John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation
101 CLR 301959 - 0227A - HCA
(Judgment by: Dixon CJ)
Between: John Fairfax & Sons Pty Ltd
And: Federal Commissioner of Taxation
Judges:
Dixon CJFullagar J
Kitto J
Taylor J
Menzies J
Subject References:
Taxation and revenue
Income Tax
Assessable income
Allowable deductions
Legal expenses
Capital or income expenditure
Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 - s 51(1)
Judgment date: 27 February 1959
MELBOURNE
Judgment by:
Dixon CJ
In this case I would but for one consideration content myself with expressing my general concurrence in the judgments of Fullagar and Menzies JJ. which I have had the advantage of reading. That consideration lies in the significance which I think attaches to the manner in which s. 51 of the Income Tax and Social Services Contribution Assessment Act 1936 (as amended) is framed. Because of that I desire to add one or two observations as to the necessity of adhering to the principles upon which that provision is founded. The provision itself was carefully framed in the consolidation of 1936 and in such a way as to show an appreciation of the more general questions that had arisen under the previous corresponding provisions (ss. 23 (1) (a) and 25 (3) of the Act of 1922-1934) and of the manner in which they had been dealt with judicially. In s. 51 can be discerned as I think a purpose of giving effect to the general principles that had been worked out: cf. Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation. [F1]
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.
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. [F2] 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.
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 thought 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 contra distinguished 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.
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 [F3] and cf. Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation. [F4]
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. [F5] 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 [F6] 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". [F7] 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, [F8] to which I have already referred.
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.
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.
The question in the case stated should be answered that the deduction claimed is not allowable.