LABRILDA PTY LTD v DFC of T
Judges: Lockhart JSpender J
Ryan J
Court:
Full Federal Court
Ryan J
This is an application by way of appeal from a decision of the Administrative Appeals Tribunal (``the Tribunal'') constituted by Miss Forgie, (Deputy President) and Messrs Beddoe (Senior Member) and Horrigan (Member). Because the issue on which the decision turned was perceived to be a question of law, the view of the learned Deputy President prevailed pursuant to s 42(1) of the Administrative Appeals Tribunal Act notwithstanding that the other two members reached a different conclusion.
ATC 4312
The appellant at all relevant times conducted a ``Mobil'' service station at Tingalpa. It had earlier conducted a similar business, since November 1987, from leasehold premises at Murrarie. About two months after commencing business at Murrarie, Mobil Oil Australia Ltd (``Mobil'') introduced a new marketing program which required resellers of Mobil products to enter into a Co-operative Program Agreement under which each reseller apparently agreed to pay to Mobil an accreditation fee. The fee paid by the appellant in respect of the Murrarie premises was $25,000. After about two years, the appellant took advantage of an opportunity to move its business to another ``Mobil'' service station at Tingalpa. To achieve that transfer, it entered into four agreements with Mobil - a ``Mobil Team Pak Agreement'' which was in the form of the earlier Co-operative Program Agreement, a lease, a reseller agreement and a meter wholesale agreement. The agreements, as the Tribunal found, were ``inter-locking and inter- dependent'' in the sense that one could not be entered into without the others and upon the determination of one, the others fell with it.
The Team Pak Agreement was prefaced by, amongst others, the following recitals:
``A. Mobil has the right to the use within Australia of a system for the identification, lay-out and co-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 (hereinafter collectively called `the Mobil System').
B. Mobil has developed considerable goodwill and reputation in the Mobil System within Australia.
C. Mobil and its dealers have been co- operating in order to develop and introduce at Mobil service stations in Australia, a business package with the objective of Mobil and its dealers achieving and maintaining market leadership in the petroleum retailing industry and comprising new and improved products, methods of marketing, merchandising and promotion, and new and improved means of customer service (hereinafter collectively called `the Team Pak Program').
D. Dealer wishes to be granted the right to carry on a service station business at the address specified in paragraph 3 of the Schedule (`the Site') selling petroleum products acquired from Mobil and other associated products and services, to use the Mobil System in the conduct of its business at the Site and to participate in the Team Pak Program and Mobil is willing to grant to Dealer the right to do so on the terms and conditions set out in this Agreement.''
This general description of the rights acquired by the Dealer was contained in cl 1 of the Team Pak Agreement:
``RIGHTS TO USE SYSTEM AND PARTICIPATE IN TEAM PAK
Mobil hereby grants to Dealer (subject to the terms and conditions contained in this Agreement and subject to Dealer entering into the other Team Pak Agreements and thereby acquiring the rights granted thereunder) the right, in carrying on a service station business at the Site selling petroleum products acquired from Mobil and other products and services of a type approved by Mobil, to use the Mobil System in the conduct of Dealer's business at the Site and to participate in the Team Pak Program.''
Pursuant to the Team Pak Agreement, the appellant paid the sum of $55,000 which has given rise to the present proceedings. That sum was described in the Team Pak Agreement as an ``accreditation fee'' and was provided for by cl 6 of the Agreement which was in the following terms:
``6. TEAM PAK EXPENSES AND FEE
(1) Accreditation Fee:
Dealer acknowledges that the continuation and success of the Team Pak Program necessitates the incurring of costs and expenses in introducing and maintaining the Team Pak Program. Dealer therefore agrees to pay to Mobil, subject to this Agreement, an Accreditation Fee in the amount specified in paragraph 6 of the Schedule.
(2) Initial Accreditation Fee Payment:
On or prior to the execution of this agreement, Dealer shall pay to Mobil at least that amount of the Accreditation Fee as is specified in paragraph 7 of the Schedule.
ATC 4313
(3) Balance of Accreditation Fee:
Where after the payment under (2) there is a balance of the Accreditation Fee still payable, it shall be paid subject to and as required in Attachment A (after adjustment for inflation and otherwise as provided in that Attachment).
