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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G. Thompson (Member): In this reference the taxpayer company is the lessee of a hotel which it operated, and which it held on a weekly tenancy. In essence the owners of the freehold land upon which the hotel stood, and the lessee company, were owned by members of a particular family. During the year ended 30th June, 1972 taxpayer incurred legal costs and outlays in the sum of $1,483 in connection with two objections to the State Licensing Commission against the grant of two new hotel licences in the subject area.

2. Taxpayer claimed these legal expenses as a deduction in respect of the said year ended 30th June, 1972 under sec. 51(1) of the Act. In his original assessment for that year the Commissioner disallowed the said sum. The taxpayer objected to this disallowance, and in consequence the Commissioner issued an amended assessment in partial allowance of the objection in order to allow the sum of $50 legal expenses, being the maximum properly allowable under sec. 64A of the Act. The question raised before the Board was whether the said sum of $1,483 is an allowable deduction under sec. 51(1) of the Act.

3. For the taxpayer it was argued, inter alia , that there was a lack of commercial goodwill in short term tenancies, and that this principle was applicable to taxpayer whose weekly tenancy could be terminated by the lessor by giving one week's notice to quit. This would theoretically be correct in law since hotel leases of this kind are not subject to the protection afforded to lessees by the relevant State legislation. Evidence to support the proposition that the taxpayer possessed little or no goodwill was given by a witness experienced in the hotel trade. But it seems to me that the danger of eviction was far more theoretical than real since the hotel was owned and operated by a family group. However, I do not rest my decision on this ground as I shall attempt to demonstrate.

4. The representative of the taxpayer further argued in his own terms that with the opening of other licensed premises (including others additional to the two against which objections were lodged), the assessable income of the taxpayer had been reduced. He continued his argument on this point in these words -

``It was for this precise reason that the expense claimed had been incurred. Had the objection been successful the taxpayer could reasonably have anticipated a continuing increase in trading and thus in assessable income in future periods. There is sufficient authority to establish the deductibility of expenditure in these instances, re Finn's case and re Hatchett's case where it is decided that expenditure albeit in respect of future income is allowable as a deduction in the period in which it is incurred.''

5. Perhaps the nucleus of his argument could be summarised in his own words as follows -

``The capital structure of the taxpayer's business had already been well established so it could not be inferred that any capital was involved. This outgoing was not directed to bringing into existence a business or some asset - tangible or intangible - which would be expected to produce assessable income. The taxpayer's objection to the Licensing Commission was for the protection of income only, and there can be no inference that the expenditure was capital or of a capital nature because at no time has the taxpayer had anything that could be called a substantial capital asset for the simple reason that in the relevant year it had only a weekly tenancy of the hotel, and at present the company is only a tenant or lessee at will from the company and at all times it could legally be deprived of its tenancy at short notice.''

6. This precis of argument should be completed by reference to the further detailed propositions of the tax agent for taxpayer in these terms -

``No fixed or other asset was acquired or intended to be acquired through the expenditure.

A favourable or unfavourable decision of the Licensing Commission would not have

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affected the capital structure of the taxpayer's business.

No enduring benefit would be obtained that was of a capital nature as a result of any decision of the Commission. There was at the relevant time sufficient competition and adequate provision by the already existing hotels for the needs of the community.

Goodwill is not a consideration since the company conducted its business as previously stated on a weekly tenancy basis, and since the goodwill of a hotel attaches to the licensed premises it therefore attaches to the owner of the premises. The entity conducting the business under these circumstances cannot be said to have any goodwill since the custom of a hotel depends purely on the particular premises being licensed and therefore having the capacity to provide for a customer's requirements. Granting of further licences therefore in the area served by the taxpayer would definitely affect the taxpayer's trading (as has been shown) and as is presently being experienced by the taxpayer.''

7. On the other hand, having given some prominence to the transcribed argument for the taxpayer, perhaps I may quote a paragraph from the submissions of the Commissioner's representative which could be taken as the king-pin of his reasoning namely -

``In support of the assessment the Commissioner contends that as the causation or purpose of the expenditure was to seek an advantage by way of freedom from competition the expenditure was allied to the business entity, structure or organisation, rather than to the process by which the business operates from day to day. In this event the expenditure is an outgoing of capital or of a capital nature and is not allowable as a deduction by reason of the exclusion clauses in sec. 51(1) of the Act.''

I accept this submission on behalf of the Commissioner.

8. For the Commissioner it was further argued that although the legal expenses were reflected in the Profit and Loss Account and not in the Balance Sheet, it was nevertheless essentially a capital item for taxation purposes. On this point reference is made to
F.C. of T. v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492 especially at 506 . Their Honours there said in relation to the acceptance of commercial or accountancy practice -

``But it is certainly true that it is not a matter depending upon `proper commercial and accountancy practice rather than jurisprudence'. Commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item as a step towards determining whether it answers the test laid down by sec. 51(1) but it cannot be substituted for the test.''

