Cliffs International Inc. v. Federal Commissioner of Taxation.

Judges: Barwick CJ

Gibbs J
Stephen J
Jacobs J
Murphy J

Court:
High Court of Australia

Judgment date: Judgment handed down 13 March 1979.

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Gibbs J.: The facts of this case, which are not in dispute, are stated in the judgments of the courts below and in the reasons for judgment which have been prepared by the Chief Justice and by my brother Jacobs. I need not repeat them.

The half-yearly payments made by the appellant to Howmet and to Mr. Enid under cl. 5 of the agreement made on the 27th November 1962 were clearly enough outgoings incurred in gaining or producing the assessable income of the appellant within sec. 51(1) of the Income Tax Assessment Act 1936 (as amended) (Cth.). They were made in the course of earning the assessable income, and were incidental and relevant to that end. The question is whether they were of a capital nature, and for that reason not allowable deductions.

The combined effect of cl. 4-6 of the agreement, so far as those provisions are relevant for present purposes, is that the purchase price payable by the appellant to Howmet and to Mt. Enid for their right, title and interest in all of Basic's capital stock and shares consisted of an initial payment of $200,000 U.S. plus ``deferred payments'' equal to fifteen cents U.S. per ton of iron bearing material mined and transported from certain temporary reserves in the Hamersley Range by or with the consent of Basic or its successor in interest during the half-yearly periods ending on the 30th June and the 31st December in each year. There was no obligation to make the ``deferred payments'' unless the ore was mined and transported from the reserves. There was no limit to the amount payable as ``deferred payments'' - the payments were to be made as long as the ore was mined and transported. Once the agreement had been completed, neither Howmet nor Mt. Enid had any right or interest, direct or indirect, to or in the reserves or the ore therein.

The advantage sought by the payments was of a capital nature. That is so, whether one looks at the ``true legal character'' of the expenditure or at what it was ``calculated to effect from a practical and business point of view''. The sources of those phrases are the authorities cited in
F.C. of T. v. South Australian Battery Makers Pty. Ltd. 78 ATC 4412 ; (1978) 21 A.L.R. 59 at pp. 68-69 , where the familiar distinction between expenditure of a capital nature and expenditure of a revenue nature was recently discussed. The true legal character of the expenditure was that of the purchase price of the shares in Basic, as Franki J. held in the Federal Court. From a business and practical point of view the appellant sought to acquire Basic's rights in relation to the temporary reserves - the actual right to occupy and use them for a short period, and the contingent right to obtain, or the possibility of obtaining, mineral leases of the land in the reserves. In the Federal Court Bowen C.J. held that the payments were made for the acquistion of the shares and the rights to which they gave access, and Brennan J. held that the payments were incurred with a view to obtaining the net assets of Basic. However the matter is stated, what was purchased - whether it was the shares, or the rights and the possibilities inherent in them, or all of these - was an asset or advantage of an enduring, although not perpetual, kind, an asset or advantage that was to form part of the organization set up by the appellant for the earning of profit. The deferred payments were made to acquire this asset or advantage - there was nothing else that Howmet and Mt. Enid had to give for which they could have been paid. In other

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words, the deferred payments should properly be regarded as expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which was a condition of carrying on the business of mining at all, within the test stated in
Robert Addie & Sons' Collieries, Limited v. I.R. Commrs. (1924) S.C. 231 , at p. 235 , in the passage cited in
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1953) 89 C.L.R. 428 , at p. 448 . The rights acquired were of a permanent character within this test, notwithstanding that a mineral lease is a wasting asset, for ``When the words `permanent' or `enduring' are used in this connection it is not meant that the advantage which will be obtained will last forever.'':
Sun Newspapers Ltd. and Associated Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 , at p. 355 per Latham C.J.; see also per Dixon J., at pp. 362-363, and
Ralli Estates Ltd. v. Commr. of Income Tax (1961) 1 W.L.R. 329 , at p. 335 .

On behalf of the appellant, particular reliance was placed on the facts that the payments were recurrent, and were related to the income earned from mining the lands, since it must be assumed that the parties contemplated that no ore would be mined and transported except for the purpose of earning income. In Sun Newspapers Ltd. and Associated Newspapers Ltd. v. F.C. of T., Dixon J. said, at p. 362, that recurrence ``is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure''. Later he said, at p. 363:

``Again, the cases which distinguish between capital sums payable by instalments and periodical payments analogous to rent payable on revenue account illustrate the fact that rights and advantages of the same duration and nature may be the subject of recurrent payments which are referable to capital expenditure or income expenditure according to the true character of the consideration given, that is, whether on the one hand it is a capitalized sum payable by deferred instalments or on the other hire or rent accruing de die in diem, or at other intervals, for the use of the thing: Compare
Ogden v. Medway Cinemas Ltd. (1934) 18 Tax Cas. 691 with
I.R. Commrs. v. Adam (1928) S.C. 738 ; 14 T.C. 34 and
Green v. Favourite Cinemas Ltd. (1930) 15 T.C. 390 .

