66 With respect to the SSAs, SPG relies on a number of matters. First, SPG relies on para 7 which is in the following terms:
7. PURCHASE PRICE
The Purchase Price is the SABL Share Price (excluding GST, if any) which the Buyer must pay to the Seller at Completion in the way set out in clause 5.4(a).
67 Secondly, SPG relies on Recital B which is the following effect:
B. The Buyer has agreed to:
(a) buy and the Seller has agreed to sell to the Buyer the Sales Shares for the Purchase Price; and
(b) pay the Top-Up Payment to the Seller,
on the terms and conditions in this document.
68 Thirdly, SPG relies on the following definitions: Market Value of the SABL Shares, SABL Share Price, Market Value of the SBRL Shares, SBRL Share Price, Market Value of the Yunderup Shares, Yunderup Share Price, Purchase Price and Refund. The definitions are as follows:
Market Value of the SABL Shares means an amount per share that is equal to their market value of the ACJV Settlement Date, being an amount of $0.001 per SABL Share.
Market Value of the SBRL Shares means an amount per share that is equal to their market value on the BRJV Settlement Date.
Market Value of the Yunderup Shares means an amount per share that is equal to their market value on the ACJV Settlement Date, being an amount of $0.001 per Yunderup Share.
The definitions relating to Share Price are as follows:
SABL Share Price means the price the Buyer is offering to pay to the Participating Shareholders for their shares in SABL, being $0.001 per SABL share, which is the Market Value of the SABL Shares.
SBRL Share Price means the price the Buyer is offering to pay to the Participating Shareholders for their shares in SBRL. It is $0.001 per share, which is the Market Value of the SBRL Shares.
Yunderup Share Price means the price the Buyer is offering to pay to the Participating Shareholders for their shares in Yunderup, being $0.001 per Yunderup share, which is the Market Value of the SABL Shares.
69 I have already referred to clause 2 in the SSA. SPG also relies on clause 6 which is headed "Top-Up Payment" and is as follows:
6. TOP-UP PAYMENT
(a) The Buyer must pay to each of:
SABL's Participating Shareholders, the SABL Top-Up payment in 3 instalments as follows:
(i) the first instalment, being an amount equal to the aggregate of the SABL Share Price and 50% of the SABL Top-Up Payment respectively, on the Completion Date;
(ii) the second instalment, being an amount equal to 25% of the SABL Top-Up Payment, on or before the first anniversary of the ACJV Settlement Date; and
(iii) the third and final instalment, being an amount equal to the full remaining balance of 25% of the SABL Top-Up Payment, on or before the second anniversary of the ACJV Settlement Date.
(b) No interest is payable on the SABL Share Price or the SABL Top-Up Payment unless any instalment is not paid on or before the due date for payment. In that case, the Buyer must pay interest on the full amount of the overdue instalment at the Default Rate, from the date on which the amount was due to and including the date on which it is paid in full, together with all interest, fees, costs, charges and expenses then due and owing. Default interest is calculated on the basis of a 365-day year and compounds monthly, on the last day of each month, until the full amount outstanding is paid.
70 SPG relies on aspects of the evidence of Mr Carr, Mr Lurie and Mr Carmichael, including contemporaneous correspondence exchanged between the first two of those witnesses to make good its argument that the Top-Up Payments were not in respect of acquiring the shares.
71 With respect to SPG's alternative argument concerning the preservation, but not enhancement of goodwill, it submits that the exception to the exception was introduced to confine deductibility under s 40-880(2) to expenditure in relation to goodwill that could not otherwise be brought to account under the ITAA (see Sharpcan at [43] and [44]-[47]). SPG submits that the payments were made to preserve the goodwill of the business, that is to say, its brand and reputation. SPG submits that should its argument that the money paid or required to be paid was in respect of acquiring the shares, then those payments would have been made in relation to a legal or equitable right being its right to acquire the relevant shares under the SSAs or the bundle of rights afforded to it as holder of the shares following the completion of those agreements. Finally, SPG claims that the value to it of the right is solely attributable to the effect that the right has on goodwill. SPG paid only a nominal market value for the shares in SABL and Yunderup, namely $0.001 per share. That amount may be contrasted with the amounts it paid by way of Top-Up Payments to the Participating Shareholders who held shares in SABL or Yunderup. SPG submits that its proposed evidence in relation to making the Top-Up Payments supports the conclusion that the shares acquired by it in both SABL and Yunderup had no value to it in and of themselves and the value to it of any rights which it acquired in relation to those shares was solely attributable to the effect which those rights had on SPG's goodwill.
72 The Commissioner defined the three issues for determination as follows:
(1) Were the Top-Up Payments made on capital or revenue account?
(2) If made on revenue account, are they allowable deductions under s 8-1(1)(a) or s 8-1(1)(b)?
