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High Court of Australia |
VACUUM OIL CO. PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1964] HCA 83; (1964) 110 CLR
419
Income Tax (Cth)
High Court of Australia
Taylor J.(1)
Dixon C.J.(2), McTiernan(3), Kitto(4), Windeyer(5) and Owen(6) JJ.
CATCHWORDS
Income Tax (Cth) - Assessable income - Allowable deductions - Taxpayer selling petrol to retailers - Expenditure incurred in tying retailers to taxpayer - Capital or income expenditure - Whether allowable deduction - Income Tax and Social Services Contribution Assessment Act 1936-1953 (Cth), s.51 (1).
HEARING
Melbourne, 1961, March 14, 15; May 8. 8:5:1961DECISION
1961, May 8.2. For a proper understanding of the case it is necessary to make a dissection of this aggregate sum and to assign portions of it to separate appropriate categories. The first general category comprises amounts said to have been paid during the relevant year directly to service station operators pursuant to contracts (SS1B and SS1C) entered into with them. These amounts totalled 66,902 pounds and of this sum 57,265 pounds was said to have been paid pursuant to the form of contract styled SS1B and 9,637 pounds pursuant to form SS1C. I have used the expression "said to have been paid" because, as will appear, the respondent's argument denies that in the circumstances of the case the appellant incurred any obligation to make the payments said to have been made pursuant to contracts in form SS1B and also that what happened pursuant to those contracts, in fact, amounted to payment. The second category is described in the various notices of objection as "Sundry sales promotion expenses at solo outlets" and into this category there falls the sum of 121,299 pounds. The residual sum of 4,500 pounds was expended in legal costs in relation to the introduction of the solo site trading plan and it has been agreed between the parties that this amount should be treated as expended proportionately on the other items in question so that if some part of the aggregate sum should be found to be revenue expenditure and some part capital expenditure the like proportions of the sum of 4,500 pounds are to be appropriated accordingly. (at p421)
3. The brief description "Sundry sales promotion expenses at solo outlets" affords no real indication of the character of the expenditure assigned to that category. Nor, for that matter, is it possible to glean much from what has been said concerning the character of the expenditure which falls into the first category. It is therefore of some importance to see precisely the course which the appellant followed in the introduction of its plan and the manner in which the payments were made or said to have been made. (at p421)
4. When it became apparent, as it did early in 1952, that it would be
necessary for the appellant to provide substantial financial
inducements in
order to obtain trading ties at selected sites the appellant's approach to
service station operators involved an offer
of dual benefits. To each there
was an offer of a cash payment the precise nature of which it will be
necessary to consider and there
was an offer to expend a sum of money in minor
structural improvements and additions, in driveway alterations, in painting
and, in
appropriate cases, the provision of a "lubratorium". The "objective"
of the appellant as far as expenditure of the latter character
was concerned
was "to spend sufficient money to attain a standard of appearance,
accessibility and manoeuvrability on the station
which will make an obvious
appeal to the reseller and his customers". The "individual average amounts per
station" which branches
were permitted to expend without reference to the head
office of the company totalled 515 pounds made up as follows:
Driveway alterations. . . . . . . . . . . . . . . . . . . . 150 poundsThe amounts expended under these headings were attributed to "Sundry sales promotion at solo outlets" and, as already appears, they totalled 121,299 pounds. This sum was made up as follows:-
Painting. . . . . . . . . . . . . . . . . . . . . . . . . . 150 pounds
Minor structural alterations. . . . . . . . . . . . . . . . 150 pounds
Lubratorium . . . . . . . . . . . . . . . . . . . . . . . .. 65 pounds
Alterations to concreting of driveways. . . . . . . . . . 29,558 poundsOf the total sum 67,629 pounds was paid directly to contractors who carried out the work and 53,307 pounds was paid to service station operators by way of reimbursement for work which had been decided upon and for which the operators had themselves paid or incurred a liability in the first instance. A residual sum of 363 pounds is not accounted for. (at p422)
Structural alterations and repairs to buildings. . . . . . 78,239 pounds
Purchase and installation of plant and
equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900 pounds
Other miscellaneous expenditure. . . . . . . . . . . . . . . 8,602 pounds
5. The other form of benefit offered to service station operators was a direct payment to each operator and provision was made for these payments by the form of contract employed. Payments were made pursuant to two types of agreement during the relevant period (SS1B and SS1C). A condition of each of these forms of contract was that the operator should "execute the Company's form of Trading Agreement for a period of . . . years from the date hereof and during that period he shall comply with the terms and conditions thereof in all respects so long as he continues to occupy the said garage or service station". There were also two forms of Trading Agreement the first of which was the current form prior to June 1952 whilst the second came into general use about that time. The later form of agreement contained some additional clauses but they are not significant for present purposes. When the appellant commenced to implement its solo site trading plan the dual offer made to each operator at a selected site was, of course, conditional upon the execution of both a Trading Agreement and an agreement either in form SS1B or SS1C and it is, therefore, of importance that some attention should be paid to these forms. The main features of form SS1B were: (1) an undertaking by the operator to execute the Company's form of Trading Agreement for a fixed period of years; (2) a covenant against the operator selling or disposing of the premises or of his business without first offering it to the appellant on the terms and conditions of any proposed sale; (3) a covenant that, in the event of the rejection of any offer made to the company under the preceding covenant, the operator would not sell or dispose of the premises or of the business unless the appellant should approve of the proposed purchaser and unless that person should execute the company's form of Trading Agreement for a period of not less than the unexpired portion of the period currently fixed; (4) a covenant that unless and until he should have disposed of the premises or business in conformity with the agreement the operator would remain personally in occupation of the premises; (5) a covenant granting the appellant the sole and exclusive advertising rights in relation to all parts of the garage or service station for the fixed period. Unlike the agreement in the case of B.P. Australia Ltd. the SS1B form of contract did not provide for the unconditional payment to the operator of a single lump sum as the consideration for the operator's covenants. It did, however, provide for the advance by the appellant of a sum of money and for its repayment by the operator. By cl. 1 it was provided that: "In consideration of the sum of pounds . . . paid by the Company on or before the execution hereof to the Borrower . . . the Borrower for himself his executors and administrators doth hereby covenant with the Company its successors and assigns to repay to the Company the sum of pounds . . . . . . together with interest thereon or so much thereof as shall for the time being remain unpaid at the rate of 6 pounds.0.0 per centum per annum computed from the . . . day of . . . 19.. by monthly payments of pounds . . . on the 1st day of each month commencing on the 1st day of . . . 19.. until the whole of the Principal sum and Interest thereon as aforesaid has been paid". (at p423)
