NATIONAL AUSTRALIA BANK LIMITED v FC of T
Judges:Heerey J
Court:
Federal Court
Heerey J
In its 1991 income year the applicant National Australia Bank Limited (the Bank) made a payment of $42 million to the Commonwealth. In return, the Bank gained the exclusive right, for a period of 15 years, to make subsidised home loans to Australian Defence Force (ADF) personnel. The interest payments on such loans were subsidised by the Commonwealth under the Defence Force (Home Loans Assistance) Act 1990 (Cth) (the HLA Act). The Commissioner has disallowed a deduction for this amount and decided against the Bank's objection to its amended assessment. The Commissioner accepted that the payment was, within the meaning s 51(1) of the Income Tax Assessment Act 1936 (Cth), incurred in gaining or producing assessable income and necessarily incurred in carrying on a business for the purpose of gaining or producing such income. But the Commissioner considered the payment was of a capital nature. The Bank has appealed to this Court.
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ADF Housing Assistance
Since the end of the First World War the Commonwealth has provided housing assistance to veterans in the form of low interest loans. The loans were made under the Defence Service Homes Act 1918 (Cth) (the DSH Act). In more recent times that assistance has been extended to all ADF personnel who have served a minimum period, and not just those returned from active service. Up until 1985 the assistance took the form of loans provided by the Commonwealth itself.
In the mid-1980s a fundamental change was made. The DSH Act scheme was terminated in respect of ADF personnel who enlisted after 15 May 1985. The portfolio of existing loans was put out to tender in 1988. A number of institutions, including the Bank, put in bids. The successful bidder was Westpac Banking Corporation.
The new scheme was to operate in this way. Instead of the Commonwealth Bank being the lender, an approved institution would have the exclusive right to make advances. Those members of the ADF who enlisted after 14 May 1985, and who satisfied particular requirements, the most important of which was six years full- time service, would be eligible to receive a 40 per cent subsidy on interest costs on loans up to $40,000. Such borrowers would also have to meet the institution's ordinary requirements as to security and other lending criteria.
On 18 August 1989 the Commonwealth published a document calling for registrations of interest in what was described as an ``Exclusive Franchise to Provide Subsidised Home Loans''.
Negotiations
Within the Department of Finance a body called the Task Force on Asset Sales (the Task Force) conducted negotiations on behalf of the Commonwealth.
In the course of preparing its bid the Bank made detailed calculations, with actuarial advice, of the profits that might reasonably and conservatively be estimated as obtainable.
These calculations were carried out by Mr Stephen Coulter who at the relevant time was Market Manager for Mass Markets in the Retail Centre of the Bank. Mr Coulter produced a computer model showing profits which the Bank could expect to receive assuming a return upon the loan funds employed at differing costs. The calculations were made for each year over a period of 40 years on the assumption that the specified term of the loan would be 25 years, and that the Bank would be making such loans for each of the 15 years in the franchise period which the Commonwealth was offering.
Mr Coulter's calculations assumed that in 1991 there would be 2,000 loans of $70,000. This was the median figure for housing loans; to the extent that loans exceeded $40,000 they would not be subsidised, but it was assumed, reasonably enough, that most borrowers would seek the excess from the Bank. In the following years it was assumed that there would be 4,000 new borrowers (this figure being based on an estimate provided by the Commonwealth) who would take out loans with the loan size adjusted for inflation at 6 per cent. Deductions were made for ``separations'' and the principal repaid from earlier loans. The separations figure (25 per cent) allowed for borrowers who left the ADF after taking out a loan. Again this percentage was based on information supplied by the Commonwealth.
Apart from calculating the cumulative volume in dollar terms of the loans which the Bank could expect to make, the model included assumptions as to other products, such as personal loans and credit cards, which the Bank could expect to sell to its new customers obtained under the scheme.
