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Ruling

Subject: Market Support Payments

Question 1

Is the Company entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 for payments representing Market Support Payments (MSPs) paid to Country X subsidiaries for the income years ended 30 June 2008 to 30 June 2011 inclusive?

Answer

No.

This ruling applies for the following period

1 July 2007 to 30 June 2011

The scheme commences on

The scheme has commenced.

Relevant facts and circumstances

Company Background

The Company is a manufacturer, distributor and retailer of products.

The Company entered the Country X market with a broad strategy to replicate the Australian approach to building market share and growing its brand presence. The Company has subsidiaries in the Country X market.

The strategy pursued in Country X is a multi-channel approach.

The intention of management has been to develop a consistent global brand, based on the strategy developed and executed successfully in Australia.

The Country X subsidiaries of the Company purchase finished products from the Company and perform wholesale distribution and retailing functions. The subsidiaries have incurred significant operating losses in the Country X market since inception.

It is said that the source of the losses has been the marketing strategies designed to achieve critical mass in the Country X market. At the time of commencement it was anticipated that the Country X operations would achieve profitability within the first two to three years.

It was also said that:

The retail operations of the [Country X subsidiaries] have been in a start-up phase since [inception] …. The [subsidiaries] have incurred significant losses since that time. The source of the losses has been associated with the market entry drive to achieve critical mass in the [Country X] market.

Consequently, since inception of the Country X subsidiaries the Company has made MSPs to the Country X subsidiaries to assist with the implementation of marketing strategies in the Country X market. The continued support is based on the objective of expanding sales of Company products in the Country X market. This has taken much longer than anticipated.

Background to the Market Support Payments (MSPs)

All of the marketing concepts and strategies including store design, products and campaigns are developed and directed by the Company. As such any of the business risks (and costs) of these strategies and initiatives remain with the Company. The Country X subsidiaries are akin to a marketer/distributor for the Company. The Country X subsidiaries are primarily engaged in the distribution (importation, warehousing, logistics and transportation of goods) and the retail sale of products. The functional and risk profile of the Country X subsidiaries is commensurate with that of a limited risk marketer/distributor within its industry. As such the Country X subsidiaries profit profile should reflect their functional and risk profile as a limited risk marketer/distributor.

Over the years the Country X market has proved to be a very challenging market for the Company. Penetrating this market requires significant spending on marketing and developing the distribution network.

As stated in Taxation Ruling TR 97/20 titled "Income tax: arm's length transfer pricing methodologies for international dealings" at paragraph 2.50:

"Independent parties would not be prepared to accept strategies or policies that would reduce their level of profit for the benefit of another enterprise. In arm's length dealings any party accepting additional risks or functions would require an appropriate reward."

Hence, the Company determined that the Country X subsidiaries should be rewarded with a market support payment in order for it to achieve a basic return for the routine functions it performs. Without the MSPs, the Country X subsidiaries would have incurred significant losses over the years as a result of implementing the market strategies set by the Company. An independent distributor would not have agreed to implement these long-term marketing strategies at its own cost and sustain losses for a prolonged period of time.

Should the Country X subsidiaries return profits at a level higher than the routine return, it has been determined that the Country X subsidiaries will pay the Company a royalty for its contribution of valuable intangible property ("IP"). The methodology used to calculate MSPs made and any potential royalties in the future is outlined in the Agreement described below.

Payment of the MSP

In your application you stated:

"[The Country X subsidiaries] are sufficiently capitalised as at FY2011 by way of continued intercompany interest free loans."

The following statement appears under the heading "Improve the financial performance of [the Country X subsidiaries] to accelerate the receipt of royalty income by [the Company]":

The support provided by [the Company] included the following:

…;

The provision of an effectively interest free loan by way of intercompany payables/loans where balances are only reduced when a MSP is made … The debt funding was intended to represent a quasi-equity contribution and as such the loan was provided on an interest-free basis. …

This means that the market support payments are recorded as an entry to the payables account or to the loan account and thus no payments are actually made in the sense that no funds are transferred from Australia to Country X.

Agreement

A copy of an Agreement between the Company and the Country X subsidiaries with a stated effective date was provided.

The Agreement provides that the Company grants to the Country X subsidiaries the exclusive right to use in Country X the Intellectual Property (IP) (as defined) during the Term of the Agreement which is from the commencement date, with automatic one year renewals, until terminated as specified in the Agreement.

