Federal Commissioner of Taxation v. Chapman

Judges:
Pincus J

Court:
Federal Court

Judgment date: Judgment handed down 31 March 1989.

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Pincus J.

These are two appeals, heard together, from a decision of the Administrative Appeals Tribunal [reported as Case V161,
88 ATC 1071] relating to income tax assessments. They concern expenses incurred by the respondent in 1982 and 1983 for the purpose of obtaining renewal of a town planning consent.

The respondent is taxed as a beneficiary under a trust, whose trustee acquired an operating quarry in the vicinity of the city of Cairns in 1974; the quarry had then been in operation for some years. The trustee's business is to win and sell fill and rock.

In 1971, the council of the city of Cairns adopted a town plan under which it was necessary for the trustee to apply for council consent to continue the quarry's operations. Neither the terms of the plan, nor those of the relevant council ordinances, were produced or referred to before the Tribunal or in this Court and the cases were conducted on the assumption that it is necessary to know no more of the plan or ordinances, for present purposes, than that the council's consent was necessary. In 1971, the council, on application made, granted the trustee a consent to carry on operations at the quarry for five years, and granted a similar consent in 1976. In 1981, according to the Tribunal's findings, a further five-year consent was granted, but I was told by counsel that what really happened was that the council initially intimated that it proposed to grant a further five-year consent. The council was obliged to advertise the trustee's application and invite objections. Some were lodged and, the council adhering to its intention to grant consent, some objectors appealed to the Local Government Court.

There were two cases in that Court, in the first of which it was held that because of a defect in the advertising done by the council, the appeal must be allowed. The procedure was gone through again and objectors again appealed, but this time the appeal was settled on the basis that there would be a consent expiring in four years instead of the normal five-year consent. The Local Government Court ordered accordingly.

There was a gap in the conduct of the business, discussed below, on account of delay in obtaining a new consent, after the 1976 consent expired.

The proceedings were very expensive. They cost over $70,000, the largest sum incurred being for legal fees; the 1971 and 1976 consents were obtained much more cheaply. The question raised is whether the expenses fall within the description in sec. 51(1) of the Income Tax Assessment Act 1936:

``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.''

It was argued for the Commissioner that deductions could not be allowed under sec. 51(1) for two reasons: firstly, the outgoings in question were not incurred in gaining or producing assessable income or necessarily incurred in carrying on any business; secondly, they were of a capital nature.

These contentions were rejected by the Tribunal, which set aside decisions made by the Commissioner and allowed objections to the relevant assessments in full. The Tribunal also had put to it, but did not decide, an issue as to whether the Commissioner had acted lawfully in issuing amended assessments. That point was not argued by the respondent taxpayer in this Court on the assumption, which I think to be correct, that if the Commissioner were

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successful here, the cases would have to be remitted to the Tribunal to consider the amendment question.

As relevant to both the issues raised, counsel for the Commissioner argued that the Tribunal had erred in its factual conclusions. The Tribunal found that the trustee continued to carry on business while it was prevented by the gap between consents from carrying on quarrying operations. This was because, the Tribunal found, the trustee had on hand substantial amounts of material which could be processed and sold. The matter assumed some importance in the appellant's argument; it was said that the cessation of business (for about 22 months) took the expenditure in question out of sec. 51.

It was argued for the Commissioner that the question of the correctness of that finding is one of law, because there was no evidence to support it. It appears to be correct that there was no direct evidence of the presence of amounts of saleable material at the beginning of the period during which the trustee was, on account of town planning restrictions, prevented from carrying on the quarry; but the conclusion that the trustee, during that period, carried on business has support in the evidence. The company's records show that during the relevant period, it received business income and incurred business expenses. Further, Mr G.E. Chapman gave evidence that maintenance work, prospecting and other work was done. It is true that Mr Chapman also suggested, at another place in the transcript, that the business was discontinued, but the resolution of any apparent inconsistency in the evidence was a matter for the Tribunal and cannot be a question of law. It was contended on behalf of the Commissioner that the absence of any evidence to support the Tribunal's finding as to continuation of the business produced the result that there was no evidence on which to base the ultimate conclusion, that the expenses fell within sec. 51. In my view the Tribunal's finding that the business did not cease operations at relevant times is, in the circumstances of this case, a factual conclusion which cannot be attacked here.

There remains for consideration the point whether, on the facts as found, the deductions claimed should have been allowed. The matter was, I think, argued before me on behalf of the respondent on the assumption that that is a legal point. Because of my ultimate conclusion, it is unnecessary to discuss the correctness of that assumption.

Some of the more relevant authorities are discussed below, but it is desirable first to consider the point broadly. It could hardly be contended that the ordinary recurring expenses of obtaining renewal of council consent every five years in order to continue carrying on the business were on capital account. The Commissioner's main argument was that obtaining the consent in question was in a different category, being a unique type of outlay, or at least one which, if not unique, could not be shown to be likely to be repeated. It was also argued that if the expense was on revenue account, the interruption to the winning of material caused by the delay in obtaining renewal took the expense outside the description at the beginning of sec. 51(1), namely ``incurred in gaining or producing the assessable income, or... necessarily incurred in carrying on a business for the purpose of gaining or producing such income''. My view is that neither the circumstance that the expenses in question were much heavier than usual (because they involved litigation), nor the interruption of the process of winning material about the time they were incurred, is sufficient to place these expenses in a different category from those which might ordinarily be expected to be incurred each five years; as to the latter point, I refer to
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at pp. 4068-4069; (1975) 132 C.L.R. 175 at pp. 192-193.

