Case G41

Judges:
FE Dubout Ch
G Thompson M
N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 9 June 1975.

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F.E. Dubout (Chairman): In its return of income of the year ended 30th June, 1972, the taxpayer company, a hotelkeeper, claimed to deduct an amount $1,483, being fees for representation in connection with objections made to the Licensing Commission against the grant of two new hotel licences in the area in which the taxpayer carried on business. Upon the total disallowance of the claim by the Commissioner, the taxpayer objected, and was successful to the extent that the Commissioner then allowed a deduction in respect of $50 of the expenditure under sec. 64A. The Commissioner's reason for rejecting the

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balance of the claim was that he regarded the expenditure as being an outgoing of capital or of a capital nature.

2. The taxpayer carried on its business in premises which it leased from another company, whose shareholders were, if not identical with those of the taxpayer, members of the same family. The tenancy under which the taxpayer had occupation was such that it could be terminated upon one week's notice by the lessor company. By way of physical assets the taxpayer owned only the normal plant and equipment that were necessary for the operation of the hotel. When the hotel was sold to a brewing company during the year of income, this taxpayer received no consideration from the brewery other than for the plant and equipment.

3. It should be mentioned that the first objection taken to the Licensing Commission was unsuccessful, and then, in view of the attitude which the Commission seemed to be taking in regard to the grant of new licences in the area concerned, the second objection was withdrawn.

4. In its notice of objection, the taxpayer set out a number of grounds, all of which (other than those relating to the claim under sec. 64A) are founded upon sec. 51, and by way of brief summary, it may be said that they assert that the outgoing satisfies the positive tests laid down in the section, and does not fall for exclusion from deductibility by reason of its having any capital, private or domestic nature. As I see the matter, the subject expenditure was clearly one which was, in terms of sec. 51, ``necessarily incurred in carrying on a business for the purpose of producing assessable income'', and the only question to be decided was whether it was an expenditure of capital or of a capital nature.

5. For the taxpayer it was contended that in view of the short term tenancy under which it occupied the premises, there was virtually no element of goodwill in the taxpayer's business. It was said by the taxpayer's managing director that the purpose of making objection to the Licensing Commission was to preserve the taxpayer's income. In his opinion, no benefit, either tangible or intangible, of an enduring nature would have accrued to the taxpayer if the objections had been successful. If the taxpayer had what could be called a profit-yielding structure, it lay in the management, staff, and equipment only, and the subject expenditure would not have resulted in the enlargement of that structure in any way.

6. Two accepted principles relating to the characterisation of payments into capital or non-capital categories are relevant in the present case. They are both, in a sense, negative in their application in that they indicate that certain factors can not, per se , be relied upon to take expenditure out of the category of capital. First, one can not test the question as to whether a payment is of a capital or revenue nature by seeing whether it proved to be productive:
Collins v. Joseph Adamson & Co. (1938) 1 K.B. 477 . Second, it is not necessary, in order that expenditure should be of a capital nature, that it should create any tangible asset:
Southwell v. Savill Brothers Ltd. (1901) 2 K.B. 349 . On the latter point, I refer also to the joint decision of the Full Court (Kitto, Taylor and Menzies JJ.) in
Foley Bros. Pty. Ltd. v. F.C. of T. (1965) 13 A.T.D. 562 , at p. 563 , where their Honours said -

``We need not discuss the appellant's contention that a reason for denying to the payment of the £ 38,750 the character of an outgoing of capital is to be found in the fact that the advantage it secured, being in substance negative, could never be reflected in a balance sheet. It is enough to refer to what was said by Dixon C.J. and Menzies J. in
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1959) 101 C.L.R. 30 , at pp. 36, 48; 11 A.T.D. 510 , at pp. 512 and 522 .''

7. If, as was submitted for the taxpayer, the purpose of the expenditure was to sustain the level of the taxpayer's income, one must look at the means by which it was hoped that this would be achieved. Clearly, the desired objective was to restrict competition in the area from which the taxpayer drew its customers. In
Broken Hill Theatres Pty. Ltd. v. F.C. of T. (1952) 85 C.L.R. 423 , the claim was to deduct expenditure incurred for the purpose of restricting the number of persons licensed to carry on picture theatre businesses to a minimum. It was held, originally by Williams J. at first instance and subsequently by a unanimous Full Court ( Dixon C.J., McTiernan, Fullagar and Kitto JJ.) that the expenditure was one of capital. The taxpayer's representative made strenuous efforts to distinguish the Broken Hill Theatres case from the present case, but I must say, that I have

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been unable to discern any material difference between the two cases. In my opinion, the Broken Hill Theatres case is directly in point, and the subject expenditure has been correctly classed by the Commissioner as capital.

8. I would accordingly disallow the taxpayer's objection and confirm the amended assessment which is before the Board.