Sun Newspapers Ltd & Anor v Federal Commissioner of Taxation

61 CLR 337
5 ATD 87

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(Judgment by: Dixon J)

Between: Sun Newspapers Ltd - Appellant
And: Federal Commissioner of Taxation - Respondent
Between: Associated Newspapers Ltd - Appellant
And: Federal Commissioner of Taxation - Respondent

Court:

Judges: Rich J (previous judgment)
Latham CJ

Dixon JMcTiernan J

Hearing date:
Judgment date: 23 December 1938

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Judgment by:
Dixon J

By the order under appeal Rich J. dismissed appeals by the respective taxpayers from assessments to income tax for the financial year beginning 1st July 1933.

The first taxpayer, Sun Newspapers Ltd., a company which is now being wound up, was at the material time the proprietor of the evening Sun and the Sunday Sun and Guardian and other journals published in New South Wales. The second taxpayer, Associated Newspaper Ltd., held nearly all the share capital of the first company. The object of the appeals to the Full Court from the order of Rich J. is to obtain the allowance, in one or other of the assessments of the respective companies, of a deduction from the assessable income of such company in respect of expenditure incurred for the purpose of preventing the publication of a rival evening newspaper. Some doubt is felt whether the deduction should be claimed by Sun Newspapers Ltd. as the operating company or by Associated Newspapers Ltd. as the holding company, because although the actual payment was made by the former, the latter made the agreement or arrangement by which the obligation to make the payments was undertaken. The appeals are therefore brought, as it were, in the alternative.

The accounting period by reference to which the income of each company has been assessed consists of the twelve months ending 21 September 1933 . During that period the publications of the companies were under the charge of a managing editor whose contract of service was actually made with Associated Newspapers Ltd. That company, although primarily a holding company, had not drawn a very precise line in the activities it had undertaken or the purposes it fulfilled. Except for one member, the boards of directors of the two companies were composed of the same persons, and the board meetings were always held one after the other on the same days. It was not unnatural that some confusion of function should arise, unless care were taken to maintain a rigid distinction between the work and responsibilities of the two companies.

The managing editor had a son who was also a journalist. The son entered into some business arrangement or association with the holder of an option for what was called a "lease" of the premises, plant and business as a going concern of a newspaper called the World, which had been established for some time as an evening journal. The option was expressed in a written instrument bearing date 1st November 1932 and had a currency until 9th November. The holder of the option appears to have formed a company called Sydney Newspapers Ltd. with a view to its exercise.

An announcement was made that the machinery and plant of the World, over which the option was held, would be employed by Sydney Newspapers Ltd. in publishing a new evening paper to be called the Star, which would be sold at a penny. The Sun, in common with other daily papers published in Sydney, sold at a penny halfpenny. The managing editor acquainted his board or boards of directors with the news of this threatened competition. He received some sort of authority to take measures by treaty or otherwise to avert the danger. In the result he made an agreement with Sydney Newspapers Ltd. and its two promoters. The agreement took the form of letters exchanged between the parties bearing date 9th November 1932, the day on which, as the option was expressed, it would have expired.

The letter of the managing editor was written on behalf of the chairman and board of directors of Associated Newspapers Ltd. It offered pounds86,500 for "your interest in the World newspaper" and made it clear that the purpose was to put an end to the publication and for three years to ensure that the plant was not used in publishing an evening newspaper in competition with the Sun.

The terms of the agreement required that during a period of three years Sydney Newspapers Ltd. and its two promoters should not take any part in the publication of a newspaper in Sydney or within three hundred miles of that city but should continue their lease of the premises and keep control of the machinery and plant used in the publication of the World.

The subsidiary conditions of the agreement included an obligation on the part of Sydney Newspapers Ltd. during the three years to produce a newspaper if required and in case of breakdown of machinery or the like to use the plant for the purpose of producing any of the publications of Associated Newspapers Ltd. They included obligations on the part of Associated Newspapers Ltd. to assume certain liabilities of Sydney Newspapers Ltd. to the proprietors of the World in respect to newsprint, stocks of linotype metal, motor vehicles and contracts for cable, wireless and telephone services and for railway advertising. Associated Newspapers Ltd. also undertook to find positions for two journalists.

