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High Court of Australia |
JOHN FAIRFAX & SONS PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1959] HCA 4; (1959) 101
CLR 30
Income Tax (Cth.)
High Court of Australia
Dixon C.J.(1), Fullagar(2), Kitto(3), Taylor(4) and Menzies(5) JJ.
CATCHWORDS
Income Tax (Cth.) - Newspaper publishing company - Assessable income - Allowable deductions - Legal expenses - Incurred in defending suit arising out of allotment to company of ordinary shares in second newspaper publishing company - Suit brought at instance of third newspaper publishing company - Both companies seeking control of second company - Nature of legal expenses incurred - Capital or income expenditure - Whether allowable deduction - Income Tax and Social Services Contribution Assessment Act 1936-1954, s. 51 (1).
HEARING
Sydney, 1958, December 17, 18;DECISION
February 27, 1959.2. Perhaps the most important thing to notice in sub-s. (1) is the character of the phrase "except to the extent to which they are losses or outgoings of capital, or of a capital nature". Its character is that of an exception which necessarily presupposes the possibility of the subject matter excepted falling under the description that precedes it. In other words it is supposed by the sub-section that a loss or outgoing incurred in gaining or producing the assessable income or in carrying on a business for that purpose may nevertheless be a loss or outgoing of capital. (at p34)
3. Perhaps no better illustration of the importance of this can be found than the apparent judicial difference of opinion that, at all events on the surface, would seem to have arisen over the correctness of the decision of Lawrence J. (Lord Oaksey) in Southern v. Borax Consolidated Ltd. (1940) 23 Tax Cas 597; (1941) 1 KB 111 . For when in England the decision has been cited with approval the consideration that has been uppermost is the business character of the expenditure upon the litigation, the fact that it was undertaken in pursuance of the purpose of continuing the earning of profits. But when in Australia the decision has been said to be erroneous what has led us to say this has been the fact that the litigation obviously has concerned nothing but an affair of capital. We may have regarded the decision too much from the point of view of minds habituated to the principles expressed in s. 51 (1). But I cannot see how if that case were to be decided under s. 51 (1) the deduction there claimed could be allowed. The next thing to note about the words under discussion is that they are introduced by the expression "except to the extent to which". This expression seems to require that a loss or outgoing that might otherwise be allowable as a deduction, must be scrutinized for the purpose of seeing if any part of it forms, to express it in a general phrase, an expenditure on account of capital. It means at least that dissection of an outgoing or loss is contemplated by s. 51 (1); possibly even apportionment. In the present case however the whole deduction claimed appears to me to be of a capital nature and if this is so no question arises under these words. (at p35)
4. In considering the form or structure of the Australian provision, it should not be overlooked that it was thought desirable to enact sub-s. (2) of s. 51. No one would suppose for a moment that the purchase of trading stock involved an outgoing which was not incurred in gaining assessable income or in carrying on the business for that purpose. Why sub-s. (2) was thought necessary is because trading stock represents or perhaps one should say may represent what is still called circulating capital. But that fact alone probably would not have been though to make sub-s. (2) necessary; the evident reason why it was considered necessary or desirable was that (and this is the important point), outgoings of capital are treated by sub-s. (1) of s. 51 not as a category outside of and contradistinguished from the prima facie criterion of deductibility expressed in the earlier part of that provision but as a category of loss or outgoing capable of falling within the wider category established by that criterion and therefore made the subject of an exception which in the case of circulating capital needed qualifying or explaining. (at p35)
5. It is not a matter really affecting this case, but it may be desirable to add that I think the word "such" in the expression "a business for the purpose of gaining or producing such income" should be construed as meaning "assessable income" not "the assessable income" that is the assessable income of the particular accounting period: see Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR, at p 56 and cf. Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295, at pp 309-311 . (at p35)
6. On the view of the Australian provision I have stated, the question in this case whether the outgoing or outgoings here in question were of a capital nature must I think inevitably be answered that they were of a capital nature. On the subject of the distinction between an outgoing of a capital nature and one of a revenue nature I adhere entirely to what I said in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] HCA 73; (1938) 61 CLR 337, at pp 359-361 . It is not in my opinion right to say that because you obtain nothing positive, nothing of an enduring nature, for an expenditure it cannot be an outgoing on account of capital. What Viscount Cave L.C. said in British Insulated and Helsby Cables Ltd. v. Atherton (1926) AC 205 was this, "But 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 very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital" (1926) AC, at pp 213, 214 . That is an affirmative proposition. But it is hardly necessary to say that it is a logical fallacy to turn it round and 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. Nor did Viscount Cave L.C. mean to say that no expenditure falling outside his proposition could be of a capital nature. No doubt it is not often that an outgoing is voluntarily incurred without anything to show for it. The cynical might say that it is a phenomenon so rare that for illustrations of such an outgoing you must look to the costs of litigation. It is however a feature that is always likely to occur when the purpose of the expenditure is to limit or buy off opposition or forestall or get rid of some present or threatened disadvantage. Of course you can have expenditure of that kind which on the soundest principles of accounting is chargeable against revenue. But you might confidently expect to find that much expenditure of the kind was undeniably on capital account. It would in my opinion depend entirely upon the application to the transaction of the tests described in the case of the Sun Newspapers (1938) 61 CLR, at pp 359-361 , to which I have already referred. (at p36)
