BP Australia Ltd. v Federal Commissioner of Taxation
(1964) 110 CLR 38737 ALJR 365
(Decision by: Dixon CJ)
Between: BP Australia Ltd
And: Federal Commissioner of Taxation
Judges:
Taylor J
Dixon CJMcTiernan J
Kitto J
Windeyer J
Owen J
Subject References:
Income Tax
Judgment date: 25 February 1964
Melbourne
Decision by:
Dixon CJ
1964, February. 25.
The following written judgments were delivered: -
This appeal concerns the extent of the liability to taxation of BP Australia Ltd. for the year of income ended 30th June 1952. The company was then assessed in respect of the aggregate taxable income derived from sources in all States to income tax in respect of the year 1952/53. At that time the conpany bore the name of The Commonwealth Oil Refineries Ltd. The company was incorporated in 1920 and carried on business as oil refiners and distributing merchants from that time onwards and of course throughout the war. At the beginning of the war in 1939 the difficulties which were likely to be encountered in respect of the commodity upon which the company depended appeared likely to arise in relation to supply rather than the distribution of motor spirit to the consumers. However, by the year of income, namely 1951/52, the question of distribution of motor spirit amongst consumers had become one of increasing difficulty. At the beginning of the war motor spirit consumed by motorists had been distributed to the consumers through petrol pumps, and had been supplied to garages and the like, under individual brands, the brand forming either the name of the petrol or the name of the company, and this went on even after rationing to the consumer was introduced. The National Security (Liquid Fuel) Regulations, the first of a series, were adopted on 24th December 1940. They were of course afterwards much amended. They provided for ration tickets (see reg. 16, reg. 19, reg. 22 and reg. 27). The pooling of supplies does not seem to have been introduced until the Japanese had been in the war for some months. Then an interesting pool was provided among the big companies by an agreement dated 9th July 1942, including Commonwealth Oil Refineries Ltd. This will be found as a schedule of the National Security Petroleum Products Distribution Regulations (Manual of National Security Regulations, 3rd ed., p. 675). The result of these wartime arrangements and the arrangements which succeeded them was that all brands of petrol lost their identity, that is to say to the consumers the petrol they consumed was all the same, at all events for their purposes. As it was put by a witness in the case of the Vacuum Oil Company's appeal: "One important thing that happened during the (war) period was that we lost the significance of what might be called brand consciousness amongst the motorists, because motorists through those years had learned that practically all the petrol was the same. That persisted for quite a while afterwards, which was one of the important and early points why, from our point of view, something had to be done about it." (at p404)
The pool is said to have ended in 1947 or thereabouts and petrol rationing ended in about 1949. By this time Commonwealth Oil Refineries Ltd. had changed its name and it is assessed as B. P. Australia Ltd. Petrol pumps remained on the various sites, and of course these sites were changed and increased in number during the period involved. A great deal of co-operation between suppliers of petrol, and that includes the distributors, had of course been necessary throughout this period but they were essentially competitors in trade and it seems natural that when ordinary trading resumed the question of the manner of distribution should be revived. The former general sales manager at the head office in Melbourne of the taxpayer company said that the general practice at the end of the period of control was that most resellers of petrol had oil companies' pumps. He said that although the petrol was sold under pool petroleum administration the brands were all sold according to the companies' brands by which they were known before the pool commenced. The brand names remained although it was well known by the public that it was the pool that was handling the petrol. The companies installed pumps and tanks for resellers when the resellers wanted their products to be sold. Each company had its own pumps. The witness said that after the war and with the withdrawal of rationing the market did increase by quite a substantial amount but the actual marketing of petrol continued just the same as previously; that the taxpayer company was doing very well as far as he could remember. He thought that its percentage increase in the market was more than the overall increase in total marketing: (during the war the Supply and Development Department circulated the total gallonage and he knew what the total overall market was). (at p405)
Prior to 15th August 1951 there was no difference at all in the general system between companies. The only difference was that two big companies (Shell and Vacuum) started painting service stations in their own colours although the system of marketing was just the same. "Without our knowing, we" (that is, the taxpayer company) "realized there was something doing, but did not know exactly what it was likely to be". Then, on 14th August 1951, a letter was received from the Shell company, signed by the General Manager. It was as follows: "My Company has decided to introduce a Dealer Plan with the object of confining its trade to stations which are prepared to become solo outlets, on similar lines to the plan existing in the U.S.A. and as recently introduced in the U.K. I regret that it has not been possible in a move of this nature to discuss such a plan in advance, but it will be clear that we could not risk giving our competitors unlimited time in which to frustrate our plans should they not be in agreement. What we propose to do involves risks, but if successful promises to provide substantial economies owing to our intending to trade in future through a reduced number of outlets. It is a settled feature of our plan: - (a) We shall trade under the existing outlet policy unless the action of Reseller Associations or other Companies compels us to do otherwise. (b) We shall trade under the existing dealers, and without any Company personnel as operators. (c) We shall adhere to existing inter-company marketing and prices policies as before providing others do so, including the undertaking regarding motor spirit quality limitations. (d) We are prepared to make reasonable mutual arrangements regarding superfluous tanks and pumps with other Companies. (e) We have left plenty of room for other Companies if they wish to follow the same pattern as our approach is