F.C. of T. v. South Australian Battery Makers Pty. Ltd.
Judges:Gibbs ACJ
Stephen J
Jacobs J
Murphy J
Aickin J
Court:
Full High Court
Gibbs A.C.J.: This is an appeal from a judgment of the Supreme Court of New South Wales ( Mahoney J.) allowing appeals from assessments to income tax in respect of each of the years 1966 to 1971 both inclusive. The question in each year is the same, viz., whether amounts paid by the taxpayer, South Australian Battery Makers Pty. Limited, as rent of land which it occupied and used as a factory at Elizabeth, in South Australia, were completely deductible under sec. 51(1) of the Income Tax Assessment Act 1936 (as amended) (Cth) (``the Act''), or whether the Commissioner was entitled to apportion those amounts and to regard them as being, in part, outgoings of a capital nature.
The taxpayer was one of a group of companies whose main business was the manufacture, sale and distribution of batteries. The taxpayer was controlled (through another subsidiary) by Associated Battery Makers of Australia Pty. Limited (``Associated Battery Makers''), which was itself a subsidiary of Chloride Group Limited, a company incorporated in the United Kingdom. These companies have all undergone changes of name, but that is not material and it is sufficient to describe them by the names already mentioned. Another company in the group, to which further reference will be made, was Property Options Pty. Limited (``Property Options'').
In 1963 the group decided, for commercial reasons, to establish a factory in South Australia. With this end in view Mr. Alkin, a senior officer of the group, had discussions with officers of the South Australian Housing Trust (``the Trust'') and was shown the site at Elizabeth which eventually came to be leased to the taxpayer. Mr. Alkin held positions in more than one company in the group - he is described as chief executive of the taxpayer, and as general manager of Associated Battery Makers - but it was in the latter capacity that he appears to have conducted these negotiations. The Trust was eager to encourage industrial development of the land and made a proposal which was stated in outline in a letter written on 5th August 1963 on behalf of the Trust to Mr. Alkin as general manager of Associated Battery Makers. This letter referred to two possible forms of lease, of which the second was described as follows:
``(2) A form of lease which carries with it some substantial advantages for purchase. This lease has as the annual rental, a sum equivalent to ten per cent of the capital cost, and read in conjunction with it would be a special option to
ATC 4414
purchase which confers on the grantor " ( sic, `grantee' was intended), " the advantages of the annual amortised accounts. The copies of the model documents for Agreement for Lease, Memorandum of Lease and Option to Purchase and Memorandum of Encumbrance illustrate the method of leasing the property under these forms of agreement, and the option to purchase shows how a company to be named by the holding company may exercise the option at any time during the term of the lease. The schedule attached to this option agreement shows the sums outstanding at the commencement of each year for completion of the purchase.''
On 10th September 1963 Mr. Alkin replied saying that his company wished to accept the Trust's offer as so outlined. The company to which he referred was Associated Battery Makers.
The Trust had originally been reluctant to erect the new factory and office buildings that were necessary to enable the site to be used but in October 1963 it agreed to do so. The work of erection commenced and further correspondence ensued between the Trust and Associated Battery Makers with regard to the lease and the option. On 21st February 1964 the Trust forwarded to Mr. Alkin an agreement for lease (with a form of lease in the schedule thereto) and a memorandum of option to purchase with a form of encumbrance annexed. The letter requested that Mr. Alkin arrange for Associated Battery Makers to accept the agreement for lease under seal, but went on to say that it would take several months after occupation before final costs would be determined and the memorandum of lease prepared for execution. It added that the memorandum of option was submitted for identification only and would be executed when the final costs had been determined. The agreement for lease was executed by Associated Battery Makers on 19th May 1964. It provided for payment of a provisional quarterly rent until execution of the lease. It further provided for the calculation of the final quarterly rent, which was to be equal to 2 ½ per cent of the ``actual cost price'', a term which was defined to mean:
- 1. $26,000, being the agreed value of the land; and
- 2. the costs and expenses of erecting a building and effecting other improvements together with capitalized interest on such costs and expenses at the rate of 6 per cent.
