30 Examples of the application of the principles laid down by Dixon J are numerous. Thus in Commissioner of Taxation v Ampol Exploration (see above) Lockhart & Burchett JJ (Beaumont J dissenting) came to the conclusion that payments made by a company that was engaged in exploring for hydrocarbons off the China coast pursuant to an agreement with an agency of the Chinese Government were payments made on account of revenue and deductible under both limbs of subs 51(1).
31 Lockhart J described the outgoings this way at 562:
"The true legal character of the expenditure was that of the ordinary business activity of the taxpayer as a petroleum exploration company. From a practical and business point of view the taxpayer sought to adopt one of a number of possible methods in which it engaged for the purpose of its exploration business to obtain, if all went well, the possibility of a right to bid to undertake further seismic and exploration work. The expenditure could not lead to the establishment of an income-producing asset for it to exploit and it was recurrent and in the nature of operating expenses of the taxpayer's prospecting and exploration business. Recurrence is, however, merely one matter to consider. …
…
The payments in question were in truth part of the outgoings of the taxpayer in the course of carrying on its ordinary business activities. It was not expenditure incurred for the purpose of creating or enlarging a business structure or profit-yielding or income-producing asset."
32 Burchett J, after noting that an assignment of an expense to capital or revenue account cannot be determined by assessing whether the transaction was successful said at 574-5:
"It seems to me the test can only be sensibly applied, in such a case as the present, on the basis that, the enterprise being the exploration company itself, the relevant business organisation, implement, or means of production, is its exploration arm (including all its skilled employees and sophisticated equipment), and not any one project undertaken by that arm. A project is a part of the regular performance and sustained effort being carried on by the enterprise, all the activities of which are directed to the finding and commercial exploitation of undiscovered oil. But once the matter is so regarded, there is no longer any question: the expenditure is a quite ordinary incident of the company's operations."
33 The facts in Commissioner of Taxation v E A Marr & Sons (Sales) Ltd (1984) 2 FCR 326 bear some resemblance to the facts of this case in that the taxpayer made payments for the benefit of related companies; the particular facts established that the receivers and liquidators of a company had made payments of amounts owing to leasing financiers in respect of plant and equipment which the company had made available to its related companies without charge. In a joint judgment (Bowen CJ, Toohey and Lockhart JJ), the Court held that such payments were payments made in the course of carrying on the company's business by reason of the fact that the company's activities as a whole included the provision of management and administrative services to related companies; the provision by it of the plant and equipment was part of those services. At 331 the Court said:
"The taxpayer's leasing activities have a commercial explanation. Indeed, if they were not part of the carrying on of the taxpayer's business it is difficult to see how else they could be properly described."
34 There is also a commercial explanation in this case. There is evidence to support the finding that it was in the interests of Email as the ultimate holding company to give Boral Concrete the indemnity; the inference can be drawn that Email thereby offered Boral Concrete a measure of security that it would not otherwise have enjoyed. In return, the absence of such an indemnity could have meant that an intending purchaser might have decided against purchasing or might have made a reduced offer. By this means one can recognise the existence of the advantage that was obtained by Email in return for its promise to indemnify the purchaser of the shares in Dowell.
35 In Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 24 ALR 401, the taxpayer was a wholly owned subsidiary of a French company; it acted as a holding company in Australia for its French parent's interests. From 1963 to 1968 the taxpayer owned the whole of the shares in an operating company which sold in Australia the products of the French company; in 1968 the taxpayer reduced its shareholding in the operating company to 50 percent. Between 1963 and 1968, the financing of operations in Australia was carried out by the French company lending money to the taxpayer at 3 per cent per annum for varying periods up to ten years. The taxpayer would then on-lend money to the operating company or take up further shares in it. In these periods, loans from the taxpayer to the operating company were interest free but repayable on demand. From 1968, after the operating company ceased to be a wholly owned subsidiary, the taxpayer charged interest at the rate of 7 per cent. For the year ended 30 June 1972, the Commissioner allowed the taxpayer, as a deduction, that part of prior losses which represented interest paid by the taxpayer to the French company on the money used to acquire shares in the operating company and on the money that was lent at interest to the operating company. The Commissioner disallowed so much of the losses as represented interest paid by the taxpayer to the French company on the money that the taxpayer had lent interest free to the operating company.