The Agreement provides that:

Intellectual Property includes but is not limited to:

a) Product formula and Manufacturing Process IP;

b) Brand Image;

c) IP such as patents, trademarks and trade names;

d) Marketing IP such as Marketing strategies, market know-how; and

e) Package design, store design

Market Support Payments by the Company

The payment of a Service Fee in the form of a market support payment by the Company to the Country X subsidiaries is required and the market support payment is calculated using the methodology in the Agreement.

Royalties to be paid to the Company

The payment of royalties by the Country X subsidiaries for the use of the Intellectual Property is required. The royalty is calculated using the methodology in the Agreement.

A royalty is paid only when the Country X subsidiaries produce a profit.

The Country X subsidiaries have produced losses in all years since inception.

Execution of the Agreement in 2012

The final Agreement was executed in 2012. You stated that the Agreement documents the Market Support Payments paid by the Company to its Country X subsidiaries since inception.

Sales by Country X subsidiaries

Details of the separate operations of each Country X subsidiary:

" … the [separate] legal entities are viewed as a single business by the [Company] group. The [separate] legal entities are managed by the same management team and are located in the same premises (i.e. there is only one single Headquarters). This model is essentially a replica of the Australian model …. As such we believe it is more appropriate to analyse the [Company's Country X] business as a whole without segregating it into [separate] legal entities. … the function of the company retail stores is predominately for marketing and brand definition/building purposes. [The subsidiaries] rely predominately on the wholesale channel to distribute its products in [Country X]."

Allocation of MSP between Country X subsidiaries

An explanation for allocating the market support payment between the subsidiaries in the fixed ratio in each income year is as follows:

" … [the Company] considers [the subsidiaries] as a single business. Further [the subsidiaries] are consolidated for accounting purposes. In this respect, when the residual profit split analysis is undertaken, it makes sense from a business standpoint to assess the contribution of [the Company] on one hand and from [the subsidiaries] as a whole on the other hand.

Consequently, the MSP is firstly determined for the whole [Country X] Group (rather than individually for [the subsidiaries]). The split between [the subsidiaries] has no impact, either from a [Country X] perspective or from an Australian perspective. In this context, it was decided … to split the MSP … for [the subsidiaries] respectively based on their EBIT forecasts …. Although the actual EBIT split between the [separate] entities may not be exactly as predicted, this is only a measure of simplification and considering that there is no impact from a business perspective, the … split has been applied consistently …."

Market Support Payment Calculations

Details of the calculation of the Market Support Payment made to each Country X subsidiary:

"... the MSP is calculated for the [Country X Group ] on a consolidated basis, based on a basic return calculated for [Country X Group ] and not individually for [the subsidiaries].

The basic return is expressed as Y% of [the subsidiaries'] external sales."

Other support provided by the Company to Country X subsidiaries

In the application you state:

The support provided by [the Company] included the following:

· Initial capital investment in [the Country X subsidiaries];

· The provision of an effectively interest free loan by way of intercompany payables/loans where balances are only reduced when a MSP is made ... The debt funding was intended to represent a quasi-equity contribution and as such the loan was provided on an interest-free basis.

Contradictory statements as to "payment" of market support

As stated earlier in this report the term "payments are actually made" was understood to mean that there was an actual transfer of funds from the Company to the Country X subsidiaries. Yet your statement that an entry is made in the accounts to record the market support payment means that the "payment" is by way of book entry only.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question 1

Summary

Your contention supported by an analysis of case law that the market support payments are incurred for the purpose of achieving a variety of objects all of which are said to be deductible in terms of the positive limbs of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) has been considered.

Our examination of the relevant law which includes the judgment of Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T (1938) 61 CLR 337; 5 ATD 87 and Hely J in Bell & Moir Corporation Pty Ltd v FC of T [1999] FCA 109; 99 ATC 4738; (1999) 42 ATR 421 reached a different conclusion.

It is concluded that the market support payments made by the Company to the Country X subsidiaries in the income years ended 30 June 2008 to 30 June 2011 inclusive were made for the purpose of strengthening the profit yielding structure of the Company.

Therefore the market support payments are not allowable deductions because they are losses or outgoings of capital or of a capital nature for the purposes of paragraph 8-1(2)(a) of the ITAA 1997.

Detailed reasoning

(i) Relevant legislation

The question of a deduction for the market support payments falls for consideration under section 8-1 of the ITAA 1997.

