the determination of the question to consider the essential character of the outgoing or liability. In Sun Newspapers, Dixon J propounded three matters which in his Honour's view fell to be considered. His Honour said at 363:
"There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."
31 Of these three factors, it is the character of the advantage sought which will generally provide the greatest guidance for it tells most about the essential character of the expenditure itself. More recently, albeit in a rather different context, the High Court in a unanimous decision in GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137 looked at the question how the character of expenditure may fall to be determined. Their Honours said:
"The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the 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."
32 Where moneys have been employed in the acquisition of the asset, the nature of what is acquired will ordinarily cast light on whether the outgoing is of a capital or revenue nature. But an outgoing may be of a capital nature, notwithstanding that no asset has been acquired as a consequence of the outgoing, as where an obsolete and dangerous large scale structure is demolished: cf Mount Isa Mines at 147-8 citing John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 36. The present is, of course, a case where no asset has been acquired. The outgoings in question have been made to discharge an obligation. But in the present case the occasion for the outgoings is to be found in the giving of the indemnity, not directly in the outgoings themselves. Indeed, it is common ground that it is the character of the advantage which the indemnity was calculated to effect, not directly the character of the payments themselves which must fall for consideration.
33 In arriving at the conclusion he did the learned primary judge focussed on what may be said to be the "ultimate" advantage which the giving of the indemnity gave rise to, namely the dividend flow which some time in the future would be expected to reach Email. We have a difficulty about this approach for two reasons. The first is that it may be said of any outgoing effected by a listed company, indeed any outgoing effected by any company which is carrying on business, that the ultimate hope and expectation will be that it will produce profits which can be translated into dividends to shareholders. Had Email outlaid funds for a head office, the expenditure would give rise to the ultimate advantage that, at some time in the future, there would be increased profits available for distribution to its shareholders. Yet it could hardly be disputed that an outlay of monies for the purpose of a head office would be on capital account. This leads to the second difficulty. Many outgoings will produce both immediate and longer term advantages. The example of the head office demonstrates that. So do the facts of the present case.
34 The immediate advantage which the giving of the guarantee was designed to effect was the sale at the maximum price possible of the shares in Dowell by OCAL. Of course, unless the sale was forced upon OCAL by Alcoa, Email had a choice to continue to have OCAL hold the shares in Dowell or seek to sell those shares. But it was part of the decision to sell, born of the commercial necessity that a full price could only be realised for the shares in Dowell if an indemnity was provided, that Email gave the indemnity which it did. The only conclusion open on the evidence was that the giving of the indemnity was in furtherance of the sale and maximising the price.
35 We are conscious of the fact that in Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 655 Gibbs ACJ, as his Honour then was, pointed out that the advantage, to which the phrase "the character of the advantage sought" refers, is an advantage to the taxpayer, and that an incidental advantage which some other person, such as even a subsidiary or holding company of the taxpayer derives, but which is not shared by the taxpayer will not be enough to give the outgoing a character of capital. This comment may need to be treated with some caution having regard to the criticism levied of it by Brennan J in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 at 190. It may well, if taken too far, unduly prefer form to substance and ignore too the requirement that the task has to be undertaken in a practical and business like way.
36 However, the advantage to which attention in the present case has to be given, is the advantage to Email. Having regard to the undoubted fact that the giving of a guarantee operated to permit the shares of Email in MDI (as a result of the latter's holding of shares in OCAL and OCAL's holding of shares in Dowell) to attain a value they could not have without the giving of the indemnity (which correspondingly increased the liabilities of Email, albeit that overall there would be no adverse consequence to the net assets of Email) there was an undoubted advantage to Email itself. That advantage was not of a revenue nature.
