Federal Commissioner of Taxation v Snowden & Willson Pty Ltd
99 CLR 431(Judgment by: Fullagar J)
Between: Federal Commissioner of Taxation
And: Snowden & Willson Pty Ltd
Judges:
Dixon CJ
Williams J
Webb J
Fullagar JTaylor J
Subject References:
Taxation and revenue
Income tax
Allowable deductions
Money spent on advertising and legal representation
Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 (No 27) - s 51
Judgment date: 15 May 1958
MELBOURNE
Judgment by:
Fullagar J
This is an appeal by the Commissioner of Taxation against a decision of a taxation board of review. It has been referred to the Full Court by Kitto J. The question is whether the respondent company is entitled to deduct from its assessable income of the year ended 30th June 1953 the amount of certain expenditure incurred by it in consequence of certain allegations made against it and the appointment by the Government of Western Australia of a Royal Commission to inquire into those allegations.
The company carries on the businesses of "Builders and Contractors, Real Estate Agents, Sworn Valuers, Financial Agents, House-letting Specialists, and Mortgage and Insurance Brokers". In 1949, in view of an acute housing shortage, the Western Australian Housing Commission decided to give to builders what were called "group permits" to build houses. The idea seems to have been that, by building houses in "groups" of from five to ten, the cost of construction would be reduced. Builders who obtained these permits built houses, and sold them either in the course of construction or after completion. There appears to have been no restriction on the price which a builder might charge. The respondent company appears to have obtained a number of group permits, under which it erected and sold a total of 92 houses. In September and October 1952, a Mr. Oldfield, a member of the Legislative Assembly of Western Australia, brought to the attention of the House certain complaints, which he said had been made to him by persons who had bought houses from the company. In the contract of sale signed by each purchaser there was a clause which has been referred to as a "rise and fall clause" (though it is really only a "rise clause"), and which provided for an increase in the contract price corresponding to any increase in the cost on which that price was based. The same clause also provided for the charging of "extras" in certain circumstances. The purchasers were complaining that the company had "represented" to them that any "rise" under the "rise clause" would not be more than PD25 (or some other small named sum). In fact, it was alleged, considerably larger sums had been demanded as due under the "rise clause", and exorbitant sums had been charged under the heading of "extras".
In consequence of these complaints the Government, by proclamation published on 19th December 1952, appointed a stipendiary magistrate as a Royal Commission "to inquire into and report upon allegations" made against the company and another (presumably subsidiary) company named Snowden & Willson (Housebuilders) Pty Ltd The terms of the commission were wide, and were extended by proclamation published on 30th January 1953. The magistrate was to inquire into all allegations made by Mr. Oldfield in the House or by any person who had purchased land or obtained a loan from either company, relating to the terms of the contracts, the circumstances attending the making of the contracts, and the moneys (including "extras") charged to the purchaser or borrower. The commission sat on a number of days in January, February and March 1953. It investigated the cases of nine purchasers, and its report was presented to the Governor on 27th April 1953. The report was in terms purporting to be very adverse to the company and to Messrs W. E. and C. H. Snowden. On its face, however, it seems open to more than one comment. For example, the finding that Mr. W. E. Snowden had "falsely represented" to some purchasers that not more than some such sum as PD25 would become payable under the "rise clause" appears to have been based on a misapprehension on the part of the magistrate. Prima facie such a statement, if made, would amount to no more than an expression of opinion. Again, it is difficult to understand such a finding as that the company was "harsh and unconscionable in charging for extras at all". The company did not stand in any fiduciary relation to purchasers, and it seems a strange idea that it ought not to have charged for extras actually provided. The question in the present case, however, does not, in my opinion, depend on whether the report of the commission was favourable or unfavourable to the company, and still less on whether that report ought to receive full faith and credit according to its tenor.
