Peyton v Federal Commissioner of Taxation [1963] HCA 33; (1963) 109 CLR 315 (30 August 1963)

HIGH COURT OF AUSTRALIA

PEYTON v. FEDERAL COMMISSIONER OF TAXATION [1963] HCA 33; (1963) 109 CLR 315

Income Tax (Cth)

High Court of Australia
Kitto(1), Taylor(1) and Owen(1) JJ.

CATCHWORDS

Income Tax (Cth) - Allowable deductions - Loss or outgoing incurred in gaining or producing assessable income - Lease of hotel - Covenants by lessee - To keep in repair - Not to part with possession without lessor's consent - Before consent given lessee to carry out and complete to satisfaction of architect of lessor such repairs and renovations as considered necessary by architect - If work not completed prior to transfer lessee to pay lessor amount to cover estimated cost of work - Whether amount so paid allowable deduction - Income Tax and Social Services Contribution Assessment Act 1936-1956 (Cth), s. 51.

HEARING

Sydney, 1963, August 14, 15; 30. 30:8:1963
CASE STATED.

DECISION

August 30.
THE COURT delivered the following written judgment:-
This is a case stated under s. 18 of the Judiciary Act in an appeal by the assessment of tax for the year ending 30th June 1957. In his return for that year, the appellant claimed to be entitled to a deduction of 3,864 pounds, under s. 80 of the Act, as being a loss incurred by him during the year ending 30th June 1956. Of this sum the respondent allowed 407 pounds as a deduction but disallowed the claim to deduct the balance, namely 3,457 pounds, and the question is whether this deduction should have been allowed. This in turn involves deciding whether during the year ending 30th June 1956 this amount was, within the meaning of s. 51(1) of the Act, a loss or outgoing incurred in gaining or producing the appellant's assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, not being a loss or outgoing of a capital nature. Although some reference was made by counsel for the appellant to s. 53 of the Act, his arguments rightly proceeded on the basis that if he could not show that the case fell within s. 51(1), he could not succeed. It should also be mentioned that before the Board of Review and before this Court counsel disclaimed any intention to rely upon s. 85; and indeed he could not be allowed to rely upon it as to do so would be to travel beyond the grounds stated in the appellant's objection (see s. 190(a)). (at p319)

2. The facts are that by an indenture of lease of 30th December 1955 the appellant became the weekly tenant of Tooth & Co. Ltd. of a hotel at Cronulla. By the indenture the appellant covenanted that he would not transfer, sublet, mortgage or otherwise part with the possession of the premises without the written consent of Tooth & Co. Ltd. There was a proviso "that before such consent is given the Lessee shall carry out and complete to the satisfaction of the Architect of the Lessor all such repairs renovations painting and papering as shall be considered necessary in accordance with the report of the said Architect and in case the work is not completed prior to the transfer of the said License of the said Hotel the Lessee shall pay to the Lessor an amount to cover the estimated cost of the work in accordance with such report". The proviso went on to authorize Tooth & Co. Ltd. to deduct from any moneys held by it on behalf of the appellant an amount sufficient to cover the estimated cost of the work to which the proviso refers. The indenture contained further covenants by the appellant, in a form usual in such cases, to keep the premises in good and substantial repair and deliver them up in that condition on the termination of the lease. On 18th May 1956 the appellant agreed to sell to one Betts the lease, licence, goodwill and the furniture, plant and fittings of the hotel for 20,000 pounds, of which 10,884 pounds represented the consideration for the sale of the goodwill. The agreement required Betts to pay 2,000 pounds forthwith to the appellant's solicitors and this was done. The balance of 18,000 pounds was agreed to be paid by Betts to Tooth & Co. Ltd. not later than three days before the application for the transfer of the licence of the hotel. Tooth & Co. Ltd. had been earlier notified by the appellant of the proposed sale to Betts and on 17th May 1956 its architect made a report in writing setting out a list of work required to be done pursuant to the terms of the proviso and estimating the cost thereof at 3,957 pounds. On 5th June 1956 the appellant ceased to carry on the hotel business and on the following day the licence was transferred to Betts who, on the same day, paid to Tooth & Co. Ltd. the balance of the purchase money. In fact there was no assignment of the appellant's lease to Betts. Instead, at the request of the appellant, Tooth & Co. Ltd. accepted Betts as tenant and granted him a weekly tenancy. On 27th June Tooth & Co. Ltd. paid to the appellant's solicitors the sum of 12,770 pounds 13s. 6d retaining the sum of 5,229 pounds 6s. 6d of which 3,957 pounds represented the amount estimated by the architect as being the cost of the work specified in his report. On 4th July 1956 Tooth & Co. Ltd. paid a further sum of 500 pounds to the appellant and this payment was treated as reducing to 3,457 pounds the amount retained to cover the estimated cost of repairs. In fact some only of the repairs were carried out, the premises being later demolished, but this is not a relevant fact in these proceedings. (at p320)

3. The submission made on behalf of the appellant is that the proviso to the covenant against assigning without the lessor's consent did no more than provide a means of ascertaining the amount to be paid by the appellant if, during the currency of the lease, he had failed to comply with the covenant to repair and that, in these circumstances, the sum of 3,457 pounds should be regarded as an allowable deduction under s. 51(1). But this submission cannot be accepted. The proviso falls into two parts. It begins by imposing upon the lessee an obligation, not to carry out such work as will make good any default under the repairing covenant of the lease, but to carry out and complete the work which the architect's report specifies as necessary. The obligation is to do this before the giving of the lessor's consent to a transfer etc. of the premises. The second part of the proviso contemplates the event which in fact happened, that the lessor's consent might be given before the lessee has completed the work; and it purports to throw upon the lessee a liability in that event to pay the lessor what it calls "the estimated cost of the work in accordance with such report". We need not stay to consider the meaning or operation of this part of the proviso, for the lessor and lessee both accepted the figure given in the architect's report as the amount which the lessee became liable to pay under it. But according to the terms of the proviso he became liable to pay the amount upon the licence being transferred, that is to say upon and by reason of the final event in the process by which he ceased to be concerned in the business he had been conducting on the premises. He incurred the loss or outgoing, therefore, not in gaining or producing the assessable income but in parting with the means by which he had been gaining and producing it; not in carrying on the business for the purpose of gaining or producing such income, but in disposing of the business and ceasing thereby to gain or produce such income. (at p321)

4. The question asked should therefore be answered "No". (at p321)

ORDER

Question in case stated answered "No". Costs of case stated to be paid by appellant.