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LABRILDA PTY LTD v DFC of T

Judges:
Lockhart J
Spender J
Ryan J

Court:
Full Federal Court

Judgment date: 26 March 1996

Lockhart J

This appeal from the decision of the Administrative Appeals Tribunal, General Division, involves the question whether a payment made by the applicant, Labrilda Pty Limited (``Labrilda''), pursuant to an agreement with Mobil Oil Australia Limited (``Mobil''), was an outgoing of a capital, or of a revenue nature. The Deputy President of the Tribunal decided the payment was of a capital nature, but the other two members decided that it was of a revenue nature. The Deputy President's decision prevailed by virtue of s. 42 of the Administrative Appeals Tribunal Act 1975.

The case involves the application of well established principles to its facts. There is no dispute about the facts; but there is dispute about the inferences to be drawn from them. The question of which inferences are to be preferred is one of impression, as it often is in cases of this kind.

The undisputed facts are as follows.

Labrilda operates a service station in Tingalpa, Queensland, and has done so since 5 October 1989. Previously, from about November 1987, it had operated another service station at Murarrie, Queensland. Labrilda transferred to the service station at Tingalpa because it had ``a much better exposure'' and a ``significantly higher turnover'' than the one at Murarrie.

Labrilda was a Mobil dealer. About two months after Labrilda had purchased the business of the first service station, Mobil introduced a marketing programme. Mobil approached a director of Labrilda - Mr NAK Wolno - to participate in the programme. Mr Wolno appears to be in charge of Labrilda's business. They reached agreement, and they executed a document to implement the marketing programme. Subsequently, Labrilda moved to Tingalpa.

Labrilda entered into four agreements with Mobil in relation to the service station at Tingalpa, which all commenced on 5 October 1990. The first agreement was the lease of the premises (``the Lease''). The Lease was for a term of three years commencing on 5 October 1990 (clause 2(1) and paragraph 5 of the Schedule). The Lease gave the right of occupation to Labrilda for the term of the Lease. There was no provision for renewal. The demised premises had to be used as a Mobil service station (clause 4(13)). Where either the MTP Agreement or the Reseller Agreement ended, (I shall describe them more fully later) then the Lease also was to end automatically (clause 2(2)(b)). Labrilda agreed with Mobil that it would comply with all ``the Team Pak Agreements'' and ``the Team Pak Standards'' (expressions I shall explain later), as specified in the Mobil Team Pak Reference Manual as updated from time to time (clause 4(1)) (again an expression I shall explain later).

The second agreement of Labrilda and Mobil was the ``Reseller Agreement'', whereby Mobil agreed to sell to Labrilda, and Labrilda agreed

ATC 4306

to purchase from Mobil, Labrilda's requirements of petrol, petroleum products and liquid petroleum gas for resale on the Site of the service station, together with certain other products. The period of operation of the Reseller Agreement was expressed to be co- extensive with the period of the Lease (clause 2).

The third agreement was the ``Meter Wholesale Agreement'', about which little is known from the evidence, and on which nothing turns.

The final agreement, with which this case is primarily concerned, was the agreement termed the ``Mobil Team Pak Agreement'' (``the MTP Agreement''). It is a lengthy document. It contains six recitals which I summarize as follows:

  • • Mobil has the right to the use within Australia of a system ``for the identification, lay-out and operation of service stations for the retailing of petroleum products and associated services, including know-how, the trade name and mark `Mobil', a distinctive Flying Horse trade mark, distinctive Mobil signage and graphics, and the Mobil Prime Sign''. This is all collectively referred to in the agreement as ``the Mobil System'' (recital A).
  • • Mobil has developed considerable goodwill toward the Mobil System, and has established a considerable reputation for the Mobil System within Australia (recital B).
  • • Mobil and its dealers have been co-operating in order to develop and introduce at Mobil service stations in Australia a particular business package, comprising new and improved products, methods of marketing, merchandising and promotion, and a new and improved means of customer service (collectively called ``the Team Pak Programme''). Thus, Mobil and its dealers have sought to achieve and to maintain market leadership in the petroleum retailing industry (recital C).
  • • Labrilda wishes to be granted the right to carry on its service station business at Tingalpa, selling petroleum products acquired from Mobil, using the Mobil System in the conduct of its business, and participating in the Team Pak Programme (recital D).
  • • Mobil and Labrilda propose to enter into the other agreements in relation to Labrilda's business at Tingalpa, namely, the Lease, the Reseller Agreement and the Meter Wholesale Agreement (all four agreements collectively called ``the Team Pak Agreements'') (recital E).
  • • Team Pak Agreements are new agreements and are not entered into by way of renewal (recital F).

