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. P. Gerber (Member)

In this reference, the taxpayer, an orchardist in the year now under review, made a loss from his fruit tree operations. In order to get some ready cash, he decided to take up part-time doctoring. He began to see a few patients at the farm and, as his practice grew, he built a surgery at a nearby town and found it necessary to install a phone, both at the surgery and at his home. This, in turn, involved a payment of what was termed a

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``connection fee'' to Telecom for each installation ($120 at each end). He claimed the full amount for the surgery, and half for the installation at his farm, conceding that half the use of the phone at home was for private or domestic purposes. The Commissioner disallowed both amounts - hence this reference.

2. No evidence was adduced as to what is involved in the payment of a connection fee, so that I am reduced to resort to the worst evidence rule - ``common knowledge''. For purposes of this reference, I am assuming that the payment of such fee is designed to compensate the Telephone Authority for the cost of installation, the subscriber in return obtaining the services of a telephone, but without any proprietary rights to any ``hardware''. Whatever the nature of these rights, they are not transferable in the sense that if, say, the practice were sold, the purchaser would have to re-negotiate with Telecom for the continued use of the service. Is the expenditure of a capital or revenue nature? The Commissioner asserts the former, the taxpayer the latter.

3. In a thoroughly researched submission, we were taken through the usual collection of cases, starting with
Atherton v. British Insulated and Helsby Cables (1925) 10 T.C. 155 ,
The Sun Newspaper case (1938) 61 C.L.R. 337 and
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1959) 101 C.L.R. 30 to name but a few. At best, these cases merely illustrate the acute difficulties courts experience when compelled by the Tax Act to characterise an expenditure as either ``capital'', ``capital nature'', or ``private or domestic''. It appears to me that there is no universal solvent, and such ``explanatory'' phrases as ``procuring a right of a permanent character'', ``creating a lasting advantage'', ``once and for all'' and such variants as ``enduring benefit'' establish two things: (i) that judicial glosses, as a means of separating ``capital'' from ``revenue'' are considerably less scientific than chicken sexing; (ii) there is only one safe conclusion - one must have regard to the facts of each case, despite Lord Wilberforce's warning that ``if one lesson emerges from the United States decisions, it is that case-to-case decisions do not add up to a system of justice'' (
Boys v. Chaplin (1969) 2 All E.R. 1085, 1104 ).

4. That this area of the law is a jungle of single instances is aptly demonstrated by the decision of the Privy Council in the
B.P. Australia case (1965) 112 C.L.R. 386 , where at p. 397 , their Lordships state:

``The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in borderline cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. The answer `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' (per Dixon J. in
Hallstrom's Case (1946) 72 C.L.R. 634 at p. 648 ). As each new case comes to be argued, felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallize particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.

One may approach the problem by considering the first of the matters mentioned by Dixon J. above, namely the character of the advantage sought, and in this both its lasting qualities and the fact of recurrence may play their parts. Under this head one might also take account of the nature of the need or occasion which calls for the expenditure ( Dixon J. in Hallstrom's Case ).''

5. Looking at ``the whole set of circumstances'' in this reference, I ask myself: ``what is the nature of the right acquired by means of the impugned

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expenditure?'' Put this way, it appears to me that on payment of the connection fee, this taxpayer brought into existence an advantage for the enduring benefit of his newly established medical practice. Seen from this perspective, it fits in neatly with the various judicial barnacles which have become encrusted around sec. 51 - ``it creates a lasting advantage'', it is ``once and for all'' and ``procures a right of a permanent nature''. It follows that it is ``like'' an expenditure of a capital nature. If the matter is to be opened up all over again, I consider it to be more appropriate that this should be done by the courts rather than a Board of Review.

6. Since my decision is irreconcilable with a recent decision on the same point arrived at by another Board, I propose to make a brief reference to that case. In Case M35,
80 ATC 260 , the Board was there concerned with - inter alia - the deductibility of telephone installation costs of a lecturer/tax agent/primary producer. After referring to the B.P. case (supra), Mr. Fairleigh Q.C. opined at p. 270:

``The word `capital' is not a disposal bag to take every outlay and loss where there is some instinctive, ill-defined, feeling that a taxpayer's claim should fail. In all circumstances `capital' in sec. 51(1) means capital in the economic sense.

