BP Australia Ltd. v Federal Commissioner of Taxation

(1964) 110 CLR 387
37 ALJR 365

---

(Judgment by: Taylor J)

Between: BP Australia Ltd
And: Federal Commissioner of Taxation

Court:

Judges:
Taylor JDixon CJ
McTiernan J
Kitto J
Windeyer J
Owen J

Subject References:
Income Tax

Hearing date: 7-10 March 1961, May 8 1961, March 13,14 1962
Judgment date: 25 February 1964

Melbourne

---

Judgment by:
Taylor J

1961, May 8.

TAYLOR J. delivered the following written judgment: -

This appeal is brought by the company pursuant to s. 187 (b) of the Income Tax and Social Services Contribution Assessment Act 1936-1952 (Cth) against its assessment to income tax for the income year which ended on 30th June 1952. It is unnecessary for the purposes of the case to refer to the notice of assessment or to the various amended assessments which were issued, beyond saying that ultimately, by the disallowance of certain deductions which had been claimed, the taxable income of the appellant was increased by the sum of 271,240 pounds and that the question in this appeal is whether the whole or some part of that sum should have been allowed as a deduction. There is no question that sums of which the amount in question is the aggregate were expended by the appellant during the relevant year; the substantial question, as will appear, is whether the deductions claimed were rightly disallowed on the ground that the expenditure was of a capital nature. (at p388)

The appellant is a company engaged in the business of selling and distributing motor spirit and before proceeding to a consideration of the nature of the constituent parts of the amount in question it is of some importance to discuss the manner in which that commodity has, from time to time, been marketed through service stations in Australia and to refer to events in August 1951 which produced a marked change in the manner of distribution to resellers and, ultimately, to the public. The business of the appellant company is not, of course, confined to selling motor spirit to service station operators. In common with other companies carrying on like businesses it has always sold large quantities of its products to industrial users and other consumers but its sales to service station operators have always represented a substantial part of its activities. For a number of years until the latter part of 1951, these sales were made to operators who conducted what were referred to in evidence as "multi-pump stations". That is to say, these operators conducted service stations at which the pumps and tanks of competing oil companies were installed and their products were bought and then resold in competition with one another. There was a relatively small number of sites where only the pumps and tanks of one company were installed but this was unusual and accidental in the sense that the volume of business at any particular site was the factor which determined whether only one, a few or a considerable number of pumps could be economically employed. As a rule the pumps and tanks remained at all times the property of the oil company concerned and they were subject to the right of the operator to require them to be removed upon one month's notice. In practice, however, the tanks were never removed for there was in existence a trade convention by which a company which had received notice of removal would make its existing tanks on the particular site available to its successor. It will be seen, therefore, that the distribution and marketing of motor spirit through these reselling outlets was for many years (omitting the war years) freely competitive and the evidence shows that in August 1951 the appellant had its pumps installed on some 3,940 "multi-pump" sites throughout the Commonwealth. But in that month there occurred an event which transformed the picture of this section of the trade. On 14th August 1951, one of the companies engaged in the trade, namely The Shell Company of Australia Limited, announced that it had "decided to introduce a Dealer Plan with the object of confining its trade to stations which are prepared to become solo outlets, on similar lines to the plan existing in the U.S.A. and which was recently introduced in the U.K.". Its adoption of this plan was announced to the other companies engaged in the trade by a circular letter by which the Shell Company also expressed its regret that it had not been possible to discuss the plan in advance since it could not risk giving its competitors unlimited time in which to frustrate the plan. As one may assume from the terms of the circular the Shell Company had already approached a considerable number of dealers for the purpose of obtaining their co-operation and, apparently, that company had been successful in its approaches. Subsequent events showed that at the time when the circular letter was dispatched many operators had entered into arrangements with the Shell Company to sell only its products at their respective service stations. The immediate result was that during the residue of the month of August 1951 the appellant company received pump removal notices from 437 operators and by the end of December of the same year this number had increased to 1,012. The reference in the Shell Company's letter to events in the U.S.A. and the U.K. may furnish some ground for thinking that the adoption in Australia at some time or other of "solo" marketing plans was inevitable. But its introduction at this particular time seems to have been a matter for surprise. (at p390)