37 No doubt it is true that no capital profits could emerge in OCAL unless there was a sale. It is also true that the entirety of the activities of the Email group were directed at the production of profits (whether income or capital profits) out of which ultimately dividends would flow to Email (and one can assume to the shareholders of Email). But neither of these factors necessarily leads to the conclusion that the giving of the indemnity produced an advantage of a revenue kind. The fact that the ultimate result of an outgoing and a result to which the outgoing is directed is the receipt of income is, in a case such as the present, too remote from the immediate advantage which the outgoing is designed to effect. The advantage here obtained goes rather to the dividend yielding structure than to the process by which the dividends themselves were to be earned. As the subsequent dividend-paying experience of OCAL illustrates, the enlargement of the "profit-yielding subject" (to use Dixon J's phrase in Sun Newspapers, at 360) does not necessarily produce the consequence of generating a flow of income to the proprietor.
38 The learned primary judge placed considerable emphasis on the repetitive nature of the expenditure, by which we assume his Honour meant rather the repetitive nature of the giving of indemnities. His Honour referred to the fact that the giving of the indemnity was not an isolated transaction but accorded with an established practice. After referring to Fanmac Ltd v Federal Commissioner of Taxation (1991) 91 ATC 4703 and remarks of Hill J in Goodman Fielder Wattie Ltd v Commissioner of Taxation (1991) 29 FCR 376, his Honour said:
" … the principle of law remains constant: expenditure having the hallmarks of capital expenditure, can, in appropriate cases, because of the repetitive nature of the expenditure, assume the character of revenue expenditure."
39 In his statement of both the first and second of the matters to be considered in determining whether an outgoing was of a capital or revenue nature, Dixon J pointed to the fact that recurrence played a part. But it is important to bear in mind what his Honour meant by this. As appears earlier in the judgment his Honour had in mind the distinction drawn by Rowlatt J in Ounsworth v Vickers Ltd [1915] 3 KB 267, between expenditure to meet a continuous demand and expenditure which is made once and for all. That case concerned the deductibility of dredging expenses incurred by the taxpayer shipbuilding and engineering company which it was necessary for the taxpayer to incur in order to enable the taxpayer company to deliver a battle cruiser which it had contracted to build. It was found to be of a capital nature. By recurrent expenditure it is not meant expenditure which may be incurred more than once, even if incurred on a number of occasions. Expenditure as we have already stated may still be capital, albeit that it is repeated. Recurrent expenditure is rather expenditure which is part of "the constant demand which must be answered out of the returns of a trade or its circulating capital": Sun Newspapers at 362. Rates, rent, interest, even premiums of insurance of capital assets (Australian National Hotels Limited v Federal Commissioner of Taxation (1988) 88 ATC 4627), notwithstanding that the proceeds of the insurance would themselves be capital, are examples of recurrent expenditure ordinarily on revenue account if incurred in the course of a taxpayer's business. Whether the expenditure is, in the sense used, recurrent, will depend more upon the nature of the expenditure than the number of times on which it is repeated.
40 We, like the learned primary judge, were referred in the course of argument to a number of cases, some going one way, some the other. As we hope is evident from the above discussion, the question of whether an item of expenditure is of a capital nature will much depend upon the particular facts of a case and the relationship which the expenditure has to the particular taxpayer's business. In deference to the submissions presented we will refer briefly to some of them.
41 The case of Commissioner of Taxation v E A Marr & Sons (Sales) Ltd (1984) 2 FCR 326 was relied upon by senior counsel for Email and said by the learned primary judge to "bear some resemblance to the facts of this case". In that case the taxpayer, a holding company, made payments for the benefit of related companies which had gone into receivership and/or liquidation to leasing financiers in respect of equipment which had been leased for use by the subsidiaries. The holding company was liable on the equipment leases and was held entitled to a deduction. Two factors distinguish the case. The first was the hiring charges do ordinarily partake of the character of recurrent expenditure. The second, and more important, is that the leasing activities were activities of the taxpayer and were part of its business. There seems to have been no separate argument that the hiring charges were on capital account.
