Federal Commissioner of Taxation v. Cliffs International Inc.

Judges: Bowen CJ
Franki J

Brennan J

Court:
Federal Court (Full Court)

Judgment date: Judgment handed down 14 December 1977.

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Brennan J.: Cleveland-Cliffs Iron Company and its wholly owned subsidiary Cliffs International Inc., the taxpayer respondent, were incorporated in the U.S.A. I shall call them respectively Cleveland-Cliffs and Cliffs. They are so described in certain statutes of Western Australia next to be mentioned. The Iron Ore (Cleveland-Cliffs) Agreement Act, 1964 as amended by the Iron Ore (Cleveland-Cliffs) Agreement Act Amendment Acts of 1970 and 1973 authorized the grant to Cliffs of a mineral lease over a substantial area of land in which there are significant iron ore deposits.

Cliffs does not mine the deposits; it granted a sub-lease and assigned its contractual interests (subject to an immaterial reservation) to a consortium which mines the deposits and pays Cliffs a royalty calculated at specified rates upon iron ore produced by or for the participant members of the consortium and sold or shipped for sale or commercial use from defined areas which include the area of the mineral lease. A subsidiary of Cleveland-Cliffs is one of the participants but the other participants payments are unrelated corporations. The participants' payments of royalty constituted the principal part of Cliffs' assessable income for the years ended 31 December 1973 and 31 December 1974.

Cliffs claimed to deduct from its assessable income for those respective years payments described by it as ``royalties'' but more accurately described as ``deferred payments'', certain payments associated with the deferred payments, and payments made during the 1974 year in respect of legal advice concerning retention of tax from payments remitted overseas by Cliffs to a foreign corporation. The Commissioner assessed Cliffs to tax without allowing the claimed deductions. Cliffs objected unsuccessfully and requested the Commissioner to treat its objections as appeals and to forward them to the Supreme Court of Western Australia. The Supreme Court allowed the appeals and varied the assessments by reducing the taxable income by $1,052,867 in respect of the 1973 income year, and by $1,193,278 in respect of the 1974 income year. The appellant Commissioner appeals by leave of this Court against the order of the Supreme Court.

The deductibility of two classes of payments falls for decision: the deferred payments paid by the respondent in each of the income years, and a sum of $16,638 paid for legal advice and services in the 1974 year. There are some losses (described as ``exchange losses'' and ``unrecouped losses'') included in the deduction of $1,052,867 allowed by the Supreme Court in respect of the 1973 income year but, by agreement of the parties, the deductibility of these losses depends upon the deductibility of the deferred payments.

The deferred payments were made during the income years 1973 and 1974 to Mt. Enid Iron Co. Pty. Ltd. of Perth, Western Australia; and to Howmet Corporation of Connecticut, U.S.A. The amounts paid to them were calculated at a rate provided for in an agreement of 27 November 1962. That agreement, called the Option Agreement, is described in more detail hereafter. The rate at which the deferred payments were made is 15 cents (U.S.) per ton of iron ore mined and transported from an area, previously a Temporary Reserve under the mining laws of Western Australia, which is now part of the area mined by the consortium. The payments are made half yearly upon the tonnage of iron ore mined and transported from the reserve are during the preceding six months. The payments are thus proportionate to the quantity of iron ore mined and transported from the reserve area and are payable at specified intervals of time within a given year of income. The payments so made by Cliffs were treated as expenditure in Cliffs income and expenditure account - an account which accompanied and formed part of its return of income for the years in question. The source of the obligation to make the payments is the Option Agreement.

The history of the Option Agreement and of

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the obligation to make the deferred payments commences with the grant of a right of occupancy by the Minister for Mines of Western Australia to Basic Materials Pty. Ltd. (hereinafter called Basic) over certain Temporary Reserves, 246 square miles in area, for the purpose of prospecting for iron ore. A right of occupancy is a statutory right which may be granted by the Minister for Mines pursuant to sec. 276 and 277 of the Mining Act, 1904 of Western Australia. The learned Judge of the Supreme Court described the effect of the relevant provisions of the Mining Act:

``The provisions of sec. 267 so far as material, enable the Minister to reserve temporarily any Crown land from occupation, that is from occupation pursuant to the other provisions of the Mining Act, but such reservation must be confirmed by the Governor within 12 months and if not so confirmed, then the land ceases to be reserved. The Minister may, again with the approval of the Governor, authorise any person to temporarily occupy any such reserve on such terms as he may think fit but subject to the provisions of sec. 277. The provision of that section so far as material, provide that a right of occupancy may be granted for a period in excess of one year but, in that event, the Minister shall cause the terms and conditions relating thereto to be laid on the table of each House of Parliament within 14 days of the granting. Further, a right of occupancy granted for any fixed period may be renewed from time to time for any term not exceeding 12 months on each occasion of renewal, but if any such renewal is granted then the Minister shall cause the terms and conditions relating thereto to be laid on the table of each House of Parliament within 14 days of the granting of the renewal.''

The Minister granted the right of occupancy to Basic in April 1972 over an area described as Temporary Reserves Numbers 2400H to 2417H (inclusive). He imposed a condition that no transfer of the ``authority to occupy'' (sic) would ``be permitted without the approval of the Minister for Mines first obtained''. The right of occupancy was a valuable asset (
Delhi International Oil Corporation v. Olive (1973) W.A.R. 52 ), although - having regard to the provisions of the Act with respect to the grant of mining leases - it conferred no right upon Basic to the grant of a lease over any of the area in respect of which the right of occupancy was granted in the event of the discovery of a deposit of iron ore (
Cudgen Rutile (No. 2) Ltd. v. Chalk (1975) A.C. 520 ). However, it did confer rights according to the tenor of the document and the statute (as to which see
J.D. & Wm. G. Nicholas and Others v. State of Western Australia and Others (1972) W.A.R. 168 ), and it gave to the holder an expectation of the grant of a mining lease, and perhaps an expectation that a mining tenement of a special kind would be authorized by a special Act, if a commercial deposit of iron ore should be discovered. By November 1962 the prospect of developing a commercial deposit was established, but much remained to be done before a mining programme could be resolved upon and before the evaluation of the deposit was complete. By that time Cleveland-Cliffs had become interested in the deposit and it negotiated an agreement with the then shareholders of Basic for an option to purchase the shares in Basic. This is the Option Agreement of 27 November 1962. The two shareholders of Basic were the Howe Sound Company (which has since changed its name to Howmet Corporation, earlier referred to), and Garrick Agnew Pty. Ltd., a company incorporated in Western Australia. The Howe Sound Company (which I shall call Howmet)) held 50.1% of the issued capital of Basic and Garrick Agnew Pty. Ltd. held 49.9%. The Agreement conferred upon Cleveland-Cliffs an option to purchase the vendors' ``entire right, title and interest in all of Basic's capital stock and shares for the purchase price set forth... to be exercised by written notice... on or before December the Thirty-First, One Thousand Nine Hundred and Sixty-Three''. The option was exercised in the manner provided for in the Option Agreement. The agreement required that on the date of the completion of the sale effected by the exercise of the option (called, in the language of the Option Agreement, the ``closing'') an initial payment of $200,000 (U.S.) should be paid to the vendors as part of the purchase price. The balance of the purchase price was dealt with in Article 5 of the Option Agreement in the terms following:

``5. The Purchase Price referred to in Article 4 shall consist of an Initial Payment of TWO HUNDRED THOUSAND DOLLARS $200,000 (US), payable in

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good New York or Cleveland, Ohio funds by certified or official bank check at the Closing of the purchase hereinabove referred to, plus Deferred Payments equal to 15 ¢ (US) per ton of Iron Ore payable as in this Article 5 set forth. Such 15 ¢ per ton payments (hereinafter sometimes called `Deferred Payments') shall be computed and paid as follows:

• (a) `Iron Ore' shall mean iron bearing material mined and transported from the Reserves by or with the consent of Basic or its successor in interests, whether or not such iron ore shall have been dried, roasted, burned, sintered, crushed, ground, concentrated, pelletized, agglomerated or otherwise beneficiated or processed or prepared prior to sale or consumption, but iron bearing material of low grade may be sold for construction purposes without any liability to pay any Deferred Payments with respect thereto.
• (b) A `ton' shall be a gross ton of 2,240 pounds avoirdupois weight in the form and at the time transported from the Reserve. Reports as to the weight of any such Iron Ore made by any common carrier trucker, railroad or vessel operator shall be conclusive for all purposes hereof. In the absence of such reports, reports thereof by Basic or its successor in interest shall, unless fraud is involved, be conclusive on each party hereto unless challenged in writing within thirty days after receipt of such report by such party;
• (c) Within ninety days after June thirtieth and December thirty first of each year Cliffs shall make or cause to be made to Howe and Agnew Company a report of the tons of Iron Ore mined and transported from the Reserves during the semi-annual period then ended, together with payment by check drawn on good United States funds of their respective participations in the Deferred Payments with respect thereto. Subject to the provisions of paragraph (b) of this Article, in the event Howe or Agnew Company does not object in writing to the computation of such amount within ninety days after receipt of such report, such report shall be binding and conclusive upon the parties, unless fraud is involved.
• (d) For purposes of this Article 5, iron bearing material mined from the Reserve shall be considered as still located at the Reserve so long as it is located at any plant in Australia for the purpose of drying, roasting, burning, sintering, crushing, grinding, concentrating, pelletizing, agglomerating or otherwise beneficiating or processing or preparing prior to its sale or consumption.

The initial Payment will be in the form of a check payable jointly to Agnew Company and Howe, and the Deferred Payments will be paid in cash or by check in the proportion of 50.1% to Howe and 49.9% to Agnew Company.''

By Article 6 of the Option Agreement, Cleveland-Cliffs was entitled to designate another corporation ``to make the purchase'' of the Basic shares. It designated Cliffs to make the purchase and, in accordance with the terms of Article 6, Cliffs was substituted for Cleveland-Cliffs ``as though it were an original party''. Cliffs paid the Initial Payment of $U.S.200,000 and took the transfer of the vendors'shares in Basic. The closing took place on 17 January 1964.

Before the closing, however, Garrick Agnew Pty. Ltd. sold its shares in Basic to Mt. Enid Iron Co. Pty. Ltd. According to the terms of admission made by the respondent, Mt. Enid ``thereby acquired all the right, title and interest claim and demand whatsoever of Garrick Agnew Pty. Ltd. in and to the Option Agreement''. At the closing therefore, the position stood thus: Howmet and Mt. Enid, the owners between them of all the issued capital of Basic, sold and transferred their shares to Cliffs, receiving their respective proportions of the Initial Payment of $200,000 (U.S.) and the benefit of Cliffs' contractual obligation to make deferred payments in accordance with Article 5. The payments made by Cliffs in accordance with Article 5 to Howmet and Mt. Enid in the 1973 and 1974 years are the deferred payments which the Commissioner disallowed as deductions.

Some months after the closing, namely on 18 November 1964, Basic and the Premier of Western Australia acting for and on behalf of that State entered into an agreement which was designed to govern the mining of the iron ore deposits in the area of the Temporary Reserves and the development of various

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associated works and facilities. The agreement was approved by the Iron Ore (Cleveland-Cliffs) Agreement Act, 1964. The terms of the agreement between Basic and the State were necessarily complex. It suffices, however, to say that the agreement provided that, if Basic should perform the onerous obligations accepted by it, the State bound itself to grant to Basic a mineral lease for the mining of iron ore. The provisions of the agreed mineral lease went beyond those authorized by the Mining Act, 1904 as amended. The area, term and conditions of the agreed mineral lease were more appropriate for a large mining undertaking than the area, term and conditions of the ordinary mining lease provided for in the Mining Act.

Cliffs decided that it, rather than its subsidiary Basic, should hold the mineral lease and be substituted for Basic as the party bound by the agreement with the State. On 21 October 1965, at an extraordinary general meeting of Basic, special resolutions were passed as follows:

``(i) That the Articles of Association of the Company be amended by adding the following Article to stand as Article 128

`If the Company shall be wound up whether voluntarily or otherwise the Liquidator may with the sanction of a Special Resolution divide among the contributors in specie or kind any part of the assets of the Company and may with the like sanction vest any part of the assets of the Company in trustees upon such trusts for the benefit of the contributors or any of them as the Liquidator with the like sanction shall think fit'

(ii) That the Company be wound up voluntarily and that Eric Joseph Hurst of 25 William Street Perth Western Australia be appointed Liquidator for the purpose of such winding up.

(iii) That the Liquidator be and is hereby authorised to divide all or such part of the assets of the Company as he shall think fit amongst the members of the Company in Specie.''