(4) Use of Accreditation Fee:
Mobil shall use the initial Accreditation Fee payments under (2) by Dealer and other Mobil dealers in paying for Mobil Team Pak expenses, including but not limited to, the expenses of training, marketing advice and support, advertising and promotions, and general set-up and operating expenses. When received, all Accreditation Fees belong to Mobil, and may be used at its discretion subject to the commitment described in the preceding sentence.
(5) No Further Fee on Renewal:
Dealer shall have no obligation to pay to Mobil any further Accreditation Fee on any renewal of this Agreement during the period of nine (9) years commencing on the Commencement Date.
(6) Where Mobil holds under Lease with less than Nine Years remaining:
Where this Agreement has an Attachment B, an extra accreditation fee may be payable under the provisions of that Attachment, including, notwithstanding (5), under the provisions of a renewal of this Agreement.''
The corresponding references in the Schedule were:
``6. Accreditation Fee: FIFTYFIVE THOUSAND DOLLARS ($55,000.00)
7. Initial Accreditation Fee Payment: FIFTYFIVE THOUSAND DOLLARS ($55,000.00) (then the balance remaining is nil).''
The appellant's Team Pak Agreement did have annexed to it both an Attachment A and an Attachment B. Attachment A apparently recognized the fact that the Team Pak Agreement was in a standard form under which some Dealers, unlike the present appellant, might pay the accreditation fee in more than one instalment. It provided for payment of the balance of the accreditation fee by stipulating:
``1. BALANCE OF ACCREDITATION FEE
Where, after the payment required by clause 6(2) of the Mobil Team Pak Agreement, a balance of the Accreditation Fee is still payable, it is to be paid as provided in clause 3 of this Attachment after re-calculation under clause 2 of this Attachment.''
Then followed a prescription of a formula for calculating the amount payable by adjusting the unpaid balance in accordance with the Consumer Price Index applied over the time which had elapsed since the Team Pak Agreement had been entered into. The formula had the effect that the amount payable was reduced to nil. Clauses 3, 5 and 6 effectively provided a release from the obligation to pay the balance of the accreditation fee if the ``Dealer as constituted'' continued to operate the site for six years or some person not associated with ``the Dealer as constituted'' became the operator of the site as a result of the death or incapacity of that Dealer or a person nominated to be personally present.
Attachment B was prefaced by these recitals:
``A. Mobil holds the Site under a lease (the `Lease') which is due to end within nine (9) years.
B. It is not known whether the Lease will be extended, renewed, or replaced.
C. Because of the uncertainty referred to in B, the Accreditation Fee and the minimum initial Accreditation Fee payment under Clause 6 of the Mobil Team Pak Agreement have been reduced.
D. This Attachment is to clarify what is to happen in each of the possible circumstances.''
Attachment B then went on to provide that, in the event of the Lease not being extended, renewed or replaced within nine years, each of the Team Pak Agreements should end immediately before the end of the Lease without Mobil incurring any liability to the Dealer because the Team Pak Agreement had not continued for at least three years. Clauses 2 and 3 of Attachment B provided as follows:
``2. MOBIL RIGHTS CONTINUE
- (a) Where the Lease is extended, renewed, or replaced; or
- (b) where Mobil purchases the freehold of the Site, or its landlord's interest in the Site;
ATC 4314
the Team Pak agreements shall continue in accordance with their provisions, and
- (c) Dealer shall pay to Mobil, on request, an extra accreditation fee, calculated under Clause 3.
3. CALCULATION OF EXTRA ACCREDITATION FEE
The extra accreditation fee is calculated in accordance with the formula: -
A = CPI (B − C)
Where: -
A is the amount payable
CPI is the movement in the consumer price index, arrived at by dividing the index number for the quarter of the year in which the amount is paid by the index number for the quarter of the year in which the Team Pak Commencement occurs. The index numbers from time to time used under s 160ZJ of the Income Tax Assessment Act of the Commonwealth of Australia shall apply.
B is
(being the minimum initial accreditation fee payment if the uncertainty referred to in Recital B did not exist).
C is the amount specified in paragraph 7 of the Schedule to the Mobil Team Pak Agreement as the initial Accreditation Fee payment.''
The Team Pak Agreement obliged Mobil to conduct promotional campaigns and provide training for each reseller and its employees, advice and assistance, including the obtaining of ``national offers from preferred suppliers'', and ``point of sale material in Mobil graphics''. Mobil was also required to provide each Dealer with ``Team Pak Reference Manuals'' embodying standards and guidance for the operation of a Mobil service station. It was contemplated that those manuals would be updated from time to time. There was a corresponding obligation on each Dealer to comply with the standards stipulated in the manuals.
