John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation
101 CLR 301959 - 0227A - HCA
(Judgment by: Fullagar J)
Between: John Fairfax & Sons Pty Ltd
And: Federal Commissioner of Taxation
Judges:
Dixon CJ
Fullagar JKitto 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:
Fullagar J
This is a reference to this Court of a question of law by a board of review under s. 196 (2) of the Income Tax and Social Services Contribution Assessment Act 1936-1957. The question is whether the taxpayer, which is a company incorporated in New South Wales, is entitled under s. 51 (1) of the Act to a deduction from its assessable income of the year ended 30th June 1954 of a sum of PD3,142 14s. 8d. which represents certain legal expenses incurred by it in that year. The company has for many years carried on in Sydney a business of publishing newspapers, including the "Sydney Morning Herald". There are two other companies which have also for many years carried on in Sydney similar businesses. These are Associated Newspapers Ltd , publisher of the "Sun", and Consolidated Press Ltd , publisher of the "Daily Telegraph". It will be convenient to refer to the three companies respectively as "Fairfax", "Associated" and "Consolidated". The expenses in question were incurred in the following circumstances.
Before 31st August 1953 the issued capital of Associated consisted of 1,071,236 ordinary shares of PD1 and 1,492,275 5 per cent preference shares of PD1. Its unissued capital consisted of 678,674 ordinary shares of PD1 and 7,725 preference shares of PD1. On 8th August 1953,when the shares of Associated had been selling on the Sydney stock exchange at prices considerably below par, a proposal was put by Consolidated to the board of directors of Associated that it should recommend to all the shareholders of Associated that they should sell their shares to Consolidated at the price of PD1 each. It was to be a condition of any purchase by Consolidated that that company should obtain 90 per cent of the whole of the issued capital of Associated. This proposal was rejected by the board of Associated, and the rejection was communicated to Consolidated on 26th August 1953. Immediately thereafter, by circular letter and advertisement in the "Daily Telegraph", an offer was made by Consolidated directly to all the shareholders of Associated to purchase their shares at the price of PD1 each.
In the meantime certain negotiations had been proceeding between Associated and Fairfax, and on 27th August 1953 an agreement was reached between those two companies. With regard to this agreement, the case is somewhat reticent. It states merely that it was agreed "to merge the operations" of the organizations of the two companies "while maintaining independence in ownership and editorial policy" of the publications of Associated, and that Fairfax was to take up all the unissued share capital of Associated. The word "merge" is a word of very vague import, but it must no doubt be understood in the light of the events which followed on the acquisition of the unissued shares. On 29th August 1953 Consolidated offered, by advertisement in the "Daily Telegraph", to purchase the shares of shareholders in Associated at a price of PD1 5s. 0d. each. It would appear that nothing came of this offer. On 30th August 1953 Associated sought and obtained from the Capital Issues Board approval of the issue of its unissued ordinary shares. At a meeting of the directors of Associated, which commenced on Sunday, 30th August 1953, and (doubtless with an eye to the Sabbath Day Observance Act) adjourned to 12.5 a.m. on Monday, 31st August, the 678,674 unissued ordinary shares were allotted to Fairfax or its nominees, and on the same day Fairfax and its nominees were registered as the holders of those shares in the share register of Associated. Later on the same day the managing director of Fairfax was appointed by the board of Associated chief general manager of the latter company.
On the same day, 31st August 1953, but after the allotment and registration mentioned above, a suit was commenced in the Supreme Court of New South Wales in equity by Gabriel Selmar Reichenbach, a shareholder in Associated. The defendants were Associated, Fairfax, and the directors of Associated. Paragraph 16 of the case states:"In commencing the suit the said Gabriel Selmar Reichenbach agreed to act in the interests of Consolidated Press Limited, which at that time was the beneficial owner of ordinary shares in Associated Newspapers Limited but was not itself registered as a shareholder of that company." The substantial relief claimed in the suit was a declaration that the allotment of the 678,674 shares was void, and rectification of the share register of Associated by the removal therefrom of the names of Fairfax and its nominees as the holders of those shares. An interim injunction in the suit was granted on the same day, but a motion for its continuance until the hearing of the suit was dismissed by Myers J. on 22nd September 1953, the costs of Fairfax to be its costs in the suit. After certain further interlocutory proceedings in the suit it was dismissed by consent on terms which did not include the payment to Fairfax of any of its costs of the suit.