6. But by cl. 6 of the agreement the appellant undertook: "During the period ending on the . . . day of 19.. so long as the Borrower remains personally in occupation of the said Garage or Service Station and continues to observe the provisions of this Agreement the Company shall pay to the Borrower the sum of pounds . . . per month commencing on the . . . day . . . 195.. and payment of such sums shall at the option of the Company be sufficiently made in terms of this Agreement if credited by the Company to the account of the Borrower in the books of the Company." It was made clear by the evidence that with the exception of one particular case the periodical payments for which cl. 6 provided were ascertained by reference to the liability of the operator to make payments of principal and interest pursuant to cl. 1 so that the monthly payments pursuant to cl. 6 were sufficient, no more and no less, to offset the liability of the operator to make payments under cl. 1. The amounts which are in question here, of course, are the amounts said to have been paid by the company pursuant to cl. 6 and during the relevant period they amounted, as already mentioned, to 57,265 pounds. The reciprocal payments were, in fact, made either by an exchange of cheques for identical amounts or, in some cases, merely by entries in the appellant's books by which the amounts payable pursuant to cl. 6 were offset against the operator's liability under cl. 1. In all, some hundreds of agreements in form SS1B were current during the relevant income year. (at p424)
7. The SS1C form of contract differed in one material respect. It contained substantially similar covenants on the part of the operator but it did not make any provision for a contemporaneous advance of any sum of money to the operator. The sole monetary consideration provided to him was that specified in cl. 5: "During the period aforesaid Vacuum shall pay to the Operator the sum of pounds . . . in respect of each period of twelve months during which the Operator has remained personally in occupation of the said Service Station or Garage and observed the provisions of this Agreement". There were approximately 30 SS1C agreements which are in question in the case and the amount paid pursuant thereto during the relevant period was 9,637 pounds.15.9. (at p424)
8. As far as the forms of trading agreement are concerned it is sufficient for present purposes to refer to that which came into general operation about June 1952. By it the company agreed to provide the operator with marketing and merchandising services free of charge such service to include the following: "1 (a) the painting in the Company's colour scheme of the exterior of the service station proper subject to such approvals and authorities as may be required; (b) reimbursing the Operator for the reasonable cost of such minor alterations to the service station as will in the opinion of the Company enable the service station to give better service to its customers; (c) assisting the Operator to obtain loans at a reasonable rate of interest if he requires finance for the purpose of his business; (d) provision of architectural advice and preliminary plans for alterations or additions to or reconstruction of the service station which the Operator and the Company mutually deem desirable; (e) assistance in the training of the Operator and his staff in modern merchandising methods; (f) the provision of a simplified accounting procedure for the Operator's use; (g) assistance and advice to the Operator in the advertising of his products and service in neighbourhood solicitation and business reminders to his customers." By cl. 3 the operator covenanted that he would purchase from the appellant at the ruling market price all motor fuels intended by him for resale at the service station and that he would not purchase otherwise than from the appellant any motor fuels intended by him for resale nor offer for sale or sell at the service station any motor fuels except as should have been bona fide purchased by him from the company. The agreement specified a fixed period for its duration and provided that it should continue in force thereafter until determined by six months prior notice. The period for which these trading agreements were made varied; a great many of them were for periods of five years, some were for three years and there were also a great many for periods exceeding five years including several for ten years and a few for as long as fifteen years. (at p425)
9. The first contention of the appellant was in a somewhat general form. As in the earlier case of B.P. Australia Ltd. v. Federal Commissioner of Taxation [1964] HCA 81; (1961) 110 CLR 387 it was asserted with some emphasis that the circumstances of the trade in which the appellant was engaged became such as to make the payments under consideration ordinary incidents of the appellant's business. They constituted, it was said, ordinary marketing costs which were properly attributable to the appellant's trading account. But I am satisfied that, as in the earlier case, the problem cannot be resolved without closer examination of the character of the payments which were made. (at p425)
10. Enough has been said concerning the nature of the payments in question and the circumstances in which they were made to indicate a close parallel to the earlier case. Indeed, the facts of the case are such that if it were concerned merely with lump sum payments made once and for all in each particular case it would be sufficient to say that for the reasons given in the earlier case the appeals should be dismissed. But that was not the fact and some attention must be given to the circumstance that expenditure was incurred by the appellant: (1) in the improvement of service stations by driveway alterations, painting, minor structural alterations and the provision of some plant and equipment; (2) in making periodical payments under contracts in form SS1B where each payment was equal in amount to the operator's periodical obligation to make payments on account of outstanding principal and interest; and (3) in making periodical payments under contracts in form SS1C where there had not been any contemporaneous advance to the operator. (at p426)