36 The taxpayer objected successfully to the Supreme Court of New South Wales and the Commissioner's appeal to the Full Court of this Court was dismissed. The leading judgment was given by Lockhart J (with whom Northrop and Fisher JJ agreed). He concluded that the payment of all interest by the taxpayer satisfied the tests required in respect of each limb of subs 51(1). His Honour was of the opinion that the liability of the taxpayer for interest to the French parent was incidental and relevant to the derivation of its income and was part of its business activities. In formulating these conclusions, Lockhart J said:
"The moneys advanced by [the French company] to the taxpayer were required, by the terms of the loan agreements, to be allocated by the taxpayer to investments in Australia approved by [the French company]. The loans were all long-term loans so structured that the taxpayer had the use of the money for a long period of time. In my opinion, it is clear from the evidence that the moneys borrowed by the taxpayer from [the French company] were to be used by it for financing [the operating company] in whatever way was regarded as appropriate from time to time, whether this be by taking up shares in [the operating company] or making advances to it with or without interest and, if with interest, at whatever rate of interest might be thought appropriate. It was regarded as appropriate to fund [the operating company] primarily by interest-free loans, not only to place it in the best light so far as its accounts were concerned, but to minimize the tax consequences that would flow from the acquisition of further shares by the taxpayer in [the operating company] and the consequent payment of dividends by [the operating company] to it, assuming there were sufficient profits. Those dividends would not be deductible to [the operating company].
The loans by the taxpayer to [the operating company] were repayable on demand. Thus it was within the power of the taxpayer, at any time it wished, to restructure the financing of [the operating company] by calling up the loans and using the funds in some other way, whether by taking up further shares in [the operating company] or the making of loans at an appropriate rate of interest. Also, there was no guarantee that the many millions of dollars which the taxpayer had invested in [the operating company] would ultimately produce a profitable trading entity.
The activities of the taxpayer were designed to render [the operating company] profitable as soon as commercially feasible and to promote the generation of income by [the operating company] and its subsequent derivation by the taxpayer and thence [the French company]."
37 The essential element in this decision, in its application to the present case, is that the generation of profits by the operating company and the intended flow-on benefits to the taxpayer was a sufficient connection to enable the taxpayer to claim all interest payments as deductions. The decision in Total Holdings also makes it clear that one must assess the situation by identifying what it is that Email has achieved. The fact that the profit that OCAL made on the sale of the shares was a capital profit is not to the point and is irrelevant for the purpose of characterising the nature of the outgoing that was incurred and paid by Email: see Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 where by Gibbs ACJ said at 656-657:
"I have said that in deciding whether outgoings made by a taxpayer are of a revenue or of a capital nature, it is necessary to consider "the character of the advantage sought". In my opinion, in principle, that must mean the character of the advantage sought by the taxpayer for himself by making the outgoings. Of course, as I have already indicated, a taxpayer may derive an advantage if someone else, such as a subsidiary, acquires an asset. But the fact that someone else incidentally derives an advantage of a capital kind in which the taxpayer does not share is not enough to give the outgoings the character of capital."
38 Stephen and Aikin JJ made the same point at 662:
"That others obtained, to its knowledge, a collateral advantage, even if it were of a capital nature, was not the advantage that it either sought or obtained."
39 In Europa Oil (NZ) Ltd (No 2) v Commissioner of Inland Revenue [1976] 1 WLR 464 (PC) Lord Diplock said 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."
40 But in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 Brennan J said that he thought that the principle laid down by Lord Diplock "may be too widely stated to be applied in s 51(1) in every case." (190). Further on, at the same page, his Honour continued:
"But there are cases where expenditure is not incurred solely to acquire an asset or legal right under a contract or to discharge a legal obligation, and there are cases where there is dispute as to the scope and nature of activities and operations by which assessable income is or is intended to be gained or produced, or by which a business is carried on. In cases of these kinds, the Europa approach does not give adequate guidance to a court in finding whether the expenditure is deductible under sec 51(1)."
41 NMRSB Limited v Federal Commissioner of Taxation 98 ATC 4188 is another example of the difficulty in determining whether outgoings are of a capital or a revenue nature. In that case the taxpayer, then a building society, entered into merger negotiations with a disassociated entity. In order to gain support for the merger from its members and depositors, the taxpayer made them a "Special Interest Offer". The merger proceeded with the support of the members and depositors. Over a period of five years, the implementation of the "Special Interest Offer" meant that the taxpayer paid out over $20m in additional interest to its depositors. The Commissioner treated those additional payments as payments on account of capital, arguing that the reason for the payment of the additional interest was the agreement that had been made between the merging parties or the offer that the taxpayer had made in the documents that it had submitted to its depositors. Sackville J, however, rejected these arguments, finding in favour of the taxpayer. His Honour held that the additional interest was paid by the taxpayer to continuing depositors pursuant to legally binding arrangements and that it had an obvious relationship with the conduct of the taxpayer's business. Those two factors are, in my opinion present in the instant case - namely, the payments were made pursuant to legally binding arrangements and the payments had, as I have found, an obvious connection with the conduct of Email's business.