The rights of the Dealer and Mobil to certain items of Mobil's intellectual property were set out as follows in cl 8 of the Team Pak Agreement:
``TRADE MARKS AND BRAND NAMES
(1) Dealer Acknowledgement:
Dealer acknowledges and recognises Mobil's interest and right to the Mobil System. Except with the written consent of Mobil, Dealer agrees not to infringe, use or imitate any element of the Mobil System (including any manuals, operating guidelines, forms, or other literature or advertising of Mobil relating to the Mobil System). Dealer shall keep confidential the Team Pak Reference Manuals and all other elements of the Mobil System that are not in the public domain.
(2) Use only under Agreement:
Dealer may use Mobil's trade marks, brand names and other elements of the Mobil System only in accordance herewith, and the Team Pak Reference Manuals only in connection with the promotion, handling and sale of Mobil products and other products or types of products and services approved by Mobil.
(3) Quality Control:
Dealer shall not adulterate, mix, or otherwise interfere with the quality of Mobil products sold by Dealer, and shall keep them in good condition and strictly adhere to the quality control and testing procedures specified in the Team Pak Reference Manuals or otherwise by Mobil from time to time.
(4) Not to misrepresent:
Dealer shall not pass off or represent any goods as Mobil goods if they are not Mobil goods.''
Notwithstanding cl 6(4) of the Team Pak Agreement which I have already quoted, the accreditation fee was not seen as the sole source of funds for promotional and marketing activities to be carried on by Mobil. Another source was the fund contemplated by cl 7 of the Team Pak Agreement in these terms:
``7. MARKETING AND SALES PROMOTION
(1) Team Pak Marketing Council:
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 Program and budget for network related marketing and promotion.
ATC 4315
(2) Marketing Allocation:
Commencing on the later of the Commencement Date or 1st January, 1990, Mobil shall allocate from the rent paid by Dealer monthly under the Dealer's lease of the Site, one-tenth of a cent for each litre of petrol, automotive distillate and automotive liquefied petroleum gas the Dealer purchases from Mobil in the month for sale at or from the Site. 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 Mobil, in paying for the marketing program referred to in (1).
(3) Information:
At least once each calendar year Mobil shall provide to Dealer a written statement showing the total of the allocations and marketing fees referred in to [ sic ] (2) in the period since the previous year's statement, and the total expenditure on the marketing program in that period.''
The Team Pak Agreement was expressed to remain in force for three years from its commencement with an obligation on Mobil to renew it in accordance with the Petroleum Retail Marketing Franchise Act 1980 as amended from time to time. Sub-cl (3) of cl 2 provided, in that context:
``(3) Notwithstanding (1) and (2): -
- (a) where Mobil itself holds the Site under a lease and sub-lets occupancy of the Site to Dealer, the life of this Agreement shall not endure beyond the period which ends immediately before the end of the lease to Mobil;
- (b) where either the Lease or the Reseller Agreement, being other of the Team Pak Agreements in relation to Dealer's business at the Site, ends, this Agreement shall end automatically.''
The ability to assign the benefit of the agreement was governed by cl 14 in these terms:
``14. ASSIGNMENT
(1) No Assignment Without Consent:
Neither party hereto shall assign, charge or otherwise encumber any of its rights or obligations under this Agreement, or the other Team Pak Agreements, without the prior written consent of the other party. Where legislation requires it, that consent is not to be unreasonably withheld.
(2) Unauthorised Assignment Void:
Subject to the Act, any assignment, charge or other encumbrance of either rights or obligations shall be void unless the prior written consent of the other party is first obtained.
(3) Change in Company or Trust:
Where Dealer is a company, or the trustee of a trust, and the legal or beneficial interest in any share(s) in that company (which give control of the company or which confer the right to receive fifty per cent (50%) or more of any dividends of the company), or the beneficial ownership of the trust, is transferred to or held by a person other than a person who holds that interest at the commencement of this Agreement, the following provisions shall apply:
- (a) Unless Mobil otherwise agrees, Dealer shall within fourteen (14) days thereafter serve on Mobil a notice in writing (the date on which Mobil receives the notice being hereinafter called `the offer date') offering to Mobil to assign Dealer's rights and obligations under the Team Pak Agreements for a consideration equal to their then market value, to such person as Mobil may nominate.