It was, of course, obvious to anyone engaged in the trade that the introduction of the Shell Company's plan made it imperative for every other company engaged in the trade to take steps to secure the co-operation of some service station proprietors if they were to retain a share of the trade through selling outlets of this description. But in the case of the appellant company there were difficulties in the way of introducing a plan to induce selected service station proprietors to sell its products only. In the first place, there was doubt whether its financial reserves at that time were sufficient to finance such a plan and, secondly, it did not market any forms of lubricating oil which would be essential for an operator conducting a one-brand service station. In these circumstances it joined with a few other companies in order to secure sites where their products might, in common, be resold to the public. In Victoria these companies were H. C. Sleigh Ltd., which marketed Golden Fleece motor spirit, and Ampol (Alba) Petroleum Pty. Ltd., and, in New South Wales and Queensland, an additional company, the Independent Oil Company Ltd., was included in the group. For the purpose of carrying their project into effect these companies formed State Committees and a Federal or Head Office Committee and many discussions took place for the purpose of formulating plans to enable them to retain their respective shares of the trade through reselling outlets of the character in question. At the outset it was decided to establish so-called "Independent" service stations and, initially, it was proposed that attempts should be made to secure the co-operation of service station proprietors at selected sites by undertaking to paint their premises in standard colours - grey with green trimmings - with a display sign identifying each station as an "Independent Service Station". By this means the operators, it was thought, would obtain the benefit of an extensive advertising programme which the Head Office Committee had decided should be undertaken. But it was not long before it became apparent that other companies were offering direct financial inducements to operators to join in their "solo site" plans and that the appellant and its co-operating companies would be compelled to follow their lead. Accordingly, by February 1952, it had been decided that "financial assistance" should be offered to resellers. This assistance was to be in the form of a lump sum payment the maximum amount of which was said to be in some measure related to the "gallonage" of petrol sold on each particular site during a base period. Initially, it was decided that in the case of service station operators who were prepared to tie themselves exclusively to the co-operating companies for not less than three years the basis for payment should be 100 pounds for every 1,000 gallons per month with a maximum of 1,000 pounds. In the case of an operator who was prepared to undertake to make the co-operating company's products at least 80% of his trade the basis of payment was to be 80 pounds for each 1,000 gallons per month with a maximum of 800 pounds. This was the initial proposal but even at that stage it was subject to the qualification that if the basis of payment was "unacceptable" in any case the sale might be increased to 150 pounds for every 1,000 gallons per month provided a tie for a period of not less than five years could be arranged. This was the limit of the authority of the State Committees but it was always open to the Head Office Committee to authorize special arrangements as, in fact, was done on many occasions. (at p391)

Originally it was agreed that each of the co-operating companies should approach an assigned number of service station proprietors throughout the Commonwealth for the purpose of obtaining their co-operation. Further allocations were made at a later stage with the result that although by the end of December 1951 the appellant company had received removal notices in respect of the 1,012 sites already mentioned it had gained another 326 sites. The net loss at this stage was 686 sites. By the end of June 1952 the number of sites in respect of which it had received removal notices since the inception of the Shell Company's plan was 1,964 and by that time the total number of sites in relation to which it had obtained trade ties had risen to 791. This process continued during the rest of the calendar year 1952 and during 1953 but it is unnecessary to refer in detail to the figures which were proved in evidence. (at p391)