11. It is, I think, convenient to deal first of all with payments of the kind mentioned in (2) above. In form there was in each case an advance of a specified sum of money accompanied by an obligation to make monthly repayments with interest. The relevant form of agreement also created a right in the operator to receive an equivalent monthly payment. This circumstance encouraged counsel for the Commissioner to say that no payments were in fact made to operators who had executed this form of agreement; at the most, it was said, all that happened was that from month to month the appellant forgave each operator part of the loan which had been made. But the respondent went somewhat further and asserted that the legal effect of the agreement viewed as a whole was to vest in the operator a right to receive a lump sum and, conditionally upon his performance of the agreement, to retain it for his own use. Upon this view of the agreement periodic payments did not become payable and were not, in fact, made. That this approximated the net practical result of the arrangement is, no doubt, true but the form of agreement was not attacked as a sham and the fact remains that there was in each case a loan, an obligation to repay the amount of the loan with interest, a right in the operator to the payments for which cl. 6 provided, a corresponding obligation on the appellant to make these payments of which in some cases there was actual payment by cheque and, in other cases, payment in the form provided by the agreement itself. I refer to the provision of cl. 6 which specified that "such sums shall at the option of the Company be sufficiently made in terms of this Agreement if credited by the Company to the account of the Borrower in the books of the Company". During the course of the argument reference was made to the cases of Price v. Parsons [1936] HCA 5; (1936) 54 CLR 332 and Boydell v. James (1936) 36 SR (NSW) 620; 53 WN 227 but the decisions in those cases do not in my opinion either require or justify the conclusion in this case that the legal effect of the arrangement evidenced by contracts in form SS1B was that for which the respondent contends. But this view by no means concludes the matter for when the facts are examined it is seen clearly enough that what each agreement provided for was the payment of a lump sum by instalments. First of all it is beyond doubt that the amount of the advance in each case was not in any way measured by the operator's desire to borrow a specified sum of money. He was not in the market to borrow money nor was the appellant, so far as he was concerned, in the market to lend. What the appellant wished to do was to secure trading ties for fixed periods and in the circumstances of the trade as it existed at the relevant time it became necessary to expend large sums of money to secure these advantages. What it was necessary from time to time to pay to secure these advantages was determined by the degree of competition for each site. And the amount of the advance in each case was determined not by the operator's need for some specified amount of borrowed capital but solely by the "price" which competition made it necessary for the appellant to pay for the advantages which it wished to secure. But for reasons which, no doubt, seemed proper to the appellant it was not prepared to pay in advance and unconditionally a lump sum for a trade tie extending over a period of years. It was, however, prepared to pay that sum by instalments spread over the relevant period and in the meantime to make available to the operator an amount equal to the lump sum involved. In substance, therefore, the "price" was agreed upon, the contract provided for the payment of this "price" by instalments and in order to secure to the operator the advantage of the present enjoyment of a sum equal to the "price" an advance of an equivalent amount was made. I should add that the amounts payable by virtue of cl. 6 were in no way related to or dependent upon the quantity of petrol which might be purchased by any operator. Further, in spite of the fact that I have consistently referred to agreements made between the company and service station operators, there seem to have been quite a number of cases in which operators were the tenants of the premises upon which they carried on business and in those cases an agreement in the relevant form was made between the company and the landlord. In such cases the owner of the premises was provided with a letter excusing him from the obligation of remaining in possession of the premises. (at p427)
12. It was suggested, however, both in evidence and in argument that the amounts paid in individual cases were based upon a "gallonage" factor. But it is beyond doubt that this factor played no part in determining the amount to be paid in any case. In fact the appellant, when it wished to secure access to any particular site, was "forced to pay the price that attracted the reseller". There were, no doubt, many instances when the "price" asked was too high and no transaction took place. But when a "deal" took place the "price" was determined by the degree of competition for the site in question. I have no doubt, of course, that the potential "gallonage" of any particular station was always an important business consideration. But the evidence shows clearly enough that it did not determine the "price" to be paid though it was of importance in considering whether the "price" which competition made necessary for any particular site might economically be expended. There was some evidence that the policy of the appellant originally was "to sign people by a trading agreement of.3 per penny per gallon" but this was extended "to one half-penny per gallon and later, as competition in the period went on, this went to 1 1/2d. and some went beyond 1 1/2d.". But this does not mean that when an agreement was signed any such rate was specified or mentioned or that there was any prevailing rate by which the "price" in any particular case was to be determined. It appeared clearly enough what was meant was that as competition increased it was possible by a series of ex post facto calculations to relate the "prices" demanded and agreed upon to a rate per gallon which varied from.3 per penny per gallon to over 1 1/2d. per gallon. But at no time did the "gallonage" factor determine what should be paid. That was determined by the degree of competition for any particular site and any subsequently ascertained "gallonage" rate would vary accordingly. And as I have already said the relation of the "price" to gallonage was the subject of consideration merely for the purpose of determining whether the proposal in any particular case was economically sound. (at p428)
13. It was said to be the policy of the appellant to avoid the advance of capital in its dealings with service station operators wherever possible and in cases where the operator did not insist upon the provision of an immediate lump sum payment contracts in form SS1C were employed. But these cases were relatively few. As already mentioned, agreements in this form called for the making of an annual payment to the operator in respect of each period of twelve months during which he should remain personally in occupation of the service station. The agreement also provided that the operator should execute the form of trading agreement and the trading agreement itself was specified to continue for at least a fixed period of years. An attempt was made to distinguish this class of agreement from the contracts in the form SS1B but it is, I think, again clear from the evidence that the periodical payments for which this class of agreement provided were simply an appropriate annual part of a lump sum agreed upon as the "price" of the trading advantages which it secured to the appellant. That being so I can see no real distinction between moneys paid under that form of contract and moneys paid under contracts in the form SS1B. (at p420)