to dealers who are predominantly favouring our brands. I would ask other companies to consider the matter carefully in the light of the trends in almost all countries overseas; as to the interest of the Industry as a whole long term; and as to the economy in delivery costs, pump maintenance, representation, accounting, etc. (sgd.) E. N. Avery." This meant that the large company from which the letter came had decided to see that its petrol was the only petrol sold from particular stations and that it was sold under the brand which its petrol bore. Of course this meant that as before the war the brand of petrol was as a matter of trading to be put forward as the identification of the petrol and the petrol as having a distinct value. The witness said that this was "probably the biggest change of marketing policy we had ever had in the oil industry, at least in my time" and conferences were held. The witness pointed out that an essential feature of selling petrol in this way was that the station (and that in effect meant that the supplying company) should have lubricating oil and greases and everything that was required to give complete service to the consumer. He said that the motorist obviously wants oil as well as motor spirit and it was clear to him that the taxpayer company could not follow the "solo site policy" because it did not market lubricating oil and greases and could not give complete service. Two other big companies sent information that they were about to follow the same policy. The smaller companies, after discussion, agreed with the taxpayer that the only course to adopt was to have a combined policy - later termed the "Independent Trading Policy" - and to form a committee termed "The Co-operating Companies". The witness was appointed Chairman of the committee. The first thing they did was to decide that they would remain independent but they would paint the stations an identifying colour. An accounting committee was formed to handle the accountancy work involved in this. The accounting committee advised that the station
s should be painted. "At that stage the committee had not been able to advise any other means of preventing the drift to the solo companies and we were losing sites each day - each of us." After a couple of months they heard that the so-called solo companies, the big companies already mentioned, were offering inducements to resellers to "go solo" and that they were buying service stations. They heard too that they would give merchandising assistance to the resellers to help them sell the products. Then they discussed advertising. (at p407)
So far as the painting is concerned it may be ignored, although at the same time it may be acknowledged that it may serve as a topic useful as a basis of comparison. But the reason why it may be ignored is that although at the time the Commissioner was inclined to disallow it, in the end he determined to allow it as a deduction. (at p407)
It has seemed to me in the consideration of this case that perhaps the general considerations governing the policy of marketing may have loomed a little too largely in the solution of the question whether actual expenditure was deductible or not. After all, in a case of this description we are dealing with outgoings incurred in gaining or producing the assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. It is not, I hope, again necessary to discuss the operation of the definite article "the" or scope of the word "necessarily". I remain against the view that they impose a temporal or rigid causal limitation which depends upon the allowability of claims for deductions; much more depends on the actual nature and amount of the expenditure than the motives which led those who made the expenditure to adopt a particular form or course of business. By "actual nature" I do not mean to distinguish between the purpose of the expenditure and the physical character of what was effected. In the Alteration Sheet which accompanied the original notice of assessment dated 28th May 1953, based on income derived during the year ended 30th June 1952, a number of small deductions claimed by the taxpayer were noticed specifically as disallowed and from their nature it can be inferred that they represented expenses in one part or another of Australia concerned with the location and character of distributing stations. A notice of amendment dated 18th February 1954, added back to the assessable income 327,059 pounds which up till that point had been allowed as a deduction but was then disallowed as expenditure relating to "solo site" and that was reduced some years later by 55,819 pounds because of the decision to allow the painting of service stations and some minor expenditure as deductions. The sum of 270,569 pounds for the five States of Victoria, Queensland, New South Wales, South Australia and Tasmania was described to the Commissioner as "Developmental allowances paid to service station customers". (The exact amount disallowed by the order under appeal is 271,240 pounds as capital expenditure disqualified from deduction.) The amount shown against New South Wales was 109,705 pounds. By a summary of payments this was shown to include 21,631 pounds attributable to the taxpayer's own expenditure. It would be tedious to go through all the expenditure but the foregoing are given as an illustration of the fact that the decision of this case should in the end depend less on any general considerations than on a particular understanding of what the various sums of money paid really represented. In Exhibit E which contains lists of payments made by the taxpayer company, types of agreement are set out which at various times the taxpayer company and the proprietor of a petrol station entered into. The first type of agreement covered a period when the taxpayer company formed part of a co-operating group of companies which continued to adhere to the principle of multiple brand service stations, that is to say, each would distribute its motor spirit to service stations which supplied more than one brand. The agreement provided for the payment to the customer, that is the proprietor of the petrol station, of a stipulated contribution towards advertising and other merchandising expenses incurred by the customer selling the products, and for the supply to him at ruling market price of such quantities of the company's brand of motor spirit as the customer from time to time shall require for resale at the service station. The company was to provide merchandising assistance according to the policy from time to time determined by the co-operating group of companies as expedient for the promotion of the principle of multiple brand service stations. The customer entered into a variety of undertakings.