7. The facts of the present case are stated and discussed in the judgments of Fullagar and of Menzies JJ. and I shall not go over them again. It is enough for me to say that I regard the litigation as exclusively concerned with the organization and structure of the profit-earning enterprise. In point of fact the litigation formed part, an inseverable part, of the contest over the so-called merger. To my mind it would not matter if the suit had been instituted only as an attack on a title to shares after the title had been acquired. For not only was it all an inseverable part of the main transaction but in any case such an attack necessarily concerned a matter of capital. (at p37)
8. The question whether the expenditure in respect of which a deduction is here sought is of a capital nature appears to me to be of more general importance, although of less difficulty, than the question whether it qualifies under the earlier part of s. 51 (1) as an outgoing incurred in gaining or producing the assessable income or in necessarily carrying on a business for the purpose of gaining or producing such income. I shall say nothing more about the latter question than that it depends much less on principle, that is principle as embodied in the Australian provision, and much more on the view taken of the specific facts. It is enough for me to say that as to the interpretation of the facts and their result I concur in the view expressed in the judgment of Menzies J. (at p37)
9. The question in the case stated should be answered that the deduction claimed is not allowable. (at p37)
FULLAGAR J. This is a reference to this Court of a question of law by a board of review under s. 196 (2) of the Income Tax and Social Services Contribution Assessment Act 1936-1957. The question is whether the taxpayer, which is a company incorporated in New South Wales, is entitled under s. 51 (1) of the Act to a deduction from its assessable income of the year ended 30th June 1954 of a sum of 3,142 pounds 14s. 8d. which represents certain legal expenses incurred by it in that year. The company has for many years carried on in Sydney a business of publishing newspapers, including the "Sydney Morning Herald". There are two other companies which have also for many years carried on in Sydney similar businesses. These are Associated Newspapers Ltd., publisher of the "Sun", and Consolidated Press Ltd., publisher of the "Daily Telegraph". It will be convenient to refer to the three companies respectively as "Fairfax", Associated" and "Consolidated". The expenses in question were incurred in the following circumstances. (at p37)
2. Before 31st August 1953 the issued capital of Associated consisted of 1,071,236 ordinary shares of 1 pound and 1,492,275 5 per cent preference shares of 1 pound. Its unissued capital consisted of 678,674 ordinary shares of 1 pound and 7,725 preference shares of 1 pound. On 8th August 1953, when the shares of Associated had been selling on the Sydney stock exchange at prices considerably below par, a proposal was put by Consolidated to the board of directors of Associated that it should recommend to all the shareholders of Associated that they should sell their shares to Consolidated at the price of 1 pound each. It was to be a condition of any purchase by Consolidated that that company should obtain 90 per cent of the whole of the issued capital of Associated. This proposal was rejected by the board of Associated, and the rejection was communicated to Consolidated on 26th August 1953. Immediately thereafter, by circular letter and advertisement in the "Daily Telegraph", an offer was made by Consolidated directly to all the shareholders of Associated to purchase their shares at the price of 1 pound each. (at p38)
3. In the meantime certain negotiations had been proceeding between Associated and Fairfax, and on 27th August 1953 an agreement was reached between those two companies. With regard to this agreement, the case is somewhat reticent. It states merely that it was agreed "to merge the operations" of the organisations of the two companies "while maintaining independence in ownership and editorial policy" of the publications of Associated, and that Fairfax was to take up all the unissued share capital of Associated. The word "merge" is a word of very vague import, but it must no doubt be understood in the light of the events which followed on the acquisition of the unissued shares. On 29th August 1953 Consolidated offered, by advertisement in the "Daily Telegraph", to purchase the shares of shareholders in Associated at a price of 1 pound 5s. 0d. each. It would appear that nothing came of this offer. On 30th August 1953 Associated sought and obtained from the Capital Issues Board approval of the issue of its unissued ordinary shares. At a meeting of the directors of Associated, which commenced on Sunday, 30th August 1953, and (doubtless with an eye to the Sabbath Day Observance Act) adjourned to 12.5 a.m. on Monday, 31st August, the 678,674 unissued ordinary shares were allotted to Fairfax or its nominees, and on the same day Fairfax and its nominees were registered as the holders of those shares in the share register of Associated. Later on the same day the managing director of Fairfax was appointed by the board of Associated chief general manager of the latter company. (at p38)
4. On the same day, 31st August 1953, but after the allotment and registration mentioned above, a suit was commenced in the Supreme Court of New South Wales in equity by Gabriel Selmar Reichenbach, a shareholder in Associated. The defendants were Associated, Fairfax, and the directors of Associated. Paragraph 16 of the case states: - "In commencing the suit the said Gabriel Selmar Reichenbach agreed to act in the interests of Consolidated Press Limited, which at that time was the beneficial owner of ordinary shares in Associated Newspapers Limited but was not itself registered as a shareholder of that company." The substantial relief claimed in the suit was a declaration that the allotment of the 678,674 shares was void, and rectification of the share register of Associated by the removal therefrom of the names of Fairfax and its nominees as the holders of those shares. An interim injunction in the suit was granted on the same day, but a motion for its continuance until the hearing of the suit was dismissed by Myers J. on 22nd September 1953, the costs of Fairfax to be its costs in the suit. After certain further interlocutory proceedings in the suit it was dismissed by consent on terms which did not include the payment to Fairfax of any of its costs of the suit. (at p39)