It is reasonably clear that after the announcement of the introduction of the Shell Company's plan there was something of a scramble by the companies engaged in the trade to obtain sites at which their products might be sold, and it was in the course of these activities that the expenditure in question on this appeal was incurred. No question, it should be said, arises with respect to the cost of painting initially undertaken by the co-operating companies; so much of this expenditure as was borne by the appellant during the relevant year has been allowed as a deduction. With the exception of a very small amount what the appeal is concerned with is the amount expended in payments by way of so-called financial assistance to service station operators. Some part of the total sum involved was paid direct to operators to obtain their co-operation and some part was paid to other companies which comprised the "Independent" group. It had been agreed that the total expenditure incurred in obtaining outlets in the particular manner with which we are concerned should be borne by the co-operating companies according to the ratio of their respective sales through reselling outlets during an earlier base period and the payments made by the appellant company to the other co-operating companies were made by way of adjustment after taking into consideration the amounts which they had expended and the amounts which the appellant company had expended. In all, 270,569 pounds of the total sum in question was expended either in payments direct to service station operators or by way of adjustment with the other co-operating companies whilst the balance of the total sum, namely 671 pounds, was expended in making structural alterations and performing concrete work on some of the sites occupied by operators who entered into agreements with the appellant company. It is common ground between the parties that each item of expenditure comprised in the sum of 270,569 pounds should share a common fate. No point is made of the fact that some part of this sum was paid direct to service station operators and some small part by way of adjustment in the manner already mentioned. Nor is it suggested that there was any significant difference in the terms of the contracts pursuant to which payments were made direct to operators in the various States. Accordingly, it is said, either the whole amount was properly deductible or, on the contrary, no part of it was. (at p392)

In Victoria the form of contract employed between the appellant and service station operators was varied on occasions and payments during the relevant year were made under different forms of agreement. Two payments were made under what was called Type "A" Agreement. About 114 were made pursuant to "C1" Agreements and about 45 pursuant to "C2" and "C3" Agreements. In New South Wales the bulk of the payments were made under Standard Agreements Nos. 1 to 4 and a few pursuant to Special Agreements Nos. 1 to 4. In South Australia the payments were made pursuant to agreements contained in Letters of Acceptance. All of the various types of contract were examined in the course of the argument but for the purposes of the case there is, as was agreed, no significant difference. Accordingly, it will be sufficient for the purposes of illustration if the Victorian Agreement C1 and New South Wales Standard Agreement No. 1 are taken as examples. (at p393)

The Victorian C1 Agreement is in the form of a letter from the appellant and it provides at its end a space for the signature of the service station operator. In terms, it purports to confirm verbal arrangements already made regarding "payment to you of an allowance to be used for the improvement of your business and hereinafter referred to as 'The Development Allowance'". Thereafter, the company undertakes to - "(1) Contribute a Development Allowance of pounds . . . to be used by you to defray cost of advertising and other merchandising expenses alterations and/or improvements. (at p393)

(2) Supply your requirements of the products marketed by the company. (at p393)

(3) Assist you to develop your business by providing you with a comprehensive Merchandising Plan as described in a brochure already in your hands." (at p393)

Thereupon the form provides that in consideration of these undertakings the service station operator shall agree to -

(1)

Increase the sale of C.O.R. products to the best of his ability.

(2)

Refrain from reaching any agreement, either verbal or in writing, with any other wholesale distributor of petroleum products.

(3)

Resell from his premises only the brands of motor spirit approved of by the company from time to time. Until further notice the form purports to approve of the resale of C.O.R. or a combination of C.O.R. with any or all of the brands Ampol and Golden Fleece as might be available at its station.

(4)

Permit the company or its contractors to paint such part of his premises which the company should consider as being ancillary to the sale of its products "to the company's standard colours".

Make no alteration to these arrangements for a period of . . . years. (at p393)

Appended to these clauses was a provision that if the business should be sold or otherwise transferred during the period mentioned in cl. 5 a condition of such sale or transfer should be that the arrangement evidenced by the agreement should continue for the unexpired portion of the period. The form of contract known as Standard Contract No. 1 and which was in use in New South Wales was, with two exceptions, in identical terms. In this form of contract the Development Allowance was "to be used by you to defray the cost of alterations and/or improvements as specified at the end of this letter" and the provision that the service station operator should resell from his premises only the brands of motor spirit approved by the company from time to time did not contain any express reference to the products of the other co-operating companies. (at p394)