As you have identified there are positive and negative limbs of section 8-1 of the ITAA 1997. The positive limbs provide that a deduction is allowable where the expenditure:

(a) is incurred in gaining or producing your assessable income; or

(b) is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

The negative limbs will deny a deduction for the expenditure where:

(a) it is capital or of a capital nature;

(b) it is of a private or domestic nature;

(c) it is incurred in gaining or producing exempt income or non-assessable non-exempt income; or

(d) a provision of the ITAA 1997 applies to prevent a deduction.

It is accepted that the expenditure is not a loss or outgoing of a private or domestic nature so that a deduction is not denied in terms of paragraph 8-1(2)(b) of the ITAA 1997.

Further it is accepted that the expenditure is not a loss or outgoing incurred in deriving exempt income or non-assessable non exempt income so that a deduction is not denied in terms of paragraph 8-1(2)(c) of the ITAA 1997.

Therefore consideration will be given to the relevant provisions of section 8-1 which are the positive limbs {paragraphs 8-1(1)(a) and 8-1(1)(b)} and the negative limbs regarding whether the expenditure is capital or of a capital nature or a deduction is denied by another provision of the legislation {paragraphs 8-1(2)(a) and 8-1(2)(d)}.

(ii) Your analysis of case law

In support of your claim that the deduction is allowable you provide an analysis of the extensive Australian case law as to the cases in which there has been found to be a relevant connection between incurring a loss or outgoing and the generation of assessable income for the purpose of section 8-1 of the ITAA 1997.

The points you derive from your analysis of the case law are as follows:

· The expenditure must be "incidental and relevant" to the gaining or producing of assessable income or to be found in whatever is productive of, or would be expected to produce assessable income. Thus "the expression 'in gaining or producing' has the force of 'in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself." (See Amalgamated Zinc (de Bavay's) Ltd v FCT (1935) 54 CLR 295 and Associated Minerals Consolidated Ltd v FCT 27 ATR 542 at 550)

· The reference in the section to the generation of assessable income is not assessable income of the accounting period but assessable income generally. (See FCT v Snowden and Wilson Pty Ltd (1958) 99 CLR 290)

· The fact that a particular payment may be made voluntarily does not mean that it lacks the necessary connection with the production of assessable income. (See W Nevill and Co Ltd v FCT (1937) 56 CLR 290)

· In determining whether there is a necessary connection one must generally look beyond the immediate objective of a particular expenditure. "No expenditure strictly and narrowly considered, in itself actually gains or produces income. It is an outgoing, not an income. Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well-conducted business, then the expenditure (if not a capital expenditure) is an expenditure incurred in gaining or producing the assessable income." (Nevill's case 56 CLR 290 at 301)

· The need for there to be a relevant/necessary connection must therefore be narrowly construed. Rather, in determining whether there is a necessary connection "the controlling factor is that, viewed objectively, the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income. Provided it comes within that wide ambit, it will, for the purposes of [section 8-1] be necessarily incurred in carrying on that business if those responsible for carrying on the business so saw it." (Magna Alloys & Research Pty Ltd v FCT (1980) 11 ATR 276 at 295)

· Further support is found with reference to the judgement of Dixon J in FC of T v The Midland Railway of Western Australia "… what governs the issue is the business purposes for which the outgoing was incurred from the point of view of the taxpayer company. The controlling factors are those which arise from the character of the business or undertaking and the relation which the expenditure or the liability to make it bore to the carrying on of the business or the gaining of assessable income." (FCT v The Midland Railway of Western Australia Ltd (1952) 85 CLR 306 at 313)

It is not necessary to examine in detail those cases and the principles established by them because they are recognised as correct statements of the law in relation to expenditure which qualifies as being incurred on revenue account.

Your analysis of the cases demonstrates that in order for the expenditure to be deductible in terms of section 8-1 of the ITAA 1997 it is necessary that there be a nexus between the outgoing and the derivation of assessable income.

However, there is equally such a nexus between capital expenditure and the derivation of assessable income.

The critical issue in any examination of expenditure such as that for the market support payments is in drawing the distinction between deductible expenditure on revenue account and non-deductible capital expenditure.

(iii)Your view as to the object of the MSP

You submit that the Country X subsidiaries in carrying on business in Country X are following a business model provided by the Company. When that model fails to function successfully the Country X subsidiaries suffer losses for which they are compensated with the market support payments.

