WERE THE IMPOSTS CAPITAL PAYMENTS?
44 Against that commercial background, the first question I propose to consider is whether the payment of the Imposts was on capital or revenue account.
45 In John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30, the High Court considered the deductibility of certain legal expenses incurred in defending an equity suit brought in relation to an allotment of shares. The approach taken by Dixon CJ was to ascertain first, whether or not the legal expenses were of a capital nature. The Chief Justice said (at 37) that the determination of whether the deduction was of a capital nature was the question of "more general importance…than the question whether it qualifies under the earlier part of s 51(1)" which depends "… much more on the view taken of the specific facts". John Fairfax provides an illustration of the convenience of first addressing the negating limb (s 8-1(2) of the ITAA 1997).
46 Various cases were put to the Court by the parties in support of the contentions advanced on this topic. As has frequently been recognised, determination of the capital or revenue question turns largely on the facts in each case. But the Court was, appropriately, taken to a number of (mainly) High Court authorities which provide guidance as to the nature of the inquiry on the capital or revenue question.
47 The early cases appear to have stressed the importance of the nature of the expenditure as either recurrent or once and for all. In Vallambrosa Rubber Co Ltd v Farmer (1910) SC 519, Lord President Dunedin upheld a claim for deductions in respect of expenses incurred on an annual basis in weeding and superintending portions of a property where trees had not yet reached production age, and were incurred in view of profit to be earned in future fiscal years. His Lordship said (at 525):
Now, I do not say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure - as against what is income expenditure - to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year. Therefore, prima facie, weeding, which does occur every year, seems to me to be an income expenditure.
(emphasis added)
48 The Imposts are, in effect, once and for all, but it is certainly not the case that all payments made once and for all will be capital expenditure.
49 SPI relies upon Moffatt v Webb (1913) 16 CLR 120 where the High Court concluded that land tax paid by a grazier was a disbursement of money wholly and exclusively laid out or expended for the purpose of the trade of being a grazier such that the grazier was entitled to deduct the expenditure from his income. Griffith CJ rejected the Commissioner's argument that the land tax was a capital expenditure (at 130). The Chief Justice distinguished the cases relied upon by the Commissioner on the basis that they were cases in which money or money's worth was paid as the price of something to be used in order to earn income, whereas, according to Griffith J, it was "impossible to say that land tax is paid for the purpose of acquiring anything…it certainly adds nothing to his capital."
50 Rowlatt J in Ounsworth (Surveyor of Taxes) v Vickers Ltd [1915] 3 KB 267 (at 273) emphasised that "the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once and for all". When Dixon J, as his Honour then was, came to consider Rowlatt J's approach in Sun Newspapers Ltd v Federal Commissioner of Taxation; Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 his Honour said (at 362) that recurrence was simply one consideration, the weight of which depends upon the nature of the expenditure in question.
51 A little later in British Insulated and Helsby Cables Limited v Atherton (1926) AC 205 Viscount Cave LC enumerated another factor of relevance to determining whether payments are capital or revenue expenditure. The Lord Chancellor's formula (at 213-214), since cited in a number of decisions, was:
When an 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, I think that there is a very good reason (in the absence of special circumstances leading to an opposite conclusion) that treating such an expenditure as properly attributable not to revenue but to capital.
(emphasis added)
52 Again, however, the notion of an enduring benefit has not been regarded as the sole test. As Dixon J noted in Sun Newspapers, this was simply a factor the relevance of which would play a part in determining the character of the advantage sought by the expenditure. In Sun Newspapers where the question for determination was whether moneys paid under an agreement were capital or otherwise, Dixon J enumerated a threefold test which has been adopted as the Australian approach to determining whether expenditure is capital or revenue in character. 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.
(emphasis added)
53 Against that synopsis, his Honour went on to analyse the character of the payments that had been made. First, the expenditure was a large sum incurred to remove Sun Newspaper's competition. Secondly, the expenditure could only be regarded as recurrent in the sense that the risk of a competitor arising must always be theoretically present. Thirdly, the chief object of the expenditure was to preserve the existing business organisation from immediate impairment and dislocation. His Honour concluded (at 364) that the advantage obtained as a result of the expenditure was a capital asset as in principle the transaction was to strengthen and preserve the business organisation and affected the capital structure.
54 Slightly different terminology was used a few years later by Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634. In that decision, certain legal costs and expenses incurred were held to be outgoings of revenue not of a capital nature and, therefore, deductible. The observations of Dixon J (with whom McTiernan J agreed, but both being in dissent) have also since been cited in a number of decisions. His Honour said (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.