5. The events which followed (together with the appointment of the managing director of Fairfax as chief general manager of Associated, which has already been mentioned) appear to explain what was intended by the word "merger", to which reference has been made above. The case states that, by agreement between Fairfax and Associated, Fairfax assumed responsibility for the management of Associated as from 1st September 1953 for a "fee" of fixed amount, which fee was "intended to cover, inter alia the services of senior executives of Fairfax". On 28th September 1953 an agreement in writing (which superseded an earlier agreement of 25th September) was made by which the two companies entered into partnership for the purpose of publishing a Sunday newspaper under the name of the "Sun-Herald", in lieu of the "Sunday Sun" and the "Sunday Herald", which had hitherto been published by Associated and Fairfax respectively. Publication of the "Sun-Herald" commenced on 11th October 1953. On 2nd December 1953 the governing director and the managing director of Fairfax were appointed directors, and the managing director was appointed managing director, of Associated. Since February 1956 the daily "Sun", published by Associated, the "Sun-Herald", published by a partnership of Associated and Fairfax, and the "Sydney Morning Herald" and the "Australian Financial Review", published by Fairfax, have all been produced from a new building at Broadway, Sydney, owned by Fairfax. Since 1954 the "integration of the staffs" of the two companies "steadily progressed", and, at the date of the statement of the case only a small number of the employees of Associated still remained to be transferred to Fairfax. In April 1956 the appellant acquired the whole of the outstanding ordinary shares in Associated, so that the only other shareholders in that company are the holders of the preference share capital. In September 1956 the directors of Associated, other than the governing director and managing director of Fairfax, resigned and their places were taken by executives of Fairfax. (at p40)
6. In defending the suit commenced by Mr. Reichenbach and in connection with the application made thereunder for an injunction, the taxpayer (Fairfax) expended moneys for barristers' fees and solicitors' costs and disbursements which in the year ended 30th June 1954 totalled the sum of 3,142 pounds 14s. 8d. In its return of income derived by it in that year the taxpayer claimed this sum as an allowable deduction under s. 51 (1), but the commissioner disallowed the deduction, and disallowed the taxpayer's objection. The matter was then, at the request of the taxpayer, referred to a board of review. (at p40)
7. The two categories of s. 51 (1) are clearly not mutually exclusive, and it has indeed been said that "in actual working" the addition of the second category "can add but little to the operation of the leading words 'losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income':" Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47, at p 56 . But it was not denied that there may be cases which fall outside the first category and within the second. The first is directed to expenditure incurred in the actual course of producing assessable income: Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295, at pp 303, 309 and W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation [1937] HCA 9; (1937) 56 CLR 290, at p 305 . It is, primarily at least, concerned with expenditure voluntarily incurred for the sake of producing income. Its scope is not, of course, confined to cases where the income is derived from carrying on a business. The second may be thought to be concerned rather with cases where, in the carrying on of a business, some abnormal event or situation leads to an expenditure which it is not desired to make, but which is made for the purposes of the business generally and is reasonably regarded as unavoidable: Hannan, Principles of Income Taxation (1946) p. 291: Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd. [1958] HCA 23; (1958) 99 CLR 431 . (at p40)
8. In the present case it appears to me to be difficult, and indeed impossible, for the taxpayer to maintain that the legal expenses in question fall within the first category of s. 51 (1). I doubt very much whether they fall even prima facie within the second category, but in any case it seems to me to be clear that they were "outgoings of capital or of a capital nature". They were incurred "in the establishment, enlargement or alteration of the profit-making machine": Hannan, Principles of Income Taxation (1946), p. 435 - "upon establishing, replacing and enlarging the profit-yielding subject": per Dixon J. in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] HCA 73; (1938) 61 CLR 337, at p 360 . (at p41)
9. The foundation of Mr. Bowen's main argument was that, at the time when the relevant suit was commenced by Mr. Reichenbach, albeit only a few hours before, the taxpayer had, by the registration of itself and its nominees in the share register of Associated, actually become the legal or beneficial owner of a new asset consisting of a large number of shares. The commencement of that suit represented an attack upon the taxpayer's title to that asset, and expenditure incurred in defence against that attack was, it was said, properly to be regarded, for income tax purposes, as a revenue outgoing and not a capital outgoing. Stated in that way, the position in the present case does not differ materially from that which subsisted in Southern V. Borax Consolidated Ltd. (1940) 23 Tax Cas 597; (1941) 1 KB 111 , and the argument is supported by the decision of Lawrence J. in that case: see also Associated Portland Cement Manufacturers Ltd. v. Inland Revenue Commissioners (1946) 1 All ER 68 , per Lord Greene M.R. (1946) 1 All ER, at p 72 ; Cooke v. Quick Shoe Repair Service [1949] EWHC KB 1; (1949) 30 Tax Cas 460 and Morgan v. Tate & Lyle Ltd. (1955) AC 21, at pp 41, 46, 51, 62, 69 . But in Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation (1952) 85 CLR 423 four Justices of this Court expressed the opinion that the decision in the Borax Case (1940) 23 Tax Cas 597; (1941) 1 KB 111 "cannot be supported" (1952) 85 CLR, at p 434 . That opinion had previously been expressed in the dissenting judgment of Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation [1946] HCA 34; (1946) 72 CLR 634, at p 650 : cf. Hannan, Principles of Income Taxation (1946) pp. 440, 441. I referred to these cases in Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd. [1958] HCA 23; (1958) 99 CLR 431, at pp 444, 445 , and would only now add that I do not think - particularly having regard to the references made by their Lordships to Ward & Co. v. Commissioner of Taxes (N.Z.) (1923) AC 145 - that there is anything in the opinions delivered in that case to warrant any re-consideration by us of the view which we have taken of the Borax Case (1940) 23 Tax Cas 597; (1941) 1 KB 111 . (at p41)
