Case A61

Judges:
JL Burke Ch
RC Smith M
RE O'Neill M

Court:
No. 1 Board of Review

Judgment date: 19 September 1969.

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J. L. Burke (Chairman), R. C. Smith and R. E. O'Neill (Members): The Board has for review decisions of the Commissioner disallowing objections to the non-allowance of deductions claimed by the taxpayer under sec. 51 for legal expenses incurred by it- $7,242 in the year ended 30 June 1963 and $5,360 in the year ended 30 June 1964.

2. Since 1956 the taxpayer has carried on the business of a commercial television station in capital city X pursuant to licences granted under the Broadcasting and Television Act 1942 as amended from time to time.

3. It appears that during 1962 certain newly licensed television stations operating in country cities had difficulties in obtaining programme material of first class quality that would attract to them profitable advertising contracts. There were discussions at meetings between Government representatives and representatives of metropolitan and country stations of matters relating to the availability of television programme material in capital city X and in two country cities each some 60 miles from X. Two commercial stations were then operating in X and neither was willing to make available to the country stations prime programmes in which one or the other had the telecast right.

4. The reason given by the taxpayer and its competitor was that telecasts of such programmes by the country stations would overlap the city stations' telecasts, that is, the same programme series as the city stations were telecasting or had telecast and were intending to repeat would penetrate from the country stations into the metropolitan viewing area. The city stations considered that such overlapping would damage their audience rating and would adversely affect their own advertising revenue because the sponsors of their telecasts were at all times concerned to ensure that only one sponsor should be identified in the public mind with a particular programme series.

5. That was the background to succeeding events. In November 1962 the Postmaster-General granted taxpayer a renewal of its licence for one year commencing 1 December 1962. The renewal was in terms granted

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subject to the provisions of the Broadcasting and Television Act and upon the condition that the licensee would comply with all orders, directions and determinations of the Australian Broadcasting Control Board.

6. At the relevant time the Act contained a lengthy sec. 105A described by the marginal note as directed to the ``monopolising of television programmes''. The purport of sec. 105A was that a licensee of a television station should have the right to have television films made available to him upon terms, which if not agreed upon, should be determined by the Board and that that right might be enforced against any person, whether another licensee or not, who had the right to make the material available or the right to procure another person to make it available. The right so given was however not absolute in character. There was no such right if the Board was satisfied that the person against whom the order was sought had a reasonable ground of objection to the making of the order. The section provided that the person against whom an order was sought had reasonable ground of objection if he satisfied the Board that the making of the order would-

``(a) enable the television film to be used by a television station serving an area coinciding to a substantial extent with the area served by that particular station or one of those particular stations; (b) enable the film to be used in Australia before there had been a reasonable opportunity for it to be used by that particular station or all those particular stations; (c) prevent the film from being available at a time when it was bona fide required for use by that particular station or one of those particular stations; or (d) cause a breach of a reasonable condition imposed by agreement by an advertiser or other person who had sponsored the television of that film by that particular station or one of those particular stations.''

7. Thus a person had reasonable ground of objection if he satisfied the Board that the making of an order would bring about any of the above situations and to that extent interfere with or prejudice his own business (sub-sec. (4)), and he had reasonable ground of objection if his failure to comply with the request was not in any way related to an intention or attempt to interfere with the enterprise of the licensee making the request (sub-sec. (5)).

8. The Postmaster-General is authorised by sec. 81(1) of the Act to grant a licence for a commercial television station upon such conditions as he determines, and he is empowered by sec. 108(1) during the currency of a licence, by notice in writing to the licensee, to impose ``further conditions''. In January 1963 the Postmaster-General served on the taxpayer notice of his intention to impose as further conditions of its licence conditions the operative provisions of which were as follows-

``The licensee will not, during the currency of the licence, obstruct, prejudice or interfere with... or become a party to an agreement, arrangement or understanding that will or is likely to have the effect of obstructing, prejudicing or interfering with- (a) the exercise of the licensee of another commercial television station, not being a station within a distance of thirty miles of the station to which this licence applies, of the rights and privileges conferred by the licence held by that other licensee; (b) the business of such a licensee in connection with its licence; (c) the making or performance of agreements by or with such a licensee for the purposes of its business in connection with its licence, and in particular, agreements for the use of any programme material for the purposes of that business; or (d) the availability of any programme material.''