As the sole owner of the shares in Basic, Cliffs was entitled ``to bring into existence, certainly and without any significant delay, a right in its own favour'' to the nett assets of Basic (see per Kitto J. in
Davis Investments Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392 at pp. 413, 414 ). By procuring the passage of the special resolutions by Basic, and the distribution of Basic's assets to it in specie, Cliffs exercised the power which it had acquired by the purchase of Basic's shares. However, before it could secure to itself and in its own name the benefits of the agreement which Basic had with the State, it was necessary for Cliffs to be substituted for Basic - a substitution provided for in cl. 13 of the agreement with the State of 18 November 1964. Accordingly, on 19 November 1965, an indenture was executed by the State, Cliffs and Basic whereby, inter alia, the State released Basic from its agreement and accepted Cliffs as the covenantor in the place of Basic. By deed dated 7 December 1965, Basic assigned to Cliffs the benefit of Basic's agreement with the State. The substitution of Cliffs for Basic was recited in the preamble to the variation agreement scheduled to and approved by the Amendment Act of 1970:

``By virtue of various agreements under seal the Company is now entitled to all the right title interest claim and demand whatsoever of Basic in and under the Agreement and by virtue of deed of covenant with the State has assumed the obligations of Basic thereunder.''

By the 1970 Amendment Act and by the 1973 Amendment Act, certain variations of the agreement of 18 November 1964 were approved, the significant variation being the authority to grant the mineral lease on the terms statutorily approved to Cliffs instead of to Basic.

Cliffs, having become entitled to the benefit of the mineral lease, entered into an agreement dated 25 May 1970 whereby it agreed to grant to the participants the mineral sub-lease earlier referred to. It is unnecessary to mention the sundry provisions of this agreement which related to Cliffs' interests in its agreement with the State and its interests in certain other agreements compendiously described as ``Robe River Rights''. It is sufficient to refer to cl. 6(d) by which each of the participants undertook to pay to Cliffs ``as royalty on Iron Ore produced by and for such Participant and sold or shipped for sale or commercial use'' from the area defined an amount calculated at specified rates. The receipt of the agreed royalties appears to be Cliffs' principal business, and the royalties constitute the

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principal part of its assessable income. There is, at all events, no other business and no other income which might relevantly be regarded for the purpose of determining whether the claimed deductions fall within sec. 51(1).

The deferred payments are made by Cliffs to Howmet and Mt. Enid in an amount arrived at by applying the rate specified in the Option Agreement to the tonnage of iron ore mined and transported from the area which was comprised in Temporary Reserves numbered 2400H to 2417H. The royalties paid to Cliffs by the participants are calculated on a different basis, and are payable in respect of ore won from areas some of which were and some of which were not comprised in Temporary Reserves numbered 2400H to 2417H. Although there is no necessary correspondence between the tonnages used in calculating the royalties payable by the participants to Cliffs on the one hand, and in arriving at the amount of the deferred payments to be made by Cliffs on the other, frequently in practice the tonnage upon which a deferred payment by Cliffs is calculated will have attracted the payment of royalty to Cliffs. Of course, the participants mine, treat, transport and sell the ore: Cliffs engages in none of the activities which quantify the royalties payable to it or the deferred payments payable by it. The participants' carrying on of their mining business quantifies the royalties and the deferred payments, and effects an entitlement in Cliffs to the royalties and liability in Cliffs to make the deferred payments. When the tonnages of ore are common to the computations of royalties and deferred payments, the entitlement to assessable income is accompanied by a liability to make the deferred payments. Such a concurrence of entitlement and liability warrants enquiry to ascertain whether the occasion of the outgoing is to be found in what is productive of assessable income and whether the outgoing thus falls within one of the limbs of sec. 51(1) (see
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 57 ).

Concurrence of entitlement and liability arising from the carrying on of the participants' business does not without more determine the application of sec. 51(1). The outgoing must be relevant to Cliffs' income-producing activities (
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 at p. 309 ). To ascertain the relevance of an outgoing to the gaining or producing of assessable income, it is necessary to examine the nature of the outgoing. What is it for? The question is necessarily to be answered not only to ascertain the applicability of either of the limbs of sec. 51(1), but to ascertain whether the proviso deprives the outgoing of deductibility. The acquisition of an asset for use in gaining or producing assessable income provides a link of relevance between the outgoing incurred to acquire the asset and the gaining or producing of assessable income, even in some cases where the asset is a capital asset (see
Poole v. F.C. of T. (1970) 122 C.L.R. 427 at p. 435 ), although in cases where the outgoing is capital or of a capital nature the outgoing falls within the proviso and thus is not deductible.

