Case V161
Members:KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
K.L. Beddoe (Senior Member)
The question at issue in these applications is whether certain expenditure incurred in connection with obtaining consent to continue to operate a quarry is an allowable deduction to the company operating the quarry. A further question arises as to the respondent Commissioner's power to amend certain assessments. The Tribunal need only consider that issue if it finds against the applicants on the primary issue.
2. The applicants are beneficiaries in a family trust of which the company is trustee. It was accepted before the Tribunal that the applicants were presently entitled to the net income of the trust.
3. The question which arises for decision must be determined under sec. 51 of the Income Tax Assessment Act, no other provision having been raised in the notices of objection. Nor does it appear that any other provision
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could apply to the amounts claimed as deductions.4. Unlike many applications which come before this Tribunal in its taxation jurisdiction the notices of objection set out very clearly both the relevant facts and the issues in dispute. Evidence was given before the Tribunal by one of the applicants who is also a director of the company and clearly the controlling mind of the company in its capacity of trustee. That evidence confirmed the facts recited in the notices of objection. For the purposes of these reasons I therefore find as facts the following paragraphs of the notices of objection. The account which follows is taken from the notice of objection in respect of the year of income ended 30 June 1985 lodged by the applicant who gave evidence:
``The... Family... Trust has owned the property in respect of which quarry operations take place since December 1974 and acquired it as an operating quarry. The property has operated as a quarry since 1967. The quarry supplies bulk fill and rock and no crushing or other processing is carried out. Some of the fill is sold to other contractors at a rate per cubic metre loaded on to their trucks. However most of it is delivered to the end user by the Trust at a contract price per cubic metre delivered. The bulldozing, blasting, loading and hauling is done by subcontractors. The quarry was previously owned by a partnership consisting of the... Family and that partnership operated the quarry since 1967. The Trust acquired the quarry in December 1974. The quarry has therefore effectively operated as a quarry since 1967.
Initially no permits, extractive industry licences or council town planning consents were necessary. In 1971 the City Council adopted a new town plan which was gazetted and owners of quarry operations within the City Council area were then forced to apply for town planning consent. In respect of the subject quarry, an initial application was lodged in 1971 and was granted by the City Council in 1971 for a period of five (5) years. In 1976 it was again necessary to reapply to the Council for renewal of the town planning consent and this was again granted (with some additional conditions) for a further five (5) years.
In 1981 it was again necessary to apply to the Council for a renewal of the town planning consent for a further period of five (5) years. The Council granted the consent but as part of the consent procedure, the Council is obliged to advertise the application and residents are entitled to lodge objections against the application. In respect of the Trust's application for renewal of consent for a further period of five (5) years lodged in 1981, some objections were received by the City Council and after the City Council decided to grant the consent, the objectors then lodged an appeal to the Local Government Court. The... Family... Trust therefore joined with the... City Council to defend the approval of the granting of the consent for a further period, in the Court.
Because of a legal technicality, the Local Government Court ruled against the Trust in September 1982 and it was then necessary for a fresh application to be lodged in October 1982. This application was again approved by the Council and again objectors lodged appeals to the Local Government Court against the Council's decision to grant consent. The... Family... Trust elected to join with the Council to defend the action.
This appeal went before the Local Government Court in May 1983 and following negotiation on certain conditions of operation of the quarry, the objectors agreed to withdraw their objection and judgement [sic] was given in favour of the council. Consequently Council issued formal consent in July 1983. One of the conditions agreed to at the court hearing, by the... Family... Trust, was that the consent would expire after four (4) years.''
5. The hearing before the Local Government Court to determine the dispute on its merits was estimated to last for a week or possibly two weeks. The trustee became concerned about the mounting cost of the litigation and this concern resulted in the settlement effected on the second day of hearing. That was the reason for the consent expiring by agreement after four years and also resulted in the trustee agreeing that it would not conduct any blasting with explosives. The Trust was obliged to accept these limitations in return for the withdrawal of the litigation. It was made very clear in evidence that the litigation was instigated by
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the objectors; the City Council always being of the view that consent for the quarry operations should be granted subject to certain conditions required by the Council which were accepted by the trustee.6. The trustee did not employ persons to do the quarrying work. All aspects other than supervision of the operation were performed by various contractors. However, the materials sold from the quarry whether sold ex quarry, or delivered to the purchaser's site were sold by the trustee. Supervision of the operations was performed by the trustee, the actual function being performed by the director who gave evidence and his father.