9. The taxpayer promptly instituted proceedings in the High Court by writ of summons against the Commonwealth and the Postmaster-General claiming declarations that the January notice was invalid and that the conditions sought to be imposed would, if imposed, be invalid, and claiming an injunction restraining the Postmaster-General from imposing the proposed conditions as conditions of its licence for the year ending 30 November 1963. On 8 March 1963 a Justice of the High Court ordered that the Postmaster-General be restrained on an interlocutory basis from imposing the proposed conditions. In May 1963 argument was heard on certain questions referred to the Full Court. Subsequently the Full Court answered the questions by saying that the proposed conditions were not such as might be imposed pursuant to sec. 108 of the Act. The view that prevailed in the High

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Court was thus expressed in a joint judgment by three Justices-

``In our view, the proposed conditions in the main present themselves as an attempt to create, as between licensees, more extensive rights and more stringent obligations than those declared by sec. 105A of the Act itself with respect to existing programme material of which one of such licensees has control. In so far as they purport to do this they are, in our view, inconsistent with the provisions of sec. 105A and may not validly be imposed.''

The legal expenses now in question were incurred in those proceedings.

10. The taxpayer company's programme material falls into three main classes-

• (a) films produced or purchased by it and in which it owns the Australian copyright;
• (b) live shows telecast directly from its studios, videotapes of which it retains and in which it owns the Australian copyright either jointly or absolutely;
• (c) films being part of a group of feature films or part of a series of episodes the right to televise which is purchased through a distributor. Films in this group are imported and are commonly purchased through a representative of a ``network''-an informal association of four capital city stations in Sydney, Melbourne, Brisbane and Adelaide. The contracts with the overseas distributors are non-cancellable. Usually the contracts give the purchasing network exclusive Australian rights to telecast the material; less usually, the rights are confined to Six City or Four City rights.

11. Almost the whole of taxpayer's income is derived from contracts entered into by it with persons desiring to advertise their products or services on its station. Advertisers are either ``national''-those whose product is advertised in outlets in more than one State, or ``local''-those who advertise in one outlet only. By far the greater part of taxpayer's income is received from national advertisers. The prime time for advertisements is 6.30 p.m. to 9.30 p.m. and that time is sponsored almost exclusively by national advertisers. Successful programme series telecast in prime time command very high prices.

12. National advertisers negotiate for a programme series with a representative of a network. They never negotiate separately with individual members of a network. Invariably these negotiations are on the basis that the advertiser will sponsor a programme on four or six capital city stations and that the particular programme will be televised only in connection with the advertiser sponsoring the programme. Each member of the network agrees to televise the sponsored programme only to the viewing area which each serves.

13. The network arrangement enables the national advertiser to have a common programme telecast in each State at a common, or approximately concurrent, time. The common programme is important to the advertiser because it assists its overall merchandising programme and prestige attaches to its produce or service through identification with a particular programme. The common time of telecast is important because of the audience rating obtainable at particular times.

14. The taxpayer's aim in the conduct of its business has been to establish and maintain in the viewing public's mind a three-way identification between (a) major programmes exclusive to it at least in its viewing areas, (b) its own television station and (c) the name and products of the national advertiser who sponsors a particular major programme. It believed that aim had been achieved largely because of its practice of acquiring exclusive rights to programme material which in turn enabled it to assure a national advertiser that only that advertiser's name and products would be associated with programme material sponsored by it. Its mode of doing business-acquiring programme material and selling such programmes and station time to advertisers-was at all times completely within the terms of its licence.