(3) If made on capital account, are they allowable deductions as "blackhole expenditure" under s 40-880?
The Commissioner addressed issue (1) and issue (2) together.
73 The Commissioner submitted that the Top-Up Payments were on capital account and were, therefore, not deductible by reason of s 8-1(2)(a). He further submitted that if it is found that the payments were on revenue account, then they are not deductible under either s 8-1(1)(a) or (b).
74 With respect to the first matter, the Commissioner submitted that the expenditure needs to be characterised objectively from a practical and business perspective of the taxpayer, but also having regard to the legal nature of the various rights created or otherwise obtained by that expenditure. In Hallstroms, Dixon J said the following (at 648):
What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.
To be clear, that does not mean that the legal rights and their classification are irrelevant (Clough Limited v Commissioner of Taxation [2021] FCAFC 197 at [69].)
75 The Commissioner submits that on the proper construction of the SSAs, the Top-Up Payments form part of the consideration SPG paid for the acquisition of a capital asset, namely, the shares of the Participating Shareholders in SABL, SBRL and Yunderup. The Commissioner contends that in construing the SSA regard should be had to the text of the document alone. He submits that any ambiguity should be subject to the contra proferentem rule having regard to the sophistication of the agreement, legal advice having been clearly sought in the drafting, and the lack of opportunity for the Participating Shareholders to make amendments or negotiate the terms.
76 The Commissioner refers to clause 2 of the SSAs. The simple submission is that, subject to the satisfaction of the Conditions Precedent, which included the sale of relevant land, SPG undertook to pay the Purchase Price and the Top-Up Payment calculated in accordance with the relevant formula. The Commissioner submits that the Purchase Price is unambiguous and susceptible of only one meaning and that there is no cause to consult the IM which is not referred to in the SSA and was created for an entirely different purpose.
77 The Commissioner submits that there are other reasons why the Top-Up Payments should be considered as having been made on capital account. A key part of SPG's business is attracting investors to its land development processes and an essential component of the infrastructure or framework of SPG's business is its investors within the special purpose vehicles which are created by it. As a result of the investment in a number of land developments, SPG is able to generate income through project management fees which are charged to the special purpose entities in which the investors invest and selling fees which are charged and recovered on the sale and settlement of the developed land. The fee arrangements are governed by PMAs. SPG's business is one of "longstanding with a well-established existing framework" and it can be inferred from this that its name and reputation are, at least, contributing factors to a potential investor's decision to invest funds in the special purpose vehicles.
78 The Commissioner submits that by reference to the three matters identified by Dixon J in Sun Newspapers, it is clear that the Top-Up Payments should be characterised as an outlay of capital, or of a capital nature, for three reasons.
79 First, the Commissioner submits that the Top-Up Payments were a means to secure or protect part of the infrastructure of SPG's business as the payments sought various advantages. The advantages were the preservation of goodwill amongst the Participating Shareholders and goodwill is considered to be a capital asset. The nature of goodwill was considered by the High Court in Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605. The plurality in that case, in turn, referred to the descriptions of goodwill by Lord Lindley and by Lord Macnaghten in Inland Revenue Commissioners v Muller & Co's Margarine Ltd [1901] AC 217 at 223-224 and 235 respectively. Lord Macnaghten made the following well-known observations:
What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade.
80 The High Court also referred to the observations of Judge Swan in Haberle Crystal Springs Brewing Co v Clarke (1929) 2 F 2d 219 at 221-2 as follows:
A going business has a value over and above the aggregate value of the tangible property employed in it. Such excess of value is nothing more than the recognition that, used in an established business that has won the favour of its customers, the tangibles may be expected to earn in the future as they have in the past. The owner's privilege of so using them, and his privilege of continuing to deal with customers attracted by the established business, are property of value. This latter privilege is known as goodwill.
81 The Commissioner submitted that the Top-Up Payments, which involved a refund of the entire value of the Participating Shareholders' investment in the Yunderup Development over a period of two years was meant to appease those shareholders. SPG sought to protect a component of its business structure, being the "minor" investors who are deployed as part of the framework to earn SPG its income. Satisfied investors are more likely to invest in SPG's land development business in the future than disgruntled investors. The Commissioner's contention is that the payments were targeted payments aimed at the organisation or arrangement of the profit earning structure of SPG's business, rather than an incident of the operations which it carried on. The other advantage was the likely immunity from potential litigation of the Participating Shareholders related to the commercial failure of the Yunderup Development. The Top-Up Payments made it less likely that the Participating Shareholders would sue and was ultimately designed to protect the infrastructure of SPG's business model as a whole.