There are, I think, 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.''

There have been a number of cases in which expenditure made for the purpose of acquiring a capital asset has been held to be expenditure of a capital nature, notwithstanding that the moneys have been paid over a period of many years, and have been fixed by reference to the income received by the person making the payments. In Colonial Mutual Life Assurance Society Ltd. v. F.C. of T., land was sold to an insurance company, in consideration of promises by the company to erect a building upon it, to use its best endeavours to lease certain shops in the building and to collect the rents therefrom, and to pay to the vendors for fifty years an amount equal to ninety per cent of all rents as and when received from lessees or tenants of those shops. Money paid under the agreement was held to be a capital outlay. Fullagar J. (with whom Kitto and Taylor JJ. agreed) said, at p. 454:

``... For it is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease 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.''

One of the authorities relied on by the members of the Court in that case was
Tata Hydro-electric Agencies, Bombay v. Income Tax Commr., Bombay Presidency and Aden (1937) A.C. 685 . The facts of that case, as summarized by Williams A.C.J. in Colonial Mutual Life Assurance Society Ltd. v. F.C. of T., at p. 444 were as follows:

``There the appellant company, which carried on the business of managing agents of A. company, had acquired the agency from B. company under an assignment whereby B. company transferred to the

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appellants their whole rights and interest as agents of A. company, subject, however, to the obligations of B. company to pay to both D. and E. companies twelve and one-half per cent of the commission earned by B. company under their agency agreement with A. company.''

The Judicial Committee held that the commission was not expenditure incurred ``solely for the purpose of earning... profits or gains''. Lord Macmillan said, at p. 695:

``In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business.''

Williams A.C.J. said, at p. 445, that this was ``another way of saying that the expenditure was of a capital nature''; see also per Fullagar J., at p. 455.

In Ralli Estates Ltd. v. Commr. of Income Tax, the payments in question were made for the purchase of a right of occupancy of two sisal estates for ninety-nine years on payment of a premium and a ``royalty'' on sisal fibre exported up to a fixed total. The Judical Committee held that the moneys were not royalties but were paid for the right of occupancy for 99 years; they were paid for a capital asset, or at least for a capital purpose, and therefore constituted a capital expenditure.

A similar question was considered by the Supreme Court of Victoria in In
re Income Tax Acts (No. 2) (1915) 21 A.L.R. 359 , where the taxpayer bought auriferous lands for £ 60,000, of which £ 25,000 was to be paid in cash, and the balance was to be paid in yearly sums calculated as being equivalent to 20 per cent of the value of the gold taken during the year from the property. It was held that the amount of the yearly sums was not deductible in ascertaining the taxpayer's profits. The argument that the moneys paid were equivalent to royalties or rents was rejected.

In my opinion, if the expenditure can be truly characterized as the payment of consideration for a capital asset or advantage, it will be of a capital nature notwithstanding that the payments are recurrent and are continued for an indefinite period. I do not regard
Egerton-Warburton v. D.F.C. of T. (1934) 51 C.L.R. 568 as a decision to the contrary, having regard to the explanation of that case given by the members of the court in Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. at pp. 445-7, 449 and 457-9, and by Kitto J. in
Cooper v. F.C. of T. (1957) 97 C.L.R. 397 , at pp. 403-4 .

In the present case, the expenditure, although recurrent, and apparently intended to be paid out of the proceeds of mining the lands, was, as I have said, made as the consideration for the acquisition of an advantage which had the character of capital. Although there was evidence, which was accepted, that the parties regarded the payments as in the nature of royalties, the payments did not in truth have that character. The payees had no interest in the mineral leases, and could not either give or withhold permission to mine them. The payments could not properly be said to have been made for the right to mine the ore, since the mining operations could be continued whether or not the payments were made. The case falls within the principle on which Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. and Ralli Estates Ltd. v. Commr. of Income Tax were decided. It is true that in the latter case, and in In re Income Tax Acts (No. 2), there was an obligation to pay a fixed total sum, of which the payments could be regarded as instalments, and that this circumstance may distinguish those cases from the present. In Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. there was no specified total sum; the obligation there was limited to a fixed period, and in the present case continues indefinitely, but this circumstance does not seem to me to be material, since in each case the expenditure was the consideration paid for a capital advantage. I do not regard the fact that in Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. the asset acquired was freehold rather than leasehold as providing any distinction in principle from the present case, since, as I have said, it is not a necessary characteristic of a capital asset that it should endure in perpetuity. In my opinion the present case is indistinguishable from Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. The facts also appear to me to be indistinguishable from those in Tata Hydro-Electric Agencies, Bombay v. Income Tax Commr., Bombay Presidency and Aden, although of course that case was decided on a statute containing words different from those of sec. 51(1).

For these reasons I hold that the expenditure in question was of a capital nature and was not allowable as a deduction.

I would dismiss the appeal.

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