The proceedings in the Legislative Assembly and before the Royal Commission received, of course, much publicity, and the directors of the company took immediate steps to defend themselves and their companies against the attack made upon them. In doing so they, of course, incurred expense. With regard to the allegations made in Parliament, they sought to have published in the press and through other channels their reply to the charges made. They found that they could not obtain the desired publicity for their reply except by paying advertising rates, and they expended PD637 in advertising. With regard to the proceedings before the commission, they instructed solicitors and were represented by counsel. The conduct of the "defence" before the commission involved some incidental expenditure apart from solicitors' and counsel's fees. The total amount expended in advertising and in conducting a case before the commission was PD4,252, of which about three-fourths represented legal costs. It is this sum that is in issue in this case. Is it an allowable deduction from the assessable income of the company derived in the year ended 30th June 1953? The question turns on s. 51 (1) of the Assessment Act, which, so far as material, provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income shall be allowable deductions except to the extent to which they are losses or outgoings of capital or of a capital nature. A majority of the board of review has held that the expenditure in question is an allowable deduction under this provision.
The two categories mentioned in s. 51 (1) are not mutually exclusive. The interpretation of the first category which was adopted and explained in Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation, [F16] at pp. 303, 307, 309, 310 and W. Nevill & Co Ltd v Federal Commissioner of Taxation, [F17] at p. 305 has always been accepted without question, and it may well be right on that interpretation to say that the expenditure now in question falls within that first category. But, however this may be, that expenditure is, in my opinion, exactly the kind of expenditure that is covered by the second category of s. 51 (1). That category, as the late Dr. Hannan (Principles of Income Taxation, (1946), p. 291), observes, has not been the subject of detailed judicial examination. The learned author goes on to say: "The meaning of 'necessarily' in that context is probably not limited to compulsion in a legal sense ..., and may extend to business expenditure arising out of exigencies created by unusual or difficult circumstances." I would respectfully adopt that passage, omitting the word "probably" and substituting the word "does" for the word "may". The interpretation of the word "necessarily" which is involved in this view is familiar in many similar contexts and in a variety of instruments: see, e.g., The Commonwealth and the Post-Master-General v Progress Advertising & Press Agency Co Pty Ltd, [F18] at p. 469 per Higgins J. It means for practical purposes that, within the limits of reasonable human conduct, the man who is carrying on the business must be the judge of what is "necessary". It accords with the general principle on which the Assessment Act is framed, and it leaves the revenue adequately safeguarded by the express exclusion of expenditure of a capital nature. In Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation [F19] a Court consisting of Latham C.J. and Rich, Dixon, McTiernan and Webb JJ. said: "The word 'necessarily' no doubt limits the operation of the alternative, but probably it is intended to mean no more than 'clearly appropriate or adapted for'". [F20] The same view is, I think, implicit in the judgment of McTiernan J. in Federal Commissioner of Taxation v Robinson & Mitchell Pty Ltd [F21] where his Honour used the expression "ex necessitate the business". [F22]
In the present case the company was carrying on a business for the purpose of gaining or producing assessable income. Attacks were made in Parliament and before the commission upon its conduct of that business-attacks which were capable of seriously affecting that business both directly and indirectly. It would naturally seem essential to the company's directors that a vigorous effort should be made to repel those attacks, and no defence could have any prospect of being effective which did not involve the expenditure of substantial sums of money. The relation between the expenditure and the carrying on of the business is clear. The expenditure was incidental to the carrying on of the business. It was incurred in carrying on the business, and it was necessarily incurred because the exigencies of the business imperatively demanded that it should be incurred.