7. In respect of the year ended 30 June 1982 the trust claimed a deduction amounting to $3,418 in respect of ``Quarry Consent Application Expenses'' made up as follows:
Professional fees for engineers and surveyors $1,146.60
Photographs, plans, photocopies and application data 662.61
City Council application fees 1,080.00
Legal fees 44.80
Advertising costs of application 73.50
Public relations consultants fees 155.00
Travel expenses for director of trustee and solicitor
for conference with counsel 256.40
---------
$3,418.91
---------
8. Because of losses incurred by the trust in the years ended 30 June 1983 and 30 June 1984 it is appropriate to group the expenses incurred for the three years ended 30 June 1985. The amounts claimed for the three year period are as follows:
Professional fees for engineers and surveyors $10,560.45
Photographs, plans, photocopies and application data 594.09
City Council application fees 550.00
Legal fees 51,578.24
Advertising costs of application 158.70
Consultant's fees for town planning and property value 3,832.00
Travelling expenses - return air fares and accommodation for
solicitor and barrister for court case 1,793.00
Model of area to support application 1,900.00
----------
$70,966.48
for ----------
9. None of the expenses claimed is of an inherently capital nature so that it will depend upon the purpose of incurring that expenditure to characterise the expenditure.
10. The evidence before the Tribunal established that the trustee continued to carry on business while it was prevented from carrying on quarrying operations. This was because the trustee had on hand substantial amounts of material which could be processed and sold. However it was not permitted for the trustee to carry on any quarrying operations while the dispute re the granting of the consent was pending.
Details of trading operations by the trustee for the years ended 30 June 1982 to 30 June 1985 may be shown as follows:
1982 1983 1984 1985
$ $ $ $
Income
Sale of Filling 82,982 5,600 39,343
11. Turning to the law, subsec. 51(1) provides for allowable deductions for 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. The section excludes from deductibility losses or outgoings of capital or of a capital nature.
12. The facts of this case point to the second limb as being the more relevant provision.
13. In
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1959) 11 A.T.D. 510, (1958-1959) 101 C.L.R. 30, the question at issue was the deductibility of legal expenses incurred by a newspaper proprietor in defending an action brought for rectification of the share register of another company by deleting the shares in that company held by the taxpayer. The action was eventually dismissed by consent but the taxpayer had to bear its own costs and claimed a deduction in respect of those costs. The High Court was unanimous in finding that the claim was not allowable.
14. In the course of his judgment Fullagar J. said at A.T.D. p. 514; C.L.R. p. 40:
``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 No Liability v. Commissioner of Taxation (1949) 78 C.L.R. 47, at p. 56; 8 A.T.D. 431. 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. Commissioner of Taxation (1935) 54 C.L.R. 295, at pp. 303, 309; 3 A.T.D. 288:
W. Nevill & Co. Ltd. v. Commissioner of Taxation (1936) 56 C.L.R. 290, at p. 305; 4 A.T.D. 187. 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, p. 291:
Commissioner of Taxation v. Snowden & Willson Pty. Ltd. (1958) A.L.R. 533; 11 A.T.D. 463.''
The paragraph referred to by his Honour in Dr Hannan's work reads as follows:
``The meaning of `necessarily' in that context is probably not limited to compulsion in a legal sense (e.g. under statute, judgment, or award) and may extend to business expenditure arising out of exigencies created by unusual or difficult circumstances.''
15. The type of case contemplated by the learned author and by his Honour had already manifested itself in F.C. of T. v. Snowden and Willson Pty. Ltd. (1958) 11 A.T.D. 463, (1958) 99 C.L.R. 431.
Allegations were made that the company had engaged in unfair and dishonest trading practices which resulted in the appointment of a Royal Commission to enquire into
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the allegations. The company incurred advertising expenses in refuting the allegations and also incurred legal expenses by its appearance before the Royal Commission and claimed these expenses were deductible under sec. 51. The High Court (Webb J. dissenting) held that the expenditure in question was an outgoing necessarily incurred by the company in carrying on its business for the purpose of gaining or producing assessable income and was therefore deductible. The majority also found that the expenditure was on revenue account and not of a capital nature. Fullagar J. (with whom Williams J. agreed) referred at A.T.D. p. 469; C.L.R. pp. 443-444 to the word necessarily in the second limb of subsec. 51(1) as meaning for practical purposes that, within the limits of human conduct the person carrying on the business is to be the judge of what is ``necessary'', the revenue being adequately safeguarded by the exclusion of expenditure of a capital nature.16. Dixon C.J. came to a conclusion which emphasised an objective approach in the following passage at A.T.D. p. 465; C.L.R. p. 437:
``Clearly the expression is used in relation to business. Logical necessity is not a thing to be predicated of business expenditure. What is meant by the qualification is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business.