There has been no discussion as to the payment for a telephone installation being a `once and for all' outlay; particularly if there is a disconnection and reconnection, say at another location, at the request of the subscriber for the telephone. In the absence of that and other pertinent evidence I view all the outlays for a telephone as being of a revenue nature; the evidence does not disturb the prima facie impression that the payment to Telecom for the installation of a telephone is a service fee for connection to a public utility.''

Mr. Fairleigh went on to examine this problem further when he came to deal with the claim for club fees:

``Outlays on club fees, whether initial joining subscription or recurrent subscriptions or recurrent subscriptions cannot be said to have the character of a capital outlay. This is because of the principle stated by Menzies J. in
Hatchett ( 71 ATC 4184 ; (1971) 125 C.L.R. 494 ) , viz.:

• An outlay is of that character ( scil, of capital or of a capital nature) when it is expended to obtain what can properly be described as capital in the economic sense.'

One who joins a club, upon payment of the entrance fee, similarly the member who pays the periodic subscription, does not expend money to obtain capital in the economic sense. Decisions of Boards of Review which are in conflict with the principle stated by Menzies J. must necessarily be disregarded. The character of payments to clubs is demonstrated by what was said by Lord Evershed M.P. in
Brown v. Bullock (Inspector of Taxes) (1961) 3 All E.R. 129 at p. 132; 40 T.C. 1 at p. 10 . That case is analysed in Case J10,
77 ATC 94 at pp. 98-99; and it now suffices to say that such outgoings are incurred to give a person a certain status.

In some circumstances, membership of a club may be an incident of the earning of income and thus the foundation may be laid to prove that fees (both initial joining fees and recurrent subscriptions) have the character of business outlays.''

7. I must readily concede that my learned colleague's decision has considerable weight. However, after considerable hesitation, I find myself, in the end, unable to give so broad an interpretation to Hatchett's case (supra) . It is one thing to say that the concept of capital ``in the economic sense'' is inappropriate when applied to a man's body, mind or capacity, or even to the status he may acquire on joining a club; it is quite another when this ``principle'' is applied to obtaining a telephone service. In Case J30,
77 ATC 282 , I took the opportunity to review Hatchett and the cases which preceded it. My views, as expressed in that decision, have remained unaltered. I can do no better than to repeat what I said at p. 287:

``I have set out the decision in Hatchett's case, at some length, largely because it seems to have been generally assumed to have established a new principle of law. I am unable to concur in this view. The decision highlights the problems that tribunals face in borderline cases when compelled by the relevant legislation to

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characterize an expenditure as either `capital' or of `a capital nature', or of `a private nature'. These terms appear at times too clumsy to describe all the outgoings that modern flesh is heir to. This is borne out by such judge-made jurisprudence when recourse is had to such explanatory phrases as `procuring a right of permanent character', an expenditure incurred `once and for all', `creating a lasting advantage'. If such phrases are intended to conceal the inadequate phraseology of sec. 51, they have succeeded. Ultimately, it is a resort to which I am myself driven in denying the deduction in the present reference.''

8. In the result, I have concluded, not without some hesitation, that the cost incurred in obtaining a telephone service is properly attributable, not to revenue, but to capital. I am mindful of what Menzies J. said in Hatchett's case (supra) which was so heavily relied on by Mr. Fairleigh Q.C. to the effect that an outlay has the character of capital or of a capital nature ``when it is expended to obtain what can properly be described as capital in the economic sense '' (my emphasis). However, I am not persuaded that his Honour intended this to become enshrined into a principle of law, to be applied in every case where the distinction between capital and revenue expenditure is brought into question. Whatever these distinctions may be, ``it is no use criticizing these, as it is easy to do, upon the ground that if you apply logic to them, they become more or less indefensible'' (per Lord President Clyde,
The Lothian Chemical Company Limited v. Commrs. of I.R. (1926) 11 T.C. 508, 521 .

9. I would uphold the Commissioner's decision on the objection.