Hallstroms Pty Ltd v Federal Commissioner of Taxation

Judges: Latham CJ
Starke J
Dixon 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

MELBOURNE

Judgment by:
Williams J

List of Judges

WILLIAMS J. The question is whether the sum of PD6,020 paid by the appellant to its solicitors for costs should have been allowed as a deduction from the appellant's assessable income derived during the year ended 30th June 1941. The costs were paid during the year ended 30th June 1940, but the appellant made a loss including this sum in this year, and it now claims to deduct the PD6,020 under s. 80 of the Income Tax Assessment Act 1936-1940 from its assessable income for the subsequent year. The deduction is claimed under s. 51 (1) of the Act as an outgoing incurred in gaining or producing the assessable income which is not of a capital nature. The respondent admits that the sum was a payment made by the appellant without which the assessable income of the company for the year ended 30th June 1940 would not have been earned, so that the dispute is whether it was an outgoing of a revenue or capital nature.

The costs were incurred under the following circumstances. The business of the appellant is the manufacture and sale of refrigerators. In 1937 it was selling a cheap and somewhat out-of-date refrigerator of the water-cooled type operated by kerosene. The Electrolux Company was selling a more expensive and up-to-date refrigerator of the air-cooled type for which it had a patent. In face of this competition the sales of the appellant's refrigerators were confined to country districts where there was no electricity or gas. But the Electrolux refrigerator could also be operated by kerosene, and the Electrolux Company was commencing to compete with the appellant in the country districts. The Electrolux patent expired on 18th August 1938, this date corresponding with the commencement of the season for selling refrigerators. The appellant was prepared to enter the market with a new air-cooled refrigerator embodying the Electrolux invention as soon as the patent expired. For this purpose the appellant had acquired the necessary plant and had manufactured and accumulated a stock of the new refrigerators and had entered into contracts to sell a large number of these refrigerators for future delivery. The Electrolux Company decided to apply to this Court under s. 84 of the Patents Act to extend the term of the patent. The company was out of time, but on 18th August 1938 an order was made under s. 84 (7) extending the time within which it might take proceedings. The appellant filed a caveat under s. 84 (2) against the extension. The Electrolux Company presented its petition on 29th December 1938. The hearing of the petition commenced on 10th July 1939, and the petition was finally dismissed on 28th March 1940 on the ground that, while the patent was highly meritorious and of great practical utility, the patentee had been adequately remunerated for the invention. The sum of PD6,020 is the balance of costs incurred by the appellant in opposing the petition after deducting certain costs which the petitioner was ordered to pay to the appellant.

The respondent, in contending that the outgoing was of a capital nature, relied principally upon the decisions of the Privy Council in Ward & Co Ltd v Commissioner of Taxes ^[F34] and British Insulated and Helsby Cables Ltd v Atherton ^[F35] . In the first case a New Zealand company expended money in printing and distributing anti prohibition literature to defeat a poll on the question whether or not prohibition of intoxicating liquors should be introduced. The Privy Council affirmed the decision of the Supreme Court of New Zealand that this expenditure was not exclusively incurred in the production of the assessable income. Viscount Cave L.C., in delivering the judgment of the Privy Council, said that:"The expenditure in question was not necessary for the production of profit, nor was it in fact incurred for that purpose. It was a voluntary expense incurred with a view to influencing public opinion against taking a step which would have depreciated and partly destroyed the profitbearing thing" ^[F36] . If the poll had been carried it would have become illegal for the brewery company to carry on its business, so that the money was spent to save the business from extinction.

In the second case it was held that a sum of PD31,784 paid by an English company out of current profits to form the nucleus of a pension fund for its clerical and technical salaried staff was not a revenue but a capital expenditure and not a proper debit item to be charged against incomings of the trade when computing the profits. Viscount Cave L.C. said: "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" ^[F37] . It was held that the purpose of creating the fund was to produce contentment amongst the staff, and that in this way an enduring benefit was obtained for the business.