You state that the object of the market support payments is to:

· Provide support for the normal day to day operational costs incurred by the Country X subsidiaries in the course of carrying on their retail and distribution business;

· Mitigate the impact of distribution costs due to the geographical restrictions imposed by the Country X consumer market and difficulty in entry into various distribution channels which adversely impacts the sales revenue derived by the Country X subsidiaries;

· Increase the Country X subsidiaries' ability to promote the Company brand in the Country X market, being a brand which is owned by the Company;

· Preserve the ownership of the intellectual property in Australia;

· Provide a quantum of payment determined under arm's length principles to bring the Country X subsidiaries up to a level of return commensurate with an independent party operating as a limited risk distributor;

· Improve the financial performance of Country X subsidiaries to accelerate the return of royalty income to the Company; and

· Promote the sale of the Company's products to its Country X subsidiaries to derive ordinary sales income.

You consider all of the above objects to be within the positive limbs of section 8-1 of the ITAA 1997 and you present an argument in support of your view regarding each object.

(iv) Revenue or capital expenditure

In order to secure a deduction it is not sufficient to confine consideration to the positive limbs of section 8-1 of the ITAA 1997 only. It is also necessary to consider paragraph 8-1(2)(a) which will not allow a deduction for expenditure which is a loss or outgoing of capital or of a capital nature.

The issue in this case as in many cases including those cited above is whether the expenditure incurred was on revenue account or on capital account.

Accordingly that question will be examined here.

A leading case involving the distinction between revenue expenditure and capital expenditure is Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T (1938) 61 CLR 337; 5 ATD 87.

In the judgement of Dixon J at p359 it was said:

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss. The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested.

Later at p360 it was said:

But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist of what has been called "a profit-yielding subject" the phrase of Lord Blackburn in United Collieries Ltd v Inland Revenue Commissioners. As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue.

Thus it is necessary to determine whether the market support payment was an outgoing incurred in the process of operating the business carried on by the Company or of creating, enhancing or maintaining the profit-yielding subject or structure of its business.

(v) MSP in the Agreement and the accounts

Under the terms of the Agreement the market support payment is payable according to a formula that is designed to give the Country X subsidiaries a routine or basic return upon sales.

Given the formula used to calculate the market support payment it is considered that the sum so calculated is an undifferentiated amount that cannot be said to be referrable to any particular outgoing of the Country X subsidiaries.

The market support payment is a notional figure and no funds actually change hands. This is because only book entries are made. The market support payments are posted by the Company to either of two accounts of the Country X subsidiaries, namely the payables account or the loan account. The effect in both instances is that the amount owed by the Country X subsidiaries to the Company is reduced.

The market support payment also appears in the profit and loss account of the Country X subsidiaries where the effect is to reduce the total expenses. Thus on paper, according to the profit and loss account, the result for the subsidiaries is better than it would be in the absence of the market support payment.

Therefore the loss or outgoing for which the Company seeks a deduction in respect of the market support payment is effected by a posting of the accounting entry to reduce either the payables account or the loan account of the Country X subsidiaries.

(vi) Transfer pricing

You state that one of the objects of making the market support payments was to preserve the Australian ownership of the Company's intellectual property.

This is considered to be inherently an affair of capital or of a capital nature such that paragraph 8-1(2)(a) applies to disallow a deduction for this loss or outgoing.

However in support of your claim that the outgoing is an allowable deduction you state:

Whilst [the Country X subsidiaries] are licensed to use [the Company] brand, they do not own any [Company] brands or trademarks. In executing the marketing and distribution strategy as directed by [the Company] with the intention of increasing brand awareness and market share in [Country X], [the subsidiaries] incurred significant expenditure in excess of that which an independent distributor would be willing to spend on brands or trademarks owned by a third party. It is reasonable to expect an independent distributor in such circumstances to demand additional compensation and in the absence of such additional compensation to cease to act for that third party.

You state that your view is supported by the ATO publication "International Transfer Pricing - Market Intangibles" and it is noted that you undertook a transfer pricing study in each of the income years ended 30 June 2008 to 30 June 2011 inclusive.

It is understood from your statement that the Company contends that the market support payments are a legitimate expense incurred under an international tax agreement and are therefore covered by the application of the transfer pricing provisions in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936).

However Taxation Ruling TR 94/14 titled "Income Tax: application of Division 13 of Part lll (international profit shifting) - some basic concepts underlying the operation of Division 13 and some circumstances in which section 136AD will be applied" must be considered.