82 Secondly, the Commissioner submitted that the Top-Up Payments were effectively made by one lump sum to secure an enduring change. The change was the extraction of the Participating Shareholders from the underperforming Yunderup Development. This freed up the Participating Shareholders to invest in other things, including other developments of SPG. It followed that the expenditure was for the enduring benefit of SPG's business as a whole and not just in respect of running the Yunderup Development.
83 Thirdly, the Commissioner contended that the payments were unusual and that no similar payment had been made before. They were not in the nature of ordinary working expenses. They were made for the purpose of restructuring the focus of SPG's business away from the Yunderup Development so as to put it in the best position to earn more profits in the future.
84 The Commissioner referred to the observations of the Full Court in Commissioner of Taxation v Healius Ltd [2020] FCAFC 173; (2020) 281 FCR 57 (Healius) at [68] to the effect that the question of whether expenditure is on revenue account or capital account requires the consideration of a counterfactual, that is to say, the expected structure of the business but for the outgoing, compared to the expected structure of the business after the outgoing. The Commissioner submits that the expected structure but for the outgoing was that the shares would still be owned by the Participating Shareholders and the Yunderup Development would have continued to incur substantial losses and require a further injection of capital. Although SPG would still have earnt an income from the Yunderup Development as properties were sold and from ongoing management fees, as one of the major investors it was unlikely to have earned a profit according to the projections made in 2018 in the IM. The structure of the business after the outgoing was that the Participating Shareholders in the Yunderup Development were removed, the threat of litigation was reduced and SPG acquired more control of the special purpose vehicles to allow it to focus its business on more commercially viable land developments.
85 It was at this point that the Commissioner addressed s 8-1(1). He submitted that there was no evidence of a discernible nexus between the Top-Up Payments and SPG's income such as to engage s 8-1(1)(a). He submits that there is insufficient evidence to engage s 8-1(1)(b). He submits that all SPG asserts is that the ends of its business required the payments to be made. In Magna Alloys & Research, Deane and Fisher JJ said the following (at 235):
The controlling factor is that viewed objectively the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income. Provided it comes within that wide ambit, it will, for the purposes of s 51(1), be necessarily incurred in carrying on that business if those responsible for carrying on the business so saw it.
86 The Commissioner submitted that the expenditure is not like marketing or advertising expenses, but rather, formed part of a considered restructure or reorganisation of SPG's business. The argument that the expenditure was similar to advertising or marketing expenses is difficult to make, having regard to the presence of a confidentiality clause in the SSAs.
87 With respect to the third issue advanced on the assumption that the payments were made on capital account, the Commissioner submits that the shares are CGT assets which could be the subject of a future CGT event and that on the proper construction of the SSAs and s 110-25(2)(a), the Top-Up Payments form part of the cost base of the acquired shares. In those circumstances, no deduction is permitted for the Top-Up Payments under s 40-880(2) by reason of the exclusion provided in s 40-880(5)(f). The argument that the Top-Up Payments formed part of the cost base of the shares has been set out in the Commissioner's argument that the Top-Up Payments were on capital account. SPG's argument to the contrary is incorrect because it relies on the subjective purpose for which it paid the Top-Up Payments. The Commissioner also points to the fact that all s 40-880(5)(f) requires is that the expenditure incurred could be taken into account in working out the amount of a capital gain or a capital loss from a CGT event (emphasis added).
88 With respect to the argument relating to s 40-880(2) and (6), the Commissioner submits that the preservation in s 40-880(6) was necessary as the Tax Laws Amendment (2006) Measures No 1 Act 2006 (Cth) abolished the ability to include expenditure in relation to goodwill in the fourth element of the cost base of a CGT asset.
89 The legal right was the acquired shares and it is not solely attributable to the preservation of goodwill because SPG gained apparent immunity from litigation in respect of the failed Yunderup Development, the silence of Participating Shareholders in respect of the failed Yunderup Development and the ability to restructure its business to focus on other ventures. Furthermore, the expenditure has a value in that the acquired shares can be identified and quantified in SPG's accounts which have a value from any contribution that their acquisition might have had on goodwill in that they could be sold to third parties irrespective of their perceived nominal value (see Sharpcan at [52]).
90 SPG made a number of submissions in reply. In relation to the first issue as to whether the expenditure was revenue or capital, SPG relied on its earlier submissions and the submissions it made in relation to the third issue, that is to say, if capital, the Top-Up Payments are deductible under s 40-880(2). Although SPG accepts that there is less risk of it being sued by dissatisfied shareholders because the Top-Up Payments were made, it does not accept that it enjoyed likely immunity from potential litigation. The SSA contains no forbearance from suit covenants or incorporation provisions purporting to release SPG from claims associated with investments made by the Participating Shareholders. Nor do they contain provisions purporting to indemnify SPG against any such claims. The submission that the shareholders extracted from the Yunderup Development would invest in, among other things, other developments of SPG does not rise above speculation. The submission that the expenditure incurred in making the Top-Up-Payments was not analogous to an advertising or marketing expense because of the presence of a confidentiality clause within the SSAs takes the matter nowhere because SPG's case is that the payments were made to limit adverse publicity, that is, the purpose of the payments was to protect SPG's brand name, reputation and continued ability to raise money from its investors. In other words, the payments were made to ensure SPG's brand and good reputation were maintained.