- (b) Dealer shall specify in the notice Dealer's assessment of such consideration. If Mobil disputes Dealer's assessment, Mobil may within thirty (30) days of the offer date notify Dealer that it requires the consideration to be determined by the arbitration of an independent valuer to be, at the request of Mobil, nominated by a Director or other Senior Office bearer of the Australian Institute of Valuers (Incorporated) or its successor, and the arbitrator's costs of such determination shall be paid by Mobil and Dealer equally, with each party bearing its own costs. Mobil and
ATC 4316
Dealer shall co-operate to expedite the arbitration, and the determination of the consideration by arbitration shall be binding on Dealer.- (c) Mobil shall have thirty (30) days from the later of: -
- (i) the offer date; or
- (ii) where the consideration is arbitrated, the aware [ sic ] of the arbitrator;
- within which to accept Dealer's offer.''
It was accepted on both sides that the Team Pak Agreement was not a sham and that entry into it was believed by the appellant to be necessary to maximize the income to be derived from the dealership. The Tribunal made the following finding of fact in respect of the intention of the director of the appellant who seems to have been accepted by both parties as its governing mind and will:
``62.... The Director understood that the taxpayer paid it so that it could take advantage of the system of advertising and promotion in place for the Petroleum Company's dealerships. This would replace the taxpayer's individual efforts and maintain its profitability in a highly competitive industry. The director also said that the taxpayer would be provided with training of its staff in the standards required of a Co-operation Programme service station network by providing manuals which the Petroleum Company would update from time to time.''
Earlier findings of fact bearing on the state of mind of the same director were:
``24. In his experience, the director said, the service station business is highly competitive. Other petroleum companies have developed very effective campaigns to attract customers to their dealerships. He also believed that there was not a great deal of `customer loyalty' among the general public and the dealership they choose is influenced by a number of factors. Those factors include price and promotions. If there is a `price war', they will choose the dealership with the cheapest price but, if that is not a factor, the public is attracted by promotions such as `free give-aways'.
25. As he was aware of the highly competitive nature of the retail fuel industry, the director considered it imperative for the continuing profitability of the taxpayer that it enter the Petroleum Company's Co- operation Programme system. He could envisage that, unless the taxpayer did so, revenue would be lost and the service station's profitability would be reduced. As a member of the Petroleum Company Co- operation Programme Agreement, he expected that the taxpayer would, at the very least, maintain its existing market share and so maintain its then current levels of revenue and profitability. He was also optimistic that the taxpayer would produce increased revenue and profits as a result of the Petroleum Company's promotions.
26. At the time the taxpayer took up the lease of the second service station, it also entered a new Petroleum Company Co- operation Programme Agreement. As the director had previous experience with the system at the first service station, he did not think it necessary to discuss the details with anyone at the Petroleum Company about the way in which it operated and what it involved.
27. As it turned out, the director felt that the Co-operation Programme was not as successful as he had hoped it would be. Despite that, he was convinced that it was necessary that the taxpayer remain a Co- operation Programme dealer when it acquired the second service station. This was based on the director's view that it was necessary in order to maximise the potential revenue and profitability of the business. Indeed, the director considered that the high exposure and greater turnover at the second service station meant that it was imperative to be associated with advertising and promotions which would enhance the taxpayer's competitiveness against other petroleum companies.
28. The director said that the Petroleum Company provided on-going training for the staff, marketing advice as and when required, advertising and promotions. The Petroleum Company supplied copies of the Co-operation Programme Reference Manuals. Those manuals, which are updated regularly remain the property of the Petroleum Company. No changes were made to the structure of lay-out of the
ATC 4317
service station and no plant, equipment or other fittings or fixtures were supplied to the taxpayer under the Co-operation Programme Agreement.29. In relation to the advertising and promotions conducted under the Co- operation Programme Agreement, the director said that:
`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 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 under- taken.'
(Exhibit 2, paragraph 18)
30. In his oral evidence, the director said that, if looked at overall, promotions normally operate on a `break-even' basis. This means that if the taxpayer is required to give away fuel, for example, it is usually reimbursed its value. In cross-examination, he was asked whether the effectiveness or otherwise of the marketing campaigns affected the taxpayer's profitability. He said that some led to increased profits and, some led to the taxpayer's incurring a loss. The marketing campaigns were never judged by reference to individual dealers, however, but by their overall national effect.