When an outgoing is incurred to acquire an asset, and the deductibility of the outgoing under sec. 51(1) is in issue, the use to which the asset is or is intended to be put is one relevant consideration, the nature of the asset is another. Both considerations start with the identification of the asset acquired.

Cliffs undertook the obligation to make the deferred payments as part of the purchase price for the shares in Basic. The deferred payments made in discharge of that obligation may therefore be said to have been made to acquire the shares in Basic. So abbreviated and simplistic an analysis of the facts does not reveal ``what the expenditure is calculated to effect from a practical and business point of view'', to adapt the phrase of Dixon J. in
Hallstroms Pty. Ltd. v. F.C. of T. (1946) 72 C.L.R. 634 at p. 648 ; not does it take account of the legal rights which ownership of the shares conferred. Such an analysis, if accepted, would deny deductibility to the deferred payments, because they fall outside either of the limbs of sec. 51(1). The shares themselves were not used, and were not intended to be used, in gaining or producing assessable income or in carrying on any business for the purpose of gaining or producing such income. Indeed, the shares went out of existence on the dissolution of Basic. The shares - as distinct from the assets to which those shares gave access - are neither incidental nor relevant to any income-producing activity undertaken by Cliffs. The owners of the shares did not have, and could not transfer, any right to the iron ore which lay within the area of the Temporary Reserves, or any right to mine that ore. The vendors of the shares thus had no asset in respect of which

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royalties could be exacted (see
F.C. of T. v. Sherritt Gordon Mines Ltd. (H.C.A.) 77 ATC 4365 ;
Barrett v. F.C. of T. (1968) 118 C.L.R. 666 ).

Although the amount of the deferred payments is quantified by reference to the ore which is mined and transported, the right to mine and transport is not a right which was attached to the shares or incidental to their ownership. Yet it is not to be doubted that when Cliffs purchased the shares it did so with a view to acquiring the right to mine if it should be commercially feasible to do so.

The preferable analysis would identify the relevant asset for which the obligation to make the deferred payments was undertaken as the nett assets of Basic. At the closing Cliffs acquired the power to secure those assets to itself and in its own name whenever it should choose to do so, and the acquisition of the shares was, and was intended to be, merely the conduit through which Basic's assets should flow to Cliffs. There is nothing in the judgments in
Steinberg v. F.C. of T. 75 ATC 4221 ; (1975) A.L.J.R. 42 which, in my view, would deny validity to this analysis.

When Cliffs acquired the mineral lease, and the other rights arising under the 1964 Act, it retained these assets (subject to the variations effected by the Agreements subsequently approved by the 1970 and 1973 Acts) and exploited them by entering into the agreement of 25 May 1970 with the Participants. The mineral lease and the other rights arising under the several Acts of Western Australia are used in gaining Cliffs' assessable income, and the payments made to acquire these assets therefore fall within the positive provisions of sec. 51(1), and are therefore deductible unless the proviso excludes them from the operation of the section.

The payments are made recurrently, in amounts which vary with the mining and transportation of the relevant tonnages of ore; the payments do not go in discharge of a fixed liability; the payments will, or may, be payable for as long as the participants carry on their mining business and pay to Cliffs the royalities payable on the ore which is mined and sold. These are indicia of an outgoing on revenue account, but they are not the relevant criteria for determining whether or not the deferred payments are of a capital nature. When an outgoing is incurred to acquire an asset, the nature of the outgoing is determined by the nature of the asset acquired. ``If the nature of what is acquired makes it a capital asset the payment for it will be a capital payment'', said Lord Morris of Borth-y-Gest in
Strick (Inspector of Taxes) v. Regent Oil Co. Ltd. (1966) A.C. 295 at p. 333 . Kitto J., in
Cooper v. F.C. of T. (1957) 97 C.L.R. 397 at p. 404 (affirmed on other grounds 100 C.L.R. 131) stated the rule, applicable in the ordinary case of a payment for an asset of a capital nature, to be that ``the purchase of a capital asset requires the conclusion that the consideration paid, whether in one sum or in several and whether at one time or over a period, is an outgoing of a capital nature''. There may, of course, be difficulty in characterizing the asset acquired by the payment, as the Oil Company cases illustrate (
Bolan v. Regent Oil Co. Ltd. (1956) 37 T.C. 56 ;
Strick (Inspector of Taxes) v. Regent Oil Co. Ltd. (1966) A.C. 295 ;
B.P. Australia Ltd. v. F.C. of T. (1966) A.C. 224 ; (1964) 110 C.L.R. 387 ;
Mobil Oil Australia Ltd. v. F.C. of T. (1966) A.C. 275 ; (1964) 110 C.L.R. 419 ). But once it is established that the asset acquired is of a capital nature, the payment made to acquire the asset is shown to have the nature of the asset acquired. In seeking the nature of the payment, regard must be had not so much to the circumstances attendant upon the payment as to the asset for which the payment is made.