The common features of these forms of agreement are that they contemplate the payment of a sum of money as part of the consideration for the undertaking of the service station operator to deal exclusively in the brands of motor spirit approved by the appellant for a fixed period of years. Their purpose and effect was, of course, to secure for the agreed period a reselling outlet for the appellant's products and those of the companies co-operating with it from time to time. That such a tie, to use a neutral word, was of considerable value in the circumstances of the trade is beyond dispute for the evidence shows that there was intense competition among the companies in the trade for what were thought to be "strategic" sites and, further, that this competition was the vital factor in determining how much or how little it was necessary for any company to pay to secure a site in this manner. It should, perhaps, be mentioned at this stage that this was not the only means adopted by the appellant to secure reselling outlets of this character for its products. It also purchased service stations, or sites for service stations, in all the States on the mainland and also secured ties by the making of loans to operators in each of the several States of the Commonwealth. For the former purpose it had by 30th June 1952 expended approximately 600,000 pounds and in the making of loans it laid out about 144,000 pounds during the relevant year. These amounts are not in question on the appeal but the evidence affords some indication that the introduction of "solo site" trading required a substantial reorganization of marketing and distribution methods in this section of the trade. (at p394)

Upon the appeal the appellant's case was put in more than one way. Much was made of the fact that the early deliberations of the Head Office Committee concerning the maximum amounts which might, without further reference, be paid in any particular case for a trade tie were concerned with "gallonage" as a factor. But it is, I think, logically more convenient to examine a wider approach which was stressed towards the conclusion of argument. This was based upon the fact that the dramatic change in the pattern of trading after the Shell Company's announcement of 14th August 1951 made it inevitable that the appellant should incur expenditure of the kind in question. So much, of course, must be conceded. But this circumstance alone is not of much help in solving the problem whether the expenditure which was actually incurred was of a revenue or capital nature. Clearly enough, expenditure for the purpose of securing sites might have been incurred on revenue account or, on the other hand, capital account. Examples of expenditure falling in the latter category are to be found in the actual expenditure on the purchases of service stations and sites for service stations and in the laying out of moneys in the making of loans. Examples of the former might have occurred if, as an inducement to secure a trade tie, periodical subsidies or allowances for the purposes of making effective trade rebates or discounts had been given. But the appellant goes further and asserts that the circumstances of the trade became such as to make payments of the character in question ordinary incidents of the conduct of the appellant's business. Such payments, it was said, became for all practical purposes an ordinary marketing cost which in accordance with general principles ought to be borne by revenue. But this contention loses sight of the fact that although the pattern of trading changed so much and so quickly, the resulting situation might have been met at the appellant's option either by capital expenditure or revenue expenditure or by a co mbination of both. As already appears it was, admittedly, met, in part, by expenditure of a capital nature and it is difficult to understand why "Development Allowances" should be characterized as revenue expenditure solely on the ground that the changed trading conditions made multiple outlays of that description necessary to secure trade ties. Emphasis was, of course, laid upon what was called the "recurring" nature of the expenditure but as was said in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 "Recurrence is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure" (per Dixon J., as he then was, (1938) 61 CLR, at p 362 ). In my view the answer to the problem must be sought in a closer examination of the purpose, effect, and, ultimately, the character of the payments in question. (at p395)