The model then calculated the profits based on ``marginal cost'' and ``average cost''. The marginal cost assumed that the Bank would acquire the necessary funds to make the loans by borrowings. In other words, the marginal cost of funds was the wholesale rate paid by the Bank. The average cost was the percentage cost of funds to the Bank as an average of its costs of overall funds. This would be a lower cost because it would include interest free deposits on current account. Consequently, profit would be higher. A third basis chosen was ``base level profits'', which were calculated as the profits upon the equity required by the Bank to support the loans. The money which the Bank lends may be borrowed, but in its overall operations there is a minimum amount which the Bank must have as equity. This equity may be expressed as an average amount spread across the Bank's portfolio. For example, in an assumed loan of $70,000 there may also be assumed to be a proportion of the money lent by the Bank as money which it held reserved as
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capital. Finally, there were calculations based on the Bank's information as to the average profitability of a customer, multiplied by the assumed number of ADF personnel who would take up loans under the scheme. The average profitability figure was $3,006.The model discounted the foregoing profits to a net present value equivalent using an after tax discount rate of 18 per cent, being the rate which the Bank sought to achieve as the minimum return to its shareholders at that time. The results were:
Profits based on marginal cost $55,053,473
Profits based on average cost $173,199,678
Base level profits $49,135,612
Profitability on a per customer basis $76,011,980
Taking the lowest of these figures as a conservative estimate of likely profits, the Bank decided on a bid of $42 million.
At an early stage of negotiations the Bank had indicated that it would prefer a ``trickle- feed'' approach, that is to say an amount payable over the period of the agreement calculated by reference to the number of loans obtained. However the Task Force made it clear that only an up-front lump sum would be acceptable.
On 22 December 1989 the Bank made an offer to the Commonwealth in order to ensure that the Bank qualified for the final tender panel, which comprised only two tendering parties. Further discussions and negotiations took place. On 7 February 1990 the Bank wrote to the Task Force putting a revised offer. On the following day the Chairman of the Task Force wrote advising that the Minister for Finance would be advised that the Bank was the ``preferred purchaser for the franchise'' for the proposed scheme. Between then and 5 November 1990 the necessary legislation and contractual documentation were drafted and finalised.
The Agreement of 5 November 1990
On 5 November 1990 the Bank and the Commonwealth entered into an agreement entitled ``Defence Home Loans Contract''. The agreement recited as follows:
``A. The Commonwealth wishes to introduce, with effect from 15 May 1991, a Scheme to assist certain Members and former Members of the Defence Force and their spouses to meet repayments on Housing Loans provided to them by the lender under the Scheme.
B. The Bank provides Housing Loans in its ordinary course of business and has offered to be the lender under the Scheme.
C. Assistance will be provided in the form of Subsidy payments by the Commonwealth paid to the Bank for the benefit of persons entitled to Subsidy and their spouses where appropriate.
D. Entitlement to Subsidy will be determined by the Commonwealth in accordance with the Act.''
Clause 1.1 contained a number of definitions. ``Act'' was defined to mean the HLA Act 1990 as amended from time to time, ``Agreement'' as the agreement itself, ``Bank'' as the National Australia Bank Limited, ``Franchise Term'' as the period from the Commencement Date (15 May 1991) to 31 December 2006 and ``Scheme'' as ``the scheme of Housing Loan assistance established by the Act and this agreement''. Clause 3 was as follows:
``3. FRANCHISE
The Commonwealth hereby grants to the Bank:
- (a) during the Franchise Term the exclusive right to participate as the lender under the Scheme; and
- (b) in respect of Subsidised Loans advanced during the Franchise Term the exclusive right to receive Subsidy for the benefit of Subsidised Borrowers, or Subsidised Borrowers and Joint Borrowers, as the case may be,
and the Bank accepts these grants.''
Under cl 4.1(a) the Bank agreed to pay to the Commonwealth $42 million. Under cl 4.1(b) it agreed to pay to the Commonwealth certain specified amounts in each calendar year of the agreement where the number of loans exceeded a minimum calculated according to a formula.