If payments be recurrent or periodic or variable in amount, the asset thereby acquired may more readily be thought not to be of a capital nature. The recurrence, periodicity or variation in the payments do not in themselves determine the nature of the payments, but they may throw light upon the nature of the asset acquired and thus upon the nature of the payments made for the asset in question.

The criteria referred to by Dixon J. in
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 at p. 363 , refer to ``the character of the advantage sought'' by the making of the payment. There are, his Honour said:

``three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.''

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When a payment is made periodically and particularly when the payment is not made in partial discharge of a fixed purchase price, a question will frequently arise as to whether the payment is made merely to acquire the ``use or enjoyment'' of an asset ``for periods commensurate with the payment''. But where it is clear that the payment, however made, is made to acquire an asset of a capital nature, the payments are likewise of a capital nature. In
Colonial Mutual Life Assurance Co. Ltd. v. F.C. of T. (1953) 89 C.L.R. 428 at p. 454 , Fullagar J. said of the payments made as the price of acquiring an asset:

``It does not matter how they are calculated or how they are payable, or when they are payable, or whether they may have a period of years to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature.''

In the Colonial Mutual Life case, a contract for the sale of land required the purchaser to pay a price being ``an amount equal to 90% of all rents as and when received from lessees or tenants'' of premises which were to be built in part on the land sold and in part on other land. The obligation thus incurred by the purchaser stamped the periodic payments to be made by the purchaser with the character of capital. There, as here, the amount to be paid was measured by reference to the yield from the asset which was bought: rent in one case, iron ore in the other. There, as here, it was immaterial that the title to the asset vested in the purchaser before the payment in question was received: the transfer of title to a capital asset in advance of the payment of the price does not alter the capital nature of the price when paid.

The obligation by Cliffs to make the deferred payments was undertaken to acquire (according to the analysis which I prefer) the nett assets of Basic. Basic's assets were the rights, including the right to the mineral lease, arising under the 1964 Act. Cliffs acquired additional and varied rights under the 1970 and 1973 Amending Acts, and it exploited the mineral lease and the other rights which it acquired in this way by entering into and taking the benefits provided by the Agreement with the participants of 25 May 1970. The assets which were so acquired and exploited were clearly capital assets in Cliffs' hands. The deferred payments, paid as part of the balance purchase price of capital assets, are likewise payments of a capital nature.

The deferred payments are not deductible and it follows, by the parties' agreement, that the exchange losses and unrecouped losses are not deductible.

The payments made in the 1974 year for legal advice related to the payment of withholding tax in respect of the deferred payments made to Howmet. The deductibility of these legal costs is not determined by the conclusion that the deferred payments made to Howmet are of a capital nature. The payment of legal costs was necessarily incurred in the carrying on of Cliffs' business (
F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 C.L.R. 431 ). The circumstance that the advice was sought with reference to the retention of tax from a capital payment does not mark the expense as a capital payment. The making of the deferred payments were part of Cliffs ordinary and recurrent business activities. The seeking of advice as to the deduction of tax from those payments in order that Cliffs might fully discharge its due obligations to its creditor, Howmet, was not an affair of capital but, in my view, an ordinary incident of the carrying on of its business. The costs of procuring that advice were deductible.

I would allow the appeal except as to the deductibility of the legal expenses and I concur in the orders proposed by the Chief Judge.