The events which followed (together with the appointment of the managing director of Fairfax as chief general manager of Associated, which has already been mentioned) appear to explain what was intended by the word "merger", to which reference has been made above. The case states that, by agreement between Fairfax and Associated, Fairfax assumed responsibility for the management of Associated as from 1st September 1953 for a "fee" of fixed amount, which fee was "intended to cover, inter alia the services of senior executives of Fairfax". On 28th September 1953 an agreement in writing (which superseded an earlier agreement of 25th September) was made by which the two companies entered into partnership for the purpose of publishing a Sunday newspaper under the name of the "Sun-Herald", in lieu of the "Sunday Sun" and the "Sunday Herald", which had hitherto been published by Associated and Fairfax respectively. Publication of the "Sun-Herald" commenced on 11th October 1953. On 2nd December 1953 the governing director and the managing director of Fairfax were appointed directors, and the managing director was appointed managing director, of Associated. Since February 1956 the daily "Sun", published by Associated, the "Sun-Herald", published by a partnership of Associated and Fairfax, and the "Sydney Morning Herald" and the "Australian Financial Review", published by Fairfax, have all been produced from a new building at Broadway, Sydney, owned by Fairfax. Since 1954 the "integration of the staffs" of the two companies "steadily progressed", and, at the date of the statement of the case only a small number of the employees of Associated still remained to be transferred to Fairfax. In April 1956 the appellant acquired the whole of the outstanding ordinary shares in Associated, so that the only other shareholders in that company are the holders of the preference share capital. In September 1956 the directors of Associated, other than the governing director and managing director of Fairfax, resigned and their places were taken by executives of Fairfax.
In defending the suit commenced by Mr. Reichenbach and in connection with the application made thereunder for an injunction, the taxpayer (Fairfax) expended moneys for barristers' fees and solicitors' costs and disbursements which in the year ended 30th June 1954 totalled the sum PD3,142 14s. 8d. In its return of income derived by it in that year the taxpayer claimed this sum as an allowable deduction under s. 51 (1), but the commissioner disallowed the deduction, and disallowed the taxpayer's objection. The matter was then, at the request of the taxpayer, referred to a board of review.
The two categories of s. 51 (1) are clearly not mutually exclusive, and it has indeed been said that "in actual working" the addition of the second category "can add but little to the operation of the leading words `losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income':" Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation. [F9] But it was not denied that there may be cases which fall outside the first category and within the second. The first is directed to expenditure incurred in the actual course of producing assessable income: Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation [F10] and W. Nevill & Co Ltd v Federal Commissioner of Taxation. [F11] It is, primarily at least, concerned with expenditure voluntarily incurred for the sake of producing income. Its scope is not, of course, confined to cases where the income is derived from carrying on a business. The second may be thought to be concerned rather with cases where, in the carrying on of a business, some abnormal event or situation leads to an expenditure which it is not desired to make, but which is made for the purposes of the business generally and is reasonably regarded as unavoidable: Hannan, Principles of Income Taxation (1946) p. 291: Federal Commissioner of Taxation v Snowden & Willson Pty Ltd. [F12]
In the present case it appears to me to be difficult, and indeed impossible, for the taxpayer to maintain that the legal expenses in question fall within the first category of s. 51 (1). I doubt very much whether they fall even prima facie within the second category, but in any case it seems to me to be clear that they were "outgoings of capital or of a capital nature". They were incurred "in the establishment, enlargement or alteration of the profit-making machine": Hannan, Principles of Income Taxation (1946), p. 435- "upon establishing, replacing and enlarging the profit-yielding subject": per Dixon J. in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation. [F13]
