Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation
(1952) 85 CLR 423(Judgment by: Williams J)
Between: Broken Hill Theatres Pty Ltd
And: Federal Commissioner of Taxation
Judges:
Williams JDixon CJ
McTiernan J
Webb J
Fullagar J
Kitto J
Legislative References:
Income Tax (Cth.) - The Act
Judgment date: 6 July 1951
Judgment by:
Williams J
This is an appeal by Broken Hill Theatres Pty. Ltd. from its assessment for income tax under the provisions of the Income Tax Assessment Act 1936-1948 in respect of its income derived during the year ended 30th June 1948. The sole question at issue is whether the appellant is entitled under the provisions of s. 51 (1) of that Act to deduct from its assessable income for that year legal expenses amounting to 270 pounds 12s. 9d. In its income tax return the appellant in claiming the deduction stated that the legal expenses were for costs incurred in contesting in the District Court of Broken Hill the application of Mr. J. Boulus for an indorsement of the licence issued under the Theatres and Public Halls Act in respect of the Town Hall, Broken Hill, which, if granted, would have established in Broken Hill another motion picture theatre in opposition to the then existing motion picture exhibitors in that city. The appellant stated that the granting of this indorsement would have occasioned considerable loss to the company, both in the way of decreased income and increased expenditure. (at p426)
The facts with respect to this litigation are set out in the report of the case Boulus v. Broken Hill Theatres Pty. Ltd. (1). The parties have agreed to treat these facts as part of the evidence on this appeal so that they need not be recapitulated. The legal expenses in dispute were those incurred by the appellant in the litigation up to 30th June 1948. The proceedings in the Supreme Court of New South Wales and in this Court occurred after that date. As appears from these facts objections to the granting of Boulus' application were lodged by the appellant, Ozone Theatres (B.H.) Pty. Ltd., South Broken Hill Music Hall Co. Ltd. and Johnson's Theatres Pty. Ltd. on the grounds mentioned in the report (1949) 78 CLR, at p 179 . It is not disputed that the sum of 270 pounds 12s. 9d. represents the share of the total costs incurred by the objectors up to 30th June 1948 attributable to the appellant. (at p427)
The appellant operates two motion picture theatres at Broken Hill. It has since March 1936 operated a motion picture theatre known as Johnson's Theatre situated at 43 Oxide Street and has since October 1940 operated another motion picture theatre known as the Crystal Theatre situated at 326 Crystal Street. Johnson's Theatre was held by the appellant until 18th February 1946 under a lease for a term which expired on that date and thereafter as purchaser under an uncompleted contract for sale and this was the position on 30th June 1948. The Crystal Theatre on 26th May 1947, the date of Boulus' application, was leased for a term expiring on 30th June 1955 and this was still the position on 30th June 1948. At the time of the application there were in the city of Broken Hill, and had been since 1940, five motion picture theatres operating as follows:-
- (a)
- Johnson's Theatre showing motion pictures every night of the week except Sunday and on two or three days each week;
- (b)
- the Crystal Theatre showing motion pictures on Saturday evenings only;
- (c)
- the Ozone Theatre with a similar number of performances to those given by Johnson's Theatre;
- (d)
- the Metropole showing motion pictures on Wednesday and Saturday evenings only; and
- (e)
- the Hillside Theatre showing motion pictures on Wednesday and Saturday evenings only.