10. But the present case is not, in my opinion, analogous to the Borax Case (1940) 23 Tax Cas 597; (1941) 1 KB 111 . This is not, as I see it, a simple case of expenditure incurred by the taxpayer in order to prevent its being deprived of an asset owned or possessed by it. If one looks at the substance of the matter, it would accord much more with reality to describe that expenditure as incurred in the course of, and as incidental to, the acquisition of a new asset. The commencement of the suit, which occasioned the expenditure in question, must be regarded in the light of all the surrounding circumstances. The essential feature of the situation which subsisted in August 1953 was that two companies were in competition for the control of a third company. Each of these two companies sought to achieve its end by different means. The one proposed to proceed by the direct method of acquiring ninety per cent or more of the issued shares of the third company - a method which would have given it immediate control of the business of that company. The other proposed not to buy the issued shares but to subscribe and pay for the unissued shares. Ownership of those shares would not of itself give it a controlling interest in the business of the third company. But, as the case states, the holding of those shares would enable it to obtain a "substantial influence in the policy and control" of that company, and the offer to take up the unissued shares was accompanied by a proposal for a "merger" of the businesses of the two companies which doubtless comprehended the placing of the offeror in immediate de facto control. The proposal of Consolidated was ultimately a matter for the shareholders of Associated individually to accept or reject. The proposal of Fairfax was made to Associated itself, and the decision to accept or reject it was a matter for the directors of Associated. From the point of view of Associated, the proposal of Fairfax had presumably the great advantage that it would provide a large sum by way of new capital. But, be this as it may, the fact is that Fairfax and Consolidated were competing for the control of Associated - competing for a capital gain or advantage. And the competition had a twofold aspect in the sense that each desired to obtain control for itself and to exclude the other from control. It was certain that, if the one company took any particular step, the other would, as soon as it heard of it, take any legitimate means in its power - with or without resort to the courts - to counter that step. (at p42)
11. When Mr. Reichenbach commenced his suit and attacked the allotment of the shares, he was doing so not because he or Consolidated claimed any right or title to the shares, but because that allotment was a step which could lead to the obtaining by Fairfax of control of Associated. It was (as no doubt Consolidated guessed) only a step in a larger plan, though no doubt a very important step It was as such a step that it was attacked, and as such a step that it was defended. The lawsuit was an incident of the competition for control, and the costs of defending it were an incident of one step in that competition - the acquisition of the unissued shares. They were really part of the cost of acquiring the shares. If Mr. Reichenbach had commenced his suit on 30th August instead of 31st August - as no doubt he would have done, if it had been possible - Mr. Bowen's argument would have been deprived of its foundation, and the costs incurred by Fairfax could not have been regarded otherwise than as part of the cost of the shares. They could not have been distinguished from costs incurred by a purchaser in obtaining a decree for specific performance of a contract for the sale of land. It can make no difference to the substance of the matter that Mr. Reichenbach was not able to commence his suit until the following day, before the dawn of which the allotment of the shares and the registration of the allottees had become accomplished facts, so that it was necessary to claim rectification of the register. (at p43)
12. The question asked by the case stated is whether the legal expenses, amounting to 3,142 pounds 14s. 8d., were an allowable deduction under s. 51 (1). This question should be answered - No. (at p43)
KITTO J. I have had the advantage of reading the reasons for judgment of the Chief Justice, and of Fullagar and Menzies JJ. I respectfully agree in their Honours' opinions and would answer the question in the case stated accordingly. (at p43)
TAYLOR J. I agree entirely with my brothers Fullagar and Menzies JJ. in this matter and have nothing to add. (at p43)
MENZIES J. The Federal Commissioner of Taxation refused to allow the taxpayer as a deduction for purposes of the calculation of its taxable income for the year ended 30th June 1954, the sum of 3,142 pounds 14s. 8d. which it had during the year paid as legal expenses in circumstances that it will be necessary to examine. From this refusal the taxpayer appealed to the Taxation Board of Review and the board has, pursuant to s. 196 of the Income Tax and Social Services Contribution Assessment Act, referred to this Court the question whether the sum of 3,142 pounds 14s. 8d. was in law an allowable deduction within the meaning of s. 51 of the said Act. For purposes of determining the reference the board has stated a case from which I extract the following material facts. (at p43)
2. The appellant was at all times material a newspaper publisher in New South Wales; so too was Consolidated Press Ltd. In August and September 1953 a struggle developed between these two companies which began with an attempt by Consolidated Press Ltd. to purchase from shareholders their shares in Associated Newspapers Ltd., another company which was also a newspaper publisher in New South Wales. The appellant countered this attempt with a proposal to Associated Newspapers Ltd. of which we are told no more than that it was a firm proposal "to merge the operations of the two organizations while maintaining independence in ownership and editorial policy of its publications and to take up all the unissued share capital". The unissued share capital there referred to consisted of 678,674 shares of 1 pound each which was the whole of the unissued ordinary capital of the company. On 27th August 1953 the appellant was informed by a committee of the directors of Associated Newspapers Ltd. that its proposal was acceptable and thereupon Associated Newspapers Ltd. by letter offered the appellant the whole of the unissued ordinary shares at par. This offer was accepted by letter from the appellant. On Sunday, 30th August 1953, the directors of Associated Newspapers Ltd. met for the purpose of allotting these shares but for some unexplained reason the meeting was adjourned until 12.5 in the morning of 31st August when the meeting was resumed and the shares were upon the subscription of the appellant allotted to it for cash which was paid and the appellant and its nominees were registered as the holders of the shares. The