14. In the result the only distinction which I am able to see between the payments made pursuant to these two forms of contract and those under consideration in B. P. Australia Ltd. v. Federal Commissioner of Taxation [1964] HCA 81; (1961) 110 CLR 387 is that in the present case the "price" was payable by instalments and in the earlier case by the outlay of a lump sum. To my mind this is a distinction which for present purposes is without significance (see Coalville Urban District Council v. Boyce (1934) 18 Tax Cas 655 ) and, in the result, I am of the opinion that the amounts paid out were not deductible for the purposes of ascertaining the appellant's taxable income. (at p420)
15. In my view the same conclusion must be reached with respect to the sum of 121,299 pounds which was expended in converting the many service stations to conform to the minimum requirements of the appellant. The evidence showed that expenditure of this character was undertaken as "part of the deal" made with operators who became parties to SS1B and SS1C agreements. It was, in fact, one of the inducements held out to operators to join in the solo marketing scheme and, as far as can be seen from the evidence, the expenditure was incurred in paying for improvements by way of alterations and additions to selected stations and the provision and installation of additional plant. Such expenditure must, in my opinion, be regarded as expenditure of a capital nature. If, contrary to what has been said, the aggregate sum comprised some minor items of expenditure properly attributable to revenue account this does not appear. Nor was it suggested that it was possible to make any further dissection of the aggregate sum which would show this to be so. (at p420)
16. The residual item of 4,500 pounds which was expended in legal costs must, of course, share the same fate as the other items with which the case is concerned and that being so I am of the opinion that the appeals should be dismissed. (at p420)
17. From this decision the taxpayer appealed to the Full Court of the High Court. (at p420)
18. K. A. Aickin Q.C. (with him N. M. Stephen), for the appellant. It is important to look at the case from the point of view of the payer of the moneys, whereupon they may be seen to be not payments once and for all but part of a process by which the appellant's business was being carried on: see Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] HCA 72; (1938) 61 CLR 337, at pp 359-364 : cf. Commissioner of Taxes (Vict.) v. Phillips [1936] HCA 11; (1936) 55 CLR 144 ; Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation [1946] HCA 34; (1946) 72 CLR 634 ; Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation [1952] HCA 75; (1952) 85 CLR 423 ; Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd. (1958) 99 CLR 431 ; John Fairfax and Sons Pty. Ltd. v. Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30 ; Morgan v. Tate & Lyle Ltd. (1955) AC 21 ; Bolam v. Regent Oil Co. Ltd. (1956) 37 Tax Cas 56 . Cases dealing with the character of the payments from the point of view of the recipient shed no light here: cp. Dickenson v. Federal Commissioner of Taxation [1957] HCA 77; (1958) 98 CLR 460 . Here there were recurring payments made at periodical intervals to customers for the purpose of inducing them to deal exclusively with the appellant. If the money had been lent simply, and there had been no arrangement for periodical offsetting of portions of the loaned money, then the making of the loans would have been capital transactions. The amount of payments had an essential commercial relationship with the estimated gallonage at the sites concerned. The payments were of the same character as discounts. One should not concentrate unduly upon the position at individual sites; the obtaining of substantial freedom from competition at a particular site was merely an incidental consequence of this method of marketing. The arrangements were not in truth designed so much to secure freedom from competition as to give the appellant a number of assured customers. The payments when looked at together had the element of having to be made from time to time, and arose out of what is an everyday matter of business, that is, inducing customers to buy: the case was otherwise in Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation [1952] HCA 75; (1952) 85 CLR 423 . There is no distinction to be found between payments in the present case and the payments made in Bolam v. Regent Oil Co. Ltd. (1956) 37 Tax Cas 56 . One must look to the character of the advantage gained, including its lasting qualities, to the manner in which it was used or enjoyed, paying attention inter alia to recurrence, and to the means adopted to gain the advantage, for instance, whether there was periodical outlay or final provision. All the payments made by the appellant were, from its point of view, recurrent payments. This is not decisive, but it is helpful to the appellant's case. Thus, absence of recurrence does not necessarily prevent an outgoing being of a revenue nature: Federal Commissioner of Taxation v. Snowden & Wilson Pty. Ltd. (1958) [1958] HCA 23; 99 CLR 431 . Further, all the payments were made pursuant to a policy of reducing operating costs and obtaining better control over the product: they arose in the day to day running of the business. The reduction of operating costs and increase of control were the objects, and the exclusive ties arose, as it were, incidentally to that. Inducing customers to buy was an ordinary marketing problem at the time; it was an extension of previous policy in obtaining and maintaining ties. Then it is relevant that the payments had a relationship to expected business. Nor was this a step in enlarging or changing the nature of the appellant's business. All these matters must be looked at, although none might alone be decisive. There is no real similarity between the case where a competitor is bought up or bought off, and the case where payments are made to customers to continue to buy and exclusively to buy from the wholesaler: the latter case is closer to that where discounts are allowed. There was no asset of an enduring nature brought into existence here; nor, in view of the marketing situation, could the payments be said to be unusual. The loans under the SSIB agreements must be considered to have been truly loans, and the monthly payments were separate and real payments made for a trade advantage, that is, for compliance during the month concerned with the trading agreement. Similar considerations apply to SSIC agreements, for there the annual payments were expressly linked to adherence to the agreement by the service station operator. (at p431)