31. The director said that the taxpayer 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 the Petroleum Company or with any other petroleum company with whom a dealer might be associated. This meant that the taxpayer had to run promotions whether they were a success or a failure.''
The question which the Tribunal saw itself as required to resolve was whether the accreditation fee of $55,000 was an outgoing of capital or of a capital nature for the purposes of s 51(1) of the Income Tax Assessment Act or whether it was a pre-payment of expenditure of a revenue nature. Section 51(1) provides:
``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 is clear, and apparently common ground, that the taxpayer has been carrying on the business of a service station operator for the purpose of gaining or producing assessable income. The questions for resolution can therefore be characterised as whether the outgoing in the form of the accreditation fee was necessarily incurred
in carrying on
that business and, if so, whether it came within the exception as wholly or partly an outgoing of capital or of a capital nature. In my view, those questions, in the circumstances of this case, come down to alternative expressions of the same issue. I say that because, if the outgoing was incurred, as the respondent contends, as an establishment expense directed to the acquisition organization and structure of the business and not to carrying it on, the factual question of whether it was of capital or of a capital nature almost answers itself as in
John Fairfax
&
Sons Pty Ltd v FC of T
(1959) 11 ATD 510
;
(1959) 101 CLR 30
.
What has become accepted for present purposes as the classic formulation of the distinction is that by Dixon J in
Associated
ATC 4318
``The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or oganization 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. The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called goodwill, that is, widespread or general reputation, habitual patronage by clients or customers and an organized method of serving their needs. At the other extreme it may consist in a great aggregate of buildings, machinery and plant all assembled and systematized as the material means by which an organized body of men produce and distribute commodities or perform services. But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a `profit-yielding subject,' the phrase of Lord Blackburn in
United Collieries Ltd v IRC (1930) SC 215 at p 220; (1929) 12 Tax Cas 1248 at p 1254 . As general conceptions it may not be difficult to distinguish between the profit yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose. But the practical application of such general notions is another matter. The basal difficulty in applying them lies in the fact that the extent, condition and efficiency of the profit yielding subject is often as much the product of the course of operations as it is of a clear and definable outlay of work or money by way of establishment, replacement or enlargement. In the case of machinery, plant and other material objects, this is illustrated by the commonplace difficulty of saying what is maintenance and what are renewals to be referred to capital. But for the same or a like reason it is even harder to maintain the distinction in relation to the intangible elements forming so important a part of many profit yielding subjects. For example, a profitable enterprise such as the sale of a patent medicine may depend almost entirely on advertisement. In the beginning the goodwill may have been established by a great initial outlay upon a widespread advertising campaign carried out upon a scale which it was not intended to maintain or repeat. The outlay might properly be considered to be of a capital nature. On the other hand the goodwill may have been gradually established by continual advertisement over a period of years growing in extent as it proved successful. In that case the expenditure upon advertising might be regarded as an ordinary business outgoing on account of revenue. More often than not an outlay of capital in establishing an organization or obtaining an asset of an intangible nature does not produce a permanent condition or advantage. Its effects are exhausted over a period of time. In such cases the commercial practice of writing off the expenditure against revenue over a term of years or making a reserve to replace exhausted capital lessens the importance of the contrast. But in the assessment of income for taxation purposes severe limitations are placed upon the application of such a practice, the allowance of which is exceptional.''
In later cases the focus of the inquiry has been narrowed to the advantage sought by the taxpayer to be derived from the expenditure in question. That advantage must be identified from a practical and business point of view
ATC 4319
(Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190 at 196; (1946) 72 CLR 634 at 648 ). The identification does not depend solely on the subjective intentions of those who sought to derive the advantage, nor on the characterisation of the legal rights (if any) acquired in consideration of the expenditure. It must be undertaken without regard to the nature of the advantage gained by another party to the transaction pursuant to which the expenditure has been incurred. Thus, in FC of T v South Australian Battery Makers Pty Ltd 78 ATC 4412; (1978) 140 CLR 645 Gibbs ACJ at ATC 4420; CLR 660 applied the test in this way:
``The outgoings in the present case were genuinely made in payment of rent. The only advantage that the taxpayer sought or gained for itself by making the payments was that which it obtained as lessee under the lease. There was nothing to suggest that the taxpayer could or would share in the advantage which Property Options would derive from the making of the payments, and the taxpayer had no legal right, or for that matter any power, to ensure that Property Options did secure its rights under the option. The advantages gained by Property Options are therefore irrelevant in deciding upon the character of the advantage sought by the taxpayer in making the payments. That advantage was of a revenue character, namely the interest of a lessee, it was to be enjoyed in the ordinary way that such an interest is enjoyed, and it was to be obtained by periodical payments. The outgoings were not of a capital nature.''