(In this and some later documents figures are given in pounds but it is convenient to convert them to dollars.) In the schedule, before the form of memorandum of lease was set out, there appeared the words ``Option to subsidiary''. On 18th June 1964 Associated Battery Makers sought the approval of the Trust to assign the use of the premises to the taxpayer, and on 3rd July 1964 the Trust replied that this request was approved. The taxpayer in fact went into possession of the land in about June 1964. In that month a certificate of practical completion of the building on the land was issued.
On 31st July 1964 Associated Battery Makers wrote to the Trust saying that it wished the option to purchase to be granted to Property Options. At a later stage the Trust expressed some concern at this suggestion, because the original form of memorandum of option, which had shown the grantee of the option as Associated Battery Makers, had provided that when exercising the option the grantee might nominate any ``associated company'' to pay the price and take a transfer of the land. The Trust sought an assurance that the taxpayer and Property Options were associated companies. The Trust was given this assurance. It was informed that Property Options had been formed for the specific purpose of holding the option, that its issued shares (two shares of $2 each) were held by members of a firm of accountants in trust for Edro Industrial Finance Company Limited, a company incorporated in the United Kingdom and a fully-owned subsidiary of Chloride Group Limited, and that the association between the taxpayer and Property Options lay in the fact that both were ``subsidiaries'' of Chloride Group Limited. It was frankly admitted that it was intended that ``the option should be granted to a company as remote as possible from the company paying the rent'' in case sec. 260 of the Act, or some section that might replace it, might be invoked.
ATC 4415
Early in December 1965 the final cost and the rent of the leased premises were fixed by the Trust. On 9th December 1965 the Trust wrote to Mr. Alkin informing him that the final cost was $178,300 and that the rent was $17,830 per annum or $4,457.50 per quarter. The letter also set out a table of prices which was later included in the schedule to the option and whose effect will shortly be mentioned.
The memorandum of lease, when finally executed, bore date 16th June 1966. By that instrument the Trust leased to the taxpayer the land at Elizabeth for a term of sixteen years from 1st July 1964 at a quarterly rent of $4,457.50. The lease contained a number of covenants of the kind commonly found in leases. It did not contain, or refer to, an option to purchase the demised land. The lease was duly registered.
The memorandum of option was executed on 25th October 1966. By that document the Trust agreed with Property Options that in consideration of the sum of $200 Property Options (therein called ``the grantee'') should have an option to purchase the subject land at the price and upon and subject to the conditions therein set out. The material terms of the option were the following:
``1. By Whom Option Exercisable: This option is granted to the grantee as a company associated with Associated Battery Makers... and with South Australian Battery Makers Pty. Limited... being the lessee from the Trust as lessor of the said land...
2. Option: The said option shall be exercisable by notice in writing to be given by the grantee to the Trust at any time after the commencement and not later than two calendar months before the expiration or sooner determination of the term granted by the Lease Provided That at the time of the exercise of the said option by such notice the lessee is not in default in any way under the Lease.
...
3. Price: If the date so nominated is at any time during the first year of the term granted by the Lease the price shall be the amount appearing in the table at the foot hereof and written opposite the term 'first year' and if the date so nominated occurs during the second or any subsequent year of the said term the price shall be the amount appearing in the said table opposite the reference to such second or subsequent year of the Lease during which the completion date so nominated occurs.
...
6. The Lease: The grantee shall arrange and procure that the lessee shall on or before completion of the purchase execute as lessee a proper Memorandum of Surrender to the Trust of the lessee's interest under the Lease... so as to complete the merger of the leasehold interest in the fee simple estate transferred by the Trust to the grantee hereunder.
...
12. Assignment: The option hereby granted is intended to be exercisable only by the grantee as a company associated with the lessee under the Lease and shall not be assignable by the grantee... without the previous consent in writing of the Trust...''
The memorandum of option contained a table of prices reducing from $178,300 in the first year to $171,168 in the second year and so on to $12,296 in the sixteenth year.
It is quite clear that the memorandum of option carried out the original proposal to the extent that the capital cost of the land and improvements were ``amortised'' by a portion of each payment of rent, and that the grantee of the option was entitled to purchase the land during the term of the lease for the amount which had not been recouped to the Trust or ``amortised'' in this way. Some figures prepared by the Trust, and embodied in a document dated 10th December 1965 (which was not proved to have been shown in that form to the taxpayer), suggest that the rental contained two elements:
- 1. Interest at 6 per cent on the unamortised capital cost; and
- 2. The balance, which was intended to go in reduction of the principal.
