The Herald and Weekly Times Ltd v Federal Commissioner of Taxation

(1932-33) 48 CLR 113
6 ALJ 314

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(Judgment by: Gavan Duffy CJ, Dixon J)

Between: The Herald and Weekly Times Ltd
And: Federal Commissioner of Taxation

Court:

Judges:
Gavan Duffy CJ
Dixon JRich J
Starke J
Evatt J
McTiernan J

Hearing date:
Judgment date: 30 September 1932

MELBOURNE

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Judgment by:
Gavan Duffy CJ
Dixon J

The appellant publishes an evening newspaper from which it derives much of its assessable income. In the course of doing so, it is exposed to claims for defamation, some of which it settles upon terms which include a payment by way of compensation, others of which it litigates successfully or unsuccessfully, and most of which involve it in law costs. During the twelve months ended 30th September 1929, upon which its assessment for income tax was based for the financial year 1929-1930, it expended 3,121 pounds in this way. Included in the amount were large sums recovered from the appellant as damages in actions for libel, sums recovered from it for costs, and sums paid by it to its own solicitors for costs of its defence. The publication of the libels took place before the year of income. For the purpose of calculating its taxable income, the appellant claimed that this expenditure should be deducted from the assessable income derived from the conduct of its evening newspaper. To establish the right to such a deduction, it is necessary for the taxpayer to show that the expenditure is a loss or outgoing (not being in the nature of a loss or outgoing of capital) actually incurred in gaining or producing the assessable income, so that it falls within sec. 23(1)(a) of the Income Tax Assessment Act 1922-1929, and to negative the application of sec. 25(e), which forbids the deduction of money not wholly and exclusively laid out or expended for the production of assessable income. These provisions have recently been considered in Federal Commissioner of Taxation v. Gordon, ^[F1] where the use of decisions upon the somewhat different English enactment is discussed.

The Commissioner disallowed the claim to the deductions, and, upon an appeal to the Supreme Court against the assessment, Mann J. confirmed the Commissioner's decision. His Honor, for the purpose of his decision, assumed that to a greater or less degree it is an inevitable consequence of the conduct of an evening newspaper the actionable wrongs should at times be committed, and that in other cases claims will be made upon allegations that such wrongs have been committed, sometimes without foundation. He described the payments as incurred as one of the consequences of gaining or producing the assessable income and in that sense as incidental to the carrying on of the business. But he regarded the expenditure as in no sense productive expenditure, directly or indirectly. He said it was an unavoidable loss arising as one of the consequences of carrying on the business of newspaper production, a loss of which is not in any sense productive of anything, or tending to the production of anything, by preserving the business, the business connection, or the assets from depletion.

None of the libels or supposed libels was published with any other object in view that the sale of the newspaper. The liability to damages was incurred, or the claim was encountered, because of the very act of publishing the newspaper. The thing which produced the assessable income was the thing which exposed the taxpayer to the liability or claim discharged by the expenditure. It is true that when the sums were paid the taxpayer was actuated in paying them, not by any desire to produce income, but, in the case of damages or compensation, by the necessity of satisfying a claim or liability to which it had become subject, and, in the case of law costs, by the desirability or urgency of defeating or diminishing such a claim. But this expenditure flows as a necessary or a natural consequence from the inclusion of the alleged defamatory matter in the newspaper and its publication. Expenditure in which the taxpayer is repeatedly or recurrently involved in an enterprise or exertion undertaken in order to gain assessable income cannot be excluded by sec. 25(e) simply because the obligation to make it is an unintended consequence which the taxpayer desired to avoid. No point is made of the fact that the publication took place in a former year, and properly so. The continuity of the enterprise requires that the expenditure should be attributed to the year in which it was actually defrayed.

The ground upon which Mann J. disallowed the deduction appears to disregard the purpose of producing income that inspired the publication which made unavoidable the expenditure. The question whether money is expended in and for the production of assessable income cannot be determined by considering only the immediate reason for making a payment and ignoring the purpose with which the liability was incurred. In other respects his Honor's conclusions operate in favour of the deduction. The inclusion of the alleged defamatory matter is the cause of the expenditure. There is no reason to suppose that, in dealing with claims made upon it, the taxpayer took any course which was not in its judgment best calculated to avert or alleviate the pecuniary consequences ensuing from publication. An exercise of judgment upon the wisdom of resisting, compounding, or capitulating to, a claim, at any rate if unaffected by any considerations except those of profit and loss, may determine the amount but cannot alter the reason of the expenditure. The money was spent to answer the claims, and whether it was expended wholly and exclusively for the production of income, must depend upon the manner in which the claims were incurred. When it appears that the inclusion in the newspaper of matter alleged by claimants to be defamatory is a regular and almost unavoidable incident of publishing it, so that the claims directly flow from acts done for no other purpose than earning revenue, acts forming the essence of the business, no valid reason remains for denying that the money was wholly and exclusively expended for the production of assessable income.

The distinction between such a case as the present and Strong & Co. v. Woodifield, ^[F2] apart from any differences in the English and Commonwealth provisions, lies in the degree of connection between the trade or business carried on and the cause of the liability for damages. Lord Loreburn L.C. said: ^[F3]

"I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accidents in travelling might be deducted. On the other hand, if a man kept a grocer's shop, for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer ought not to be deducted. Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise. In the present case I think that the loss sustained by the appellants was not really incidental to their trade as innkeepers, and fell upon them in their character, not of traders, but of householders."

The findings of Mann J. show that claims for libel are an ordinary incident of the business of conducting a newspaper.

The cases of Inland Revenue Commissioners v. Von Glehn ^[F4] and Inland Revenue Commissioners v. Warnes & Co., ^[F5] which decide that penalties imposed for breaches of the law committed in the course of exercising a trade cannot be deducted, are distinguishable for a somewhat similar reason. 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 offender as a person deterrent, and it is not incurred by him in his character of trader. Lord Sterndale M.R. in Von Glehn's Case ^[F6] said: "It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading."

In our opinion the appeal should be allowed and the assessment of taxable income reduced by 3,131 pounds.