42 Carapark Holdings Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1965-1966) 115 CLR 653 is an example of the reverse situation, that is, it is an example of a taxpayer's receipts being assessable income notwithstanding that the relevant sum was sourced out of an event in a subsidiary company. The taxpayer, a holding company, had insured the lives of certain employees of subsidiary companies. In holding that the amount received by the holding company was assessable, the members of the High Court in their joint judgment said at 663:
"True, in a case like the present the insurance money was not received by the appellant to take the place of what Lord Greene described as "those benefits on revenue account which it would have received if it had continued to enjoy (the employee's) services", for the appellant was not itself in enjoyment of those services. But it was in enjoyment, through the medium of dividends from the employing companies, of some or all of the profits of those companies which, on the one view of the purpose of the insurance, the services of the employees were helping to produce and which, on the other view of that purpose, the payments to injured employees or to dependants of deceased employees would necessarily reduce. So whichever of the purposes was the true purpose, the situation simply is that the appellant, rather than leave the employing companies to take out separate insurances designed to bring in money in place of profits which would be lost to them if any of the events insured against should occur, itself took out a single policy in its own name to provide directly against such loss of dividend income as it might itself suffer, really, though indirectly, in consequence of the death or disablement of any of the employees. Accordingly the insurance moneys which the appellant received in respect of the death of Williams must be considered as having been gained in the course of its business, using "business" in the broad sense which makes it relevant to the tax problem …"
43 This passage identifies the importance of the relationship between dividends that flow through to the holding company and the expenditure that the holding company is seeking to deduct from its assessable income.
44 Three cases from the United Kingdom that dealt with payments made under guarantees were cited by Mr Gzell QC for the taxpayer as having persuasive value in this case. The first of them was Morley v Lawford and Company (1928) 14 TC 229. The taxpayers, a firm of contractors, were guarantors for 500 pounds to the British Empire Exhibition; they claimed a deduction of 375 pounds being the amount paid by them under the guarantee. The taxpayers established that they had been told by a representative of the Exhibition that guarantors would be given preference in the allotment of contracts for work at the Exhibition. The taxpayers gave the guarantee with the sole object of obtaining a contract to carry out works for the Exhibition but, in fact, were unsuccessful in obtaining one. The General Commissioners decided that the amount paid under the guarantee was money expended wholly and exclusively for the purpose of the taxpayer's trade and was therefore deductible. The Court of Appeal, holding that the matter was primarily a question of fact, declined to intervene.
45 The next case was Hunt v Wellesly (1945) 27 TC 78. In that case the taxpayer lent money to a company and also guaranteed its overdraft account with its bank. The company had been formed for the express purpose of making a film and the taxpayer was the artistic film producer. The film was produced, but at a loss. No moneys were repaid to the taxpayer who also had to pay money to the bank under the guarantee. The taxpayer was successful in contending that the sums advanced by him to the company and the sum paid by him to the bank were expenditure incurred by him wholly and exclusively for the purpose of his profession and were therefore deductible.
46 The last of these three cases was Jennings v Barfield (1962) 40 TC 365. The taxpayers, a firm of solicitors paid out money under a guarantee that they had given to a client's banker. The taxpayers convinced the General Commissioners that the practice of solicitors acting as a guarantor for a client was so common that it was to be regarded as part of the usual business of a practicing solicitor and that the payment made under the guarantee was, on ordinary principles of accounting, a revenue payment. Whilst that case might be distinguished on its facts in Australia, the principle for which it is authority, along with the decisions in Morley v Lawford and Hunt v Wellesley lend support to the taxpayer's arguments in the present case.
47 A similar result was obtained by the taxpayer in 15 CTBR(NS) Case 33. The taxpayer was a property owning company which had a number of operating subsidiaries from whom it derived dividends. Its only other income was from interest and rents. The taxpayer guaranteed the repayment of the overdraft account of a customer of one of its subsidiaries in anticipation that the customer would continue to purchase goods from that subsidiary. The taxpayer sought a deduction for the amount that it was required to pay under the guarantee. The Board of Review decided, by a majority, in favour of the taxpayer. In their joint decision Mr JD Davies (later Davies J of this Court) and Mr GR Thompson said, quoting Hunt v Wellesley as authority:
"It has never been doubted that an outgoing is allowable as a deduction though it, or the occasion for it, affects the income of another person or body as well as that of the taxpayer."(at 217)
48 Giving the indemnity to Boral Concrete assisted Email in various ways. It aided in getting the best price and making the best use out of an asset of a controlled entity. It thereby preserved and enhanced its future dividend stream.