19. C.I. Menhennitt Q.C. (with him H.R. Newton), for the respondent. The decision of Taylor J. is correct for the reasons given. When the character of the advantages obtained is considered, all the payments can be dealt with together, as they were all directed to the same purpose. The essential starting point is to ascertain what the advantages were, and when it is seen that they were of a permanent nature and constituted a complete change in the way in which the company conducted its business, it will be seen that they were essentially of a capital nature and that the means whereby they were obtained is of lesser importance. The advantages included obtaining retail outlets, and at the same time rights to use such outlets over a period of years. The fact that payments are, for convenience, made over a period does not alter the capital nature of these advantages; the bargaining was for a fixed sum. Further advantages were that the appellant's tanks could remain on the sites and that the outlets were to be exclusive, which is a very important aspect, and that the appellant obtained advertising rights on the premises. The effect of all this was that the appellant and the service stations entered into a joint business venture which was likely to last beyond the period of the agreements: Coalville Urban District Council v. Boyce (1934) 18 Tax Cas 655 . At the same time its goodwill was protected and extended. The fact that the expenditure was capital is emphasized by the large amount of money involved and the complete change in the marketing by the appellant. Applying the test propounded in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] HCA 73; (1938) 61 CLR 337, at p 360 one sees that the payments related to establishing and replacing the profit-yielding subjects of the appellant. One must look to the realities of the transaction: Dickenson v. Federal Commissioner of Taxation [1958] HCA 62; (1958) 98 CLR 460, at p 491 . Expenditure to limit competition or to forestall a threatened disadvantage is generally capital: John Fairfax and Sons Pty. Ltd. v. Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30, at p 36 . See also Henriksen v. Grafton Hotel Ltd. (1942) 2 KB 184 ; Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 CLR 634 ; Collins v. Joseph Adamson & Co. (1938) 1 KB 477 . Although in Inland Revenue Commissioners v. Coia (1959) 38 Tax Cas 334 the position of the recipient was dealt with, similar reasoning suggests that the outgoings here were capital. Thus in the present case the dominating consideration for the appellant was the importance of the advantages gained which were capital advantages and the means of obtaining them was of less importance. The capital nature of the payments is not affected by the fact that it was agreed that they be made in instalments under the SSIB and SSIC agreements; nor by the fact that payment was subject to the performance of conditions: United Steel Companies Ltd. v. Cullington (1940) AC 812 ; Commissioners of Inland Revenue v. Adam (1928) 14 Tax Cas 34 . The substance of the transaction must be looked at. The substance of the SSIB agreement is that a lump sum was paid on execution; this, not the instalments, was the outgoing, and it was in response to this that the tie was obtained, and the payments of instalments were not for producing assessable income but for furnishing the means for the garage proprietor to repay his loan: Ronpibon Tin N. L. and Tongkah Compound N. L. v. Federal Commissioner of Taxation (1949) 78 CLR 47, at p 56 . Alternatively, the payments of instalments by the appellant, being equal to the amounts of the loan to be repaid at the same time, were not losses or outgoings at all, as the payments cancelled each other out; cf. Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] HCA 65; (1953) 88 CLR 492, at p 506 . The payments could be set off against each other and it would not be necessary for counterclaims to be made. On the question what was the nature of the outgoing, if any, the principles stated in Doncaster Amalgamated Collieries Ltd. v. Bean (1946) 1 All ER 642 are applicable. The case here is quite different from that where there is merely payment of rent. Usher's Wiltshire Brewery Ltd. v. Bruce (1915) AC 433 and Nash v. Tamplin & Sons Brewery Brighton Ltd. (1952) AC 231 concern concepts not applicable here. If the present payments under the SSIB agreements are allowable deductions by virtue of s. 51 (1), then s. 260 of the Act applies to prevent them from being allowable deductions; one is left simply with the original loans and one does not look at the provisions relating to repayment and the offsetting of further payments. One of the reasons why the form SSIB was chosen was to obtain a deduction. For the application of s. 260 see Newton v. Federal Commissioner of Taxation (1958) AC 450, at p 465; [1958] UKPCHCA 1; (1958) 98 CLR 1, at p 8 . The purpose of evading taxation is shown by the documents themselves; see cl. 1 and cl. 6 of SSIB Bolam v. Regent Oil Co. Ltd. (1956) 37 Tax Cas 56 dealt with a situation different to that here, in that the payments there were related directly to gallonage; the approach to this question in English courts is different from that approved in the High Court, and that case was decided wrongly; see Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners (1922) 12 Tax Cas 427 . The moneys for structural alterations were paid pursuant to the trading agreements, and so for the same advantages: further, they were paid in lump sums, and some importance should be placed on their use for capital purposes: Coalville Urban District Council v. Boyce (1934) 18 Tax Cas 655 ; Ounsworth v. Vickers Ltd. (1915) 3 KB 267 . Similar considerations to those which point to payments under SSIB agreements being capital outgoings indicate that the SSIC agreements are of the same sort, and involve just as clearly capital payments to be made in instalments. (at p433)
20. N. M. Stephen, in reply. The proper approach is to look simply at the
agreements themselves; what was done by the parties does
not detract here from
the form and effect of those agreements: Commissioner of Stamp Duties (N.S.W.)
v. Perpetual Trustee Co. Ltd.
[1929] HCA 27; (1929) 43 CLR 247, at p 263 . There is no
evidence that the appellant's goodwill has been increased, and, even if
it has
been increased,
that does not make the expenditure capital outgoings. Section
260 of the Act does not apply, and, apart from
s. 260, there is no
special
approach to be found in taxation cases to transactions in writing. Section 260
does not apply, because
there is no arrangement
which can be seen from overt
acts to have been directed towards the avoidance of tax and which cannot be
explained on a basis of
ordinary business dealing.
Cur. adv. vult.
(at
p434)
1964, February 25.
The following written judgments were delivered: -Australia Ltd. v. Federal Commissioner of Taxation [1964] HCA 81; (1964) 110 CLR 387 the judgment in which is delivered now. In many ways it is parallel but in a broad way there is a marked distinction. Vacuum Oil Co. Pty. Ltd. decided on its own account to follow Shell Oil Company in pursuing an immediate policy of attempting to sell petrol from sites confined in their operation to the Vacuum Oil Company's products. But there was no attempt, immediate or otherwise, to combine with other small companies in selling their own products exclusively from definite sites. Another distinction is perhaps in the year of income to which reference is made. As said in the judgment appealed from, the matter now in question is whether the respondent has wrongly disallowed as a deduction from the appellant's assessable income of the year ended 30th June 1953 the sum of 192,701 pounds, that being the aggregate of amounts claimed as deductions during the relevant year which were said to have been expended in or in connexion with its efforts to secure sites for the exclusive sale of its products. Then there are certain forms of contract which are described in the judgment appealed from. The whole matter, however, is governed by the same considerations as govern the appeal of B. P. Australia Ltd. and in my opinion there is no sufficient reason for treating the expenditure as made on capital account. It appears to me clearly expenditure incurred in the process of marketing the commodity and to be expenditure which is not made once for all but is likely to be repeated, and not to be sufficiently identified as outside the ordinary conduct of business. (at p434)
DIXON C.J. This appeal is in a case treated as parallel to the case of B. P.