The relevant operative clauses of the MTP Agreement are summarized as follows:

  • • Mobil grants to Labrilda the right to carry on the service station business at Tingalpa, selling petroleum products acquired from Mobil, along with certain other products, using the Mobil System in the conduct of Labrilda's business, and participating in the Team Pak Programme (clause 1).
  • • The MTP Agreement is expressed to operate for a period of three years, with provision for renewal (clause 2).
  • • Mobil agrees to provide assistance and training for Labrilda and its employees in the efficient operation of a Mobil service station in accordance with the Team Pak Programme, and to provide Labrilda with ``Team Pak Support'' in relation to the carrying on of the business (clause 3). Clause 3 is important, so I shall set out its terms:

``3. TRAINING AND TEAM PAK SUPPORT

(1) Training:

Mobil shall, from time to time as Mobil deems appropriate, provide assistance and training for Dealer and its employees in the efficient operation of a Mobil service station in accordance with the Team Pak Program including: -

  • (a) if Dealer is a new Mobil dealer, a free Mobil Team Pak pre-installation course, covering, amongst other things, customer relations, money management, merchandising and safety; and
  • (b) free accreditation training in accordance with the Mobil Team Pak Reference Manuals.

(2) Team Pak Support :

ATC 4307

Mobil shall, in addition, from time to time as Mobil deems appropriate, provide further support to Dealer including: -

  • (a) advice and assistance in relation to Dealer's business plans, financial affairs and accounting systems;
  • (b) obtaining national offers for Dealer and all other Mobil Team Pak dealers through preferred suppliers;
  • (c) conducting incentive programs for Mobil dealers and their employees;
  • (d) advice based on extensive analysis and testing carried out with suppliers, in relation to allocation of shelf space;
  • (e) advice in relation to sales room and service station lay-out;
  • (f) point of sale material in Mobil graphics;
  • (g) advice on merchandising;
  • (h) advice on signage;
  • (i) the planning and execution of marketing programs specifically directed to the benefit of Mobil service station network.''

• Mobil, in conjunction with its dealers, has produced Mobil Team Pak Reference Manuals containing detailed information in relation to the operation of a Mobil service station, including standards (collectively called ``the Team Pak Standards''), in relation to (a) customer service; (b) service station appearance; (c) marketing; (d) business management; (e) staff management; (f) safety; (g) operations; (h) hygiene; and (i) other subjects where appropriate. The Team Pak Reference Manuals are updated from time to time by Mobil (clause 4(1)).

• Labrilda agrees to adhere to the Team Pak Standards at all times, and to the policies and other requirements of the Team Pak Program, which it acknowledges to be essential for the ``success, goodwill and reputation of the Mobil dealer network and Mobil System and Team Pak Program'' (clause 4(3)).

• Labrilda agrees to use its best endeavours to efficiently promote and maximize the sale of Mobil products at the Site (clause 5(a)); to conduct its business at the Site generally in a manner calculated to protect and enhance the Mobil System (clause 5(b)); and to comply with the provisions of the other Team Pak Agreements (clause 5(c)).

• Labrilda acknowledges that the continuation and success of the Team Pak Programme necessitates the incurring of costs and expenses in introducing and maintaining that programme (clause 6(1)); and it therefore agrees to pay to Mobil an Accreditation Fee in the sum of $55,000. This is the amount with which this case is concerned (clause 6(2)). Sub-clauses 6(2) and (3) recognize that the Accreditation Fee may be payable in one lump sum or by instalments. But the effect of those two sub- clauses, taken together with paragraphs 6 and 7 of the Schedule, makes it clear that in the case of Labrilda the Accreditation Fee of $55,000 was payable as one initial payment, with no periodical instalments.

• Mobil agrees to use the Accreditation Fee in paying for Mobil Team Pak expenses (clause 6(4)).

• Mobil and its dealers have formed a Team Pak Marketing Council, which includes dealer representatives, for the purpose of developing an annual Team Pak Marketing Programme and Budget for network related marketing and promotion (clause 7(1)).

