Case M53

Judges: MB Hogan Ch
P Gerber M

GW Beck M

Court:
No. 3 Board of Review

Judgment date: 21 August 1980.

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Dr. G.W. Beck (Member)

My colleague, Dr. Gerber, has set out the facts in this reference and the point at issue is the classification of a telephone connection fee paid by a taxpayer carrying on business as revenue expenditure or capital expenditure. As stated by Menzies J. in
F.C. of T. v. Hatchett 71 ATC 4184 the classification depends on the economic characteristics of the expenditure, but classification on this basis is by no means easy or unambiguous.

2. The accountants are the functionaries most frequently required to distinguish capital and revenue items and they have tended to make the distinction on the basis of the speed of turnover of the asset acquired as a result of the expenditure. Expenditure on items that are ``consumed'' in the business, or are resold, during one operating cycle or during the year for which accounts are being prepared is invariably regarded as ``revenue'' expenditure and other expenditure is capital. For example, the raw materials that are used up in production are a revenue charge against production, but raw material purchases are capitalised as ``stock on hand'' at acquisition and remain capital until sold or used in production. I do not know what Menzies J. meant by ``economic sense'' when in Hatchett's case he said expenditure was capital ``when it is expended to obtain what can properly be described as capital in the economic sense'', but I think it not unreasonable to assume he meant no more than that ``capital'' equated to the value in exchange or use of the assets that one holds at a specified point. To the accountant, of course, an asset is an economic benefit as yet not used up. An economic benefit is one that is either directly or indirectly exchangeable for money. Using the Hatchett principle, therefore, and the definitions of the accountants, capital expenditure is that which results in a taxpayer acquiring a benefit (assets) that is not used up (consumed) in the tax year under consideration. The reality is, that all expenditure is capital, but some is quickly - or even instantaneously - transformed into revenue expenditure by being used up in the process of trying to generate more capital (i.e., more assets) or, in the case of individuals, in the process of spending on food, clothing and so on.

3. When one asks how a telephone connection fee is to be classified in the light of this, one is in effect asking: has the asset arising from the fee been used up in the course of the year or does it remain at the end? And the answer to this question is obvious - the benefit remains, its economic aspect reflected in the fact that the connection will continue without the need for the outlay of further moneys, and it thus represents an item of capital.

4. I confirm the Commissioner's assessment.

Claim disallowed