2. I therefore think that for the reasons more fully given in the judgment of B. P. Australia Ltd. v. Federal Commissioner of Taxation [1964] HCA 81; (1964) 110 CLR 387 the appeal should be allowed. (at p434)
McTIERNAN J. I have arrived at the conclusion that the judgment of Taylor J. is right. I think that his Honour's findings of fact are fully supported by the evidence and cover all the material issues of fact in the case. Further, his Honour correctly applied the criteria laid down in the authoritative decisions for distinguishing between payments on income and capital accounts respectively. In my opinion, having regard to his findings of fact and the whole of the evidence he was correct in rejecting the contention of the appellant that the payments in question are allowable deductions under s. 51 of the Income Tax and Social Services Contribution Assessment Act 1936-1953. The appeal should be dismissed. (at p435)
KITTO J. The reasons I have given for my conclusion in the case of B. P. Australia Ltd. [1964] HCA 81; (1964) 110 CLR 387 apply in substance in the present case also. There are only two additions that I wish to make, each tending to reinforce the conclusion. (at p435)
2. In the first place, the evidence in this case is even more specific than in the other as to the necessity inherent in the "solo" system of constantly obtaining new and renewed restrictive agreements with resellers. The manager of the appellant's Real Estate and Finance Department, Mr. W. D. McConaghy, testified that the company's restrictive agreements continued in use even up to the time of the hearing of the case. By way of illustration he said that in 1959 the appellant paid 1,180,000 pounds to renew agreements with operators. Mr. E. A. Jones, the appellant's managing director, described the obtaining of such agreements as "a continuing operation". Asked what his company did about obtaining renewals, he said that the reseller was "putting pressure on us for some sort of concession, in some form or other, and in order to get renewals we had to make concessions of various types . . . if we did not accede to his request we stood in danger of losing his business". The giving of the concessions, therefore, was part of the process of getting the business - of selling the goods - under the newly-accepted method of trading. Surely the cost of the concessions must be taken into account in ascertaining the profit from the business. (at p435)
3. In the second place, it seems to me that each of the amounts paid periodically by the appellant to operators, monthly under the SS1B agreement and yearly under the SS1C agreement, was not an instalment of a principal sum, but was a reward separately related to the operator's due performance of his agreement during the relevant month or year; in other words, it was expended by the appellant for recurring periods of enjoyment of the benefits of the agreement. But whether one considers the month's or year's orders for the obtaining of which each payment under a particular agreement was made, or considers the whole of the orders for the obtaining of which during the entire term of the agreement the total sum was paid, the case is the same in essence. The appellant had embarked upon a course of securing orders by making payments to its customers and every payment that it made must necessarily it seems to me, be regarded as having diminished the profit from the orders obtained. (at p436)
4. In my opinion the outgoings in question were not of a capital nature and should have been treated as allowable deductions in the assessment of the appellant's tax. I therefore would allow the appeal. (at p436)
WINDEYER J. I think that the conclusion of Taylor J. in this case was correct. The relevant facts are fully set out in his judgment, and the legal transactions are examined in detail in the judgment to be delivered by Owen J. which I have had the advantage of reading. I need not analyse the somewhat ingenious method which the appellant adopted for obtaining the advantage it gained by the expenditure of the moneys in question. In a business sense, and using the language of "merchandising", it seems to me that, in each case, it obtained for a period, and in a selected locality, an assured "outlet" to consumers for its products. Having regard to the competitive character of the trade in which it was engaged and to the whole of the circumstances, I think that the expenditure was of a capital nature. The case differs little, in what I regard as essentials, from the case of B.P. Australia Ltd. v. Commissioner of Taxation [1964] HCA 81; (1964) 110 CLR 387 and I shall not repeat what I said there. The distinction between capital expenditures and outgoings on revenue account is no doubt an accounting concept. But for income tax purposes, analysis of a particular expenditure may, I think, sometimes produce a different result from that which could properly appear in accounts prepared for the ascertainment of a distributable annual profit. (at p436)
2. I would dismiss the appeal. (at p436)
OWEN J. The question arising in these appeals is whether certain sums totalling 192,701 pounds are allowable as deductions from the appellant company's assessable income for the year ended 30th June 1953. The Commissioner of Taxation disallowed the appellant's claim and appeals by it against that disallowance were dismissed by Taylor J. (at p437)
2. At all material times the major part of the appellant's business consisted of selling petrol and petroleum products to service station operators in competition with other wholesale suppliers of similar products. Prior to 1951 the majority of service stations were what were called "multi-pump" stations at which were installed tanks and pumps belonging to different oil companies and to which petrol was supplied by each of the companies whose tanks and pumps were installed at the particular station. One result of this system of marketing, which was then the trade practice, was to increase the costs of delivery. A service station at which the tanks and pumps of a number of oil companies were installed would sell less of any particular brand of petrol than would have been the case if that particular brand had been the only one sold at that station. Deliveries were required to be made by the wholesaler over a greater area and to a larger number of delivery points and in smaller quantities to any one point than would have been required if a system of what came to be called "solo site" stations, each selling only one brand of petrol and petroleum products, could be brought into being. The "multi-pump" system involved also the employment of a larger staff of salesmen than would be required under the "solo site" system. It was known to suppliers also that undesirable practices had occurred on occasions at "multi-pump" stations when a tank waggon belonging to one wholesaler might fill up all the tanks at that station regardless of the ownership of the tanks or the brand of petrol which each was supposed to contain. In consequence of these matters the appellant in June 1951 prepared plans to alter its selling system and adopt a "solo site" scheme, the idea being to induce selected service station operators to purchase and resell only its brand of petrol and petroleum products. The inducement then intended to be held out to the service station operator was that the appellant, at its own expense, would paint the station from time to time in colours associated with its name and products and, if thought desirable, would make alterations to the structure and lay-out of the station with a view to improving its appearance and efficiency - for example, by providing or altering driveways. Before this plan was put into operation, however, the Shell Company of Australia Ltd., a competitor of the appellant, announced its intention in August 1951 to introduce immediately a "solo site" system for its products and this move decided the appellant to put into immediate operation its plans for a similar kind of system. As might be expected in a highly competitive trade, other wholesalers of petrol acted at or about the same time in various ways to obtain exclusive outlets for their products and during 1952 and in 1953 