91 The Commissioner's submissions that if the Top-Up Payments were on revenue account, then they are not deductible under s 8-1(1)(a) or s 8-1(1)(b) of the ITAA 1997 is not supported by reasons. SPG's submission is that once it is accepted that the Top-Up Payments were on revenue account, it necessarily follows that they fall within s 8-1(1)(a) or s 8-1(1)(b).
92 With respect to the first argument in relation to s 40-880(2) and s 110-25(2)(a), SPG submitted that the position taken by the Commissioner requires consideration of the role of any construction of the SSA in ascertaining SPG's purpose in making the Top-Up Payments. SPG had previously submitted that the statutory inquiry to which s 110-25(2)(a) of the ITAA 1997 was directed invites attention to the purpose for which the taxpayer paid the money, relevantly, whether the taxpayer did so to acquire the CGT asset. SPG pointed to the difference between motive and purpose. The motive for a person's conduct is the person's reason for engaging in it and, by contrast, the purpose of a person's conduct is the end that is sought to be accomplished by it (see Sharpcan at [49]).
93 SPG drew a distinction between an inquiry into a taxpayer's purpose in incurring an expense and an inquiry into the meaning of a provision in a commercial instrument. These inquiries serve different functions. In the case of the first, the inquiry is to ascertain the purpose of one person in incurring an expense and, in the latter, the inquiry is to ascertain the common intention of two or more parties to the instrument. In the case of an inquiry into the common intention of the parties to the instrument, that is to be ascertained by reference to what "a reasonable person would understand by the language used by the parties to express their agreement" (Wilson v Anderson [2002] HCA 29; (2002) 213 CLR 401 at 418). In the ordinary case, the terms of the instrument cannot be contradicted, altered or added to by oral evidence because of the parol evidence rule. The rule applies not only to oral evidence, but to extrinsic evidence in other forms.
94 The inquiry under s 110-25(2)(a) is as to the purpose of the taxpayer in incurring the expense in question. The parol evidence rule has no role to play in this inquiry. It follows that the SSAs, although plainly relevant to the drawing of possible inferences as to SPG's purpose in making the Top-Up Payments, their proper construction is not necessarily determinative.
95 In the alternative, the process of construction does not involve reading the various definitions in isolation. A commercial contract must be construed as a whole in order to ascertain the common intention of the parties to it. SPG pointed to the difference drawn in Recital B between the Purchase Price and the Top-Up Payment. Furthermore, the Purchase Price is expressly identified as consideration for the subject matter of the transaction, namely, the shares held by the Participating Shareholders. SPG submitted that the repeated maintenance in the SSAs of the distinction between Purchase Price and Top-Up Payments supports an inference that each payment was intended for a separate purpose. The Top-Up Payment was intended as a separate, ex gratia payment to compensate the Participating Shareholder for any difference between the Purchase Price and the price originally paid by the shareholder in connection with the acquisition of the shares. It followed, so SPG submitted, that the Top-Up Payment was not intended to form part of the consideration for the acquisition of the shares. SPG makes the point that although the phrase "for their shares" in the definition (for example) of SABL Top-Up Payment in the SSAs, that phrase does not appear in any of the definitions in the IM.
96 With respect to the argument based on s 40-880(6), SPG made the following submissions in response to the four matters referred to by the Commissioner.
97 First, as to the apparent immunity from litigation, the SSAs contain no forbearance from suit and nor do they release SPG from claims associated with investments made by Participating Shareholders. Nor do they contain provisions purporting to indemnify SPG against any such claims.
98 Secondly, with respect to the silence of Participating Shareholders and the confidentiality clause, SPG submits that it is difficult to see how the shareholders' agreement not to disclose the information in question could have had any value to SPG in and of itself. In any event, clause 10 merely prevented the Participating Shareholders disclosing information about the SSAs. It did not prevent them from making adverse remarks about either the failed Yunderup Development or their own failed investments.
99 Thirdly, with respect to the argument that as a result of the rights acquired under the SSAs, SPG was able to restructure its business to "focus on other ventures", SPG submits that this does not rise above speculation. Furthermore, SPG submits that even if this was not the case, it is not apparent how any such "ability" might be capable of translating into "value" within the meaning and for the purpose of s 40-880(6).
100 Finally, with respect to the argument by the Commissioner that the shares were capable of being sold to third parties irrespective of their "perceived nominal value", that argument is again, speculative.