Other binding judicial dicta of the High Court may be found in the judgment of
Menzies J. in John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1959) 101 C.L.R. 30 at 46 where his Honour wrote -

``In passing I should say that the way in which a taxpayer deals with a debit in its accounts cannot of course determine its character for the purposes of the Act: See
Broken Hill Theatres Pty. Ltd. v. F.C. of T. (1952) 85 C.L.R. 423 , at p. 435 , and
Ward & Co. Ltd. v. C. of T. (N.Z.) (1923) A.C. 145 , at p. 149 .''

9. Accountancy evidence or commercial practice may well be highly persuasive in deciding an income tax problem, but it is not decisive. It always remains an issue for the Court or Tribunal to determine. Many of the modern authorities on this subject were analysed and applied by this Board in the recent Case F26,
74 ATC 132 , particularly at pp. 137-138, 145-146 and at 152. The judgments from which quotations were selected in the Court of Appeal decision in
Heather (Inspector of Taxes) v. P. & E. Consulting Group Ltd. (1973) 1 All.E.R. 8 (q.v.) are particularly instructive on this subject. Since the final solution to the problem posed involves a question of law, I now proceed to what I consider are the two most relevant binding High Court authorities on the matter.

10. In my opinion, this reference is in all essential material aspects, governed by the decision in
Broken Hill Theatres Proprietary Limited v. F.C. of T. (1952) 85 C.L.R. 423 where the judgment of Williams J. was affirmed by the majority of the Full High Court. In that case the taxpayer claimed a

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deduction for legal expenses incurred in successfully opposing an application made under the relevant legislation to the Theatre and Films Commission for an endorsement to a licence specially authorising the proposed transferee to exhibit cinematographic films in the Town Hall. Williams J. at first instance held that the legal expenses incurred by the appellant taxpayer were not recurrent expenditure on account of revenue but were an outgoing of capital within the meaning of sec. 51(1) of the Act, and were therefore not deductible. His Honour (at 85 C.L.R. 429) approached the basic issue in these terms -

``The question whether an outgoing is an outgoing of income or capital has arisen for decision in many cases and the problem has been found difficult of solution. Many tests have been propounded, the most favoured being that propounded by Viscount Cave L.C. in
British Insulated and Helsby Cables Ltd. v. Atherton (1926) A.C. 205 , at pp. 213, 214 : `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'. That test has been used and discussed in many cases, including three cases which closely resemble the present case in that the essential purpose of the expenditure was to prevent the competition of another business with that of the taxpayer. These cases are
Collins v. Joseph Adamson & Co. (1938) 1 K.B. 477 ;
Associated Portland Cement Manufacturers Ltd. v. I.R. Commrs. (1946) 1 All E.R. 68 ; and
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 . In all these cases the expenditure was held to be of a capital nature.''

11. An apposite quotation from the judgment of Williams J. for present purposes may be made from p. 430 where his Honour said -

``The expenditure now in dispute was, I think, an expenditure made once and for all and with a view to bringing into existence an advantage for the lasting benefit of the appellant's motion picture business. This business is of a kind which can only be carried on by persons who are licensed to exhibit motion pictures in particular theatres or halls. The less the number of licences the less the competition, and the better the opportunity for those privileged to possess licences to carry on a profitable business. The defeat of any particular application for a new licence frees the existing exhibitors forever from the threat of new competition resulting from the success of that particular application. The application might be granted or it might be refused. Expenditure in opposing the application would be of the same nature whether the opposition succeeded or failed (
Southwell v. Savill Bros. Ltd. (1901) 2 K.B. 349 ). The essential purpose of the opposition is to restrict the number of persons licensed to carry on the business to a minimum.''

Thus in the view of the learned Justice, which has always been authoritatively accepted, the question of success or failure in pursuing the objection is immaterial.

12. Williams J. at p. 431 went on finally to state the ratio of his judgment in these terms -

``Adapting what Rich J. said in the
Sun Newspapers case (1938) 61 C.L.R. 337 , at p. 347 , the expenditure `is not an incident, whether normal or unusual, of the regular conduct of the organisation for earning profits. The purpose was to buy out opposition and secure so far as possible a monopoly. The fact that the benefit was not perpetual does not deprive it of its capital attributes'. Expenditure of this nature is in each case made once and for all to remove a particular threat to the prosperity of the business structure as a whole. The fact that further applications may be made in the future for new licences does not destroy the nature of the advantage to be derived from the defeat of any particular application.''

