Hallstroms Pty Ltd v Federal Commissioner of Taxation

72 CLR 634

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(Judgment by: Latham CJ)

Hallstroms Pty Ltd v Federal Commissioner of Taxation

Court:

Judges:
Latham CJStarke J
Dixon J
McTiernan J
Williams J

Subject References:
Taxation and revenue
Income tax
Assessable income
Deduction
Expenditure
Capital or revenue
Outgoings

Legislative References:
Income Tax Assessment Act 1936 No 27 - ss 51(1); ss 196

Hearing date: 1 August 1946; 2 August 1946
Judgment date: 7 October 1946

MELBOURNE

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Judgment by:
Latham CJ

List of Judges

The following written judgments were delivered:

LATHAM C.J. The appellant company was engaged in the manufacture and sale of domestic refrigerators. Electrolux Pty Ltd had a patent for a refrigerator which was a great improvement upon that which was sold by the appellant company. The Electrolux patent expired on 18th August 1938. The appellant company made preparations to manufacture and sell refrigerators on the Electrolux model as soon as the field was open by reason of the expiry of the Electrolux patent. On 29th December 1938 the Electrolux Company filed a petition seeking an extension of patent for ten years. The appellant company entered a caveat, opposed the petition, and the petition was dismissed. The appellant company had to bear its own costs of issues upon which it had failed, and these costs amounted to PD6,020. The appellant company seeks to deduct this amount from its assessable income in the year ended 30th June 1940 by virtue of s. 51 (1) of the Income Tax Assessment Act 1936-1940. Section 51 (1) is in the following terms: "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."

The appellant contends that the amount paid in costs was an outgoing incurred in gaining or producing the assessable income and therefore is a proper deduction. The Commissioner, on the other hand, contends that the payment of the costs was a loss or outgoing of capital or of a capital nature and that it was not incurred in relation to the gaining or production of assessable income.

Upon appeal by the company from assessment to income tax the Board of Review held that the expenditure of the sum of PD6,020 was made "for the purpose of acquiring a right to manufacture and sell the refrigerators after the judgment of the Court upon the petition for extension during a period of some years in which but for its opposition the right could not be expected to arise." Upon this ground the assessment was confirmed; the company appealed to the Court and Rich J. directed that the appeal and the question involved therein should be argued before the Full Court.

The leading case upon this subject is British Insulated and Helsby Cables Ltd v Atherton ^[F1] . In that case Viscount Cave L.C. said: "... when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital" ^[F2] . See also in this Court W. Nevill & Co Ltd v Federal Commissioner of Taxation ^[F3] and Associated Newspapers Ltd v Federal Commissioner of Taxation ^[F4] .

In my opinion the expenditure by the company was not made for the purpose of acquiring an asset or of adding to the profit yielding subject which constituted the capital structure of the business but, as Lord Hanworth M.R. said in Mitchell v B. W. Noble Ltd ^[F5] , at p. 421, the expenditure was made "not in order to secure an actual asset to the company but to enable them to continue, as they had in the past, to carry on" the same business, unfettered by a particular difficulty which had arisen in the course of the year.

When the Electrolux patent expired on 18th August 1938 the appellant had the same right-no more and no less-as every other person to manufacture refrigerators in accordance with the patent. All persons have a right to carry on a lawful business, whether they manufacture refrigerators, boots or anything else. A right enjoyed in common with all persons is not a capital asset of any single person. If the Electrolux patent had been extended the Electrolux Company would have obtained a monopoly which would have prevented the appellant from manufacturing refrigerators according to the Electrolux patent, but the appellant company did not acquire any asset or any right of any character when the petition of the Electrolux Company was dismissed. It simply maintained its position as it already existed.

Nor can it be said that the company, by making the expenditure, gained "an enduring advantage." It gained nothing-it merely succeeded in maintaining an existing position. The prevention or avoidance of a loss is not a gain of anything. The prevention of subtraction is not the same thing as addition. Occasional legal proceedings are incidental to many businesses. They may result in the acquisition of a new right as, for example, where a person successfully applies for and obtains a patent. But expenditure in the defence of a right enjoyed in common with all His Majesty's subjects is not expenditure incurred in obtaining anything. It is an outgoing of the business incurred in keeping the business going on the same basis as in the past, without any change in the constituent elements of the profit-yielding structure. In Southern v Borax Consolidated Ltd ^[F6] , Lawrence J. held that a company which incurred costs in defending its title to its land and buildings was entitled in computing the profits of the company for income tax purposes to deduct the costs as expenditure wholly and exclusively laid out for the purposes of the company's trade. This case was approved by the Court of Appeal in Associated Portland Cement Manufacturers Ltd v Inland Revenue Commissioners ^[F7] . In the present case the expenditure, in my opinion, was not incurred in relation to anything which can be called a capital asset-either to acquire it or even to protect it-but in order to maintain a common right.

The Commissioner relied upon Ward & Co Ltd v Commissioner of Taxes ^[F8] ; where it was held that an expenditure incurred in order to prevent the extinction of the business from which the income was derived was not an expenditure exclusively or at all incurred in the production of the assessable income. That case is distinguishable from the present. If the petition of the Electrolux Company had been granted the business of the appellant company would not have been extinguished, though it would have been seriously diminished during the period of extension. The company was selling other refrigerators and had made some arrangements towards dealing in refrigerators manufactured upon an American design.

In my opinion the expenditure in question was an outgoing incurred in gaining or producing assessable income and was not an outgoing of capital or of a capital nature. The company is therefore entitled to have the expenditure deducted in its assessment to income tax. In my opinion, the appeal should be allowed and the assessment remitted to the Commissioner for the purpose of amending it by allowing the deduction claimed.