Taxation Ruling TR 94/14 when discussing the interaction between section 51(1) and Division 13 of the ITAA 1936 states:

19 It may not be necessary to consider the application of Division 13 for the purposes of denying or reducing a deduction under subsection 51(1) of the ITAA, in respect of an acquisition of property under an international agreement where the deduction, or the relevant part of it, is not allowable under subsection 51(1) because it:

(a) was not incurred for the purpose of producing the assessable income of the taxpayer - but for some other purpose;

(b) is properly regarded as being incurred in producing the income of another party; or

(c) was incurred in relation to the gaining or production of exempt income.

Later under the heading "Expenditure incurred not for the purpose of producing the assessable income of a taxpayer but for some other purpose" it is stated:

189. If the proper conclusion to be drawn from all the facts and circumstances is that certain expenditure (or part of it) was not incurred for the purpose of gaining or producing assessable income of the Australian taxpayer, or is otherwise not allowable under subsection 51(1), then the appropriate result is that the expenditure (or relevant part) should be disallowed as a tax deduction under subsection 51(1). Such a case would not normally give rise to an application of Division 13.

(vii) Profit yielding structure of the Company

The profit-yielding structure of the Company includes its interest as a shareholder in the Country X subsidiaries as well as the relationship it has with those subsidiaries as the supplier of products for sale by the Country X subsidiaries.

You contend that the market support payment will "accelerate the return of royalty income".

The Country X subsidiaries will only pay a royalty when a profit above a routine or basic rate of return is earned in an income year. However, given the history of losses and the magnitude of the accumulated losses in order to reach a position in which the requirement to pay the royalty arises all those prior year losses must first be recouped.

Thus in any year when a loss is realised the making of the market support payment will reduce that loss so that the total of future profits necessary to extinguish the accumulated losses is less than it would be in the absence of the market support payment. Hence the market support payment brings forward the time at which the requisite profit will be realised and a royalty paid.

Clearly therefore if it were not for the market support payments the Country X subsidiaries would realise greater losses and the share capital subscribed to the Country X subsidiaries would be reduced. Thus in order to maintain the Country X subsidiaries, that is, in order to maintain the Company's profit yielding structure the Company would need to fund those losses either by an injection of equity via additional capital subscribed for shares or by an ever increasing loan.

Further as noted above you state:

The support provided by the Company included the following:

…;

The provision of an effectively interest free loan by way of intercompany payables/loans where balances are only reduced when a MSP is made (…). The debt funding was intended to represent a quasi-equity contribution and as such the loan was provided on an interest-free basis. … (Emphasis added)

The Company has chosen to fund the Country X subsidiaries by the original share capital subscription, interest free loans and the market support payments.

The market support payments achieve the same end as the loans, that is, they keep the Company business structure intact. The loans are non deductible capital outgoings and the market support payments are likewise of the same capital character. This means the market support payments are not deductible by virtue of paragraph 8-1(2)(a) of the ITAA 1997.

(viii) Case law

You state that one of the objects of the market support payments is to maintain the sale of the Company's products to the Country X subsidiaries. However, as explained above our interpretation is that the market support payments are a means by which the Country X subsidiaries are maintained as operating entities so that they are in a position to trade with the Company. This maintenance of the business structure is an outgoing of capital.

In Bell & Moir Corporation Pty Ltd v FC of T [1999] FCA 109; 99 ATC 4738; (1999) 42 ATR 421 (Bell & Moir) the taxpayer carried on business as a motor vehicle dealer, and associated activities. The taxpayer acquired a 33 1/3% shareholding interest in another motor vehicle dealer, Barry Michael Motors Pty Ltd ('BMM"). The purpose of this investment was to improve revenues and profitability by way of a relationship with BMM which involved, among other things, sales of products by the taxpayer to BMM.

The taxpayer agreed to become a co-guarantor of a finance facility, not to protect the investment but to ensure continuity of the dealings between itself and BMM that enabled the taxpayer to earn income. Later, the taxpayer became a guarantor of a facility under a bank provided overdraft facility to BMM.

It is acknowledged that for the Company there is no loan guarantee and on this point Bell & Moir is distinctly different. However, there is a common factor in that the purpose of the expenditure was to promote future sales and hence the derivation of assessable income.

Other similarities are set out below.

In both instances there is a document which formalises the obligation to make the payment in question. In Bell & Moir it is the guarantee whilst in your case it is the Agreement between the Company and the Country X subsidiaries.

In Bell & Moir the guarantee represents part of the stake in BMM while the Agreement is part of the stake the Company has in the Country X subsidiaries.