The agreement stipulated for payment of the pounds86,500 in instalments, pounds12,000 down, pounds17,500 on 30th November 1932, and thereafter pounds365 every week.

When the managing editor reported the transaction to his chairman of directors the latter appears to have shown some disposition to disclaim it but after consultation with their solicitor the board of directors agreed to abide by the agreement.

It is clear that Associated Newspapers Ltd. and not Sun Newspapers Ltd. was the contracting party. But Sun Newspapers Ltd. actually met the payments. They were shown in its profit and loss account and claimed in its income tax returns. During the accounting period in question that company paid pounds44,830 on account of the pounds86,500, but it also paid pounds2,831 on account of the additional obligations undertaken under the agreement, making in all pounds24,363. Rich J. decided that the deduction claimed was in the nature of a loss or outgoing of capital and was therefore not allowable.

In this conclusion I agree.

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. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called goodwill, that is, widespread or general reputation, habitual patronage by clients or customers and an organized method of serving their needs. At the other extreme it may consist in a great aggregate of buildings, machinery and plant all assembled and systematized and the material means by which an organized body of men produce and distribute commodities or perform services. But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a "profit-yielding subject" the phrase of Lord Blackburn in United Collieries Ltd. v. Inland Revenue Commissioners ^[F23] . 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. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time.

For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose. But the practical application of such general notions is another matter. The basal difficulty in applying the lies in the fact that the extent, condition and efficiency of the profit-yielding subject is often as much the product of the course of operations as it is of a clear and definable outlay of work or money by way of establishment, replacement or enlargement. In the case of machinery, plant and other material objects, this is illustrated by the commonplace difficulty of saying what is maintenance and what are renewals to be referred to capital. But for the same or a like reason it is even harder to maintain the distinction in relation to the intangible elements forming so important a part of many profit- yielding subjects. For example, a profitable enterprise such as the sale of a patent medicine may depend almost entirely on advertisement. In the beginning the goodwill may have been established by a great initial outlay upon a widespread advertising campaign carried out upon a scale which it was not intended to maintain or repeat. The outlay might properly be considered to be of a capital nature. On the other hand the goodwill may have been gradually established by continual advertisement over a period of years growing in extent as it proved successful. In that case the expenditure upon advertising might be regarded as an ordinary business outgoing on account of revenue. More often than not an outlay of capital in establishing an organization or obtaining an asset of an intangible nature does not produce a permanent condition or advantage. Its effects are exhausted over a period of time. In such cases the commercial practice of writing off the expenditure against revenue over a term of years or making a reserve to replace exhausted capital lessens the importance of the contrast.

But in the assessment of income for taxation purposes severe limitations are placed upon the application of such a practice, the allowance of which is exceptional.

In the attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or to revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made "once for all", and to a still greater extent upon a distinction to be discovered in the nature of the asset or advantage obtained by the outlay. If what is commonly understood as a fixed capital asset is acquired the question answers itself. But the distinction goes further. The result or purpose of the expenditure may be to bring into existence or procure some asset or advantage of a lasting character which will enure for the benefit of the organization or system or "profit-earning subject." It will thus be distinguished from the expenditure which should be recouped by circulating capital or by working capital.

"An asset or an advantage for the enduring benefit of a trade" is the phrase of Viscount Cave, a phrase which by constant use has become almost a formula. The elastic application which the expression should receive is illustrated from the facts in reference to which it was first used. For it was held to include the "lasting advantage of being in a position throughout its business life to secure and retain the services of a contented and efficient staff," which advantage a taxpayer company obtained by contributing the nucleus of a fund to pension its employees (British Insulated and Helsby Cables Ltd. v. Atherton ^[F24] ).

But the idea of recurrence and the idea of endurance or continuance over a duration of time both depend on degree and comparison. As to the first it has been said it is not a question of recurring every year or every accounting period; but "the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all" (per Rowlatt J., Ounsworth v. Vickers Ltd. ^[F25] ). By this I understand that the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely. Thus, in Anglo- Persian Oil Co. Ltd. v. Dale ^[F26] the establishment and reorganization of agencies formed part of the class of things making the continuous or constant demand for expenditure, but the given transaction was of a magnitude and precise description unlikely again to be encountered. Recurrence is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure.

