Commissioner of Taxation (Cth) v South Australian Battery Makers Pty Ltd

Commissioner of Taxation (Cth) v South Australian Battery Makers Pty Ltd - [1978] HCA 32 - HCA 1978 case summary — Zoe

[8]

The Trust had originally been reluctant to erect the new factory and office buildings that were necessary to enable the site to be used but in October 1963 it agreed to do so. The work of erection commenced and further correspondence ensued between the Trust and Associated Battery Makers with regard to the lease and the option. On 21st February 1964 the Trust forwarded to Mr. Alkin an agreement for lease (with a form of lease in the schedule thereto) and a memorandum of option to purchase with a form of encumbrance annexed. The letter requested that Mr. Alkin arrange for Associated Battery Makers to accept the agreement for lease under seal, but went on to say that it would take several months after occupation before final costs would be determined and the memorandum of lease prepared for execution. It added that the memorandum of option was submitted for identification only and would be executed when the final costs had been determined. The agreement for lease was executed by Associated Battery Makers on 19th May 1964. It provided for payment of a provisional quarterly rent until execution of the lease. It further provided for the calculation of the final quarterly rent, which was to be equal to 2½ per cent of the "actual cost price", a term which was defined to mean: 1. $26,000, being the agreed value of the land; and 2. the costs and expenses of erecting a building and effecting other improvements together with capitalized interest on such costs and expenses at the rate of 6 per cent. (In this and some later documents figures are given in pounds but it is convenient to convert them to dollars.) In the schedule, before the form of memorandum of lease was set out, there appeared the words "Option to subsidiary". On 18th June 1964 Associated Battery Makers sought the approval of the Trust to assign the use of the premises to the taxpayer, and on 3rd July 1964 the Trust replied that this request was approved. The taxpayer in fact went into possession of the land in about June 1964. In that month a certificate of practical completion of the building on the land was issued.

[28]

It is clear that by making the payments the taxpayer itself did not acquire any interest in the land or buildings except that of a lessee. The only binding arrangement between the taxpayer and the Trust was that embodied in the lease, under which the taxpayer had the rights and interests of a lessee and nothing more. The taxpayer was not granted any option to purchase, and it had no right to enforce the option granted to Property Options. It was argued on behalf of the Commissioner that if the group of companies of which the taxpayer was a member derived a benefit from the making of the payments, part of that benefit must accrue to the taxpayer. In my opinion, that statement cannot be accepted; it is true only in the most general sense - in the same way that it may be said that a man benefits if his children or his neighbours prosper. Of course it cannot be denied that the circumstances may be such that one company may benefit from the fact that its subsidiary receives an advantage; the control which the parent company exerts over its subsidiary may ensure that the benefit flows on from the latter to the former. This seems to me to be a sufficient explanation for the decision of the Court of Appeal in Littlewoods Mail Order Stores Ltd. v. Inland Revenue Commissioners [15] , where it was found that the object of the taxpayer in paying rent was to obtain the freehold reversion for its subsidiary and that the payments were of a capital nature. Denning L.J. reached this result by drawing aside the corporate veil and finding behind it a subsidiary which was in law as well as in fact the puppet of the parent company - an approach which was disapproved by the Judicial Committee in the first Europa Case [16] . The majority of the Court of Appeal declined to depart from the principle that for tax purposes the taxpayer and its wholly owned subsidiary are separate entities, but found that in fact the true nature and purpose of the expenditure was to acquire the capital asset. However in the present case there is no evidence on which it could be found that the taxpayer could benefit from the exercise of the option. Property Options was not a subsidiary of the taxpayer and there is no evidence that Property Options was intended to hold the land and buildings for the taxpayer, or would be likely to share with the taxpayer any profits which might accrue as a result of the exercise of the option. Indeed the probability is that any financial benefit from the transactions would enure for the benefit of the parent company, Chloride Group Ltd., and not for the taxpayer.

[34]

"In their Lordships' opinion, s. 111" [of the New Zealand Act] "does not enable the Crown to disallow expenditure genuinely made whenever it can be found that some economic advantage accrues to the trader as a result of making the expenditure For a claim to disallow a portion of expenditure incurred in purchasing trading stock to succeed, the Crown, in their Lordships' judgment, must show that, as part of the contractual arrangement under which the stock was acquired some advantage, not identifiable as, or related to the production of, assessable income, was gained, so that a part of the expenditure, which can be segregated and quantified, ought to be considered as consideration given for the advantage. Taxation by end result, or by economic equivalence, is not what the section achieves." In the second Europa Case, the taxpayer had no contractual right to enforce the performance of the obligation owed to Pan Eastern, and the majority of their Lordships regarded this distinction as crucial. Lord Diplock said [22] that "it is not the economic results sought to be obtained by making the expenditure that is determinative of whether the expenditure is deductible or not; it is the legal rights enforceable by the taxpayer that he acquires in return for making it." See also [23] . It was held that the "true legal character of the whole of the expenditure claimed to be deductible is that of the purchase price of stock in trade and nothing else. As such it is deductible in full " [24] . Lord Wilberforce, who dissented, thought that in deciding what was the purpose of the expenditure a commercial rather than a legal test should be applied, and that the fact that the taxpayer was in a position to expect a substantial profit through Pan Eastern was relevant, even though the taxpayer could not enforce the receipt of that benefit [25] . 1. [1971] A.C., at p. 775. 2. [1971] A.C., at p. 772. 3. [1976] 1 W.L.R., at pp. 471-472; [1976] All E.R., at p. 508. 4. [1976] 1 W.L.R., at pp. 472-473; [1976] 1 All E.R., at pp. 509-510. 5. [1976] 1 W.L.R., at p. 474; [1976] 1 All E.R., at p. 511. 6. [1976] 1 W.L.R., at pp. 480-481; [1976] 1 All E.R., at pp. 516-517.