The rent payable in each year was, as has been mentioned, $17,830. In the first year the ``interest portion'' of this amount was shown as $10,698 and the ``reduction of principal
ATC 4416
portion'' was $7,132. The purchase price in the second year was $171,168 which of course is a reduction by $7,132 of the original price. Similar reductions were made from year to year.The option has not been exercised. The taxpayer has at all relevant times been the lessee of the land and has used the premises for the purposes of its business of manufacturing batteries. Extensions to the factory proved necessary and in 1967 work costing $42,000 was done by the Trust at the cost of the taxpayer. The taxpayer has in fact paid the rent in accordance with the lease. Mr. Alkin stated in his affidavit that the annual rent was ``a reasonable commercial amount'' and (if it matters) that statement was not contradicted in evidence.
There can in my opinion be no doubt that the payments made by the taxpayer to the Trust under the lease were outgoings incurred in gaining or producing the assessable income, or alternatively were necessarily incurred in carrying on a business for the purposes of gaining or producing such income, within the meaning of sec. 51(1) of the Act. It is impossible to suggest that the lease was a sham. The taxpayer carried on its business in the factory on the leased land and the payments were those required by the lease to be made as the price for the right to possession of that land. The payments were made in the course of earning the assessable income and were incidental and relevant to that end:
Ronpibon Tin N.L. and
Tongkah Compound N.L.
v.
F.C. of T.
(1949) 78 C.L.R. 47
, at pp. 56-57, 58
. They therefore fall within the first of the alternatives mentioned in the section. If the business had failed to produce income, and the payments were not within the first alternative, they would have been covered by the second alternative; they were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, in the sense that they were clearly appropriate or adapted for the purpose of earning such income: see
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T.,
at p. 56. It would not be relevant, if it were the fact, that the taxpayer might have leased the same or other premises at a lower rental:
``It is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent.''
Ronpibon Tin N.L. and Tongkah Compound N.L.
v.
F.C. of T.,
at p. 60 and see also
Cecil Brothers Pty. Ltd.
v.
F.C. of T.
(1964) 111 C.L.R. 430
, at pp. 434, 441
and
Commr. of I.R. (N.Z.)
v.
Europa Oil (N.Z.) Ltd. (the first Europa case)
,
70 ATC 6012
, at p. 6019;
(1971) A.C. 760
, at p. 772
.
The argument most strongly pressed on behalf of the Commissioner was that the payments were in part outgoings of capital or of a capital nature and so within the exception to sec. 51(1). They were not outgoings of capital, and the true question is whether they were (in part) outgoings of a capital nature. The submission on behalf of the Commissioner was that each payment made as rent comprised two separate parts, one part being attributable to the right of possession under the lease and therefore of a revenue nature, and the other attributable to the reduction or amortisation of the cost or price of the land and buildings which Property Options had an option to buy and therefore of a capital nature. It may be said immediately that it is not in doubt that it is open to the Commissioner in an appropriate case to apportion an outgoing and to treat part of it as being of a capital nature: see
Ronpibon Tin N.L.
and
Tongkah Compound N.L. v. F.C. of T.
, at p. 55;
Poole and Dight
v.
F.C. of T.
,
70 ATC 4047
at p. 4054;
(1970) 122 C.L.R. 427
, at p. 440
; the first
Europa case,
70 ATC 6012, at p. 6019; (1971) A.C. 760 at p. 772 and
Europa Oil (N.Z.) Ltd.
v.
Commr. of I.R. (N.Z.) (the second Europa case)
76 ATC 6001
, at p. 6006;
(1976) 1 W.L.R. 464
, at pp. 472-473
. It should be added that if it was right to make an apportionment in the present case the taxpayer did not seek to attack the manner in which the Commissioner made the apportionment. The case for the taxpayer however is that it was wrong to regard any part of the outgoings as of a capital nature.
In Australia the classical statement as to the principles to be applied in determining whether an outgoing is made on revenue or on capital account is that of
Dixon
J. in
Sun Newspapers Ltd. and
Associated Newspapers Ltd.
v.
F.C. of T.