It was contended that the present was an analogous case because the purpose of the expenditure was to defeat the application of the Electrolux Company for an extension of its patent and so bring into existence for the benefit of the appellant the substantial and lasting advantage of being able to manufacture and sell their new refrigerator. But the business of the company would not necessarily have been extinguished. Even if the patent had been extended it would still have been lawful for the appellant to carry on the business of manufacturing and selling refrigerators. For, as Lord Greene M.R. said in Inland Revenue Commissioners v Desoutter Bros. Ltd ^[F38] , at p. 163:"It is merely, in effect, a shield against competition. It is the right to exclude competitors from all operations, whether manufacturing, or vending, or using the patented article in the territory covered by the patents. That is all a patent is."

The appellant could still have manufactured the old type of refrigerator from the sales of which it had made small profits in 1938 and 1939. Mr. Hallstrom, the managing director of the appellant, had been to the United States in 1937 and arranged to import a new and improved type of water-cooled refrigerator, and the new models were arriving early in 1938. The appellant would still have been free to manufacture and sell any type of refrigerator other than types which infringed the Electrolux patent (or any other current patents).

The Electrolux patent expired in August 1938. Subject to a regrant the appellant had after this date the same right as any other member of the public to manufacture and sell the invention. The application for an extension was an attack upon this right. The defeat of the application did not clothe the appellant with any fresh right. The expenditure was incurred to safeguard an existing right and for the purpose of earning profits from the sale of the new refrigerator and to produce revenue in the conduct of its business. The appellant did not acquire any asset or other advantage from the Electrolux Company. It was still subject to the competition of this company in common with every other member of the public. In this respect the case differs completely from Sun Newspapers Ltd v Federal Commissioner of Taxation ^[F39] and Associated Portland Cement Manufacturers Ltd v Inland Revenue Commissioners ^[F40] , where the taxpayers obtained the benefit of a covenant against competition by potential trade competitors and thereby improved the value of their goodwill. Collins v Joseph Adamson & Co ^[F41] was a similar case.

The only advantage which the appellant acquired was, in the words of Maclean J. in Kellogg Co of Canada Ltd v Minister of National Revenue ^[F42] , a judicial affirmation of an advantage already in existence and enjoyed by the taxpayer. The words of Lawrence J., as he then was, in Southern v Borax Consolidated Ltd ^[F43] , at p. 602 are, mutatis mutandis, very much in point: "The title of the company, which must be assumed, in my opinion, to have been a good title, remains the same; there is nothing added to the title or taken away, and the title has simply been maintained by this payment." Cf. Income Tax Commissioner v Singh ^[F44] ; Spofforth v Golder ^[F45] ; Rushden Heel Co Ltd v Inland Revenue Commissioners ^[F46] .

The sum of PD6,020 was, in my opinion, an outgoing incurred in gaining or producing the assessable income not of a capital nature, and the appellant is therefore entitled under s. 80 to have this sum deducted for the year ended 30th June 1941.

This appeal, which has been directed to be argued before the Full Court pursuant to s. 18 of the Judiciary Act, is against a decision by the Board of Review. Such an appeal lies only where the decision involves a question of law: Income Tax Assessment Act, s. 196. The Board decided that the expenditure was made by the taxpayer in acquiring a right to sell the new refrigerator which it would not have had if the Electrolux patent had been extended, and was therefore of a capital nature. In my opinion this decision was not reasonably open on the evidence so that the Board erred in law. As Viscount Simon L.C. said in Doncaster Amalgamated Collieries Ltd v Bean ^[F47] , at p. 645; "The borderline between revenue and capital expenditure is sometimes difficult to draw, and there may be cases in which the conclusion is properly reached by the Commissioners as a question of fact which will not be disturbed. But where, as here, the Commissioners find facts which in law must lead to the conclusion that the item falls into one class and not into the other ... the error can be corrected on appeal."

For these reasons I would allow the appeal.