• Clause 7(2) provides for the establishment of a second source of monies payable to Mobil by Labrilda, namely, it entitles Mobil to allocate from the rent paid by Labrilda monthly under its lease of the Site, one-tenth of a cent for each litre of petrol, other petroleum products and liquefied petroleum gas purchased by Labrilda from Mobil in the month. The amount so allocated, plus similar allocations for other Mobil Team Pak lessee dealers, and marketing fees received from Mobil Team Pak owner dealers, shall be used by Mobil, together with a matching amount provided by it, in paying for the Marketing Program (clause 7(2)). Provision is made by clause 7(3) for Mobil to provide Labrilda with a written statement each calender year showing the total allocations and marketing fees referred to in clause 7(2).

• Labrilda acknowledges Mobil's interest and right to the Mobil System and agrees that, except with the written consent of Mobil, it would not infringe, use or imitate any element of the system, and would keep confidential the Team Pak Reference

ATC 4308

Manuals and all other elements of the Mobil System that were not in the public domain (clause 8(1)).

• Labrilda agrees to use Mobil's trade marks, brand names and other elements of the Mobil System only in accordance with the Co-Operation Programme Agreement (clause 8(2)).

• Labrilda is required to take out and maintain adequate insurance in respect of the premises (clause 10).

• Labrilda agrees to make all the payments to Mobil that are required under the Team Pak Agreements in accordance with Mobil's direction, as specified in the Team Pak Reference Manuals, or as otherwise specified to Labrilda from time to time (clause 11).

• Neither Mobil nor Labrilda may assign, charge or otherwise encumber any of its rights or obligations under the Team Pak Agreement, or other Team Pak Agreements, without the prior written consent of the other party (clause 14(1)).

• Clause 16 deals with breach and determination of the MTP Agreement, including provision in clause 16(4) for notice by Labrilda of breach of the Team Pak Standards by Mobil, referral of the breach to the Mobil Team Pak Standards Council, and thereafter the right of Labrilda to terminate the agreement if the breach is not rectified. Alternatively, Labrilda may seek specific performance of the agreement, but then not being entitled to claim damages or any other remedy in respect of the breach.

• On termination of the agreement, Labrilda is required immediately to cease use of all elements of the Mobil System and to deliver to Mobil all manuals, books, maps, graphs and other material relating to the Team Pak Program and the operation of a Mobil service station on the Site (clause 17).

The only oral evidence in the case was given by Mr Wolno. He was accepted by the Tribunal as a witness of truth and reliability. Mr Wolno gave evidence about the manner in which Labrilda came to enter into the MTP Agreement with Mobil at its first and second service stations.

The evidence of Mr Wolno has probative value for the purpose of determining the matrix of facts which surrounded the making of the agreements, the purpose of entering into them, and the nature of their practical operation.

Mr Wolno said that the service station business is highly competitive, that petroleum companies other than Mobil have also developed very effective campaigns to attract customers to their dealerships, and that there was not a great deal of ``customer loyalty'' among members of the public. He said that it was imperative for the continuing profitability of Labrilda that it enter Mobil's Co-Operation Programme System; otherwise revenue would be lost and the service station's profitability would be reduced. He expected that Labrilda would, by entering into the MTP Agreement, at the very least maintain its existing market share, and so maintain its levels of revenue and profitability. But what is more, he was optimistic that Labrilda would produce increased revenue and profits as a result of Mobil's promotions. By comparison, Mr Wolno said that Labrilda would find it almost impossible to run its own marketing programme and promotions, as it could not meet the costs of, for example, giving away free fuel for a two month period. It was important to work with Mobil.

For its dealers, including Labrilda, Mobil provided ongoing training for the staff, marketing advice as and when required, advertising and promotion. Mobil also supplied copies of the Co-Operation Programme Reference Manuals, which were updated regularly. But importantly, no changes were made to the lay-out of the service station at Tingalpa, and no plant equipment, fittings or fixtures were supplied to Labrilda under the MTP Agreement.

In relation to the advertising and promotions conducted under the Co-operation Programme Agreement, Mr Wolno said:

``The advertising and promotions provided by... [ the Petroleum Company] usually apply for quite a limited period of time - no more than two or three months. It is my experience that the promotional campaigns organised by each of the major oil companies for their dealerships tend to change very rapidly, as each of them struggles to maintain its competitiveness with the others. There is no way that the Taxpayer would be able to develop such rapidly changing advertising and promotional campaigns, without the

ATC 4309

assistance of... [ Petroleum Company] through the... [ Co-operation Programme model] system. It is my experience that, once a particular advertising or promotional campaign has expired, it has little or no on- going benefit for the Taxpayer's business; such advertising and promotional campaigns only seem to influence potential customers whilst they are current, and as soon as a particular advertising or promotional campaign has finished motorists have a tendency to take their business to the Taxpayer's competitors unless and until a fresh advertising or promotional campaign is undertaken.''