reaction of Consolidated Press Ltd. was prompt and on the morning of the same day one Reichenbach, a shareholder in his own right in Associated Newspapers Ltd. commenced suit against Associated Newspapers Ltd., the appellant and the board of directors of Associated Newspapers Ltd. as defendants. In commencing this suit Reichenbach agreed to act in the interests of Consolidated Press Ltd. which at that time was the beneficial owner of ordinary shares in Associated Newspapers Ltd. but was not itself registered as a shareholder of that company. The relief claimed was rectification of the register of members of Associated Newspapers Ltd. by the removal therefrom of the name of the appellant as the holder of the aforesaid 678,674 ordinary shares and injunctions restraining the appellant from dealing with the shares or voting in respect of them and restraining the other defendants from recognizing the appellant as the holder of the shares. Later on the same day the plaintiff obtained an interim injunction restraining the appellant and its nominees from selling the shares in Associated Newspapers Ltd. which represented capital unissued as at 26th August 1953 or from voting in respect of the said shares at any meeting of shareholders of Associated Newspapers Ltd. and restraining Associated Newspapers Ltd. and its directors from treating the said shares as qualifying any person to be elected as a director of Associated Newspapers Ltd. On 1st September 1953 the plaintiff filed a notice of motion to continue the interim injunction until the hearing of the suit. This application was dismissed on 22nd September 1953 but no order was made as to the appellant's costs. After further interlocutory proceedings the suit was dismissed by consent upon terms which did not include the payment to the appellant of any of its costs of the said suit. Its costs, which it paid itself, amounted to 3,142 pounds 14s. 8d. and its claim is that it is entitled to have this sum deducted as an outgoing not of a capital nature, incurred in gaining its assessable income or as necessarily incurred in carrying on a business for the purpose of gaining such income. (at p45)
3. The case stated goes on to show that partnership agreements were made between the appellant and Associated Newspapers Ltd., firstly on 25th September 1953 and subsequently on 28th September 1954, for the publication of a Sunday paper called "The Sun-Herald"; that in October 1953 Associated Newspapers Ltd. ceased to publish "The Sunday Sun" and the appellant ceased to publish "The Sunday Herald" and thereafter, pursuant to the agreements aforesaid, "The Sun-Herald" was published by the two companies in partnership; that since 1956 all papers of Associated Newspapers Ltd. and the appellant, whether published separately or in partnership, have been produced from one building erected by the appellant, each having disposed of the building formerly used by it; that in April 1956 the appellant acquired all the ordinary shares in Associated Newspapers Ltd. so changing the position which had resulted from its holding of a large block of ordinary shares of being able to exercise "a substantial influence in the policy and control of Associated Newspapers Ltd. and of the business conducted by that company" to a position of complete control, subject only to the rights of preference shareholders. (at p45)
4. There are therefore two questions for consideration: (1) whether in the circumstances aforesaid the sum of 3,142 pounds 14s. 8d. was an outgoing incurred in gaining or necessarily incurred in carrying on business for the purpose of gaining the assessable income of the appellant; and if so, (2) whether it was an outgoing of a capital nature. (at p45)
5. It has been said that the words "the assessable income" in s. 51 refer to "the assessable income from which the deduction is to be made": Charles Moore & Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation [1956] HCA 77; (1956) 95 CLR 344, at p 350 . This assessable income in the present case seems in strictness to be the total on the credit side of the profit and loss account of the appellant for the year ended 30th June 1954 but there is a practice described by Dixon J. in Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 as follows: "In a continuing business, items of expenditure are commonly treated as belonging to the accounting period in which they are met. It is not the practice to institute an inquiry into the exact time at which it is hoped that expenditure made within the accounting period will have an effect upon the production of assessable income and to refuse to allow it as a deduction if that time is found to lie beyond the period" (1935) 54 CLR, at p 309 . Furthermore, there is some justification for reading the words "such income" in the alternative provision in s. 51 as assessable income generally rather than as meaning the assessable income of a particular year: see Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47, at p 56 and Federal Commissioner of Taxation v. Snowden and Willson Pty. Ltd. [1958] HCA 23; (1958) 99 CLR 431 , per Dixon C.J. (1958) 99 CLR, at pp 435, 436 . Accordingly I do not confine my attention exclusively to inquiring whether it has been shown that the outgoing in question was incurred in gaining or in carrying on business to gain the assessable income of the appellant for the year ended 30th June 1954. This inquiry, however, it is desirable to make because of the language of s. 51 itself; because there has here been an attempt to link the outgoing and that assessable income, and because the examination of that attempt seems to me to reveal the true nature of the outgoing. In passing I should say that the way in which a taxpayer deals with a debit in its accounts cannot of course determine its character for the purposes of the Act: see Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation (1952) 85 CLR 423, at p 435 and Ward & Co. Ltd. v. Commissioner of Taxes (1923) AC 145, at p 149 . (at p46)