Boulus' application was an application to the Theatre and Films Commission for an indorsement under s. 13A (1) of the Theatres and Public Halls Act 1908-1946 for a licence to authorize the exhibition in the Town Hall of cinematograph films. Since 1939 the appellant has opposed the granting of such a licence for theatres in the city of Broken Hill on five occasions and on each occasion has incurred legal costs in connection therewith. These occasions were an application by Peter Coochiroff and Ernie Johns on 22nd March 1939 for such a licence for the Crystal Theatre, and four applications by Salvatore Guide on 6th June 1939, 13th September 1940, 29th January 1943 and 10th December 1943 for such a licence for th e Tivoli Theatre. The application for the Crystal Theatre was granted and this caused the appellant to enter into the lease of that theatre already mentioned. The first three applications for the Tivoli Theatre were refused and the applicant died in the course of the fourth application. The appellant opposed Boulus' application on the grounds of opposition allowed by the Theatres and Public Halls Act, s. 13D (5) (b) (i) to (v), but it informed the respondent that its real objection was that the granting of the application would have adversely affected its business. (at p428)
The profit and loss account of the appellant for the year ended 30th June 1948 shows that its income of 26,600 pounds was almost completely derived from moneys paid for admission to its theatres and that two heavy items of expenditure were film hire, 4,786 pounds, and advertising, 1,633 pounds. These items were about its normal expenditure for these purposes. Boulus said in evidence in support of his application that if it was granted he could obtain films for exhibition and that he intended to spend a considerable sum of money on a superior type of chair to that used in the appellant's theatre, on air-conditioning (the appellant's theatres are not air conditioned) and on carpets. The appellant called as a witness its circuit supervisor Mr. Cooper, whose evidence I accept. He said that the seating capacity of Johnson's Theatre was 1,192 persons and of the Crystal Theatre 999 persons. He estimated the seating capacity of the Town Hall at 800 persons. He said that the average attendance at the appellant's theatres was two-thirds of their seating capacity. He also said that the competition of a new exhibitor of motion pictures would increase the amounts the appellant would have to pay for film hire and advertising. Its revenue was therefore threatened by a diminution in income due to loss of patronage and by this increased expenditure. Accordingly, as Mr. Cooper very fairly admitted to Mr. Windeyer, the appellant had for some time regarded the prevention of other motion picture theatres in the neighbourhood of its theatres as essential to the maintenance of its business. (at p428)
Section 51 (1) of the Income Tax Assessment Act provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. The meaning of this sub-section has been considered by this Court in two recent cases, Ronpibon Tin (N.L.) v. Federal Commissioner of Taxation (1949) 78 CLR 47 , at pp 55-57 and Federal Commissioner of Taxation v. Green (1950) 81 CLR 313 . An outgoing is an outgoing within the meaning of the first limb of the sub-section if it is incurred in the course of gaining or producing the assessable income in the sense that the occasion of the outgoing is to be found in what is productive of the assessable income or, if no assessable income is produced, would be expected to produce assessable income. It is an outgoing within the meaning of the second limb if the expenditure is necessarily incurred in the sense that it is clearly appropriate or adapted for producing assessable income. The sum of 270 pounds 12s. 9d. was, in my opinion, expended in the course of gaining or producing the assessable income of the appellant and the expenditure was appropriate or adapted for that purpose as it was expended to prevent a loss of patronage in its theatres and a consequential diminution in its revenue by the competition of a new and more comfortable motion picture theatre and it was expended to prevent the necessity of increased expenditure on film hire and advertising due to this competition. But outgoings only qualify as deductions to the extent to which they are not, inter alia, of a capital nature and the respondent contends that the expenditure in dispute was an outgoing of capital. (at p429)
The question whether an outgoing is an outgoing of income or capital has arisen for decision in many cases and the problem has been found difficult of solution. Many tests have been propounded, the most favoured being that propounded by Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205 , at pp 213, 214:
"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".
That test has been used and discussed in many cases, including three cases which closely resemble the present case in that the essential purpose of the expenditure was to prevent the competition of another business with that of the taxpayer. These cases are Collins v. Joseph Adamson & Co. [1938] 1 KB 477 : Associated Portland Cement Manufacturers Ltd. v. Inland Revenue Commissioners (1946) 1 All ER, 68 ; and Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 . In all these cases the expenditure was held to be of a capital nature. In Adamson's Case and the Sun Newspapers' Case the expenditure was partly incurred to acquire tangible capital assets. But the essential purpose of the expenditure was as I have stated. In the Associated Portland Cement Manufacturers' Case [1946] 1 All ER 68 no capital assets were acquired. Payments were made to retiring directors simply as consideration for covenants on their part not to engage in activities in competition with the taxpayer. Lord Greene M.R., referring to the test propounded by Viscount Cave, said (1946) 1 All ER, at p 72 that the test, though not by any means exhaustive, was an extremely useful test and in many cases would give the clue to the right answer. The test was discussed by this Court in the Sun Newspapers' Case. Latham C.J. said:-
"It is true that the payments did not result in obtaining a new capital asset of a material nature, but they did obtain a very real benefit or advantage for the companies, namely, the exclusion of what might have been serious competition. When the words 'permanent' or 'enduring' are used in this connection it is not meant that the advantage which will be obtained will last forever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole" (1938) 61 CLR, at p 355.
Dixon J. said:-
"The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss" (1938) 61 CLR, at p 359.