The advantages sought by the taxpayer were complex. They included the right to conduct a Mobil service station, with the concomitant use of trademarks, signs and other intellectual property, and the right to receive promotional assistance and advisory services as Mobil might choose to make them available during the term of the Team Pak Agreement. From a practical and business point of view, some of those rights could be regarded as of a revenue, and some of a capital nature. The determinative features seem to be the time at which they were acquired by the expenditure in question, the ``once for all'' nature of the payment and the character which the rights bore at the time of their acquisition.
The length of time, three to nine years, over which the rights were exercisable seems to be neutral to the present issue; see BP Australia Ltd v FC of T (1965) 14 ATD 1; (1965) 112 CLR 386 where the Privy Council observed at ATD 9; CLR 399:
``What additional indication is given by the actual length of the agreements? That must be a question of degree. Had the agreements been only for two or three year periods that fact would have pointed to recurrent revenue expenditure. Had they been for twenty years, that fact would have pointed to a non- recurring payment of a capital nature. Length of time, though theoretically not a deciding factor, does in practice shed a light on the nature of the advantage sought. The longer the duration of the agreements, the greater the indication that a structural solution was being sought. In this case the periods varied between 3 and 15 years, but the average appears to be something just under 5 years and the predominant number of agreements was for a five-year period. The case was argued before their Lordships as in the Courts below on the footing that five years was the length of the tie and neither side sought to make any differentiation because a few of the ties were very much longer. That length of time appears to be neutral, and in itself indicates neither capital expenditure nor revenue by its mere length. It therefore does not add effectively to the argument either way. The question must be decided by other weights in the balance.''
Confining attention, for the purposes of illustrating the character of the rights, to an expenditure directed to rights to use intellectual property, a payment of a royalty paid to the registered owner of a trademark on each occasion when the mark is attached to goods produced by the taxpayer is clearly of a revenue nature. (See eg
J Gadsden
&
Co Ltd
v
Commr of Inland Revenue (NZ)
(1964) 14 ATD 18
.) On the other hand, a licence fee paid as a lump sum for the right to apply a trademark to any goods produced by the taxpayer for the ensuing ten years is equally of a capital nature.
There was no evidence before the Tribunal that the sum of $55,000 was a genuine pre- estimate of the value of promotional services, advice and similar assistance to be provided by Mobil over the period during which those services were to be supplied. On the other hand, there was evidence of a discrete arrangement, in
ATC 4320
cl 7 of the Team Pak Agreement to defray the costs of an annual co-operative marketing programme from contributions by dealers of 0.1 cents per litre of fuel purchased and a matching contribution by Mobil. It is significant in the balancing exercise which the authorities ordain that the advantage (whatever it was) to be obtained by the taxpayer was not generally assignable and that the balance of the accreditation fee, where not paid in a lump sum, could be amortized to the point where it reached nil after six years. These indications tend to suggest that the rights acquired by the assumption of the obligation to pay the fee were capital in nature, albeit constituting a wasting asset.It might have been possible, as contemplated by the language of s 51(1), to apportion the outgoing between revenue and capital account. However, the case was conducted before the Tribunal, and before this Court, on an ``all or nothing'' basis and, as already indicated, the evidence does not permit an apportionment to be made.
For these reasons, I have been led, on balance, to conclude that the accreditation fee is to be characterized as expenditure upon establishing the profit-yielding subject of the taxpayer's business. It is true that when it was incurred, the taxpayer believed that it would derive from the expenditure advertising and other sales promotional benefits and business advice. However, in my view, the nature of the payment and the time at which it was made militate against its characterization as having been made in return for those benefits as the need for them might arise from time so as to be on revenue account. Accordingly, I would dismiss with costs the application by way of appeal.
THE COURT ORDERS THAT:
The application by way of appeal be dismissed.
THE COURT GRANTS liberty to apply with respect to costs order, but must be exercised within 14 days of today if application is to be made.
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