15. The substance of the contention for the Commissioner was that the legal expenses were incurred to avert a threatened subtraction from the rights it enjoyed under its licence-a threatened diminution of its profit yielding subject in that the proposed ``further conditions'' ``would no longer permit the most lucrative modus operandi''. It was put thus-

``Revenue from big sponsors would be prejudiced because sponsors would not pay as much for programmes which could be received in the same viewing area from another station and another sponsor. The taxpayer would no longer be able to prevent the country stations from obtaining its television viewers.''

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The main cases relied on were
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337;
Broken Hill Theatres Pty. Ltd. v. F.C. of T. (1951) 83 C.L.R. 423, and
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1959) 101 C.L.R. 30.

16. To apply those cases to the facts of the present case would in our opinion involve extending their scope to an unwarranted extent. Broadly speaking those three cases deal with the buying off of competition. In the present case the taxpayer's expenditure neither eliminated nor prevented competition. Competition for audience rating between it and the other commercial station and the national station in capital city X was in no way affected; nor was either of the country stations, whose difficulties it may safely be assumed prompted the Postmaster-General's proposed ``further conditions'', prevented if they were so minded from attempting to establish an audience rating in the capital city viewing area. Admittedly they could not use the same programmes as the taxpayer had but they could use whatever programmes they had or could obtain from distributors. Nor is there any suggestion in the case that the taxpayer was concerned to put the country stations at a competitive disadvantage with it in their own viewing areas-the evidence is to the contrary: the taxpayer's secretary said that his company was not concerned with any loss of viewing audience it might have had in the country viewing area ``because in the business the people who do the counting of viewers, the people who take the ratings do not seem to take those numbers into account''.

17. The proposed ``further conditions'' did not threaten the existence of its licence either presently or in the future. They, if they had ever become effective, would have affected the way in which it conducted its day-to-day affairs in that (a) it would have been prevented from entering into contracts with film distributors giving it alone or with others of its network exclusive rights to televise particular programme material; (b) it would have lost its right to insist upon performance and observance of such terms in all its existing contracts; (c) ``overlapping'' in its bona fide belief would have reduced the audience rating of its established programmes and consequentially the price it could obtain from sponsors for programmes would also fall. Those were all matters concerned with the ordinary conduct of its business for the purpose of producing assessable income: the ``further conditions'' would modify its contracts for the purchase of programmes and its contracts for selling station time for advertising. In the company's belief the proposed ``further conditions'' would have adversely affected its efficiency in conducting its business profitably-but in no sense did they threaten the continuing existence of the business it was licensed to do.

18. In our opinion the legal expenses in question have the character of outgoings on revenue account rather than that of expenditure of a capital nature. The case is close to such cases as the following in each of which the expenses were allowed-
F.C. of T. v. Duro Travel Goods Pty. Ltd. (1953) 87 C.L.R. 524, costs incurred in settling action brought by the taxpayer for alleged infringement of its trade marks;
F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 C.L.R. 431, costs in protecting goodwill and to enable business to be carried on as before; and
Commr. of I.R. (N.Z.) v. Murray Equipment Ltd. (1965) 14 A.T.D. 212, costs in opposing applications by third party for grant of patents in respect of machinery similar to that patented and manufactured by the taxpayer.

19. We find further support for the view we take in
Inland Revenue v. Carron Company (1968) S.L.T. 305, a unanimous decision of the House of Lords. The head note to the report reads-

``A company was incorporated by Royal Charter in 1773. Under modern conditions of trade it proved impossible to develop the company's business on account of the restrictive nature of the constitution under the charter. To overcome these difficulties it was decided to apply for a supplementary charter which was obtained. The company claimed that the cost of obtaining the supplementary charter, including the cost of settlement of court actions with two shareholders who were delaying and impeding by a series of litigations the grant of the supplementary charter, was an allowable deduction as revenue expenditure from profits. The Special Commissioners held that `the significant points of the supplementary charter and the objects of the company were (i) to remove the limitation on the borrowing power and (ii) to deal with the restriction on the shares and the

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qualification for voting which were obstacles to the proper management and conduct of the business'. They accordingly held that the cost was wholly and exclusively for the purpose of the company's business.