(1938) 61 C.L.R. 337
, at pp. 359-363
. Sir Owen
Dixon
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there concluded his analysis by saying (at p. 363) that there are three matters to be considered:``(a) The character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.''
However the present case cannot be resolved simply by applying these tests. The real problem in the case is not to determine the character of the advantage sought, once it has been identified, but to decide what was the advantage sought by the taxpayer by making the payments. If the only advantage sought was the right to possession under the lease, and what was called ``rent'' really answered that description, clearly the outgoings were entirely of a revenue nature. If on the other hand one advantage sought by the outgoings was the acquisition of a capital asset (the land and buildings), the fact that the payments were called ``rent'', and were made periodically, would not necessarily prevent them from being in part outgoings of a capital nature
-
see
Colonial Mutual Life Assurance Society Ltd.
v.
F.C. of T.
(1953) 89 C.L.R. 428
;
Poole and Dight v. F.C. of T.
; and
A.P.A. Fixed Investment Trust Company Ltd.
v.
F.C. of T.
(1948) 8 A.T.D. 369
at p. 371
.
It is clear that by making the payments the taxpayer itself did not acquire any interest in the land or buildings except that of a lessee. The only binding arrangement between the taxpayer and the Trust was that embodied in the lease, under which the taxpayer had the rights and interests of a lessee and nothing more. The taxpayer was not granted any option to purchase, and it had no right to enforce the option granted to Property Options. It was argued on behalf of the Commissioner that if the group of companies of which the taxpayer was a member derived a benefit from the making of the payments, part of that benefit must accrue to the taxpayer. In my opinion, that statement cannot be accepted; it is true only in the most general sense
-
in the same way that it may be said that a man benefits if his children or his neighbours prosper. Of course it cannot be denied that the circumstances may be such that one company may benefit from the fact that its subsidiary receives an advantage; the control which the parent company exerts over its subsidiary may ensure that the benefit flows on from the latter to the former. This seems to me to be a sufficient explanation for the decision of the Court of Appeal in
Littlewoods Mail Order Stores Ltd.
v.
I.R. Commrs.
(1969) 1 W.L.R. 1214
, where it was found that the object of the taxpayer in paying rent was to obtain the freehold reversion for its subsidiary and that the payments were of a capital nature.
Denning
M.R. reached this result by drawing aside the corporate veil and finding behind it a subsidiary which was in law as well as in fact the puppet of the parent company
-
an approach which was disapproved by the Judicial Committee in the first
Europa case,
70 ATC at p. 6018; (1971) A.C. at p. 771. The majority of the Court of Appeal declined to depart from the principle that for tax purposes the taxpayer and its wholly owned subsidiary are separate entities, but found that in fact the true nature and purpose of the expenditure was to acquire the capital asset. However in the present case there is no evidence on which it could be found that the taxpayer could benefit from the exercise of the option. Property Options was not a subsidiary of the taxpayer, and there is no evidence that Property Options was intended to hold the land and buildings for the taxpayer, or would be likely to share with the taxpayer any profits which might accrue as a result of the exercise of the option. Indeed the probability is that any financial benefit from the transactions would enure for the benefit of the parent company, Chloride Group Limited, and not for the taxpayer.
