Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34

Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34 - HCA 1946 case summary — Zoe

[67]

'The Act provides in s. 51 (1) that " all losses and outgoings to the extent to which they are incurred in gaining or producing the assess- _ able income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allow- able deductions except to the extent to which they are losses or out- _ goings of capital, or of a capital, private or domestic nature." The _ expenditure must be incurred in the course of business operations, _ directed towards the production of income or be " incidental and relevant to the operations or activities regularly carried on for the _ production of income" (W. Nevill & Co. Ltd. v. Federal Commis- sioner of Taxation (1) ; Sun Newspapers Ltd. v. Federal Commissioner of Taxation (2) ). But it must not be an expenditure of capital or of acapital nature. The Act does not define these terms but the cases haye attempted various definitions or descriptions of the terms. Thus when expenditure is made not only once and for all but with a view to bringing into existence an asset or an advantage for the _ enduring benefit of a trade "there is very good reason . . . for treating such an expenditure as properly attributable not to revenue _ but to capital " (British Insulated and Helsby Cables Ltd. v. Atherton (3)). "Inarough way . . . it is not a bad criterion of what is capital expenditure . . . to say that capital expenditure is a _ thing that is going to be spent once and for all, and income expendi- _ture is a thing that is going to recur every year " (Vallambrosa Rubber Co. Lid. v. Farmer (4)). " The test of circulating as contrasted with

fixed capital is as good a test . . . as can be found" (Golden Horse Shoe (New) Ltd. v. Thurgood (5) ). Or again " the distinction _ between expenditure and outgoings on revenue account and on capital account corresponds with 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" (Sun News- _ papers Ltd. v. Federal Commissioner of Taxation (6) )-

[94]

e 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. B The facts upon which the case before us must be decided present ina somewhat unusual aspect the elements or factors governing the

distinction. The claim is to deduct legal expenses, and legal expenses, we may assume, take the quality of an outoing of a capital nature _ or of an outgoing on account of revenue from the cause or the purpose of incurring the expenditure. We are, therefore, remitted to a con- sideration of the object in view when the legal proceedings were undertaken, or of the situation which impelled the taxpayer to undertake them. _ The situation of the taxpayer, a company, was briefly this. The business of the company had been the manufacture and sale of _ household refrigerators. The business had suffered a decline because it had encountered the competition of a different and better kind of refrigerator. The decline was so severe that the company would have had to go out of business or into some other form of manu- facture. The rival refrigerator was based upon different principles and involved a quite new construction. It made the taxpayer's refrigerator obsolete and, although much more costly, it rendered the _ sale of the latter impracticable wherever gas or electric power was available. It was the commercial expression of an invention covered by a patent, but the patent was soon to expire. The company, in anticipation of the date of expiry, re-organized its production in order to manufacture a new refrigerator according to the invention. The company entered into contracts for the supply of the new tefrigerator, and, moreover, it went into actual production. Then 'it was faced with an application on the part of the patentee for an _ extension of the patent. If an extension had been granted, it would have been unlawful for the company to pursue any part of the programme for which it had undertaken the reorganization of its

[112]

The second passage in the judgment of Lawrence J. reads thus : "Tt appears*to me that the legal expenses which were incurred by _ the respondent company did not create any new asset at all, but were expenses which were incurred in the ordinary course of maintaining the assets of the company and the fact that it was maintaining the _ title and not the value of the company's business does not, in my opinion, make it any different " (1). It is possible to find in this statement two reasons not necessarily fy interdependent. One is the lack of any fresh acquisition of assets. _ That, in my view, does no more than put aside one possible state of facts i in which the payment would have certainly been of a capital nature. The other is that the defence of the title against impeach- _ ment amounted to maintenance, the costs forming part of the _ business expenditure in the ordinary course upon maintaining the company's assets. An analogy which suggests itself is the cost of restoring the front door of the business premises after an attempted entrance by bandits. No ground was disclosed in the case stated, __as set out in the reports, and none exists in the known customs or propensities of Californian city authorities, for supposing that the company was exposed to regular or recurrent attacks upon the validity of its title. His Lordship probably did not doubt that the _ purpose of the litigation was to decide once and for all whether the taxpayer had or had not a valid title ; but, as appears from the first of the foregoing passages cited from his judgment, his Lordship regarded outlays making no alteration in a fixed capital asset as amounting in substance to a matter of maintenance. I should have thought that the decided cases illustrated the fact that these are not exhaustive alternatives. A decision of the Canadian Supreme Court that is entirely at variance with the view of Lawrence J. is the Minister of National Revenue v. Dominion Natural Gas Co. Ltd. (2). The second case upon which, during the argument of this appeal, counsel for the taxpayer placed great reliance is Kellogg Co. of Canada Ltd. v. Minister of National Revenue (3). The legal expenses there in question were those of defending successfully an action against the taxpayer and one of the traders through whom the taxpayer distributed its products. The action was for infringement of the trade marks of the plaintiff, a rival manufacturer, and the defence was the invalidity of the registration. It was held that the costs were deductible as a business expense on account of revenue. The full judgment of Maclean J. in the Canadian Exchequer Court

At a glance

Court

Decision date

Before

Source

Judgment (143 paragraphs)

Cited By (7)