The question remains whether the expenditure in question was an outgoing of a capital nature. This is a question which has given rise to difficulty in a large number of cases. The three most recent cases in this Court are Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation, [F23] Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation, [F24] and Federal Commissioner of Taxation v Duro Travel Goods Pty Ltd. [F25] The first two are decisions of the Full Court, and the third is a decision of Taylor J. In the Broken Hill Theatres Case [F26] disapproval was expressed of the decision of Lawrence J.in Southern v Borax Consolidated Ltd. [F27] Since then in Morgan v Tate & Lyle Ltd, [F28] Lord Morton [F29] has in effect expressed approval of the decision in the Borax Case, [F30] and both Lord Reid [F31] and Lord Tucker [F32] have referred to that decision with apparent approval. Lord Keith [F33] expressly approved of the "first branch" of that decision. The case had previously received the apparent approval of the Court of Appeal in Associated Portland Cement Manufacturers Ltd v Inland Revenue Commissioners, [F34] at p. 117, and had been applied by Croom-Johnson J. in Cooke (H.M. Inspector of Taxes) v Quick Shoe Repair Service. [F35] There is an article in the Australian Law Journal [F36] by Mr. R. E. O'Neill, who observes that the English courts have been disposed to draw (as in the Borax Case [F37] ) a decisive distinction between (to put it very shortly) expenditure which adds to capital and expenditure which merely protects or preserves capital. Here the distinction has not been regarded as irrelevant, but it has not been treated generally as decisive. It is to be noted on the one hand that, although the relevant statutes differ in terms, the English courts, taking the view that capital expenditure is never deductible, have in many cases in substance addressed themselves to the question of what constitutes an outgoing of a capital nature, though often (the Borax Case [F38] being a notable exception) subsuming it under the general question of what constitutes expenditure "wholly and exclusively" laid out in producing income. It is to be noted on the other hand that there is no essential inconsistency between the particular view discernible in recent English cases and the general principle expounded in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation, [F39] at pp. 359 and following., which has received acceptance in this Court ever since the decision in that case.
For present purposes I do not think that the general question need be pursued further. Whether or not the decision of Lawrence J. in the Borax Case [F40] be accepted as correct, and whether or not the distinction above referred to ought to be regarded as decisive, I am quite unable to regard the expenditure now in question as being of a capital nature. It is true that the allegations against which the company was defending itself were calculated to affect adversely the goodwill of the company, and that fact was doubtless present to the minds of the directors. But that is very far from being the whole of the truth. The allegations were made in specific cases, and were capable of directly affecting the past present and future revenue of the company as such. They were made by persons who stood in an existing legal relationship to the company, either as contractors or as mortgagors. The object of those who made them can only have been to obtain ultimately some reduction in their obligations to the company-either by way of repayment of moneys paid or by way of partial cancellation of future indebtedness. If they had pursued this object in the courts, there could have been no doubt about the position. Expenditure incurred by the company in an action or suit to enforce a contract or a mortgage, or in resisting a claim for relief by a contractor or mortgagor, must have been deductible from the company's assessable income in the year in which it was incurred. It can surely make no difference that contractors or mortgagors chose a less direct (and perhaps in the long run less satisfactory) means of achieving the object they had in view. The expenditure was not recurrent, and it must be regarded as abnormal: it was not a continuing and unavoidable incident of the taxpayer's business, as was the expenditure in Herald & Weekly Times Ltd v Federal Commissioner of Taxation. [F41] But, on the other hand, the case appears to me to have nothing in common with the Broken Hill Theatres Case, [F42] where, as in the Sun Newspapers Case, [F43] a price was in effect paid for freedom from competition.
For the above reasons I find myself in agreement with the majority of the board of review. I do not agree with the dissenting member of the board that the present case bears any analogy to cases in which penalties and costs have been incurred in connection with prosecutions for infringements of the law. The distinction between cases of that kind and such a case as the present was explained by Gavan Duffy C.J. and Dixon J. in Herald & Weekly Times Ltd v Federal Commissioner of Taxation [F44] where their Honours referred to Inland Revenue Commissioners v von Glehn & Co Ltd [F45] and Inland Revenue Commissioners v Warnes & Co, [F46] and said:"The penalty is imposed as a punishment of the offender considered as a responsible person owing obedience to the law. Its nature severs it from the expenses of trading. It is inflicted on the trader as a personal deterrent, and it is not incurred by him in his character of trader". [F47]
The appeal should, in my opinion, be dismissed.