the setting up of "solo site" stations became a feature of the trade. Broadly speaking, the scheme which the appellant developed and which was operating during the income tax year in question took three forms. A certain number of stations were purchased and operated by the appellant. With these cases we are not concerned in the present proceedings. In the majority of cases the appellant and a service station operator, who was prepared to conduct his retail business as a "solo site" station selling only the appellant's products, executed a deed which was described as the SS1-B. Agreement. This recited that the operator had requested the appellant to lend him a specified sum of money and that the appellant had agreed to do so upon the terms set forth in the deed. The operator covenanted to repay the amount of the loan together with interest at six per cent per annum by equal monthly instalments comprising both principal and interest and to execute the appellant's form of "Trading Agreement" and comply with its terms and conditions. The operator further covenanted that during the terms of the "Trading Agreement" he would not dispose of his interest in the service station without first offering to sell it to the appellant, on specified terms and conditions. If such offer to sell was not accepted by the appellant, the operator undertook not to dispose of the premises otherwise than by sale unless the appellant approved of the person to whom the operator proposed to dispose of the station and unless that person executed the appellant's form of "Trading Agreement" to run for a term not less than the unexpired term of the original operator's "Trading Agreement". The deed provided also that unless and until the operator should have disposed of the station he would, during the term of the "Trading Agreement", continue to remain personally in occupation of it. It contained a further covenant by the operator granting the appellant the sole and exclusive advertising rights on the station. By cl. 6 of the deed the appellant covenanted to pay the operator a specified sum of money each month, a payment which, at the option of the appellant, might be made by crediting the operator in the appellant's books with the amount payable to him. These payments were covenanted to be made so long as the operator remained personally in occupation of the premises and provided he continued to observe the provisions of the deed. In fact the amount of these monthly payments to be made by the appellant to the operator was calculated so as to coincide with the amount of the monthly payments of principal and interest which the operator had covenanted to make in repayment of the loan made to him. Finally, cl. 7 of the deed provided that in the event of any breach by the operator of any of the covenants contained in it, the whole of the principal money or so much thereof as was then owing to the company together with interest thereon should become immediately payable to the appellant. (at p439)
3. During the period under consideration the appellant had two forms of "Trading Agreement" but for present purposes their relevant terms are the same. Each provided, inter alia, for the painting of the service station and the making of alterations to it at the appellant's expense. The appellant undertook to supply the operator with all motor fuels required by him, and the operator undertook to purchase from the appellant all motor fuels intended for resale and not to purchase or sell or offer for sale motor fuels other than those purchased from the appellant. The form of agreement provided for a specified period for its duration and that it should continue to run from the expiry of that period until determined by six months' notice in writing. In fact the specified periods for the duration of these agreements varied from three to fifteen years. (at p439)
4. A minority of the operators who entered into "solo site" arrangements with the appellant executed not the SS1-B. form of deed but one described as the SS1-C. Agreement. It differed from the SS1-B. document in that it contained no provision for the loan of money by the appellant to the operator nor did it provide for monthly payments by the appellant to the operator. Instead it made provision for an annual payment of a specified sum in respect of each period of twelve months during which the operator remained personally in occupation of the station and observed the provisions of the agreement. Otherwise the two forms of deed were in all material respects the same. (at p439)
5. In the SS1-B. transactions the amount advanced by the appellant to the operator varied from station to station and the monthly payment covenanted to be paid by the appellant varied in the same way since, as I have said, its amount was calculated so as to coincide with the amount of the monthly loan repayments. Similarly the annual payment covenanted to be paid by the appellant in the case of the SS1-C. transactions varied from station to station. It was the appellant's original intention to determine the amount of the loan to be made under the SS1-B. Agreements and the amount of the annual payment to be made under the SS1-C. Agreements by estimating the probable number of gallons of its petrol likely to be resold by the particular operator over a period and multiplying that number by.3 of a penny, but as competition for "solo site" grew, as it did, operators soon realized that there was a "seller's" market and, as a result, the amount required to be lent by the appellant and the monthly or annual payments required to be made by it had to be increased in order to induce operators to tie their stations to the appellant rather than to rival wholesalers, with the result that the figure of.3 of a penny per gallon on the estimated "gallonage" increased in some cases to as much as 1 1/2d per gallon according to the extent of the competition for a tie over the particular station. At no time, however, during the relevant period, did the appellant's arrangements with operators provide for a rebate or discount on the price of petrol supplied. Taylor J. was of opinion, and I agree with him, that the estimated "gallonage" demand by a particular station was no more than a factor - and no doubt an important factor - in deciding what sum it would be economically sound to lend or pay to the particular operator. (at p440)
6. The total amount of 192,701 pounds, which the appellant claims to be an allowable deduction for income tax purposes, falls under four heads and neither party has suggested that any further dissection is required to be made. In respect of each of them the appellant contends that the amount represents an outgoing properly chargeable against revenue, while the Commissioner contends that whatever outgoing there was is to be regarded as an outgoing of capital or of a capital nature and is therefore not deductible under s. 51 (1) of the Income Tax and Social Services Contribution Assessment Act. The first item, amounting to 121,199 pounds, represents moneys expended by the appellant on alterations and improvements to "solo site" service stations pursuant either to the SS1-B. or the SS1-C. Agreement. It is not questioned that the appellant expended these moneys, sometimes by direct payment to the service station operator concerned, sometimes by payment to the contractor who did the work at the particular station, and no suggestion is made that any distinction should be drawn between the two kinds of payments. The next item, amounting to 57,265 pounds, represents the amount of monthly payments made by the appellant to operators or credited to them in the appellant's books under the SS1-B. type of agreement. It appears that in the early stages of the operation of the SS1-B. Agreements the practice with regard to these payments was for the appellant and the operator to exchange cheques each month, the former's cheque representing the monthly payment required to be made to the operator and the latter's cheque representing the monthly repayment of principal and interest on the loan made to him. Later the general practice was for cross entries to be made in the appellant's books and in all cases the appellant included as income in its tax returns so much of these loan repayments as represented interest. The third item, amounting to 9,637 pounds, represents the amount of the annual payments made by the appellant to operators under the SS1-C. type of agreement. The fourth item, amounting to 4,500 pounds, consisted of legal costs incurred by the appellant in introducing its "solo site" system. The parties agree that this last amount is to be treated as having been expended proportionately to the first three items of expenditure and that it should follow their fate. (at p441)