His Honour pointed out that "Recurrence is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure. Again, the lasting character of the advantage is not necessarily a determining factor" (1938) 61 CLR, at p 362. (at p430)
The expenditure now in dispute was, I think, an expenditure made once and for all and with a view to bringing into existence an advantage for the lasting benefit of the appellant's motion picture business. This business is of a kind which can only be carried on by persons who are licensed to exhibit motion pictures in particular theatres or halls. The less the number of licences the less the competition, and the better the opportunity for those privileged to possess licenses to carry on a profitable business. The defeat of any particular application for a new licence frees the existing exhibitors forever from the threat of new competition resulting from the success of that particular application. The application might be granted or it might be refused. Expenditure in opposing the application would be of the same nature whether the opposition succeeded or failed (Southwell v. Savill Bros. Ltd. [1901] 2 KB 349 ). The essential purpose of the opposition is to restrict the number of persons licensed to carry on the business to a minimum. The success of the opposition to the grant of a new licence would benefit what Dixon J. described in the passage cited (1938) 61 CLR, at p 362 as "the business entity, structure, or organization set up or established for the earning of profit" or what Lord Greene in the Associated Portland Cement Manufacturers' Case (1946) 1 All ER, at p 71 described as the goodwill of the business. Experience has shown that applications for further licences to exhibit motion pictures at Broken Hill are made from time to time and it is, no doubt, in the business interests of the appellant to make a practice of opposing them. But this does not make the costs of doing so in any true sense a recurring expenditure of the business. Such expenditure is the regular outlay required to gain or produce the assessable income such as film hire, advertising, rent, salaries and wages and such like. Adapting what Rich J. said in the Sun Newspapers Case (1938) 61 CLR, at p 347, the expenditure "is not an incid ent, whether normal or unusual, of the regular conduct of the organization for earning profits. The purpose was to buy out opposition and secure so far as possible a monopoly. The fact that the benefit was not perpetual does not deprive it of its capital attributes". Expenditure of this nature is in each case made once and for all to remove a particular threat to the prosperity of the business structure as a whole. The fact that further applications may be made in the future for new licences does not destroy the nature of the advantage to be derived from the defeat of any particular application. Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 CLR 634 was also cited, but to my mind there is the same distinction between that case and the present case as it seemed to me (1946) 72 CLR, at p 655 existed between that case and Collins' Case [1938] 1 KB 477 , the Associated Portland Cement Manufacturers' Case [1946] 1 All ER 68 and Sun Newspapers Case (1938) 61 CLR 337 . (at p431)
For these reasons I am of opinion that the expenditure in dispute is an outgoing of capital and the order I make is that the appeal be dismissed with costs. (at p431)
From that decision the appellant appealed to the Full Court of the High Court. (at p432)
G. E. Barwick Q.C. (with him N. H. Bowen), for the appellant. The legal costs incurred by the company in opposing Boulus' application for a licence were a loss or outgoing incurred in the gaining or producing of assessable income; they were not expenditure of a capital nature. Expenditure of this kind is an incident of this type of business. It does not relate to the profit-yielding subject matter but to the process of earning. The company's profit-earning organization was the same after the opposition as before: see Theatres and Public Halls Act 1908-1946, ss. 13A, 13B, 13D. The company has an annual licence for each of its theatres with an indorsement permitting it to exhibit motion pictures. The indorsement will be renewed if the licence is renewed, but there is not any right to renewal of the licence. The expenditure in question is recurrent in type and small in amount. After it was made there was nothing acquired and nothing added to what the company already had. It related directly to turnover and to cost of turnover. In Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 CLR 634 the taxpayer's capital organization was in jeopardy; in this case the taxpayer's capital organization was not in jeopardy; only its turnover was in jeopardy. The deduction is liable in accordance with the principle applied in Hallstrom's Case and, indeed, its licence would not be inconsistent with the reasoning in the dissenting judgment of Dixon J. (as he then was) in that case. The decision in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 has no application to the facts of the present case. The important features which were present in the Sun Newspapers' Case are listed by Dixon J. in his judgment in that case and a number of the important features so listed are absent from this case. (at p432)
W. J. V. Windeyer Q.C. (with him Dr. F. Louat), for the respondent. The decision of Williams J. was correct. None of the so called "tests" of whether an outgoing is of an income or a capital character is really a decisive test. They are indicia rather than criteria. The weight to be given to any one must depend upon all the circumstances of the particular case: see per Dixon J. in Sun Newspapers' Case (1938) 61 CLR, at p 362. In fact the expenditure in this case was not of a recurring character. Moneys had been paid on other occasions to prevent competition by the opening of other theatres. The application in respect of the Town Hall was, however, made once only. Expenditure to buy out a competitor has been held to be of a capital character. It is immaterial whether the money be paid to buy out or, by legal proceedings, to knockout threatened competition. Hallstroms' Case is distinguishable. (at p433)
G. E. Barwick Q.C., in reply. Cur. adv. vult. (at p433)