The taxpayer company provided an elaborate form of agreement prepared by it and printed. It provided for the payment of a stipulated sum as a contribution towards advertising and other merchandising expenses incurred by the customer. It agreed to supply him at market price with such quantities of the company's brand of motor spirit as he should require and to provide him with merchandising assistance as before. The customer agreed by the form to apply the sum towards the development and advancement of the service station as a multiple brand service station, to exhibit advertising signs for the group of companies, and to maintain one or more pumps for the retail sale of the company's brand of petrol. The dealer also promised to carry on and not to cease to do so without the company's assent in writing and so with sub-letting or assignment. The taxpayer company adopted a standard agreement, indeed a succession of standard agreements, regarding payment to the proprietors or holders of sites for the distribution of petrol. They concerned the payment to them of an allowance to be used for the improvement of the business and referred to as a development allowance. The company undertook to contribute the development allowance, to supply their requirements of the products marketed by the company, chiefly of course petrol, and to assist in the development of the business by providing a comprehensive merchandising plan. The person occupying or conducting the site agreed to increase the sale of the company's products to the best of his ability, to form no agreement with rival wholesale distributors, and to resell from his premises only the brands of motor spirit approved by the taxpayer company or the other company writing the letter which included not only the appellant company under the name of C.O.R., but also Golden Fleece, Ampol, Caltex and Atlantic. In each case some period was named for the operation of the agreement or arrangement. (at p409)
This course of business was followed in each of the States although there was some variation in form but hardly of substance. As at the close of the year of income, viz. 30th June 1952, the sum already mentioned of 271,240 pounds was claimed by the taxpayer as an allowable deduction from assessable income but was disallowed by the Commissioner as a deduction from assessable income. There is no dispute that the sum represents expenditure in advancing or promoting the sales of petrol, nor indeed, that an increased volume of selling business followed. Prima facie, therefore, it forms part of the expenditure of the year in question upon marketing and is properly deductible from the gross proceeds before taxable income is arrived at. The company's claim for the allowance of this expenditure was rejected on the ground that it involved what amounted to capital expenditure or outlay on capital account. Cases of this kind do not often arise, that is to say, cases where expenditure upon promoting the day to day flow of business is said to be of a capital nature and not of a revenue nature. When they do arise if you ask the question "Why is it capital?" the reasons for an affirmative answer may well appear insubstantial, and if you ask the question "Why is it of a revenue kind?" the reasons for an affirmative answer may amount to little more than saying "Why not?". In this case the company was engaged in a continuous process of business expenditure from a period before the war, through the period of the war and on indefinitely into the subsequent post-war period. It involved the cost of selling in whatever way might from time to time seem suitable a fluid required by members of the public. Of necessity many changes in method were made during the period. In the present case the changes in the conduct of the company's selling business seem to be of a more or less enduring character and the fact that it involved the securing of pumps which remained on the premises to be used by persons selling or intended to sell its petrol and that that petrol alone was to be sold has been taken to mean that a resultant advantage possibly covering a long period of years was really purchased by the expenditure which it is sought to deduct from assessable income. As I have followed the history of the matter it seems clear that in all the unexpected incidents of marketing throughout these years the company was engaged in an endeavour to obtain a definite market among the public by one means or another and was doing so in the course of conducting its business of disposing of petrol which it was able to acquire or import. I do not think it was acquiring a capital asset or doing any more than so conducting its business on revenue account as to increase it and make as certain as it could that its business was continuing and also would continue, if possible, to expand. For my part I cannot think that all the course adopted changed the character of the transactions of the company from those of a continual attempt to establish its product in a consumers' market and to meet all the obstacles which arose in a long and rather troubled period to obtaining a reputation for its product. There appears to me to be no specific expenditure in increasing its plant, machinery or any other element in the profit-earning instrument under its control. I do not see any sufficient ground of a distinct or specific nature for saying that the expenditure was of a capital nature. (at p410)
I think the appeal should be allowed. (at p410)