Again, the lasting character of the advantage is not necessarily a determining factor. In John Smith & Son v. Moore ^[F27] the coal contracts which Lord Haldane and Lord Sumner thought were acquired at the expense of capital had a very short term. By reselling coal bought under the contracts the taxpayer made his profit. "But," said Lord Haldane, "he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they were, it was not by parting with them to other" (coal) "masters, but by retaining them, that he was able to employ his circulating capital in buying under them. I am accordingly of opinion that, although they may have been of short duration, they were none the less part of his fixed capital."

Again, the cases which distinguish between capital sums 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. ^[F28] with Inland Revenue Commissioners v. Adam ^[F29] and Green v. Favourite Cinemas Ltd. ^[F30] .

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.

The facts of the diversified but not very numerous cases collected in the notes to par. 325 of Halbury's Laws of England, 2nd ed., vol. 17, pp. 158-160, under income tax supply illustrations of the application of these considerations. A comparison is perhaps necessary with the cases or some of them collected under pars. 312 to 316.

The facts of the present case show the following features:

(i)

The expenditure was of a large sum incurred to remove finally the competition feared from the Star and actually experienced from the World.

(ii)

It could be regarded as recurrent only in the sense that the risk of a competitor arising must always be theoretically present and that the reality or imminence of the risk depends upon circumstances which can never clearly be foreseen.

(iii)

The chief object of the expenditure was to preserve from immediate impairment and dislocation the existing business organization of the taxpayers.

(iv)

The impairment or dislocation feared involved a lowering of selling price, a loss of circulation, a change in advertising rates and a reorganization of selling and production arrangements all of a lasting character; that is, the changes would be of indefinite duration and their effects would continue until they disappeared under influences brought by the future the exact nature of which could not be foreseen.

(v)

The transaction involved the acquisition for a cash consideration of the right to enjoy for three years all the property tangible and intangible of an existing undertaking, that is, the acquisition of a going concern for a period, a thing recognized as a capital asset. The advantage in terms of profit was not to be obtained by the use of the undertaking but by putting it out of use; but in itself it remained a capital asset.

In these circumstance I think that in principle the transaction must be regarded as strengthening and preserving the business organization or entity, the profit-yielding subject, and affecting the capital structure.

In point of authority the case nearest to it appears to me to be Collins v Joseph Adamson & Co ^[F31] . There the deduction claimed was a contribution paid to a fund for the purpose of purchasing a boilermaker's business in order to ensure that it was not carried on in contravention of the price-fixing arrangements of a trade association. The business was acquired by the association and closed up, and a covenant was obtained from the owner of the premises that they would not be used during the next twenty years for any similar business. Lawrence J. decided that the deduction ought not to be allowed, because it was a payment of a capital nature. He remarked that the test was not whether the payment could be shown to be productive, nor was a payment to be treated as a revenue item because what it produced was impalpable, intangible or incalculable, but the advantages obtained were sufficiently enduring because the competitive business ceased to exist and the premises were sterilized for twenty years.

In my opinion the expenditure, whether considered as an outgoing incurred by Sun Newspapers Ltd or by Associated Newspapers Ltd , was of a capital nature.

This conclusion makes it unnecessary to consider the contention that the obligation contracted by Associated Newspapers Ltd. could not be regarded as incurred in or for the production of its assessable income because its business was in effect to receive dividends; and that the payments made by Sun Newspapers Ltd. could not be regarded as incurred, laid out or expended in or for the production of the assessable income of that company because they were no more than disbursements conveniently made to discharge an unfortunate liability incurred by the company holding its shares.

It may be desirable to add that in the present case we are concerned with an intended outlay to secure a contemplated advantage or to prevent a known disadvantage accruing. It is not a case of a loss of money or of assets which spells no more than a bare depletion of wealth without the actual potential or speculative accrual of advantage. In allocation such losses to capital or income special difficulties arise.

In my opinion the appeals should be dismissed with costs.