But added to the considerations involved in the general contention already mentioned the appellant was at pains to assert that, in the language of Viscount Cave in British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205 , the expenditure was not made with a view to bringing into existence any asset or advantage for the enduring benefit of the appellant's trade. In support of this proposition it was said that a payment made to induce a customer to promise that he will remain a customer of the other contracting party for a fixed period is purely a revenue outgoing and that such a contract secures nothing in the nature of an enduring asset or advantage. That, and nothing more, it was said, was the substance of the arrangements made by the appellant with the service station operators who entered into contracts with it. But the contention does much less than justice to those arrangements. As will be seen from the forms of contract already referred to they go much further than the appellant is prepared to concede. In terms, the contractual arrangements did not bind any service station operator to purchase any, or any stated quantity of, motor spirit from the appellant though it is beyond doubt that it was contemplated that purchases would be made and the operator's promise to increase the sales of C.O.R. products to the best of his ability proceeds on this basis. But the real substance of the arrangements is to be found in the exclusion from sale on the subject premises of brands of motor spirit other than those approved of by the appellant. To the extent specified in the contract an operator was bound to suffer "a substantial or enduring detraction from pre-existing rights": Dickenson v. Federal Commissioner of Taxation (1958) 98 CLR 460 , at p 492 . The appellant did not, of course, succeed to these rights but it seems clear to me that it did obtain a great deal more than the contention under consideration acknowledges. First of all, it was implicit that the payment in each case was intended to secure that the appellant's pumps and tanks should remain on the subject premises undisturbed for the period agreed upon. Secondly, it was implicit that the appellant's product would be sold on the site for that period and finally, by the stipulation that no brands of motor spirit other than those approved by the appellant should be sold on the site, substantial freedom from competition on each selected site was secured to the appellant for periods extending from three to ten years. To say, as the appellant does, that this was neither an asset nor an advantage for the enduring benefit of its trade would be, in my view, to give the lie to a great number of decisions since Viscount Cave's dictum was first promulgated. "Enduring" in this context does not mean "that the advantage which will be obtained will last forever": per Latham C.J. in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR, at p 355 ; and per Williams J. in Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation (1952) 85 CLR 423 , at p 430 , and the advantage which the appellant secured was of a more defined character and more readily identifiable as such than the asset or advantage which Viscount Cave recognized in the Helsby Cables Case [1926] AC 205 (cf. per Dixon J., as he then was, in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 CLR 634 , at p 650 referred to in Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation (1952) 85 CLR, at p 434 ). (at p397)

The foregoing observations are concerned with some of the factors to which consideration must be given in solving the problem in the case and which the appellant's argument has stressed. The views which I have expressed concerning them do not, however, mean that it was not open to the appellant to secure trade ties by expenditure of a revenue character. And if it was open to the appellant to do so the critical question is whether the expenditure was or was not of that character. In approaching this question it is proper to observe that during the relevant year trading ties associated with service stations on "strategic" sites afforded advantages of considerable value. In a period of intense competition the value of the tie in relation to any particular site bore some relation to its trading potential. But there can be no doubt that the amounts which were paid were determined by the intensity of the competition and the lump sums which were paid were laid out by one or other of the competitors to secure the resultant advantage for periods of years. If there were nothing more in the case I should entertain no doubt that expenditure so made by the appellant was expenditure of a capital nature in spite of the fact that there was a multiplicity of payments during the relevant year. But the appellant claims that in reality the payments made by it represented no more and, indeed, no less, than the equivalent of trade rebates or discounts calculated on the basis of the estimated trade turnover at each particular site. This contention finds its origin in the initial decision of the Head Office Committee which formulated the basis upon which "financial assistance" might be offered to resellers in the various States to which some detailed reference has already been made. The relationship of the "gallonage" factor to the amount which it might be thought economical to expend to secure a tie is obvious. No doubt it would also be an important matter for consideration in deciding whether the price demanded for the sale of any par ticular service station as a going concern could economically be paid. But this does not mean that, in cases where the "gallonage" factor may have played some part in determining how far the appellant would go in offering "financial assistance", any sum actually paid was, in substance, the equivalent of trade rebates or discounts. And to my mind the evidence in the case goes no further. It leads, I think, to the conclusion that the "gallonage" factor was, first of all, a matter for consideration in determining what particular sum should, prima facie, be regarded as the maximum amount which in any particular case might be laid out by the State Committees without reference to the Head Office Committee. No doubt, also, it was a material factor in ultimately determining whether any particular proposal should be entertained by the Head Office Committee. But the "gallonage" factor played no greater part than this and I am satisfied on the evidence that the lump sums paid to service station operators by the appellant and its co-operating companies were not paid either in form or substance as the equivalent of trade rebates or discounts. In form they were paid as "Development Allowances" expressed to be for the purpose of defraying "the cost of advertising and other merchandising expenses, alterations and/or improvements" or for the purpose of defraying "the cost of alterations and/or improvements as specified at the end of this letter". In substance they were outlaid as the necessary capital sums to secure trade ties for fixed periods. Except in one exceptional case in New South Wales no specification was ever made under the latter form of contract. And, although the appellant no doubt hoped that the sums paid would be used in the improvement of the various sites there was no obligation on the service station operator to use the sum which he received in this way. It seems that some