The foundation of Mr. Bowen's main argument was that, at the time when the relevant suit was commenced by Mr. Reichenbach, albeit only a few hours before, the taxpayer had, by the registration of itself and its nominees in the share register of Associated, actually become the legal or beneficial owner of a new asset consisting of a large number of shares. The commencement of that suit represented an attack upon the taxpayer's title to that asset, and expenditure incurred in defence against that attack was, it was said, properly to be regarded, for income tax purposes, as a revenue outgoing and not a capital outgoing. Stated in that way, the position in the present case does not differ materially from that which subsisted in Southern v Borax Consolidated Ltd, [F14] and the argument is supported by the decision of Lawrence J. in that case: see also Associated Portland Cement Manufacturers Ltd v Inland Revenue Commissioners, [F15] per Lord Greene M.R.; [F16] Cooke v Quick Shoe Repair Service [F17] and Morgan v Tate & Lyle Ltd. [F18] But in Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation [F19] four Justices of this Court expressed the opinion that the decision in the Borax Case [F20] "cannot be supported". [F21] That opinion had previously been expressed in the dissenting judgment of Dixon J. in Hallstroms Pty Ltd v Federal Commissioner of Taxation: [F22] cf. Hannan, Principles of Income Taxation (1946) pp. 440, 441. I referred to these cases in Federal Commissioner of Taxation v Snowden & Willson Pty Ltd, [F23] and would only now add that I do not think-particularly having regard to the references made by their Lordships to Ward & Co v Commissioner of Taxes (N.Z.) [F24] - that there is anything in the opinions delivered in that case to warrant any re-consideration by us of the view which we have taken of the Borax Case. [F25]
But the present case is not, in my opinion, analogous to the Borax Case. [F26] This is not, as I see it, a simple case of expenditure incurred by the taxpayer in order to prevent its being deprived of an asset owned or possessed by it. If one looks at the substance of the matter, it would accord much more with reality to describe that expenditure as incurred in the course of, and as incidental to, the acquisition of a new asset. The commencement of the suit, which occasioned the expenditure in question, must be regarded in the light of all the surrounding circumstances. The essential feature of the situation which subsisted in August 1953 was that two companies were in competition for the control of a third company. Each of these two companies sought to achieve its end by different means. The one proposed to proceed by the direct method of acquiring ninety per cent or more of the issued shares of the third company-a method which would have given it immediate control of the business of that company. The other proposed not to buy the issued shares but to subscribe and pay for the unissued shares. Ownership of those shares would not of itself give it a controlling interest in the business of the third company. But, as the case states, the holding of those shares would enable it to obtain a "substantial influence in the policy and control" of that company, and the offer to take up the unissued shares was accompanied by a proposal for a "merger" of the businesses of the two companies which doubtless comprehended the placing of the offeror in immediate de facto control. The proposal of Consolidated was ultimately a matter for the shareholders of Associated individually to accept or reject. The proposal of Fairfax was made to Associated itself, and the decision to accept or reject it was a matter for the directors of Associated. From the point of view of Associated, the proposal of Fairfax had presumably the great advantage that it would provide a large sum by way of new capital. But, be this as it may, the fact is that Fairfax and Consolidated were competing for the control of Associated-competing for a capital gain or advantage. And the competition had a twofold aspect in the sense that each desired to obtain control for itself and to exclude the other from control. It was certain that, if the one company took any particular step, the other would, as soon as it heard of it, take any legitimate means in its power-with or without resort to the courts-to counter that step.
When Mr. Reichenbach commenced his suit and attacked the allotment of the shares, he was doing so not because he or Consolidated claimed any right or title to the shares, but because that allotment was a step which could lead to the obtaining by Fairfax of control of Associated. It was (as no doubt Consolidated guessed) only a step in a larger plan, though no doubt a very important step. It was as such a step that it was attacked, and as such a step that it was defended. The lawsuit was an incident of the competition for control, and the costs of defending it were an incident of one step in that competition-the acquisition of the unissued shares. They were really part of the cost of acquiring the shares. If Mr. Reichenbach had commenced his suit on 30th August instead of 31st August-as no doubt he would have done, if it had been possible-Mr. Bowen's argument would have been deprived of its foundation, and the costs incurred by Fairfax could not have been regarded otherwise than as part of the cost of the shares. They could not have been distinguished from costs incurred by a purchaser in obtaining a decree for specific performance of a contract for the sale of land. It can make no difference to the substance of the matter that Mr. Reichenbach was not able to commence his suit until the following day, before the dawn of which the allotment of the shares and the registration of the allottees had become accomplished facts, so that it was necessary to claim rectification of the register.
The question asked by the case stated is whether the legal expenses, amounting to PD3,142 14s. 8d., were an allowable deduction under s. 51 (1). This question should be answered-No.