Sun Newspapers Ltd & Anor v Federal Commissioner of Taxation
61 CLR 3375 ATD 87
(Judgment by: Latham CJ)
Between: Sun Newspapers Ltd - Appellant
And: Federal Commissioner of Taxation - Respondent
Between: Associated Newspapers Ltd - Appellant
And: Federal Commissioner of Taxation - Respondent
Judges:
Rich J (previous judgment)
Latham CJDixon J
McTiernan J
Judgment date: 23 December 1938
Judgment by:
Latham CJ
These are appeals from decisions of Rich J. dismissing appeals against assessments of the appellants to Federal income tax for the financial year 1933-1934.
Each of the appellants claimed a deduction from its assessable income of money paid by reason of an agreement made between the appellant Associated Newspapers Ltd. on the one hand and Messrs. E. G. Theodore and D. F. H. Packer and Sydney Newspapers Ltd. on the other. The amount of the deduction claimed was, upon one basis, pounds44,830, or, if certain other payments were included, pounds47,671, or, if the deduction were limited to such portion of a total liability of pounds86,500 as was discharged during the relevant accounting period, a sum of pounds24,363. Both companies claimed the deduction, but the payment in question was actually made by Sun Newspapers Ltd., and the appeals have been argued upon the basis (which appears to me to be a correct basis) that if a deduction is allowable it is allowable to Sun Newspapers Ltd., and not to Associated Newspapers Ltd. It is true that the agreement under which the payment was made was an agreement which bound Associated Newspapers Ltd. and which did not bind Sun Newspapers Ltd. But the payment which was plainly made by Sun Newspapers Ltd. as a payment which was expedient for business purposes, and the fact that it was made voluntarily does not exclude the possibility of it being an allowable deduction (Usher's Wiltshire Brewery Ltd. v. Bruce [F1] and British Insulated and Helsby Cables Ltd. v. Atherton [F2] ).
The deduction is claimed under sec. 23 (1) (a) of the Income Tax Assessment Act 1922-1934. That section provides:
"In calculating the taxable income of a taxpayer the total assessable income derived by the taxpayer ... shall be taken on a basis, and from it there shall be deducted -
- (a)
- all losses and outgoings (including commision, discount, travelling expenses, interest and expenses, and not being in the nature of losses and outgoings of capital) actually incurred in gaining or producing the assessable income."
The question for decision is whether or not the payments made were in the nature of outgoings of capital. It has not been contended that they were losses. If this question is answered in the affirmative the appeal must fail.
The reasons for judgment of my brother Rich contain a history of the appearance and disappearance of newspapers in Sydney out of which the transaction arose which is the basis of the claim for a deduction. It is not necessary to repeat the statement of facts made by the learned judge. There is no dispute as to any of the facts in the case. The two appellant companies were engaged in the production of newspapers in Sydney. Associated Newspapers Ltd. was largely, though not entirely, a holding company, and owned nearly all the shares in Sun Newspapers Ltd., which was an active operating company. One of the most important properties of Sun Newspapers Ltd. was the Sun newspaper, published in the evening. It was sold at 1 1/2d. per copy. The World was a competitive evening newspaper, also sold at 1 1/2d. per copy. In September 1931 it became known that proposals were on foot for publishing in place of the World and evening newspaper to be known as the Star at a price of 1d. The directors of the two companies took the matter into consideration, and as a result Sir Hugh Denison, the chairman of directors, authorized Mr. R. C. Packer, the managing editor of the Sun, to see what he could do to prevent the publication of a competitive evening newspaper at the lower price proposed. On 9th November 1932 Mr. R. C. Packer, on behalf of Associated Newspapers Ltd. and Sir Hugh Denison, made the agreement mentioned with the persons interested in the proposed newspaper. As agent as aforesaid he agreed to pay them pounds86,500 as the purchase price of their interest in the World newspaper and further in consideration of those persons withdrawing their arrangements to start the new newspaper and binding themselves for three years not to produce a morning or evening daily paper or a Sunday newspaper in Sydney or within an area of three hundred miles thereof.
The agreement also provided that certain plant controlled by the other parties to the agreement should be available for use by Associated Newspapers Ltd. if required. Arrangements were made to take over or provide for certain employees. The nature of the agreement was accurately expressed in part of the phrase used in the profit and loss account of Sun Newspapers Ltd. submitted to the income tax commissioner, where the payments in question were described as payments "to prevent the publication of competitive journals." On 10th November 1932, that is, immediately after the making of the agreement, the publication of the World ceased, by direction of the chairman of directors of the appellant company. The agreement made by Mr. R. C. Packer was approved and adopted, though not without some reluctance, by Associated Newspapers Ltd.