In the present case it appears to me that the taxpayer company could do nothing else but defend itself, if it was to sustain its business and continue carrying it on in anything like the same volume or according to the same plan. That seems to me to be enough.''
The dicta of Dixon C.J. is apt to the facts of this case.
17. The trustee incurred the various expenses in dispute for the purpose of enabling it to continue to carry on the quarrying business at its existing quarry. It was not seeking to do anything different than it had been doing in the past and merely sought council consent to continue the existing quarrying operations for another five years. Clearly the expenses were necessarily incurred in carrying on the business of the trust for the purpose of producing assessable income.
18. Were the expenses outgoings of a capital nature? In this case the advantage sought by the trustee was permission under municipal by-laws to continue quarrying operations on the site. No new advantage or right was sought, merely the renewal of a permit which by itself is of little if any value but which makes a quarry a feasible economic proposition by allowing the quarrying operations to continue.
19. In
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 at p. 363 Dixon J. stated three tests to assist in determining whether an outgoing was a capital sum (at p. 363):
``Again, the cases which distinguish between capital sums payable by instalments and periodical payments analogous to rent payable on revenue account illustrate the fact that rights and advantages of the same duration and nature may be the subject of recurrent payments which are referable to capital expenditure or income expenditure according to the true character of the consideration given, that is, whether on the one hand it is a capitalized sum payable by deferred instalments or on the other hire or rent accruing de die in diem, or at other intervals, for the use of the thing: compare
Ogden v. Medway Cinemas Ltd. (1934) 18 Tax Cas. 691 with
Inland Revenue Commissioners v. Adam (1928) S.C. 738; 14 Tax Cas. 34 and
Green v. Favourite Cinemas Ltd. (1930) 15 Tax Cas. 390.There are, I think, 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.''
19. [sic] Applying those tests to the facts of this case:
- (i) the amounts claimed were incurred because the exigencies of the business demanded that the trustee take every reasonable action necessary to ensure the quarrying business gained the necessary
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council consent to enable it to continue its operations - no asset was acquire and all that accrued to the trustee was the permission to continue quarrying operations on the site; - (ii) expenditure of this kind is likely to arise each time the trustee has to apply for a renewal of the council consent so that there is no enduring benefit; and
- (iii) the outgoings were incurred on a basis commensurate with the obtaining of the council consent, the trustee not deriving any benefit from the payments beyond the period of the consent obtained and incurred the additional outgoings because of the objections lodged by residents without any additional benefit to the trust.
20. The respondent relied on numerous authorities; at the forefront of these was the decision of the High Court in
Broken Hill Theatres Pty. Ltd. v. F.C. of T. (1951-1952) 85 C.L.R. 423. That case involved the deductibility of expenses incurred in contesting an application by another party for a licence to operate a movie theatre in competition with the applicant. The Court held that the outgoings were on capital account. In coming to that conclusion the Court distinguished the case from its decision in
Hallstroms Pty. Ltd. v. F.C. of T. (1946) 8 A.T.D. 190, (1946) 72 C.L.R. 634, where the Court decided (by majority) that legal expenses incurred in connection with the company's opposition to an extension of a patent to manufacture refrigerators held by another manufacturer were allowable deductions. Webb J. distinguished Hallstroms case in terms which apply mutatis mutandis to the present application. At p. 436 his Honour stated:
``Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 C.L.R. 634 is, I think, distinguishable, as Williams J. held. The extension of the patent in that case would have been for a fixed period of years. The life of the patent, like that of a coat of paint, would be of definite duration and known in advance. But forecasts as to the probable fate of applications for theatre licences would be in the region of speculation and beyond the scope of evidence. Expenditure in preventing the extension of a patent in so far as it would tend to protect for a definite period of years the income of the business making the articles formerly patented would be regarded as revenue expenditure. But expenditure in preventing a new licence for an indefinite period might properly be claimed to be for the protection of the business as a whole, and so be treated as capital expenditure.''
21. I am satisfied that the expenditure in question was necessarily incurred in carrying on the quarrying business from which the trust derived assessable income at all relevant times and that the outgoings were not of capital or of a capital nature. There is no basis, on the facts, for finding that the outgoings were of a private or domestic nature.
22. In view of that finding it is not necessary to consider whether the amended assessments were authorised nor is it necessary for the Tribunal to consider whether the applicants were presently entitled to the amounts assessed as income resulting from the disallowance of the expenditure in dispute.
23. The Tribunal will set aside the objection decisions under review and allow the objections in full.
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