6. It appears from the case stated that the profit and loss account of the appellant for the year ended 30th June 1954 included the 3,142 pounds 14s. 8d. as a debit and included among the credit items three receipts, two of which were derived from the partnership constituted between the appellant and Associated Newspapers Ltd. already referred to and the third from an arrangement made with Associated Newspapers Ltd. that the appellant would manage that company as from 1st September 1953 for a fee. Of this arrangement little more is revealed than that at a meeting of the directors of Associated Newspapers Ltd. on 29th September 1954 it was resolved that the management fee for the financial year ended 26th September 1954 be fixed at 20,000 pounds. This fee, it is explained, "was intended to cover inter alia the services of senior executives of the appellant which were made available to the partnership; no direct payments were made by Associated Newspapers Ltd. to such executives". The first of these credits was an item described as "Licence fee - The Sun-Herald - 37,500 pounds". This, it seems, was the proportionate part of the fee of 50,000 pounds for the period ending 30th September 1954 for the use by the partnership of the word "Herald" in the name "The Sun-Herald". The second credit was an item "Interest - The Sun-Herald - 6,837 pounds 12s. 9d." This was interest payable by Associated Newspapers Ltd. to the appellant as interest upon working capital of the partnership supplied by the appellant. The third credit was an item "Management fee - Associated Newspapers Ltd. - 16,666 pounds 13s. 4d." which was the proportionate part of the fee of 20,000 pounds already mentioned for the year ended 26th September 1954. This information has no doubt been included in the case stated in order that the inference might be drawn that the outgoing of 3,142 pounds 14s. 8d. was incurred in gaining these items or some part of them or in carrying on business for the purpose of doing so. This I cannot accept. It is obviously true that the income represented by the first two credit items was derived from partnership operations and would not have been derived had there been no partnership and had the appellant not provided working capital at interest; similarly, the third credit item would not have been derived had there not been an arrangement that the appellant should manage Associated Newspapers Ltd. Furthermore, it is possibly a matter for inference rather than speculation that there would have been no partnership and no arrangement for management if the appellant had not taken up the 678,674 ordinary shares in Associated Newspapers Ltd. and successfully resisted the attack made at the instance of Consolidated Press Ltd. upon that transaction. But to draw this inference does not mean that either the outlay to pay for the shares or that to defend the acquisition of the shares was incurred in gaining the income in question or in carrying on business to gain such income. At best what the acquisition of the shares and successful defence did was to put the appellant in a position to enter into partnership with Associated Newspapers Ltd. and to undertake the management of that company. An analogy may be found in the case of a person acquiring shares in a company to qualify himself to be a director and so earn director's fees, or, although perhaps somewhat less pertinently, in a lawyer entitled to practise in one jurisdiction paying a fee to be admitted to practise in another jurisdiction: see Daley v. Minister of National Revenue (1951) DLR 529 . To make a payment to acquire or to defend the acquisition of a favourable position from which to earn income or to enter into arrangements that will yield income is not in general an outlay incurred either in gaining or in carrying on business for the purpose of gaining assessable income; such a payment in the case of a trading company, occurs at a stage too remote from the receipt of income to be so regarded. To be deductible an outlay must be part of the cost of trading operations to produce income, i.e., it must have the character of a working expense. What the appellant wanted in taking up the shares in Associated Newspapers Ltd. was to keep Consolidated Press Ltd. out, and to gain the opportunity to make profits of the sort which the accounts show that it made, but that does not mean that payments in connection with the acquisition of the shares or for the defence of the acquisition of shares were incurred in carrying on the profitmaking business. (at p48)
7. The difference that has resulted from the inclusion in s. 51 of the alternative head of deduction that depends upon the words "or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income" has on more than one occasion received the attention of this Court, notably in Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR, at pp 55 et seq where it was said: "The alternative in s. 51 (1) therefore covers a wide description of activities. But in actual working it can add but little to the operation of the leading words, 'losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income'. No doubt the expression 'in carrying on a business for the purpose of gaining or producing' lays down a test that is different from that implied by the words 'in gaining or producing'. But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative. The words 'such income' mean 'income of that description or kind' and perhaps they should be understood to refer not to the assessable income of the accounting period but to assessable income generally. If they were so interpreted, they would cover a case where the business had not yet produced or had failed to produce assessable income and the alternative would then itself suffice to authorize the deduction of a loss made in a distinct business" (1949) 78 CLR, at p 56 . See also Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation (1952) 85 CLR, at p 429 and Federal Commissioner of Taxation v. Snowden and Willson Pty. Ltd. (1958) 99 CLR, at pp 435, 436, 443, 444 . Disregarding the application of the section to losses and considering the alternative head solely in its application to outgoings, there must, if an outgoing is to fall within its terms, be found (i) that it was necessarily incurred in carrying on a business: and (ii) that the carrying on of the business was for the purpose of gaining assessable income. The element that I think it necessary to emphasise here is that the outlay must have been incurred in the carrying on of a business, that is, it must be part of the cost of trading operations. The only trading business of the appellant with which we are here concerned is the publication of newspapers and to my mind to pay money to acquire shares in another newspaper company is not to incur an outgoing in carrying on that business nor is to pay legal costs either in the course of that acquisition or in its defence. (at p49)
8. For these reasons I have reached the conclusion that the outgoing was not incurred in gaining the assessable income of the year ended 30th June 1954, nor in gaining any assessable income of subsequent years, nor in carrying on business to earn the assessable income of the year ended 30th June 1954 or that of subsequent years. It had the character of an outgoing in the course of extending the appellant's business rather than that of a working expense in the carrying on of the appellant's business. (at p49)