[37]

The words of the judgments in the Europa Cases, like those of any judgment, must be understood in the light of the issues that fell to be decided. Their Lordships could not have meant to suggest that in every case the character of an outgoing must be determined by having regard only to the contractual or other legal rights that the taxpayer acquired in return for it. That would indeed have been inconsistent with the principle stated by Dixon J. in Hallstroms' Case, and with cases too numerous to mention in which payments made "voluntarily and on the grounds of commercial expediency" (to use the words of Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton [30] ) have been held deductible as outgoings of a revenue kind although the taxpayer obtained no legally enforceable rights in return for them. However it is unnecessary for the decision of the present case to consider whether the second Europa Case [31] laid down a principle in terms too wide to be applied to s. 51 (1). If the statement of Lord Diplock already cited correctly states the law for Australia, it is apparent that the Commissioner cannot succeed in the present case, for the taxpayer had no legal right to enforce the option in favour of Property Options. If on the other hand that statement needs qualification so far as Australia is concerned, the decisions in the Europa Cases, and indeed the dissenting judgments in those cases, support the conclusion that it is the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer that is relevant in determining the character of the expenditure, and that when an expenditure is genuinely made in payment of the price of trading stock, or in payment of rent, it is not permissible, for the purpose of deciding whether the expenditure was in part of a capital nature, to consider an advantage gained by another person as a result of the payment, when the taxpayer neither shares in that advantage, nor can secure its enforcement.

[85]

I here observe that the burden lay upon the taxpayer on the appeal of proving that the assessment was excessive (s. 190 (b)) and therefore it had to establish the negative of the question which I have posed. It was content to rely upon the legal proposition that it had no legal right to use and enjoy the factory premises after the expiry of the lease and produced no evidence that by the payment of a rent which would secure transfer of the fee simple without further cost it did not thereby seek the advantage that it would be able to use and enjoy the premises free of the obligation to pay a rack or other rent thereafter. If it fails in this approach, as in my opinion it does, it has failed to produce evidence which will satisfy the burden of proof which lay upon it. But it seems to me that the Commissioner does not have to rely wholly on s. 190 (b). Such evidence as there is tends strongly to support the conclusion that a relevant advantage was sought by SABM in respect of the time after expiry of the lease. The Trust was not prepared to grant an unconditional option to purchase. It required that any company granted the option or nominated to exercise the option should be a landholding company for the lessee or otherwise directly associated with the lessee. The reason is obvious. The concern of the Trust was to encourage industrial development in South Australia and to ensure that the factory premises continued to be used for the industrial development which it had encouraged. There is nothing to indicate that it was interested in a mere financial association of companies. It wanted a direct association which would encourage the proposed lessee to take up the lease and to continue to use the factory premises for its manufacturing business after the expiry of the lease. Naturally it was not concerned, provided that it did its best to ensure that the industry was continued by the lessee, whether the former lessee paid rent to the associated company. But that is not to the point on the present inquiry. Further, there is no reason to think that, unless it suited the companies for bookkeeping purposes, the taxpayer would be required by its co-subsidiary to pay a rack rent for premises in respect of which it had already paid the value in fee simple.

[103]

From which cases it appears, that the sages of the law heretofore have construed statutes quite contrary to the letter in some appearance, and those statutes which comprehend all things in the letter, they have expounded to extend but to some things, and those which generally prohibit all people from doing such an act, they have interpreted to permit some people to do it, and those which include every person in the letter they have adjudged to reach to some persons only, which expositions have always been founded upon the intent of the Legislature, which they have collected sometimes by considering the cause and necessity of making the Act, sometimes by comparing one part of the Act with another, and sometimes by foreign circumstances. So that they have ever been guided by the intent of the Legislature, which they have always taken according to the necessity of the matter, and according to that which is consonant to reason and good discretion. In Bradlaugh v. Clarke [55] Lord Blackburn said: All statutes are to be construed by the Courts so as to give effect to the intention which is expressed by the words used in the statute. But that is not to be discovered by considering those words in the abstract, but by inquiring what is the intention expressed by those words used in a statute with reference to the subject matter and for the object with which that statute was made; it being a question to be determined by the Court, and a very important one, what was the object for which it appears that the statute was made. In Central Hanover Bank & Trust Co. v. Commissioner of Internal Revenue [56] Judge Learned Hand said: There is no more likely way to misapprehend the meaning of language - be it in a constitution, a statute, a will or a contract - than to read the words literally, forgetting the object which the document as a whole is meant to secure. Nor is a court ever less likely to do its duty than when, with an obsequious show of submission, it disregards the overriding purpose because the particular occasion which has arisen, was not foreseen. That there are hazards in this is quite true: there are hazards in all interpretation, at best a perilous course between dangers on either hand: but it scarcely helps to give so wide a berth to Charybdis's maw that one is in danger of being impaled upon Scylla's rocks. 1. (1560) 1 Plowd. 199, at p. 205 [75 E.R. 305, at p. 315]. 2. (1883) 8 App. Cas. 354, at p. 372. 3. (1947) 159 F. 2d 167, at p. 169.

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