The Commissioner's counsel relied on the decision of Vaisey J. in
Pyrah v. Annis & Co. Ltd. (1956) 2 All E.R. 858, and that of Brightman J. in
ECC Quarries Ltd. v. Watkis (1975) 3 All E.R. 843. In each of those cases, it was suggested, payments of a comparable sort were held to be of a capital nature.

But in both the Annis and ECC Quarries cases, as I read the reports, what was sought was permission of a permanent kind. In Annis, the taxpayers attempted to obtain from the relevant licensing authorities an increase in the number of articulated vehicles which they were permitted to use in their haulage business. Vaisey J. held that the legal expenses incurred in that attempt (which was unsuccessful) were incurred for the purpose of making the taxpayer's fleet of lorries ``more useful and advantageous as income-winning assets''

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(p. 862). The attempt was described as ``designed to improve the taxpayers' capital position''. In the ECC Quarries case, the facts were closer to the present, in that the expense was incurred in applying for planning permission to operate two quarries. Again, it was the permanence of the advantage sought which was regarded by the Court as decisive against the taxpayer. Two sets of applications were in issue. The first, which was made in 1967, was unsuccessful. Further applications were made in 1969 and they, being more restrictive, were allowed. It was held that the money was expended ``for the purpose of securing a permanent alteration to the nature of the land'' (p. 860). The Judge added that ``the planning permission, if obtained, would in some sense have been an intangible asset of a capital nature''. The permission was one which would enable the sites in question to be worked until well past the year 2000.

The Tribunal's reasons in this case were criticised by the Commissioner's counsel because they asserted that no asset was acquired. In the ECC Quarries case, the contrary was held to be so. I agree with the Commissioner's contention that the consent which was obtained as a result of the expenditure here in question either was an asset in itself, or at least augmented the value of the land to which it applied. But I do not accept that either of the English cases, or any other decision to which reference was made by counsel, is authority for the proposition that money spent to obtain a series of relatively short consents under a town planning scheme, to enable a business to be carried on, is necessarily or prima facie of a capital kind.

It was also suggested for the Commissioner that the expenses could fairly be compared with those incurred in
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 and
Broken Hill Theatres Pty. Ltd. v. F.C. of T. (1951-1952) 85 C.L.R. 423. It is unnecessary to discuss the former case; the reasons of Dixon J. given there are too familiar to require analysis. In the latter, expenses were incurred by motion picture theatre proprietors at Broken Hill in successfully resisting an application by a would-be competitor (one Boulus) to obtain a licence permitting the showing of motion pictures there.

The High Court said that, by reason of the relevant legislation, the successful opposition to a new licence ``procured an immunity from competition for no more than 12 months'' (p. 433). It also appeared that over a period of 10 years, five similar applications had been made and had been resisted by the taxpayer. Nevertheless, it was held that the expenditure should not be regarded as recurrent in the relevant sense.

``At the time when it was made, nobody could say whether Boulus or anyone else would or would not make another application in two or five or ten years' time.''

(p. 433)

This is a point of distinction from the present case, where there was a necessity for regular applications, every five years. It is not an altogether satisfying one, since other sorts of recurrent expenditure, whose recurrence was not absolutely predictable, have passed muster - e.g. the payment of a lump sum to the managing director in
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 56 C.L.R. 290; see per Dixon J. at p. 306. Perhaps cases concerning attempts to prevent competition must be treated as in a separate category: see
B.P. Australia Ltd. v. F.C. of T. (1965) 112 C.L.R. 386 at p. 395.

Here, as it appears to me, the expenses are fairly comparable with those incurred by a business or professional man who has to pay a fee each year (or, for that matter, each five years) to renew a licence or certificate entitling him to carry on his business or practice. It could hardly be disputed that such a fee would be on revenue account. If, in a particular year, the applicant for renewal met opposition and found it necessary to engage lawyers to overcome it, in my view the same result would follow. It is true that here the permission added value, albeit temporarily, to the land, but I do not think that enough to set this sort of case apart.

One would expect recurring costs paid every few years (such as painting a building) to preserve a business and its assets ordinarily to be deductible under sec. 51. Here, the period of five years for which the advantage obtained ordinarily endured, and the period of four years during which the advantage in fact obtained on the occasion in question was to endure, both appear to be short enough to refute the contention that the advantage obtained should be characterised as ``permanent''. In the B.P. case (supra) a period of five years was said to

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be ``neutral'', i.e. not such as by its mere length to indicate either capital or revenue expenditure (p. 400). But given the expectation of recurrence, the relatively short period of the permission goes in favour of the taxpayer here.

The conclusion arrived at in the Tribunal was, in my opinion, correct. The Commissioner's application to this Court is dismissed with costs.