7. Before dealing with what appear to me to be the substantial questions for decision, it is convenient to mention two submissions made on behalf of the Commissioner. One was that the SS1-B. and SS1-C. Agreements should be treated as shams. What result would happen if this was done I did not follow. It is sufficient to say, however, that not only is there not a tittle of evidence on which to base such a finding, but all the evidence points to the opposite conclusion. The arrangements were, without question, real transactions intended to be and in fact carried out according to the terms of the documents. The second of these submissions was that in the case of SS1-B. Agreements so much of the total amount of the monthly payments made by the appellant to the operator as was represented merely by book entries crediting the operator with the monthly sum was not to be treated as outgoing at all. If this is correct, I do not know how much of the item of 57,265 pounds would be affected and, as I pointed out earlier, the parties agreed that no further dissection of the various items was required. But in any case I do not agree with the submission. The SS1-B. form of agreement provided, as I have said earlier, for these montly payments to be made by entries to the credit of the operator in his account in the appellant's books. The result of such a transaction was dealt with in Spargo's Case (1873) 8 Ch App 407, at p 414 in a passage from the judgment of Mellish L.J. which was quoted by Knox C.J. and Dixon J. (as he then was) in Commissioner of Stamp Duties (N.S.W.) v. Perpetual Trustee Co. Ltd. [1929] HCA 27; (1929) 43 CLR 247, at p 263 ). His Lordship said: "Nothing is clearer than that if parties account with each other, and sums are stated to be due on one side, and sums to an equal amount due on the other side of that account, and those accounts are settled by both parties, it is exactly the same thing as if the sums due on both sides had been paid. Indeed, it is a general rule of law, that in every case where a transaction resolves itself into paying money by A to B, and then handing it back again by B to A, if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards. (1873) 8 Ch App, at p 414 " That is exactly what happened in these instances. With the assent of the operator the monthly loan repayment by the operator and the monthly payment by the appellant to the operator were set off against one another in the appellant's books. (at p442)
8. For the appellant it was submitted that during the income year in question the introduction and development of the "solo site" system had become a feature or incident of the wholesale and retail trade in petrol and petroleum products. In these circumstances, it was said, the expenditure with which the case is concerned was part of the cost of marketing petrol and that each of the amounts was an outgoing incurred in gaining or producing the appellant's assessable income or necessarily incurred by it in carrying on its business for the purpose of gaining or producing its income. Undoubtedly the appellant was compelled to join in the race for exclusive outlets for its products in order to preserve and maintain its business but it does not follow that all expenditure made for such purposes is chargeable for income tax purposes against revenue. One way in which a "solo site" system might be established would be by the purchase by the wholesaler of service stations, and an outlay for this purpose would obviously be of a capital nature. To take another example: if the inducement held out to an operator to tie his station to a wholesaler took the form of a rebate of portion of the price charged to him for petrol by his supplier the outlay might be regarded as chargeable against revenue, as Danckwerts J. decided in Bolam v. Regent Oil Co. Ltd. (1956) 37 Tax Cas 56 . (at p442)
9. The difficulty in deciding whether a payment is to be treated for income tax purposes as an outgoing of a capital nature or one made on revenue account is due to the fact that no definite criterion has been or can be laid down which would enable that question to be answered with certainty in all circumstances. A number of tests have been suggested, no one of which can be treated as conclusive. They are no more than indications, in particular circumstances, of the category into which a particular outgoing should be placed. For example, Dixon J. (as he then was) pointed out in the Sun Newspapers Case [1938] HCA 73; (1938) 61 CLR 337, at pp 359, 363 that the fact that the expenditure is of a "recurrent, repeated or continual" nature as against an expenditure which is "final or once for all" tends to suggest an outgoing of a revenue and not of a capital nature. Again, as his Honour said, if the "result or purpose of the expenditure is to bring into existence or procure some asset or advantage of a lasting character which will enure for the benefit of the organization or system" that fact points rather to the expenditure being of a capital nature. And in considering matters such as these, questions of degree inevitably arise. One important consideration is, as his Honour said in the Sun Newspaper Case (1938) 61 CLR, at p 363 , "the character of the advantage sought, and in this its lasting qualities may play a part". (at p443)
10. It can fairly be said, I think, that all the types of outgoings involved in the present case were of a recurring nature. It is true that as to the moneys expended to improve the lay-out and structure of stations, expenditure on one particular site would not be likely to recur in connexion with that site since the improvements were of a lasting character. But I think that would be to take too narrow a view. Regard should rather be had to the whole picture and in that case the expenditure was recurrent. It was expenditure on sites and not on a site. In the case of the monthly or yearly payments to operators under the SS1-B. and SS1-C. arrangements, they were unquestionably recurrent whether one has regard to the single operator or to the many operators concerned in these transactions. To that extent it may be said that the expenditure bears a resemblance to an outgoing on revenue account. But when an examination is made of the character or nature of the advantage gained by the appellant by the making of all these payments, the balance seems to me to tilt in favour of the view that the outgoings were of a capital nature. The expenditure on structural and the like improvements to service stations was made in return for the operator's undertakings to deal exclusively in the appellant's products and give it exclusive advertising rights on the station site for a substantial period of time. The monthly payments under the SS1-B. Agreements and the annual payments under the SS1-C. Agreements were made in return for the carrying into effect of those undertakings in respect of the periods for which those payments were made. The advantages thus obtained were of a continuing and not of a transient nature. The purpose or effect of the expenditure seems to me to have been to add valuable, even if intangible, assets of a lasting character to the appellant's profit-earning organization. (at p443)
11. In the result therefore I am of opinion that Taylor J. rightly held that the amounts in question were outgoings of a capital nature and therefore not deductible for income tax purposes. In these circumstances it is unnecessary to consider a further point raised by the respondent Commissioner based upon s. 260 of the Act. (at p444)
12. The appeal should be dismissed with costs. (at p444)
ORDER
Appeal dismissed with costs.
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