Hallstroms Pty Ltd v Federal Commissioner of Taxation
72 CLR 634(Judgment by: Starke J)
Hallstroms Pty Ltd v Federal Commissioner of Taxation
Court:
Judges:
Latham CJ
Starke JDixon J
McTiernan J
Williams J
Subject References:
Taxation and revenue
Income tax
Assessable income
Deduction
Expenditure
Capital or revenue
Outgoings
Legislative References:
Income Tax Assessment Act 1936 No 27 - ss 51(1); ss 196
Judgment date: 7 October 1946
MELBOURNE
Judgment by:
Starke J
List of Judges
STARKE J. Appeal from the decision of a Board of Review constituted under the Income Tax Assessment Act 1936-1940 which Rich J. pursuant to s. 18 of the Judiciary Act 1903-1940 directed to be argued before the Full Court and also the question involved therein upon the evidence taken before him.
The question is whether a sum of PD6,020 or thereabouts, law costs and expenses incurred and paid by the appellant the taxpayer during the income year which ended on 30th June 1940 in opposing the extension of certain letters patent, is an allowable deduction from its assessable income under the Income Tax Assessment Act 1936-1940.
The Act provides in s. 51 (1) that "all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature." The expenditure must be incurred in the course of business operations, directed towards the production of income or be "incidental and relevant to the operations or activities regularly carried on for the production of income" (W. Nevill & Co Ltd v Federal Commissioner of Taxation [F9] ; Sun Newspapers Ltd v Federal Commissioner of Taxation [F10] ). But it must not be an expenditure of capital or of a capital nature. The Act does not define these terms but the cases have attempted various definitions or descriptions of the terms. Thus when 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 "there is very good reason ... for treating such an expenditure as properly attributable not to revenue but to capital" (British Insulated and Helsby Cables Ltd v Atherton [F11] , at pp. 192, 193). "In a rough way ... it is not a bad criterion of what is capital expenditure ... to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year" (Vallambrosa Rubber Co Ltd v Farmer [F12] , at p. 536). "The test of circulating as contrasted with fixed capital is as good a test ... as can be found" (Golden Horse Shoe (New) Ltd v Thurgood [F13] , at p. 560). Or again "the distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay" (Sun Newspapers Ltd v Federal Commissioner of Taxation [F14] ).
The asset or advantage need not have a tangible existence: thus the acquisition of the goodwill of a business or of restrictive covenants not to compete in business and the promotion of Parliamentary bills and so forth may all involve expenditure of capital or of a capital nature (Van Den Berghs Ltd v Clark [F15] ).
But none of the so-called definitions or tests or any other definitions or tests suggested by the cases are decisive.
They are all matters which may be considered for the purpose of determining whether the expenditure in question is of a revenue or of a capital nature.
In the end, as in the beginning, the question is one of fact, as was said in the British Insulated and Helsby Cables Case [F16] , which must be determined on the facts of each particular case.
It appears in this case that the taxpayer was the manufacturer of domestic refrigerators. The Electrolux Pty Ltd also manufactured domestic refrigerators under letters patent which expired on 18th August 1938. The Electrolux model operated upon a different principle to that upon which the model manufactured by the taxpayer operated and was superior to it for domestic purposes. As soon as the Electrolux patent expired the taxpayer proceeded to manufacture and to take orders for and to sell domestic refrigerators constructed substantially in accordance with the patent specifications of the Electrolux model. And I take it that the taxpayer was put to expense in acquiring plant and in improving the layout of its premises for the manufacture of the new model. The taxpayer was entitled to manufacture the Electrolux model, not because it acquired any right or title from Electrolux Pty Ltd or anyone else to do so, but because the patent rights of the Electrolux Co had expired and were open to the public.
But in December 1938 the Electrolux Pty Ltd applied to this Court pursuant to the provisions of the Patents Act to extend the term of its patent. The taxpayer opposed this petition and it was dismissed in March of 1940. It was in these opposition proceedings that the taxpayer incurred and paid costs and expenses amounting to the sum of PD6,020 or thereabouts that it now claims to deduct from its assessable income. If the taxpayer had manufactured the Electrolux model in its business before the expiration of the patent and been sued for infringement and defended its action upon the ground that the patent was invalid or had not been infringed, clearly, in my judgment, the costs and expenses of so doing would be a loss or outgoing incurred in the course of its business operations directed towards the production of income, or at least incidental and relevant to those operations, and an allowable deduction.
And so, I think, are the costs and expenses of opposing the extension of the patent. Its opposition to the extension of the patent would enable it, if successful, to carry on the business of manufacturing the Electrolux model and avoid legal proceedings for infringement in the conduct of its business.
In short, in my judgment, the legal costs and expenses incurred by the taxpayer in opposing the extension of the Electrolux patent are in fact outgoings of a revenue and not a capital nature.
The provisions of s. 196 (1) of the Act require notice. "The Commissioner or taxpayer may appeal to the High Court from any decision of the Board which involves a question of law."
In my opinion, the ultimate question in this case is one of fact but if in its conclusion of fact the Board of Review acted upon some principle of law or without any evidence to support it then a question of law is involved in the decision of the Board. The Board of Review in the present case acted, I think, upon a wrong principle of law and without any evidence to support its conclusion. It said that the outgoings were incurred in acquiring a right or an advantage which is a proposition that cannot, I think, be supported in law or in fact. It also said that the outgoings were expended in an intended alteration in the structure of the taxpayer's business. Apart from the indefiniteness of this test and the practical difficulty of its application, I am unable to follow how the manufacture of a new model of refrigerator altered the structure of the taxpayer's business which was to manufacture refrigerators.
The appeal should succeed and the deduction claimed by the taxpayer allowed.