Federal Commissioner of Taxation v Snowden & Willson Pty Ltd
99 CLR 431(Decision by: Webb J)
Between: Federal Commissioner of Taxation
And: Snowden & Willson Pty Ltd
Judges:
Dixon CJ
Williams J
Webb JFullagar J
Taylor 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
Decision by:
Webb J
This is a reference by Kitto J. under s. 18 of the Judiciary Act 1903-1955 of an appeal to this Court by the appellant commissioner under s. 196 (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1953 from a majority decision of a board of review. The board decided that legal and advertising expenses of the respondent taxpayer, amounting to PD4,252, incurred in appearances before and in publishing part of the report of a Royal Commission were outgoings under s. 51 (1) of the Act in respect of the year ended 30th June 1953 and were not of a capital nature and so were allowable deductions.
The Royal Commission was appointed by the Government of Western Australia on 28th January 1953 to investigate and report on allegations made in the Parliament of that State suggesting what might well have appeared to be fraudulent conduct on the part of the managing director of the taxpayer in connection with the sale of houses. The report is dated 27th April 1953 and was made after a hearing lasting thirty-two days. The findings were without exception unfavourable to the taxpayer.
From the statement of facts agreed upon by the parties in this Court it appears that for many years prior to 1953 the taxpayer had carried on the business inter alia of building houses for its customers on terms. Ordinarily the transaction took the form that the customer, who already owned the land or purchased it from the taxpayer, selected the design of house he required and paid a deposit varying according to whether or not the customer already owned the land. The contract fixed a price subject to adjustment for "extras," and contained a "rise and fall" clause. When the house was erected the amount owing by the customer to the taxpayer was ascertained, and on behalf of the customer the taxpayer raised a first mortgage over the property, usually from the Commonwealth Bank, and the taxpayer took a second mortgage for the balance owing to it. In September 1952 a member of the Legislative Assembly made charges against the taxpayer, more particularly in relation to abuse of the "extras" and "rise and fall" clauses and the Royal Commission was appointed. The terms of this appointment were to inquire into and report upon allegations against Snowden and Willson Proprietary Limited, that is the taxpayer, and Snowden and Willson (Housebuilders) Proprietary Limited, or either of them, or against any shareholders or employees of either, made in speeches in the Legislative Assembly, or made to the commission by any purchaser of land from or through the agency of either company in relation to any term in the contract of sale relating to the land, the circumstances leading to the making of the contract or under which it was entered into or performed, including any inducement, representation, demand or request made to the purchaser, and money charged to the purchaser in connection with the contract or land, including "extras".
Eleven transactions with purchasers were referred to and investigated by the commission.
In giving evidence before the board of review the managing director of the taxpayer said, in explaining the reason for the expenditure claimed to be a deduction under s. 51 (1), that in the appointment of the Royal Commission there existed a threat both to the past revenue of the taxpayer and also to its goodwill and potential earning capacity; that the taxpayer planned a defence based on the services of leading counsel and advertising; and that advertising was resorted to because of abridged and presumably misleading newspaper versions of the report of the Royal Commission. This explanation appeared in a letter written by the managing director in February 1954, about ten months after the commission had made its report, but claimed by him to state the facts. The managing director added that the shareholders of the taxpayer were afraid that any adverse criticism, presumably by the commission, could seriously damage the taxpayer's goodwill and reputation and that the capital of the taxpayer would suffer.
As submitted by Mr. Young of counsel for the taxpayer we have first to decide for what purpose the money claimed as a deduction under s. 51 (1) was in fact expended: see Morgan v Tate & Lyle Ltd per Lord Morton. [F7] As to this purpose, I see no reason why we should not accept the evidence of the taxpayer that the goodwill, reputation and capital of the taxpayer would suffer if adverse criticism were indulged in. This was a reasonable, if not indeed a necessary conclusion, having regard to the nature of the allegations and the terms of the commission. It might be different if the commission had no further authority than to investigate the eleven individual transactions which were before it and to report its findings on them. But the commission was not confined to that. There was nothing to prevent it, if it felt obliged so to do by the evidence and its findings, from making recommendations which, if carried out, might well result in that prejudice to the taxpayer's goodwill, reputation and capital that the shareholders were said to fear. Accepting then the evidence for the taxpayer as stating the real purpose of the expenditure in question, and applying the reasoning in Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation, [F8] I conclude that the expenditure was for the protection of the taxpayer's business as a whole, and was not directly incurred in gaining or producing the assessable income, or in carrying on a business for that purpose, and so was not an outgoing and deductible under s. 51 (1). Indeed this case is a fortiori .
For the contrary view the majority of the board of review relied upon the judgment of the House of Lords in Morgan v Tate & Lyle Ltd [F9] in which it was held by a majority of their Lordships that expenditure "for the purposes of the trade" within r. 3 (a) of the rules applicable to Cases I and II of Schedule D of the English Income Tax Act 1918 included expenditure on propaganda to oppose the threatened nationalisation of the industry. Clearly that expenditure was to protect the business as a whole. However, Lord Morton who was one of the majority pointed out [F10] that the words "for the production of assessable income" in s. 25 (e) of the Australian Income Tax Assessment Act 1922-1932 were narrower than the words "for the purpose of the trade" in the English Act. His Lordship also quoted, [F11] with apparent approval, Viscount Cave's observation in Ward & Co Ltd v Commissioner of Taxes, [F12] at pp. 149, 150 in referring to the words "for the production of assessable income" in s. 86 (1) (a) of the New Zealand Land and Income Tax Act of 1916, that to be deductible the expenditure "must have been incurred for the direct purpose of producing profits", and also with apparent approval, [F13] as I understand his Lordship, to Lord Cave's contrasting, but not inconsistent observation three years later in British Insulated & Helsby Cables, Ltd v Atherton, [F14] at pp. 211-212, when referring to the words "for the purpose of the trade" in the English Act, that money expended "... in order indirectly to facilitate the carrying on of the business, may yet be expended ... for the purpose of the trade". Lord Reid in Morgan v Tate & Lyle Ltd [F15] also quoted, with approval, these observations of Lord Cave. Such then is the difference between the English Act on the one hand and the Australian and New Zealand Acts on the other hand.
The expenditure in question here cannot be said to have been directly incurred in gaining or producing the assessable income or in carrying on a business for that purpose so as to be an outgoing and deduction under s. 51 (1).
It becomes unnecessary for me to deal with the other submissions for the appellant commissioner, including the submission that expenditure is not an allowable deduction under s. 51 (1) when made in the course of unsuccessfully refuting charges in the nature of fraud, or otherwise of a criminal nature, even before a Royal Commission. It seems clear enough I think that an individual cannot claim as a deduction moneys spent in meeting a criminal or perhaps quasi criminal charge of which he has been convicted. But it is, I think, arguable that a company that spends money in the defence of its employees convicted of breaches of the law in the course of its work would, at least in some cases, be entitled to treat such expenditure as an outgoing deductible under s. 51 (1). Carelessness or inadvertence of employees is incidental to the conduct of many businesses and in some cases it could result in breaches of the law and fines. I have in mind more particularly traffic offences.
I would allow the appeal, set aside the decision of the board of review and affirm the appellant commissioner's assessment.