However it is abundantly clear that those who managed the affairs of the taxpayer knew that the grant of the lease was part of a wider scheme designed to benefit another or other companies in the group. They knew that part of the payments made as rent would in effect be credited against the purchase price of the land if in the end the option was exercised, as in all probability it would be. It seems right to say that the payments were
ATC 4418
made not only with the knowledge, but also with the purpose, that part might be treated as part of the price of a capital asset which Property Options would probably acquire. The question is whether in these circumstances it may be said that the acquisition of the capital asset was an advantage sought in part by the payments, notwithstanding that the taxpayer had no right to share in or benefit from the capital asset if acquired, and that the payments gave the taxpayer no right to ensure that Property Options did acquire the asset.I have said that in deciding whether outgoings made by a taxpayer are of a revenue or of a capital nature, it is necessary to consider ``the character of the advantage sought''. In my opinion, in principle, that must mean the character of the advantage sought by the taxpayer for himself by making the outgoings. Of course, as I have already indicated, a taxpayer may derive an advantage if someone else, such as a subsidiary, acquires an asset. But the fact that someone else incidentally derives an advantage of a capital kind in which the taxpayer does not share is not enough to give the outgoings the character of capital. This view is in my opinion implicit in the discussions in the leading authorities such as the Sun Newspapers' case, but it is expressly supported and illustrated by the decision in Poole and Dight v. F.C. of T. In that case the appellants, who were father and daughter, were members of a grazing partnership which carried on its business on land which included a grazing homestead freeholding lease, under which the tenure could be converted to freehold, and the purchasing price was payable by way of annual rent. This leasehold land was not part of the partnership property but the partnership paid the rent to the Crown. Walsh J. held that if the lessees had been carrying on business on the land, the payment of rent would have been of a capital nature. He held however that from the point of view of the partnership the rent was a revenue outgoing. For reasons which do not concern us, that did not assist the father, who, besides being a member of the partnership, was one of the lessees of the grazing homestead. However the appeal of the daughter, who was not one of the lessees, succeeded. As to her position Walsh J. said, 70 ATC at p. 4056; 122 C.L.R. at p. 443:
``She has no interest in the lease. The partnership of which she is a member has the right to use the land but has no other rights in respect of it. She will get no benefit if an estate in fee simple is acquired by payment of the purchasing price. Therefore, the payment made by the partnership was not related in any way to the acquisition by her of a capital asset. From her point of view it was simply a payment made in fulfilment of a condition which attached to the right of the partnership to use the land.''
The fact, which the daughter must have known, that the payment of the rent to the Crown would go towards paying off part of the price which the lessees would have to pay to complete the purchase of the grazing homestead did not make it an outgoing of a capital nature so far as she was concerned, although it was of such a nature when viewed from the point of view of a partner who was also a lessee.
The decisions of the Judicial Committee in the two Europa cases both proceeded on the basis that it is the advantage which the taxpayer seeks and gains from the outgoing that has to be considered in deciding whether the outgoing is of a revenue or of a capital nature. In the first Europa case, it was held that the money expended by the taxpayer under a contract for the purchase of trading stock was incurred in part for the purpose of producing advantages which the taxpayer would derive through a subsidiary company, Pan Eastern. In that case the taxpayer had a contractual right to enforce the performance of the obligations to Pan Eastern, and the majority of the Judicial Committee attached considerable importance to this circumstance: see 70 ATC at p. 6021; (1971) A.C. at p. 775. In the course of his judgment Lord Wilberforce said, 70 ATC at p. 6019; (1971) A.C. at p. 772:
``In their Lordships' opinion, sec. 111 " [of the New Zealand Act] " does not enable the Crown to disallow expenditure genuinely made whenever it can be found that some economic advantage accrues to the trader as a result of making the expenditure...For a claim to disallow a
ATC 4419
portion of expenditure incurred in purchasing trading stock to succeed, the Crown, in their Lordships' judgment, must show that, as part of the contractual arrangement under which the stock was acquired some advantage, not identifiable as, or related to the production of, assessable income, was gained, so that a part of the expenditure, which can be segregated and quantified, ought to be considered as consideration given for the advantage. Taxation by end result, or by economic equivalence, is not what the section achieves.''
In the second Europa case, the taxpayer had no contractual right to enforce the performance of the obligation owed to Pan Eastern, and the majority of their Lordships regarded this distinction as crucial. Lord Diplock said, 76 ATC at p. 6006; (1976) 1 W.L.R. at pp. 471-472:
``It is not the economic results sought to be obtained by making the expenditure that is determinative of whether the expenditure is deductible or not; it is the legal rights enforceable by the taxpayer that he acquires in return for making it.''
See also 76 ATC at pp. 6006-7; (1976) 1 W.L.R. at pp. 472-473. It was held that the ``true legal character of the whole of the expenditure claimed to be deductible is that of the purchase price of stock in trade...and nothing else. As such it is deductible in full...:'' see 76 ATC at p. 6009; (1976) 1 W.L.R. at p. 474. Lord Wilberforce, who dissented, thought that in deciding what was the purpose of the expenditure a commercial rather than a legal test should be applied, and that the fact that the taxpayer was in a position to expect a substantial profit through Pan Eastern was relevant, even though the taxpayer could not enforce the receipt of that benefit: see 76 ATC at p. 6013; (1976) 1 W.L.R. at pp. 480, 481.