The evidence shows that the disappearance of the World and the prevention of the threatened competition was advantageous to the appellant companies. They were saved from the risk of losing circulation and of being forced to reduce the price of the Sun and their advertising rates. It became possible to effect certain economies, and it is clear that the agreement proved profitable to the enterprises carried on by the respondents. As already stated, moneys due under agreement were in fact paid by Sun Newspapers Ltd., though the deduction has been formally claimed also by Associated Newspapers Ltd. Evidence was given by an accountant that in his opinion payments of instalments of the pounds86,500 were payments of a revenue nature, that they should be charged against revenue in instalments over the term of the agreement, and that they should not be charged against capital. It is a matter of some uncertainty whether the inquiry whether a payment is of a capital nature raises a question of law or a question of fact (Morley v. Lawford & Co. [F3] ). This question is unimportant in the present case, for upon an appeal to the Full Court from a justice of the court, the Full Court may determine all questions of fact and of law. There is no dispute as to facts, whatever room for difference of opinion there may be as to the interpretation of or colour to be put upon the facts.
The question which arises upon these appeals has often been described as one of peculiar difficulty: See, for example, per Rowlatt J. in Countess Warwick: Steamship Co. Ltd. v. Ogg [F4] , where it was said: "It is very difficult, as I have observed in previous cases of this kind, following the highest possible authority, to lay down any general rule which is both sufficiently accurate and sufficiently exhaustive to cover all or even a great number of the possible cases, and I shall not attempt to lay down any such rule." The cases which have dealt with the question are conveniently collected in Anglo-Persian Oil Co. Ltd. v. Dale [F5] and in Collins v. Joseph Adamson & Co. [F6] .
The most authoritative decision upon the question is British Insulated and Helsby Cables Ltd. v. Atherton [F7] , where Viscount Cave said: "But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." In my opinion the expenditure in this case falls within this principle. The expenditure in question is a large non-recurrent unusual expenditure made for the purpose of obtaining an advantage for the enduring benefit of the appellants' trade by conserving and increasing the value of goodwill of the newspaper enterprise. Apart perhaps from "enduring benefit," no single one of the characteristics mentioned in the last sentence can be regarded as in itself decisive, but they all represent elements which are material in the consideration of the question. In Mitchell v. B. W. Noble Ltd. [F8] the magnitude and non-recurrent nature of the payment was regarded by Sargant L.J. as a circumstance which should be considered. In Collins v. Joseph Adamson & Co. [F9] the unusual nature of a payment, as referred to in Mitchell v. B. W. Noble Ltd. [F10] . was regarded as material by Lawrence J. In Ounsworth v. Vickers Ltd. [F11] it was said by Rowlatt J. that "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" and the learned judge said that the question to be answered was "whether" (expenditure) "is to be regarded as enduring expenditure and serving the business as a whole" [F12] . In applying this test Rowlatt J. anticipated the judgment of Viscount Cave in British Insulated and Helsby Cables Ltd. v. Atherton [F13] .
It is true that the payments did not result in obtaining a new capital asset of a material nature, but they did obtain a very real benefit or advantage for the companies, namely, the exclusion of what might have been serious competition. 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. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole: See per Rowlatt J. in Anglo-Persian Oil Co. Ltd. v. Dale [F14] , where consideration is given to the significance of the word "enduring" in this connection. The effect of the payment was to enlarge the goodwill of the enterprise, which was one of its most valuable assets. There is no doubt that the goodwill of the Sun newspaper became worth very much more as the result of the agreement which prevented the publication of a competitive newspaper within the same area, possibly at a lower price, by persons who had the control of a press and the necessary plant, together with a newspaper organization in being. In the case of Anglo-Persian Oil Co. Ltd. v. Dale [F15] reference was made by Lawrence L.J. to the fact that in that case the company by making the payment in question did not improve its goodwill. So also in W. Nevill Co. Ltd. v. Federal Commissioner of Taxation [F16] reference is made to the increasing of the value of the goodwill of a company as a relevant circumstance - "enlargement of the goodwill of a company" [F17] , and - "permanent improvement in the material or immaterial assets of the concern" [F18] . The goodwill of a business is an asset of the business, and is plainly a capital asset. It is radically different from assets which are turned over and bought and sold in the course of trading operations.
It may be sold by a trustee in bankruptcy (Walker v. Mottram [F19] ), and it includes the benefit of agreements in restraint of trade (Jacoby v. W hitmore [F20] : Smith v. Hawthorn [F21] ).
If Associated Newspapers Ltd. had bought outright the goodwill of a competing newspaper (for example, the World) and had continued the publication of that newspaper under its current name, there would have been no doubt that the payment of the purchase price would have been an expenditure of a capital nature. The company in fact, after buying the right to publish the World, closed down that newspaper. The payment made to enable the company to do this must be regarded as a payment of a capital nature (Collins v. Joseph Adamson & Co. [F22] ). As a direct consequence of the agreement, the publication of the World ceased immediately, and immunity from a threatened competition within a large area was also obtained for a period of three years. Such a transaction must, in my opinion be regarded as a transaction which added to the goodwill of the enterprise. In substance it amounted to the addition of a capital asset, immaterial in character but substantial in value and significance, to the general equipment of the business enterprise of the appellant companies.
Accordingly I agree with Rich J, that the expenditure in question cannot be deducted: it was in the nature of an outgoing of capital.
In my opinion the appeals should be dismissed.