(emphasis added)
55 Latham CJ and Starke JJ (at 641 and 644) in the majority followed the decision of Viscount Cave LC in British Insulated and Helsby Cables outlined above. The Chief Justice formed the view that the expenditure by the company on legal costs was not made for the purpose of acquiring an asset, nor of adding to the profit yielding subject which constituted the capital structure of the business, and accordingly was of revenue nature. Williams J (at 655) distinguished the legal expenditure from the capital expenditure in Sun Newspapers in which the taxpayer obtained the benefit of a covenant against competition by potential trade competitors and thereby improved the value of the taxpayer's goodwill.
56 In Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 the Court treated periodical payments made over 50 years equalling 90 per cent of rents received in respect of buildings or land as being the price for which the land was bought and therefore regarded the payments as being outgoings of capital nature and not allowable deductions. In reaching this conclusion, Fullager J observed (at 454):
...[I]t is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter…If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. It does not indeed seem to me to be possible to say that they are incurred in the relevant sense in gaining or producing assessable income or in carrying on a business - any more than payment of a lump sum would have been so incurred if the purchase price had been a lump sum payable on transfer. The questions which commonly arise in this type of case are (1) What is the money really paid for? - and (2) Is what it is really paid for, in truth and in substance, a capital asset? …
(emphasis added)
57 In John Fairfax, Dixon CJ quoted Viscount Cave LC in British Insulated and Helsby Cables, and again noted, as his Honour had previously in Sun Newspapers, that it is a "logical fallacy" to say that an expenditure cannot be attributable to capital unless it is made once for all and is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade.
58 In contrast with Colonial Mutual Life, the Privy Council was of the view in BP Australia Ltd v Federal Commissioner of Taxation (1965) 112 CLR 386 that lump sums paid by a petrol distributing company for the purpose of securing a trade tie covenant over a period of years were not capital outgoings, but deductible income expenditure.
59 In Cliffs International Inc v Federal Commissioner of Taxation (1978-1979) 142 CLR 140, the High Court (by majority, namely Barwick CJ, Jacobs and Murphy JJ) concluded that recurrent payments of 15 cents per tonne of iron ore mined and sold could not be regarded as part of the purchase price of a capital asset acquired by the taxpayer. Accordingly they were revenue in character. The majority considered that the payments were analogous to rent agreed to be paid on the grant of a lease or to royalties agreed to be paid on the grant of a licence to use a patent (at 151 and 176). The minority (Gibbs and Stephen JJ), however, followed the approach of Fullagar J in Colonial Mutual Life. Their Honours placed particular weight on the fact that the payments, even though they were recurrent and indefinite, were properly to be considered as being made as part of the consideration for the acquisition of an advantage which had the character of capital (at 156 and 167).
60 In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1989-1990) 170 CLR 124 the question for the High Court was whether "establishment costs" paid to the appellant under a contract which required the building of a plant were capital or revenue in nature. It held (at 137) "…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" (emphasis added). Although the asset acquired was a capital asset and the expenditure by the taxpayer in its construction was an outgoing of a capital nature, the establishment costs were held to be assessable remuneration earned by the carrying on of the taxpayer's business.
61 More recently in Federal Commissioner of Taxation v CityLink Melbourne Ltd (2006) 228 CLR 1 the High Court considered whether concession fees payable by CityLink Melbourne Ltd to secure concession rights and impose and collect tolls for its use were capital or revenue expenditures. After citing Dixon J in Sun Newspapers and in Hallstroms, Crennan J with whom Gleeson CJ, Gummow, Callinan and Heydon JJ agreed, (Kirby J dissenting) concluded that the concession fees were revenue in nature. In reaching this conclusion, Crennan J reiterated the danger recognised by the Full Court in arguing by analogy in circumstances where the arrangements are sui generis commercial arrangements specific to a particular project (at [151]). Crennan J concluded (at [154]) (footnotes omitted):
154 The concession fees are only payable during the term of the concession period. The respondent does not acquire permanent ownership rights over the roads or lands used. All rights granted under the Concession Deed revert to the State at the expiry of the concession period. Unlike periodic instalments paid on the purchase price of a capital asset, the concession fees are periodic licence fees in respect of the Link infrastructure assets, from which the respondent derives its income, but which are ultimately "surrendered back" to the State. Accordingly, they are on revenue account.
(emphasis added)
62 Although the cases give some guidance in how commercial dealings might be considered, this "danger" of arguing by analogy (referred to by Crennan J (at [151] in CityLink) requires that the individual commercial transaction be assessed. Preliminary payments, as the cases show, may in some instances be on revenue account and on others, capital. The primary judge noted the elements of the three considerations referred to by Dixon J in Sun Newspapers which, as Crennan J observed (at [147] in CityLink) is the starting point. As Crennan J (at [148]) (and the primary judge) noted (footnotes omitted):
The characterisation of an outgoing depends on what it "is calculated to effect", to be judged from "a practical and business point of view". The character of the advantage sought by the making of the expenditure is critical.