of the operators did, in fact, make improvements to their premises but the evidence shows, as counsel for the appellant said in his opening address, that the operator "simply got the amount and what he did with it was his business". Nor was there any pretence as between the parties to any of the relevant agreements that the amount paid was paid as the equivalent of trade rebates or discounts. To my mind the evidence clearly establishes that although a formula based on a "gallonage" factor was originally decided upon its purpose was, as already mentioned, merely to furnish some guidance for the State Committees. But the formula itself was elastic and provided for increases of up to 50 per centum in the firstmentioned rate if that rate should proce to be "unacceptable". Again the rate was not related to a tie for any specific period and the Head Office Committee reserved to itself the right to decide in cases where the proposal involved a sum in excess of the maximum provided by its formula. A persual of the Head Office minutes is sufficient to show that there were many of such cases. The truth of the matter is that in relation to sites in respect of which it secured ties the appellant paid what competition demanded. If it was able to secure a tie for a lesser sum than the maximum amount according to the original formula it did so. On the other hand competition was so keen in relation to other sites that it was compelled to pay substantially more. As for the period of the tie the appellant did the best it could in the circumstances. Indeed it was quite frankly admitted in cross-examination that the fact that 1,000 had been paid to any particular reseller could not be taken as an indication that the "gallonage" on his site was 10,000 per month. "The idea", it was said, "was to get the agreement signed for as little as possible". There is no doubt that the "price" fluctuated with competition and it was the degree of competition and the "strategic" nature of the site which finally determined the amount to be paid; and , as Mr. Scruton observed in cross-examination "the longer it went the more educated the resellers were to the amount that could be made". (at p399)

On this aspect of the case the appellant relied very strongly on the case of Bolam v. Regent Oil Co. Ltd. (1956) 37 Tax Cas 56 . This case was one of the products of the introduction of "solo site" trading in the United Kingdom. From the facts in that case it appears that the company had expended large sums of money as part of the consideration for trade ties given by service station proprietors and the question was whether the money so expended was of a capital or revenue nature. The monetary consideration for the tie was to be paid periodically "to reimburse to the buyers during the currency of this agreement such sums as are shown (by vouchers or other reasonable evidence) to have been expended by the buyers during the currency of this agreement on sales promotion co-operative advertising and dealer display expenses in manner approved by the company and in connexion with the sale of the company's fuel on the buyers' premises". The payments were subject to a specified maximum amount in each year and, indeed, during the whole period of the agreement and were calculated by reference to the estimated "gallonage" to be supplied by the company. Originally the payments were calculated at one farthing a gallon but it was not long before the rate was raised to 3/8d per gallon. It appears from the case stated that at the outset the oil company restricted the payments made under its agreement to cases in which vouchers were supplied showing that approved expenditure had been incurred by the dealer. Subsequently, by force of competition, the company was said to be driven to make payments in advance of expenditure by the dealer and in two isolated cases the company made lump sum payments which were not calculated by reference to estimated "gallonage". But apart from these isolated cases the company was said to have been guided throughout by the principle of limiting the expenditure to an amount calculated by reference to 3/8d per gallon of the estimated "gallonage" of petrol to be supplied during the currency of the agreement. It does not appear very clearly when the payments were to be made but it is reasonably clear from the form of the agreement that periodical payments were contemplated. In these circumstances Danckwerts J. held the expenditure to be of a revenue character, but it seems to be reasonably clear that he did so because he regarded the payments as being the equivalent of a rebate "expended by the Regent Oil Co. in the course of its trade in the making of its profits" (1956) 37 Tax Cas, at p 68 . To my mind there is a clear distinction between that case and the present case. In this case the payments which were made had no real relation to "gallonage", and by no stretch of imagination is it possible to assimilate them to the position of a trade rebate or discount. Each was paid in a lump sum for the purpose of securing a trade tie for a period of years and the amount paid was in my opinion a capital outgoing for the purpose of obtaining the resultant advantage. That being so and in spite of the fact that a great many of such payments became necessary in the changed circumstances of the trade at the relevant time it is, I think, impossible to regard them as outgoings having a revenue character and they were properly disallowed by the Commissioner. I should add that I am unable to see any reason why the residual amount of 671 pounds should be regarded as falling in any different category and, accordingly, I am of the opinion that the appeal should be dismissed. (at p400)