9. This conclusion is, I think, supported by another consideration that I will refer to shortly. It seems to me that the deductibility of an outlay cannot be made to depend upon the success or failure of what the outlay was intended to achieve. If the attack on the acquisition of the shares had succeeded, I can see no basis upon which legal costs incurred by the appellant in unsuccessfully attempting to maintain that it was the holder of the shares, could have been regarded as deductible from assessable income. But the success or failure of what was attempted can make no difference to the character of the expenditure, cf. Southwell v. Savill Brothers Ltd. (1901) 2 KB 349 , which is the matter at issue. (at p49)
10. It is, however, necessary to consider whether the conclusion I have stated is at variance with controlling authority and, in particular, with Morgan v. Tate & Lyle Ltd. (1955) AC 21 , where expenditure to resist the nationalization of the sugar industry in England was treated by the commissioners as wholly and exclusively laid out for the purposes of the company's trade and as an admissible deduction from its profits for income tax purposes, and the House of Lords decided that there was no reason in law to prevent the commissioners from so deciding. The basis of the decision of the House of Lords was that according to ordinary accountancy principles the outlay "must be charged against the profits to which it related" (these profits were treated as those of the year of the expenditure) and that there was no statutory prohibition against deducting the sum in question to arrive at the balance of profits for the purposes of taxation: see per Lord Morton (1955) AC, at pp 38, 39 , and per Lord Reid (1955) AC, at p 47 . The prohibition invoked by the Solicitor-General was that against allowing any deduction "not being money wholly and exclusively laid out or expended for the purposes of the trade" and in considering the applicability of that prohibition their Lordships emphasized one part of Lord Davey's famous observation in Strong & Co. of Romsey Ltd. v. Woodifield (1906) AC 448, at p 483 , upon the meaning of the words "for the purposes of such trade" and rather discounted another part of that observation. The part emphasized was: "These words . . . appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade" (1906) AC, at p 483 ; the part discounted came later and was as follows: "It must be made for the purpose of earning the profits" (1906) AC, at p 483 : see per Lord Morton (1955) AC, at pp 39, 40 and per Lord Reid (1955) AC, at p 54 . The earlier words were regarded as governing the later words. When attention is directed to s. 51 of the Income Tax and Social Services Contribution Assessment Act (Cth.) however, it is the latter part of Lord Davey's observation that seems to me to have more application than the former. This is obviously so if attention is directed to the first alternative, that is outgoings "incurred in gaining or producing the assessable income", i.e., to use Lord Davey's words, "made for the purpose of earning the profits". But if attention is directed to the second alternative in s. 51 (1) "outgoings . . . necessarily incurred in carrying on business for the purpose of gaining or producing such income", again, as I have already said, the essential element is that the expense has been incurred "in carrying on business" rather than again, to use Lord Davey's words, "for the purpose of enabling a person to carry on" trade and earn profits. It seems to me that the decision of the Privy Council in Ward & Co. Ltd. v. Commissioner of Taxes (1923) AC 145 is closer in point than Morgan v. Tate & Lyle Ltd. (1955) AC 21 . The earlier case concerned New Zealand legislation and the question was whether expenditure by a brewery to oppose prohibition was "exclusively incurred in the production of assessable income". It was held that it was not and their Lordships said: "The expenditure in question was not necessary for the production of profit, nor was it in fact incurred for that purpose. It was a voluntary expense incurred with a view to influencing public opinion against taking a step which would have depreciated and partly destroyed the profit-bearing thing. The expense may have been wisely undertaken, and may properly find a place, either in the balance sheet or in the profit-and-loss account of the appellants; but this is not enough to take it out of the prohibition in s. 86, sub-s. 1 (a), of the Act. For that purpose it must have been incurred for the direct purpose of producing profits" (1923) AC, at pp 149, 150 . This decision was distinguished in Morgan v. Tate & Lyle Ltd. (1955) AC 21 on the ground that the statutory provisions relating to deductions were different. The Australian Act is different again and it seems to me that neither case is precisely applicable. (at p51)
11. The foregoing discussion is not directed to speculating whether Morgan v. Tate & Lyle Ltd. (1955) AC 21 would have been decided differently if it had been s. 51 of the Commonwealth Act that had had to be applied, but has been undertaken for the purpose of pointing out that the decision rested upon statutory provisions that are not the same as those here in question and that accordingly it is not sufficient to say that because the outgoing there allowed as a deduction was one undertaken to protect assets from seizure and because the outgoing here in question was to protect the acquisition of assets, as I prefer to put it, or to protect the appellant's assets previously acquired, as Mr. Bowen preferred to put it, the outgoing must be allowed as a deduction. (at p51)
12. This conclusion in strictness makes it unnecessary for me to consider whether the outgoing was of a capital nature but as I have reached the conclusion that it was I will state my reasons for so thinking. (at p51)
13. It was argued that the outgoing was to preserve an existing capital asset and was of the same character as expenditure to maintain a building or other physical capital assets used in trading operations and Rhodesia Railways Ltd. v. Income Tax Collector, Bechuanaland (1933) AC 368 was cited. I see the outgoing, as I have already said, rather as part of the expense of adding to the appellant's capital than as an expense of maintaining a capital asset but even if it be assumed that its true character was a payment to protect a capital asset that had already been acquired I would still be disposed to regard it as of a capital nature. (at p52)