The relevant principle which governs the determination of the question whether outgoings are of a capital, or of a revenue nature are well established and need little reference. It is not necessary to recite the seminal passage from the judgment of Dixon J. in
Associated Newspapers Ltd and Sun Newspapers Ltd v FC of T (1938) 5 ATD 87 at 93-94; (1938) 61 CLR 337 at 359-360 ; but I shall set out the oft-cited passage at ATD 96; CLR 363 where his Honour said:

``There are, I think, three matters to be considered, (1) the character of the advantage sought, and in this its lasting qualities may play a part, (2) 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 (3) 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.''

It must be borne in mind that these statements of Dixon J. are not exhaustive or ultimately definitive of the relevant matters to be considered in each case.

In
Commissioner of Taxes v Nchanga Consolidated Copper Mines Limited [ 1964] AC 948 Viscount Radcliffe said at 959 :

``Nevertheless, it has to be remembered that all these phrases, as, for instance, `enduring benefit' or `capital structure' are essentially descriptive rather than definitive, and, as each new case arises for adjudication and it is sought to reason by analogy from its facts to those of one previously decided, a court's primary duty is to inquire how far a description that was both relevant and significant in one set of circumstances is either significant or relevant in those which are presently before it.''

In
BP Australia Limited v FC of T (1965) 14 ATD 1 ; (1965) 112 CLR 386 , Lord Pearce, who delivered the judgment of the Privy Council, referred at ATD 5-6; CLR 394 to the judgment of Dixon J. in Sun Newspapers , including the passage in Sun Newspapers at ATD 95; CLR 362 where his Honour said:

``... the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.''

Lord Pearce went on to say at ATD 7-8; CLR 397 that:

``The solution to the problem [that is whether expenditure is properly attributable to revenue or capital] 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 border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That 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 Halstrom's Case (1946) 72 CLR 634 at p 648; 8 ATD 190 at p 196). 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

ATC 4310

particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.''

See also
Colonial Mutual Life Assurance Society Limited v FC of T (1953) 10 ATD 274 ; (1953) 89 CLR 428 ; and
FC of T v South Australian Battery Makers Pty Ltd 78 ATC 4412 ; (1978) 140 CLR 645 .

The question in the case is what was the sum of $55,000 paid for? On the one hand, counsel for Labrilda argued that the payment was made on revenue account. He submitted that if the payment had not been an ``up-front'' lump sum payment, but a series of periodical instalments, then clearly they would have been of a revenue nature. Counsel continued by saying that the fact that there was only one payment does not alter its revenue character. The payment related to the day to day activities of Labrilda; it was not a payment for the right to carry on its business as a Mobil service station operator.

On the other hand, counsel for the Deputy Commissioner argued that the payment of $55,000 was of a capital nature. He submitted that this conclusion was supported by the following considerations:

  • • It was essentially an accreditation fee for the right to purchase the business of a service station, or gain access to it; and thus it was a right to acquire a business structure.
  • • It was in part a payment for the right to have access to, and use, the intellectual property of Mobil.
  • • The monies once paid were not refundable.
  • • Once paid to Mobil, the disposition of the monies was a matter for Mobil's discretion. Mobil could use them for whatever purpose it wished, subject to the fact that it had to use the monies at least in part for the purpose mentioned in clause 6(4) of the MTP Agreement; namely ``the expenses of training, marketing advice and support, advertising and promotions, and general set- up and operating expenses''.
  • • The levy payable pursuant to clause 6(2) of the MTP Agreement constituted the part of the funds expended by Mobil as marketing expenses. They, not the Accreditation Fee, were of a revenue nature.

It is necessary to examine all four agreements entered into by Mobil and Labrilda in order to determine the true character of the payment of $55,000. Although the MTP Agreement is the primary agreement with which this case is concerned, the four agreements are interlocking.

Nevertheless, from all of the agreements, clause 6 of the MTP Agreement stands out as particularly important. As mentioned earlier, it envisages the possibility of payment of the Accreditation Fee by more than one instalment (sub-clauses 6(1), (2) and (3)); but the Schedule provides (at paragraphs 6 and 7) that in this case the Accreditation Fee of $55,000 was to be paid by the initial Accreditation Fee payment, leaving the balance as nil. The first sentence of clause 6(4) requires Mobil to use ``initial Accreditation Fee payments'' to pay for the Mobil Team Pak expenses. It goes on to provide in the second sentence that, when received, all the Accreditation Fees are to belong to Mobil, and that they may be used at its discretion, subject to the commitments described in the preceding sentence. I do not think this clause on its proper construction entitles Mobil to use the Accreditation Fees, if any, that are paid after the initial Accreditation Fee for whatever purpose it wishes; although the point is perhaps academic in this case because the initial Accreditation Fee and the Accreditation Fee are one and the same.