Held (affirming interlocutor of First Division) that the total cost to the company of obtaining the supplementary charter was an expenditure of an essentially revenue character which was a proper deduction from profits chargeable to income tax.''

20. Lord Guest said-

``There was in this case nothing in the shape of the acquisition of a capital asset in the sense in which that expression is used in accountancy practice. That it was an advantage was undoubted. But was that of a capital or a revenue nature? It is in this connection that the finding of the Commissioners that the money was expended wholly and exclusively for the purposes of the company's business is of prime importance. Counsel for the Crown argued that as the supplementary charter secured a substantial alteration in the company's structure and that as the constitution was the basis of the company's undertaking, this expenditure must be of a capital nature. But this, in my view, is to take too narrow a view of the advantages obtained by the company under the supplementary charter. The charter was not a mere scrap of paper altering the company's structure. The real value and purpose inherent in the alteration was to facilitate the trading opportunities of the company as is evidenced by the Commissioner's finding that it was expended wholly and exclusively for purposes of the company's trade.''

So here the real value and purpose inherent in the taxpayer's opposition to the proposed ``further conditions'' being imposed was to facilitate its trading opportunities by leaving it free to assure its advertisers that the programmes offered for their sponsorship would not be available to others.

21. His Lordship continued-

``It is legitimate, in my view, to consider what the expenditure was intended to effect and the way in which the advantage was to be used. (
Hallstroms Pty. Ltd. v. F.C. of T. (1946) 72 C.L.R. 634, per Dixon J., at p. 648, quoted with approval by Lord Pearce in
BP Australia Ltd. v. F.C. of T. (1966) A.C. 224 at p. 264). The advantages which the company obtained by the charter were mainly on two broad lines-(1) the lifting of the restriction on the borrowing powers enabled the company to trade more efficiently and (2) the alteration in the constitution had an advantageous effect on the company's trading activity. These advantages were used in the day-to-day running of the company's business. This was not an advantage in the nature of a fixed capital asset. It was rather, in my view, of a revenue character.''

In the present case the advantages the taxpayer obtained were the lifting of a threatened restriction on its right to buy programmes for exclusive showing by it and on its right to sell such programmes and station time on an exclusive basis to advertisers. Those advantages were used in the recurring entry into contracts for buying programmes and for selling advertising.

22. His Lordship went on-

``The case nearest to the present on its facts is
Mitchell v. B. W. Noble Ltd. (1927) 1 K.B. 719. In that case a very large payment was made to get rid of a director on the ground that he was inimical to the company's interest. This was held to be of a revenue character. Rowlatt J. likened that case to a payment made to remove the possibility of a recurring disadvantage (p. 728). The disadvantages of the 1773 charter were being removed by the supplementary charter. The removal of these disadvantages enabled the company's business to be carried on more efficiently in its day-to-day trading. The advantage was not static but recurring. It was, in my view, an income advantage as opposed to a capital advantage.''

The taxpayer in this case incurred expense in forestalling the threat of a recurring disadvantage so enabling it to continue to carry on its business as efficiently as it had been doing and was doing when such expense was incurred.

23. Once the conclusion is reached that the expenditure is of a revenue nature there seems to be no ground for saying that it does not come within one or other of the positive limbs of sec. 51(1)-see B.P. case
(1966) A.C. 224 at p. 274. Even assuming that it does not come within the first limb we have no doubt it was ``necessarily incurred in carrying on a business'' for the purpose of gaining assessable income. The company's

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action was dictated by the business ends to which it was directed, those ends being that it should be able to continue conducting its business in the same way as it was when it was given notice of the proposed ``further conditions''. On this aspect of the case the company's claim is no less strong than that of the taxpayer in F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 C.L.R. 431 in which legal expenses incurred to repel attacks upon its conduct of its business were allowed.

24. For the given reasons we would allow the company's claims and amend the assessments accordingly.

Claim allowed