14. The distinction between capital and revenue expense has been the subject of a good deal of consideration in this Court over recent years. The starting point is Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] HCA 72; (1938) 61 CLR 337 , where a payment of 86,500 pounds by a newspaper publisher to persons about to publish a competing newspaper, made in order to prevent the publication of that paper but by which some tangible assets were acquired, was held to be a capital payment. Rich J. said: "It is not expenditure of a recurrent nature. It is not an incident, whether normal or unusual, of the regular conduct of the organization for earning profits. The purpose was to buy out opposition and secure so far as possible a monopoly. The fact that the benefit was not perpetual does not deprive it of its capital attributes. If physical assets of a terminating or wasting description were bought no one would say on that account that the money was a revenue expenditure" (1938) 61 CLR, at p 347 . This decision was affirmed upon appeal and Dixon J. found the distinction between capital and revenue expenditure to correspond "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, the difference between the outlay and returns representing profit or loss" (1938) 61 CLR, at p 359 i.e. the distinction between "the profit yielding subject and the process of operating it" (1938) 61 CLR, at p 360 . His Honour said: "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" (1938) 61 CLR, at p 363 . These principles have received acceptance in this Court ever since, see per Fullagar J. in Federal Commissioner of Taxation v. Snowden and Willson Pty. Ltd. (1958) 99 CLR, at pp 444, 445 . One instance of their application was in Broken Hill Theatres Pty. Ltd v. Federal Commissioner of Taxation (1952) 85 CLR 423 , where it was decided that the costs of a theatre proprietor of regularly opposing applications by other persons for licences for new theatres were capital outgoings notwithstanding that the expenditure did not result in any addition to the taxpayer's assets. See too Federal Commissioner of Taxation v. Duro Travel Goods Pty. Ltd. [1953] HCA 32; (1953) 87 CLR 524 , per Taylor J. (1953) 87 CLR, at p 527 . (at p53)
15. In my judgment the application of the principles stated and applied in the cases cited shows the outgoing here in question to be of a capital nature. The advantage sought to be obtained by the defence of the acquisition of shares was the same as that sought by the acquisition itself, i.e. to prevent Consolidated Press Ltd. from obtaining control of Associated Newspapers Ltd. and to make possible the merger of the operations of Associated Newspapers Ltd. with those of the appellant; these were affairs of capital, relating as they did to the profit bearing subject rather than its operation. (at p53)
16. There is however one argument pressed by Mr. Bowen that I must consider. It was that because the payment of the costs added nothing to the appellant's assets it could not properly be regarded as capital expenditure. To this there are two answers: the first is that the costs were incidental to the acquisition of the shares; the second is that the test propounded is not a decisive test. It is perhaps true that that test was treated as decisive by Lawrence J. in Southern v. Borax Consolidated Ltd. (1940) 23 Tax Cas 597; (1941) 1 KB 111 , for his Lordship said: "On the other question whether this a payment properly attributable to capital or to revenue, in my opinion the principle which is to be deduced from the cases is that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company" (1940) 23 Tax Cas, at p 602; (1941) 1 KB, at pp 116, 117 and he concluded his judgment by saying: "It 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" (1940) 23 Tax Cas, at p 605; (1941) 1 KB, at p 120 . That decision has not been accepted by this Court (Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation (1952) 85 CLR, at p 434 ) notwithstanding that it had been approved by the Court of Appeal in Associated Portland Cement Manufacturers v. Kerr (1946) 1 All ER 68 and applied by Croom-Johnson J. in Cooke v. Quick Shoe Repair Service [1949] EWHC KB 1; (1949) 30 Tax Cas 460 . Now, however, Southern v. Borax Consolidated Ltd. (1940) 23 Tax Cas 597; (1941) 1 KB 111 has the approval of the members of the House of Lords who decided Morgan v. Tate & Lyle Ltd. (1955) AC 21, at pp 41, 46, 51, 62 and 69 . In that case, however, it was not argued that the payments in question were of a capital nature; it was conceded that they were not and in these circumstances I do not regard the approval given to Southern v. Borax Consolidated Ltd. (1940) 23 Tax Cas 597; (1941) 1 KB 111 as going beyond the first branch of the decision, i.e. that the costs of maintaining the taxpayer's title to land used in its business were "wholly and exclusively laid out for the purposes of the trade" which as has been seen was the only point in issue about the payments in Morgan v. Tate & Lyle Ltd. (1955) AC 21 . I do not therefore regard the House of Lords in that case as adopting the proposition that because a payment made for the purposes of trade has not added to a taxpayer's assets it is therefore of a revenue and not of a capital character. Some payments of a revenue character do add to the value of capital assets, such as (1.) renewals, the subject of decision in Rhodesia Railways Ltd. v. Income Tax Collector, Bechuanaland (1933) AC 368 where although no new asset was created an old one, worn out by service, was improved; or (2.) the cost of advertising which in addition to boosting current sales builds goodwill; or (3.) the cost of sowing annual crops. On the other hand capital expense does not always result in the creation of a new asset or increase the value of an existing asset, e.g. a payment to get rid of an unwanted capital asset such as in Mallett v. Staveley Coal & Iron Co. Ltd. (1928) 2 KB 405 , or the cost of reducing capital: Archibald Thomson, Black & Co. Ltd. v. Batty (1919) 7 Tax Cas 158 . See also the cases cited by Dixon J. in Hallstroms' Case (1946) 72 CLR, at p 650 . In Van den Berghs Ltd. v. Clark (1935) AC 422 Lord Macmillan said that from a study of the decided cases "no infallible criterion emerges" (1935) AC, at p 438 and the oft-quoted observation of Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton (1926) AC 205 is carefully expressed in qualified terms: "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 very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital" (1926) AC, at pp 213, 214 . There can be no doubt that when the question is whether a payment is of a capital nature or not it is an important circumstance that it has or has not increased the taxpayer's assets but this has not been accepted as an infallible test and I do not regard Morgan v. Tate & Lyle Ltd. (1955) AC 21 as elevating it to such a position. I do not therefore think that this Court should accept the proposition that a payment otherwise within s. 51 (1) is not of a capital nature unless it has resulted in the creation of a new asset or an addition to an existing asset. (at p55)
17. For the foregoing reasons I think the question asked should be answered No. (at p55)
ORDER
Question referred to the High Court in the case stated by the board of review answered that the legal expenses mentioned in the said question were not an allowable deduction. Order that the taxpayer pay the costs of the reference to the High Court.
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