From this decision the taxpayer appealed to the Full Court of the High Court. (at p400)

J. B. Tait Q.C. (with him K. A. Aickin Q.C. and J. McI. Young Q.C.), for the appellant. There are differences between this case and that of the Vacuum Oil Co. Pty. Ltd. Here the expenditure was for the protection of the appellant's revenue, and the appellant joined with other companies in a defensive link against the attack of competitors. Further, the basis upon which payments were calculated was different. The payments here are an incident of the regular conduct of the organization for earning profits; they may have been unusual payments, but unusual circumstances had arisen. Applying the test set out in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 , at p 359 et seq it can be seen that the present payments are rather of circulating capital than of fixed capital. They were made in the course of marketing the appellant's goods and they were part of the cost of marketing just as were advertising costs and salaries of salesmen. There was the expectation that the payments would be recouped out of profits. It is wrong to approach the case by looking merely at one of the bargains made; one must look at it broadly from the appellant's point of view as expenditure at hundreds of points of resale. The position as to the character of the payment in the hands of the recipient is different: cf. Dickenson v. Federal Commissioner of Taxation (1958) 98 CLR 460 . Further, in that case there had been no attempt to calculate the amount by reference to probable sales. If the only consideration for the payments had been undertakings not to go solo the expenses would certainly not have been of a capital nature: and it should not make any difference that the undertakings were not only that the appellant's petrol would be sold but also that petrol of various other companies would not be sold. It is not accurate to say that the amount of the payments was determined simply by the competition for the site concerned. The substance of what took place is that the payments were based on gallonage. The expenditure had a relation to the volume of trade. The measurement of the volume of trade was a matter of difficulty, and some sites might be such that it would be expected that the volume of trade would increase greatly in the future: thus the exceptional payments were nonetheless based on potential trade. Although the payments were not strictly trade rebates or discounts they were of the same nature and character as rebates, and were part of the cost of marketing the petrol. Nethersole v. Withers [1946] 1 All ER 711 , at p 716 deals with the relevance of the fact that a lump sum is based upon anticipated future use; and where a lump sum is arrived at by reference to some anticipated quantum of user it will normally not be of a capital character; as to the position where the sum is not arrived at by reference to quantitative future user, see Rustproof Metal Window Co. Ltd. v. Inland Revenue Commissioners [1947] 2 All ER 454 . In Bolam v. Regent Oil Co. Ltd. (1956) 37 Tax Cas 56 a similar situation to that in the present case arose and the payments by the taxpayer there were held not to be of a capital nature: and properly considered the present case is not distinguishable from that case: see also Anglo-Persian Oil Co. Ltd. v. Dale [1932] 1 KB 124 , at p 137 . Inland Revenue Commissioners v. Rolls Royce Ltd. [1961] 2 All ER 469 is a recent case where it is emphasized that one cannot consider a single payment without looking to the relation of the payment to the taxpayer's business. That case concerned a receipt, not an outgoing, but the criteria are to a certain extent similar. In the present case the fact that the agreements were for a period of years does not mean that there was an advantage of an enduring nature. Circulating capital may be expended in a way such that it is only fully returned after a period, and it does not thereby become capital expenditure.