What clause 6 means is that the whole of the Accreditation Fee, whether payable by one initial payment or by instalments, must be applied for the purpose specified in the first sentence of clause 6(4); but since the monies are not trust monies and may be mixed with Accreditation Fees paid by other Mobil dealers, the second sentence is designed to ensure that the monies, once paid, are Mobil's monies, and the method of their application is at the discretion of Mobil. In any case, the Accreditation Fee is to be for the Mobil Team Pak expenses. The discretion of Mobil is in regard to the time and method of the payment of the monies. Even if the construction of the second sentence of clause 6(4) for which counsel for the Deputy Commissioner contended is correct, it would be but one circumstance to consider in determining the true character of the payment.

Counsel for the Deputy Commissioner is correct in submitting that there is no express obligation imposed upon Mobil to refund the Accreditation Fee if the agreement should be terminated. But if the agreement is breached by

ATC 4311

Mobil, Labrilda would be entitled to sue Mobil for damages; and a component of the damages would be the proportion of the Accreditation Fee paid by Labrilda that had not been used by Mobil for the payment of the Mobil Team Pak expenses. Clause 16(4) of the MTP Agreement previously mentioned, whereby, if Mobil breaches that agreement Labrilda may seek specific performance, but not be entitled to claim damages, is but one situation which the MTP Agreement addresses.

Fundamentally, the MTP Agreement enabled Labrilda to obtain access to the assistance and training provided by Mobil for the efficient operation of a service station, and to participate in Mobil's marketing and merchandising programmes. The agreement was not concerned with establishing or preserving the business structure of the service station, but rather with improving Mobil's market share, and increasing the revenue and profitability of its dealers, including Labrilda. It was directed to the provision of services which related to the day to day operations of a service station. To the mutual advantage of Mobil and its dealers, the services which Mobil agreed to provide under the MTP Agreement were directed to the income producing activities of Labrilda. Indeed, Labrilda paid $55,000 to Mobil to receive benefits of a revenue nature. In fact, Labrilda did not receive the increased profitability that it had expected, but that is not to the point. None of the services and promotions provided under the MTP Agreement had an enduring quality in the sense of enhancing Labrilda's service station's business structure.

The $55,000 was expressed to be an Accreditation Fee in the MTP Agreement. Essentially, however, the payment was made to enable Labrilda ``to use the Mobil System in the conduct of its business at the Site and to participate in the Team Pak Program'' (recital D).

Among the rights conferred upon Labrilda under the MTP Agreement was the right to have its Accreditation Fee applied to Mobil Team Pak expenses - expenses connected with the use within Australia of the Mobil System, including training of staff, marketing advice and support, advertising and promotion, and the general ``set-up'' and operation of the Mobil Team Pak Marketing Program. In my opinion this stamps them with the character of revenue, not capital.

Although one of the rights obtained by Labrilda under the MTP Agreement is the right to use Mobil's know-how, the trade name and mark ``Mobil'', the distinctive Flying Horse trade mark, and distinctive Mobil signage and graphics - all being intellectual property of Mobil - this does not automatically clothe the $55,000 with the character of capital. It simply means that Labrilda is entitled to use intellectual property of Mobil in the course of carrying on its business at the Site, the purpose plainly being to increase its business, revenue and profits, and at once those of Mobil.

In my opinion, the payment of $55,000 was an outgoing on revenue account, and therefore deductible under s. 51 of the Income Tax Assessment Act 1936.

It is agreed between the parties that, if Labrilda succeeds in this matter, s. 82KZM of the Assessment Act will apply, so that an apportionment will be necessary to spread the deduction over the relevant years of income. The matter must therefore be remitted to the Tribunal to determine the deductibility of the sum of $55,000 pursuant to that section.

I would order that:

1. The appeal be allowed.

2. The decision under review be set aside.

3. The matter be remitted to the Tribunal to determine the appropriate deduction in accordance with s. 82KZM of the Assessment Act .

4. The Deputy Commissioner of Taxation pay the costs of Labrilda Pty Limited of the appeal.


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