F.C. of T. v. South Australian Battery Makers Pty. Ltd.

Members: Gibbs ACJ
Stephen J
Jacobs J

Murphy J
Aickin J

Tribunal:
Full High Court

Decision date: Judgment handed down 10 August 1978.

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Murphy J.: The question is whether part of certain payments made by the taxpayer, South Australian Battery Makers Pty Limited and described as rent were allowable deductions within sec. 51(1) of the Income Tax Assessment Act 1936 (as amended), which provides:

``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.''

On 19 May 1964, the Electricity Trust of South Australia entered into a lease with Associated Battery Makers, after giving it the choice of paying rent at a nominated rate or paying higher rental payments with the excess being credited against the purchase price of the premises, over which an option to purchase would be given to an associated company. In each year, the payment would achieve a defined credit against the purchase price. On 3 July 1964, the taxpayer, South Australian Battery Makers, accepted an assignment of the lease, knowing that part of the ``rental'' was to reduce the purchase price to an associated company. Later that month, the Electricity Trust granted Property Options (an associate of the taxpayer) the option to purchase. Thus, the taxpayer, as assignee of a lease, is paying sums in excess of the rent at which the lessor was willing to rent the premises in order to enable an associated company (if it chooses to exercise its option) to purchase the premises at a price reduced by the amount of the excess rental payments.

The negotiations and events which led to these payments are set out in the judgments of Mr. Justice Gibbs and Mr. Justice Jacobs. The lease expressed the total payments to be for occupation. But the wording of the lease is not controlling; the niceties of conveyancing must not be allowed to obscure the real substance of the transaction. The

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lease was a transparent device which is not consistent with the real transaction evidenced by the negotiations and various steps which the taxpayer revealed with refreshing frankness. The fact that the taxpayer was the assignee and not the lessee does not alter the real transaction. The companies were not at arm's length; they were all associates in what was described as ``the Chloride group''. Companies, like natural persons, can act as agents and intermediaries. The substance is that the payment for occupation (the true rent) was the amount for which the Electricity Trust was willing to let the premises to Associated Battery Makers. The excess was not payment for occupation but was intended to confer a benefit on Property Options. Payment for such a purpose was not intended by the legislature to be an allowable deduction under sec. 51(1).

It would make a mockery of the legislative intent if the taxpayer is able to pay to another (who finds it convenient because it is nontaxable or otherwise) excess amounts for goods or services on the basis that the excess will be passed on as a benefit for an associate of the taxpayer.

As the Supreme Court of the United States said in
Gregory v. Helvering 293 U.S. 465 :

``To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.''

(p. 470)

Thus, payments may be outgoings within sec. 51(1) although no contractual or other legal rights or obligations are received or satisfied; conversely, payments may fail to come within sec. 51(1) even if in form contractual or other legal rights are received or obligations discharged.

Even if the excess payments were not of a capital nature, the result would be the same. If they were paid so that the Trust would confer a benefit of a revenue nature on Property Options, they would not be allowable deductions within sec. 51(1). However, the excess payments are properly regarded as of a capital nature and thus excluded from sec. 51(1).

In Sun Newspapers Limited and Associated Newspapers Limited v. F.C. of T. (1938) 61 C.L.R. 337, Mr. Justice Dixon said that the matters to be considered in deciding whether an outgoing is revenue or capital are:

``... (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.''

(p.363).

The substantial economic reality must be dealt with. As Mr. Justice Dixon expressed it in
Hallstroms Pty. Ltd. v. F.C. of T. (1946) 72 C.L.R. 634 :

``What is an outgoing of capital and what is an outgoing on account of revenue 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.''

(p. 648).

If the option were held by the taxpayer and the excess payment would reduce the purchase price for it, it would clearly be a payment of a capital nature. This was the position at the time the taxpayer became the assignee, but a little later the arrangement was altered so that the option was given to Property Options. It is difficult to see that the taxpayer's position improves if the benefit is not to flow to it but to an associated company. In my opinion, the payment was of a capital nature and is excluded by sec. 51(1) even if the benefit flows, not to the taxpayer, but to another.

Literal interpretations of the Act have allowed tax avoidance devices to succeed and have encouraged their growth. While the Act is read literally, no amount of legislative amendment will be able to stem the proliferation of such devices which are inconsistent with the general legislative intent. The strictly literal approach departs from the traditional respect of the courts for the legislative will. In
Stradling v. Morgan 1 Plowd. 199 ; 75 E.R. 305 , the English Court of Exchequer, after referring to many cases

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in which the courts have construed the intent of Acts contrary to their letter, said:

``From which cases it appears that the sages of the law heretofore have construed statutes quite contrary to the letter in some appearance, and those statutes which comprehend all things in the letter, they have expounded to extend but to some things, and those which generally prohibit all people from doing such an act, they have interpreted to permit some people to do it and those which include every person in the letter they have adjudged to reach to some persons only, which expositions have always been founded on the intent of the Legislature, which they have collected sometimes by considering the cause and necessity of making the Act, sometimes by comparing one part of the Act with another, and sometimes by foreign circumstances. So that they have ever been guided by the intent of the Legislature, which they have always taken according to the necessity of the matter and according to that which is consonant to reason and good discretion.''

(p.205a). In
Bradlaugh v. Clarke (1883) 8 A.C. 354 , Lord Blackbun said:

``All statutes are to be construed by the Courts so as to give effect to the intention which is expressed by the words used in the statute. But what is not to be discovered by considering those words in the abstract, but by inquiring what is the intention expressed by those words used in a statute with reference to the subject matter and for the object with which that statute was made; it being a question to be determined by the Court, and a very important one, what was the object for which it appears that the statute was made.''

(p. 372).

In
Central Hanover Bank & Trust Co. v. Commr. of Internal Revenue 159 F. 2d 167 , Judge Learned Hand said:

``There is no more likely way to misapprehend the meaning of language - be it in a constitution, a statute, a will or a contract - than to read the words literally, forgetting the object which the document as a whole is meant to secure. Nor is a court ever less likely to do its duty than when, with an obsequious show of submission, it disregards the overriding purpose because the particular occasion which has arisen, was not foreseen. That there are hazards in this is quite true: there are hazards in all interpretation, at best a perilous course between dangers on either hand: but it scarcely helps to give so wide a berth to Charybdis's maw that one is in danger of being impaled upon Seylla's rocks.''

(p. 169).

Literal compliance with the terms of an Act is not enough if the real result is contrary to the general intention of the legislature. This approach should be taken to tax Acts.

The appeal should be allowed.