42 Next, there is the case of Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 24 ALR 401. There the holding company borrowed at interest from a financier and onlent the funds to its operating subsidiary without interest. On the facts, the transaction was explicable by reason of the fact that the holding company, which was carrying on actively the business of a holding company in much the same way as Email, wished to establish the profitability of the subsidiary as soon as possible and to bring profits to the holding company by way of dividend or interest. A factual argument that it was readying the subsidiary for sale was rejected. The issue was framed in terms of whether the liability for interest was incidental and relevant to the derivation of the holding company's income and was part of its business activities, so as to come within one or both limbs of s 51(1). Here the outgoing was interest, clearly on revenue account. The argument was a different one, and largely concentrated on the question whether the parent company was intending to sell the shares in its subsidiary. The outcome was determined by a finding that the loans to the operating subsidiary were designed to render it profitable as soon as commercially feasible and to promote the generation of income by the subsidiary and through it to the holding company.
43 Hooker Rex Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 181 concerned a claim for a deduction by a land developer. In order to obtain the consent of the Commissioner of Taxation to the liquidation of various companies which the taxpayer and a subsidiary of the taxpayer had purchased for the purpose of distributing in specie land owned by the companies, the taxpayer had guaranteed to the Commissioner the payment of any income tax to which the companies might become liable on the liquidation. It was held that the taxpayer was entitled to a deduction for the amount it was obliged to pay to the Commissioner on its guarantee of the tax liabilities of a company it had purchased but not in respect of the amount outlaid to guarantee the tax liabilities of companies purchased by its subsidiary, where land of that company was distributed in specie to the subsidiary. In the part of the case in which the taxpayer was successful the guarantee payment was in essence part of the cost of its trading stock and so held to be on revenue account. In the case of the guarantee in respect of the shares acquired by its subsidiary however, the amount outlaid was held to be on capital account. The fact that the taxpayer had given a number of guarantees did not change the character of the outgoing. The giving of the guarantee in respect of the acquisition by the subsidiary was capital because it was a step in a process which led to an increase in value of the shares held by the taxpayer in its subsidiary, just as in the present case the giving of the indemnity led to an increase in the value of the shares held by Email in MDI.
44 The facts of the English cases referred to by his Honour in the judgment appealed from are so remote from the present case that they give little assistance. We shall refer only to one of them to illustrate this. In the first of the English cases discussed by his Honour, Morley v Lawford and Company (1928) 14 TC 229, the taxpayer, a firm of contractors guaranteed the British Empire Exhibition to the extent of 500 pounds. They did so because they had been advised that guarantors would be given preference in the allotment of contracts for work at the exhibition. In fact they were not given work. Nevertheless, it was held that moneys paid under the guarantee were wholly and exclusively laid out for the purposes of the taxpayer's trade and were thus deductible. No doubt that case was correctly decided and would probably be decided the same way in Australia under s 51(1). The guarantee was so much a part of the taxpayer's trading operations that it was properly to be regarded as a revenue outgoing. The case has more similarity with NMRSB Limited v Federal Commissioner of Taxation (1998) 98 ATC 4188, a decision of Sackville J where additional interest paid to continuing depositors as part of the merger of building societies was held to have a sufficient connection with the business of the payer to be deductible.
45 Generally, although not invariably, money paid by a taxpayer pursuant to guarantees the taxpayer has given has been held to be on capital account, notwithstanding that the guarantee is given in the course of some business activity of the taxpayer. A typical example is the recent decision of Hely J in Bell & Moir Corp Pty Ltd v Commissioner of Taxation (unreported) [1999] FCA 1009 which refers to a number of decisions of Taxation Boards of Review which have so held, but cf Commissioners of Inland Revenue v Huntley & Palmers Ltd (1928) 12 TC 1209. We do not think it desirable in the present case to enter into a discussion of the circumstances where the occasion for the giving of a guarantee will result in moneys paid under it being on revenue account.
46 In our view the appeal should be upheld, the orders made by the learned primary judge set aside, and in lieu thereof the Commissioner's objection decisions should be affirmed, and Email ordered to pay the Commissioner's costs of the proceedings below and of the appeal.