13. The taxpayer's representative attempted to distinguish this case from the present reference, but I can perceive no point of material distinction. The fact that taxpayer was not successful in its objections in this reference does not alter the capital nature of the expenditure. Actually, one objection was heard on the merits by the Licensing Commission and was rejected. As a result, taxpayer then withdrew the second objection in the light of that decision. The important consideration is what was the object or end in view sought to be achieved by the taxpayer

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when it lodged the objections. Taxpayer asserts that its purpose was to protect its income. But in my view this contention is unreal. What it sought to do was to protect its income producing structure by preventing potential competitors from trading in the locality. These considerations point to its capital nature. In all material respects the position here is the same as that in the Broken Hill Theatres case (supra) where the taxpayer secured immunity from competition for twelve months. This success for a short period, on the authorities, does not make any difference in favour of the taxpayer.

14. The principle that expenditure can and does in a proper case remain of a capital nature despite lack of success as a result of incurring that expenditure, or where no capital asset is thereby brought into existence, cannot be disputed. Relevant authorities, in addition to the above cited passage from Williams J., may be found analysed by this Board in Case B31,
70 ATC 148 where legal expenses incurred by a taxpayer in connection with an unsuccessful application for the right to operate a drive-in cinema were held to be on capital account, and were not of a revenue nature so as to be deductible under sec. 51(1) of the Act.

15. Finally, I should advert to
F.C. of T. v. Snowden & Wilson Proprietary Limited (1958) 99 C.L.R. 431 upon which reliance was placed for the taxpayer. The High Court there held that certain advertising costs and legal expenses incurred by the taxpayer were an outgoing necessarily incurred in carrying on its business for the purpose of gaining or producing assessable income and were deductible under sec. 51(1) of the Act. The taxpayer carried on a business which included speculative building of houses for customers on terms. Complaints reflecting on the integrity of those conducting the company's business were made and a Royal Commission was appointed to inquire into those allegations. In those circumstances the company spent the subject moneys on advertising to counter the effect of certain press reports concerning the allegations, and on legal representation before the Royal Commission. The case, in my opinion, presents special features, and the real rationale of the High Court's decision, and the distinction between it and the Broken Hill Theatres case (supra) , which is relevant to the present reference, may be discerned in a passage from the judgment of that great Justice, Fullagar J.

16. The succinct passage to which I refer (at 99 C.L.R. 445 to 446) reads as follows -

``I am quite unable to regard the expenditure now in question as being of a capital nature. It is true that the allegations against which the company was defending itself were calculated to affect adversely the goodwill of the company, and that fact was doubtless present to the minds of the directors. But that is very far from being the whole of the truth. The allegations were made in specific cases, and were capable of directly affecting the past present and future revenue of the company as such. They were made by persons who stood in an existing legal relationship to the company, either as contractors or as mortgagors. The object of those who made them can only have been to obtain ultimately some reduction in their obligations to the company - either by way of repayment of moneys paid or by way of partial cancellation of future indebtedness. If they had pursued this object in the courts, there could have been no doubt about the position. Expenditure incurred by the company in an action or suit to enforce a contract or a mortgage, or in resisting a claim for relief by a contractor or mortgagor, must have been deductible from the company's assessable income in the year in which it was incurred. It can surely make no difference that contractors or mortgagors chose a less direct (and perhaps in the long run less satisfactory) means of achieving the object they had in view. The expenditure was not recurrent, and it must be regarded as abnormal; it was not a continuing and unavoidable incident of the taxpayer's business, as was the expenditure in
Herald & Weekly Times Ltd. v. F.C. of T. (1932) 48 C.L.R. 113 . But, on the other hand, the case appears to me to have nothing in common with the Broken Hill
Theatres case (1952) 85 C.L.R. 423 , where, as in the Sun Newspapers case (1938) 61 C.L.R. 337, a price was in effect paid for freedom from competition.''

17. Thus his Honour gave his reasons for regarding the expenditure as being on income account rather than on capital account. The subject allegations were made in specific cases, and were capable of affecting the past present and future revenue of the company as such. The persons making the allegations might have pursued other remedies directly against the

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taxpayer calculated to obtain repayment of moneys, or partial cancellation of future indebtedness. Had they thus pursued their remedies in the courts, expenditure incurred by the taxpayer in resisting these claims must have been deductible from the taxpayer's assessable income for that year in which it was incurred. It was not a continuing and unavoidable incident of the taxpayer's business. It made no difference that the contractors or mortgagors chose the other method of requesting a Royal Commission as a prospective means of achieving their objects.

18. The situation in the present reference is quite different in that taxpayer laid out moneys in order to rid itself of prospective business competitors and thus preserve its income earning structure. The expenditure was incurred in an attempt, albeit unsuccessful, to achieve freedom from competition, which was the essence of the case in Broken Hill Theatres (supra) . On the authorities I am, therefore, clearly of opinion that the legal expenses incurred by taxpayer were of a capital nature and thus excluded from the categories of allowable deductions under sec. 51(1) of the Act.

19. Accordingly, I must disallow the taxpayer's objection, and confirm the Commissioner's amended assessment.