The payments were of a recurrent nature in that they related to the retention of the appellant's business and of marketing outlets. (at p402)

C.I. Menhennitt Q.C. (with him H.R. Newton), for the respondent. The decision of Taylor J. was correct for the reasons given. The respondent adopts the arguments put on his behalf in Vacuum Oil Co. Pty. Ltd. v. Federal Commissioner of Taxation (1964) 110 CLR 419 as far as they are applicable. It is significant that the payments by the appellant were of lump sums and that there were no payments over a period. It is wrong to look at all the payments together; in the case of each site the question is whether there was any recurrence in the payment, and there clearly was no such recurrence. The payments were made for the trade ties. A complete change in trading structure involves capital payments: an asset was created, for there was now a system of committed service stations. Even if the payments had been used in merchandising, nonetheless the payments would have been capital outgoings. But the appellant did not care how the moneys were used, it was only interested in obtaining the tie: Ounsworth v. Vickers Ltd. [1915] 3 KB 267 ; Coalville Urban District Council v. Boyce (1934) 18 Tax Cas 655 ; Ralli Estates Ltd. v. Commissioner of Income Tax [1961] 1 WLR 329 . Even if the only advantage obtained was sites at which to sell and there were no ties as to exclusiveness the payments would be capital outgoings. There is no new method of trading, but a new trading structure. The appellant is not in a different position from the other petrol companies, as all were dealing with the same situation. The amount of payment was determined simply by the value of the site. It may be that in some cases complete exclusivity was not required and the independent group of companies were satisfied by a guaranteed proportion of sales, but this does not affect what in substance was taking place. The appellant was able to turn the sites in respect of which it entered into agreements into solo sites, and this fact emphasizes that the appellant was not in a position different from that of the other companies. The appellant purchased many service stations outright, and this indicates that the agreements for payments were only another method of expending capital to secure sites which were assets of an enduring nature and part of the profit making subject of the business: Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 , at p 359 ; John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation (1959) 101 CLR 30 ; Henriksen v. Grafton Hotel Ltd. [1942] 2 KB 184 . That the appellant was protecting its business in this way does not suggest that the payment was not of a capital nature, but rather suggests that it was of a capital nature, as is shown by a consideration of the cases cited: see also Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 CLR 634 ; Broken Hill Theatres Pty. Ltd. v. Federal Commissioner of Taxation (1952) 85 CLR 423 . A site secured for the sale of one's products is an asset; but if opposition is excluded it is more valuable and more clearly of a capital nature: Dickenson v. Federal Commissioner of Taxation (1958) 98 CLR 460 . Expenditure on acquiring goodwill and enlarging goodwill can be, and commonly is, capital expenditure: Usher's Wiltshire Brewery Ltd. v. Bruce [1915] AC 433 . Here the payments are no more out of circulating capital than would be the purchase of land or buildings: the expenditure is of an unusual nature, and this further suggests it to be capital expenditure. Further, the payments were not made in gaining or producing assessable income or necessarily made in carrying on a business for the purposes of gaining or producing such income. They were made at a stage anterior to gaining or producing such income and do not fall within s. 51 (1): John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation (1959) 101 CLR, at p 47 et seq ; they were made to acquire or defend the acquisition of a favourable position from which to earn income. Here as in all questions relating to the present case the proper course is to consider the various payments singly, and it is not to the point to say that there were many such transactions. (at p403)

K. A. Aickin Q.C., in reply. The maintenance of turnover is an ordinary marketing problem for any wholesaler and payments for this purpose are ordinary incidents of trading. If it is desired that the customer deal with the appellant more extensively, then the change is one of degree only, and the problem is still one of maintaining overall turnover. To make up for the customers who ceased to deal with the appellant those who continued had to do so more extensively, and the problem remained one of persuading sufficient customers to buy the appellant's product. Nor can it be said that the payments do not come within the opening words of s. 51 (1) of the Act: they were not anterior either in time or in logic to the carrying on of the business.

Cur. adv. vult. (atp403)