The
Europa cases
were decided on a New Zealand section which is not identical with sec. 51(1), but which for present purposes appears to be indistinguishable in effect from that section. It becomes a question whether the decisions in those cases are inconsistent with the principle stated by
Dixon
J. in
Hallstroms Pty. Ltd.
v.
F.C. of T.
(1946) 72 C.L.R. 634
, at p. 648
, in a passage cited with approval by the Judicial Committee in
B.P. Australia Limited
v.
F.C. of T.
(1965) 112 C.L.R. 386
, at p. 397
, and by Lord
Wilberforce
in his dissenting judgment in the second
Europa case,
76 ATC at p. 6013; (1976) 1 W.L.R. at p. 480. In
Hallstroms' case, Dixon
J. said, at p. 648:
``What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.''
In Hallstroms' case, as in B.P. Australia Limited v. F.C. of T., it was known what advantage was sought by the taxpayer from the expenditure, and the question was whether an expenditure made to secure an advantage of that kind had the character of capital or income. In other words, the question in dispute was not, ``What was the expenditure for?'', but ``Was the advantage, known to be sought by the expenditure, of a capital or of a revenue nature?'' It was held that in answering that question the nature of the advantage from a practical and business point of view had to be considered. In the Europa cases the question for decision was ``What was the expenditure for?'', and it was held, at least in the second case, that it was only for benefits to which the taxpayer became legally entitled.
The words of the judgments in the
Europa cases,
like those of any judgment, must be understood in the light of the issues that fell to be decided. Their Lordships could not have meant to suggest that in every case the character of an outgoing must be determined by having regard only to the contractual or other legal rights that the taxpayer acquired in return for it. That would indeed have been inconsistent with the principle stated by
Dixon
J. in
Hallstroms' case,
and with cases too numerous to mention in which payments made ``voluntarily and on the grounds of commercial expediency'' (to use the words of Viscount
Cave
L.C. in
British Insulated and Helsby Cables, Limited
v.
Atherton
(1926) A.C. 205
, at p. 212
) have been held deductible as outgoings of a revenue kind although the taxpayer obtained no legally enforceable rights in return for them. However it is unnecessary for the decision of
ATC 4420
the present case to consider whether the second Europa case laid down a principle in terms too wide to be applied to sec. 51(1). If the statement of Lord Diplock already cited correctly states the law for Australia, it is apparent that the Commissioner cannot succeed in the present case, for the taxpayer had no legal right to enforce the option in favour of Property Options. If on the other hand that statement needs qualification so far as Australia is concerned, the decisions in the Europa cases , and indeed the dissenting judgments in those cases, support the conclusion that it is the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer that is relevant in determining the character of the expenditure, and that when an expenditure is genuinely made in payment of the price of trading stock, or in payment of rent, it is not permissible, for the purpose of deciding whether the expenditure was in part of a capital nature, to consider an advantage gained by another person as a result of the payment, when the taxpayer neither shares in that advantage, nor can secure its enforcement.The outgoings in the present case were genuinely made in payment of rent. The only advantage that the taxpayer sought or gained for itself by making the payments was that which it obtained as lessee under the lease. There was nothing to suggest that the taxpayer could or would share in the advantage which Property Options would derive from the making of the payments, and the taxpayer had no legal right, or for that matter any power, to ensure that Property Options did secure its rights under the option. The advantages gained by Property Options are therefore irrelevant in deciding upon the character of the advantage sought by the taxpayer in making the payments. That advantage was of a revenue character, namely the interest of a lessee, it was to be enjoyed in the ordinary way that such an interest is enjoyed, and it was to be obtained by periodical payments. The outgoings were not of a capital nature.
No doubt at first sight the transaction appears to have the flavour of a scheme or device to reduce taxation. However it was not a sham, and the Commissioner, no doubt rightly, made no attempt to rely upon sec. 260 of the Act. What the companies did was to arrange their affairs so that payments, which, if made by different persons and under different circumstances, might in part have been of a capital nature, were, when made by the taxpayer, truly of a revenue character.
For these reasons I consider that the conclusion reached by Mahoney J. was correct and that the appeal should be dismissed.
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