In Bell & Moir the taxpayer appealed to the Federal Court from a decision of the Administrative Appeals Tribunal (AAT). The taxpayer contended that, prior to the giving of the guarantees, its trading pattern with BMM was already well established. The giving of the guarantees was to enable it to maintain and continue that trading relationship with BMM. Further it was said that the guarantees were not calculated to create a new asset or advantage, nor did they alter or expand the framework within which the taxpayer's business operated. It was claimed that the resultant payments were thus of a revenue nature, even if what was sought was an enhancement of the taxpayer's trading operations.

On the other hand the Commissioner contended that the guarantees were given for the purposes of strengthening, preserving or expanding the business structure of the taxpayer and, as such, payments made pursuant to the guarantee were of a capital nature. Unless the taxpayer was in the business of giving guarantees, then it was not entitled to a deduction arising out of payments made pursuant to the guarantee.

The Court confirmed the decision of the AAT which had found that the payments were of a capital nature because:

· the applicant was not in the business of giving guarantees, nor did it o so recurrently.

· The guarantees "constituted a stake in BMM" which, from the applicant's viewpoint, "was structural in nature", the stake was part of the applicant's overall structure, and would, it was hoped, produce income by increasing the applicant's turnover and income through its association with, and support of BMM.

In your case it is considered that the purpose is likewise strengthening, preserving or expanding the business structure of the Company.

The nature of the benefit or advantage sought in Bell & Moir was the propping up of BMM so that the taxpayer could continue to trade with it. That is the type of enduring benefit which would ordinarily result in the cost of acquiring it being characterised as capital in nature.

Similarly the nature of the benefit or advantage sought by the Company was to improve the financial performance of the Country X subsidiaries and thereby place them in a better position so that they would continue to purchase products from the Company so that the latter derived assessable income.

Accordingly, it is worthwhile to examine the judgement of the Court in Bell & Moir.

Hely J at p4740 said:

The applicant submitted that … The advantage which the applicant sought to acquire by the giving of the guarantees was the maintenance or continuation of the trading relationship with BMM through which the applicant derived assessable income. The giving of the guarantees was not calculated to create a new asset or advantage, nor did it alter or expand the framework within which the applicant's business operated. The resultant payments were thus of a revenue nature. That would be so even if what was sought was an enhancement of the applicant's trading operations.

The respondent submitted that the guarantees were given for the purpose of strengthening, preserving or expanding the business structure of the applicant. As such payments made pursuant to the guarantees are of a capital nature. Unless a taxpayer is in the business of giving guarantees, then it is not entitled to a deduction arising out of payments made pursuant to a guarantee.

It is the character of the advantage sought by the taxpayer for itself by making the outgoing for which deduction is sought which is the chief factor in determining whether the outgoing is on revenue or capital account.

…

The character of the advantage sought is to be determined from a practical and business point of view: Hallstrom Pty Ltd v FC of T (1946) ATD 190 at 195; (1946) 72 CLR 634 at 648. Where what is sought to be obtained is not an asset, but a practical though intangible business advantage, then that too must be analysed to determine its nature, as, for example, whether it is an enduring advantage for the benefit of the business: FC of T v South Australia Battery Makers Pty Ltd 78 ATC 4412 at 4421; (1977-1978) 140 CLR 645 at 662.

Expenditure may be on capital account even if it is not calculated to produce an asset or enduring advantage for the benefit of the business: John Fairfax & Sons Pty Ltd v FC of T (1959) 11 ATD 510 at 511-512; (1958- 1959) 101 CLR 30 at 36; Broken Hill Theatres Pty Ltd v FC of T (1952) 9 ATD 423 at 424; (1951 - 1952) 85 CLR 423 at 434.

Later at p 4743 Hely J said:

The benefit or advantage expected to accrue to the applicant as a result of the giving of the guarantee can thus be described as the provision of funds to BMM so as to provide it with a stronger base from which to carry on its business, including purchases of goods from the applicant in the expectation that the applicant would continue to derive assessable income from its dealings with BMM.

(ix) Conclusion

It is concluded that the market support payments made by the Company to the Country X subsidiaries in the income years ended 30 June 2008 to 30 June 2011 inclusive were made for the purpose of strengthening the profit yielding structure of the Company.

Therefore the market support payments are not allowable deductions because they are losses or outgoings of capital or of a capital nature for the purposes of paragraph 8-1(2)(a) of the ITAA 1997.