Case H28

Judges: FE Dubout Ch
N Dempsey M

P Gerber M

Court:
No. 3 Board of Review

Judgment date: 13 July 1976.

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Dr. P. Gerber (Member): The facts of this case have been sufficiently set out in the reasons of my colleague, Mr. Dempsey, which I have had the advantage of reading. My only regret is that I am unable to adopt his conclusion.

2. The material fact, which, in my view, governs this appeal is - and I so find - that the sole and exclusive purpose which motivated the taxpayer to demolish the building - the subject of this appeal - was to rid itself of a vermin-infested white elephant, which was threatening its other income producing activities, which included the handling of cargo which constituted the source material of the hide beetle and its pupation.

3. Whilst fully appreciative of the force of the argument of Kitto J. in the
B.H.P. case , 120 C.L.R. 240 , relied upon by my colleague, and in particular, the statement that the ``removal of a continuing source of danger'' results, if nothing else, in a ``positive and enduring

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advantage'', by freeing the land of the aforementioned danger, I do not, however, accept that case as laying down that in all circumstances, this consequence, however unintentionally achieved, must ineluctably bear the stamp of an expense of a capital nature. It does not follow that bricks and mortar - like leopards - are incapable of changing their spots, and what goes up as ``capital'' can only come down the same way.

4. I do not accept that the Income Tax Assessment Act must be administered with such inflexibility that ``purpose'' must at all times be subordinate to ``method''.

5. It is not disputed by the Commissioner that the taxpayer could legitimately have deducted from its taxable income, the recurring (and more costly) fumigation expenses as an item of revenue, yet it is solemnly alleged, that the taxpayer must treat the cheaper form of demolition as an expense of a capital (and non-deductible) nature. Support for this proposition is sought from the statement of Kitto J. in
F.C. of T. v. Western Suburbs Cinemas Ltd. (1952) 86 C.L.R. 107 , where his Honour said:

``When a taxpayer has two courses open to him, one involving an expenditure which will be an allowable deduction for income tax, and the other involving an expenditure which will not be an allowable deduction, and for his own reasons he chooses the second course, he cannot have his income tax assessed as if he exercised his choice in the opposite way.''

6. This is an axiomatic proposition in those cases where the alternative method is indisputably of a non-allowable nature; it cannot however, be prayed in aid in those cases where one must first determine whether the outgoing is of a capital nature or not. I derive some comfort in so concluding from such cases as
Mitchell v. V.W. Noble Ltd. (1927) 1 K.B. 719 , where a lump sum, paid to get rid of an unsatisfactory director was held to be a revenue payment. In that case, Lord Hanworth M.R., said that the payment was made ``not in order to secure an actual asset to the Company but to enable the Company to continue to carry on, as it had done in the past, unimperilled by the presence of one who... might have caused difficulty'' (at p. 737).

7. This reasoning was followed by Dixon J. (as he then was) in
W. Nevill & Co. v. F.C. of T. (1937) 56 C.L.R. 290 , where a lump sum, paid to get rid of an unnecessary director was again held to be a revenue payment, since ``the purpose was transient, and, although not in itself recurrent, it was connected with the ever recurring question of personnel'' (at p. 306).

8. In a more recent decision of the Privy Council,
B.P. Australia Ltd. v. F.C. of T. (1965) 112 C.L.R. 386 ; 39 A.L.J.R. 190 , their Lordships stated:

``The best solution to the problem (i.e. the distinction between `revenue' and `capital' expenditure) is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer `depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process' (per Dixon J. in
Hallstrom's case (1946) 72 C.L.R. 634 ) at p. 648. As each new case comes to be argued, felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallize particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.

One may approach the problem by considering the first of the matters mentioned by Dixon J. above, namely the character of the advantage sought, and in this both its lasting qualities and the fact of recurrence may play their parts. Under this head one might also take account of the nature of the need or occasion which calls

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for the expenditure ( Dixon J. in Hallstrom's case (1946) 72 C.L.R. 634).''

(112 C.L.R. at pp. 396-7; 39 A.L.J.R. at p. 194).

9. This reasoning is not, in my view, inconsistent with the decision of the Western Suburbs Cinemas case (supra), where Kitto J. concluded his judgment with the remark: (at pp. 108-9)

``But the capital or income character of the expenditure actually incurred depends upon the nature of the purpose for which it was incurred''

(the italics are mine).

I cannot therefore share my colleague, Mr. Dempsey's view - notwithstanding his formidable argument - that the seven categories of demolition expenses enumerated by Kitto J. in the Broken Hill case (supra) were intended to be exhaustive and should be exalted to the status of a statutory definition. To do so, would convert, what is in essence a question of fact, into a dogmatic proposition of law - a consequence which, in my opinion, was unintended by that eminent judge, particularly in the light of his concluding remarks quoted above.

10. I also reject the proposition that the ``once and for all'' test must invariably lead to the characterisation of an expenditure as ``capital''.

11. On the authorities referred to above. I am satisfied that in this case, on the facts as proved, the taxpayer was entitled to select the cheapest way of eradicating a nuisance which was threatening its income earning activity, without being penalised by having the costs of demolition labelled ``capital expenditure''. I hold that there is, for tax purposes, no difference between vermin and a bad director, if the removal of either or both ``enabled the company to continue to carry on, as it had done in the past, unimperilled by the presence of one who might have caused difficulty''. It is, in my view, irrelevant that, by way of a side wind so to speak, some other, albeit elucive, ``enduring advantage'' may have been achieved.

12. For these reasons, I would uphold the taxpayer's objection.

Claim disallowed