Under cl 4.7.1 the Commonwealth agreed that the Bank might be entitled to a refund of part or all of the $42 million if, before 31 December 1995, the Commonwealth should pass legislation to refuse benefits available under the scheme or change in a restrictive way eligibility criteria under the scheme or introduce another scheme for members eligible under the
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present scheme, and any of those measures caused the number of persons to whom subsidised loans were provided to fall below 2,000 in the remainder of 1992 or the 1993, 1994 or 1995 calender years. Clause 4.7.2 provided for negotiation of refund and cl 4.7.3 for arbitration in default of agreement.The agreement provided detailed machinery for the application for loans under the Scheme and the payment of subsidy by the Commonwealth. A would-be borrower had to obtain an Entitlement Certificate (cl 5.2). Such a person could lodge an application for a Certificate with the Bank, which then was to forward the application to the Commonwealth (cl 5.2.1), or the person might apply directly to the Commonwealth, in which case the Commonwealth agreed to ``advise the person that the Bank has an exclusive right under this Agreement to participate as the lender under the Scheme'', and provide the person with an application for an Entitlement Certificate (cl 5.2.2). Where the Commonwealth determined that a person was entitled to an Entitlement Certificate, it was to forward a copy of the Certificate to any branch of the Bank nominated by the person (cl 5.2.4). The person then had to lodge with the Bank loan application documents ``reasonably required by the Bank'', an Application for Payment of Subsidy, and the Entitlement Certificate. Upon receipt of those documents the Bank had to consider the application for the subsidised loan (cl 5.3.1). Where an entitled person satisfied the lending criteria and provided security in accordance with cl 5.12, the Bank was to make a subsidised loan of the amount sought in the application (cl 5.4.1). After making the Subsidised Loan the Bank was to immediately forward the documents to the Commonwealth (cl 5.4.2.). Clause 5.4.3 provided that nothing in the agreement should be construed as
- (a) preventing the Bank from making or agreeing to make a Housing Loan to a person who has not obtained an Entitlement Certificate; or
- (b) obliging the Commonwealth to pay subsidy in respect of a Housing Loan until the provisions of cl 7.1 have been satisfied.
Clause 5.7 defined Lending Criteria. Generally speaking, payments were not to exceed 25 per cent of the gross income of the entitled person, known commitments of an entitled person were to be taken into account and the entitled person was to provide, as a general guideline, a 20 per cent deposit.
Under cl 5.13, the loan agreement was to be in the terms set out in Schedule D, the maximum rate of interest was to be the ``Benchmark Rate'', the term was to be 25 years (subject to agreement between Bank and borrower to the contrary), the amount to be within the range prescribed by the Act and the loan should be a credit foncier [sic] repayable by monthly instalments of principal and interest less payments of subsidy made to the Bank by the Commonwealth.
Clause 5.15 contained detailed provisions for calculation of the ``Benchmark Rate''. In effect, this was to be the market rate for housing loans.
Under cl 7.1 the Commonwealth agreed to pay ``Subsidy to the Bank in accordance with the Act and this Agreement''. By cl 7.2 the Bank agreed to ``receive and deal with the Subsidy payments for the benefit of the Subsidised Borrowers... in accordance with the Act and this Agreement''.
Clause 21 provided that the agreement was not to be assigned in whole or in part by either party without the prior written consent of the other.
Clause 29 contained default provisions. The Commonwealth could terminate the agreement where there had been ``persistent failure'' by the Bank to provide subsidised loans (cl 29.1), or to comply with any other term of the agreement (cl 29.2). In both instances there was a machinery for notification of default and termination in the event of failure by the Bank to rectify. Clause 29.4 provided for immediate termination on the happening of various events, such as the winding up of the Bank, and including assignment by the Bank of its rights or obligations under the agreement in whole or in part without the consent of the Commonwealth (cl 29.4(g)). Under cl 29.5.1, if the agreement was terminated for any reason, ``the exclusive rights granted to the Bank in cl 3 shall be terminated and the Commonwealth may grant these rights to another person of the Commonwealth's sole choosing''.
The HLA Act
The HLA Act establishes eligibility for subsidised loans under the scheme. The basic requirement is six years full-time service in the ADF. By s 3 ``the agreement'' is defined to mean the Agreement made between the
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Commonwealth and the Bank on 5 November 1990, and ``the Bank'' to mean ``National Australia Bank Limited, or any person or body to whom it assigns all or any of its rights or obligations under the Agreement''. By s 9, the agreement of 5 November 1990 and its execution on behalf of the Commonwealth are approved. Section 21 provides that, subject to Part 3, subsidy is payable to the Bank on a loan made by the Bank in accordance with the Agreement.The Scheme in Operation
The scheme is managed by a body called the Defence Housing Authority. The Authority produces brochures concerning the scheme which are held by all ADF recruiting offices. The Authority, in conjunction with officers of the Bank, conducts presentations approximately two to three times per year at ADF establishments throughout Australia. The presentations outline the criteria for eligibility, the application process, the subsidy arrangements and other issues. The scheme is advertised in ADF newspapers. Posters are placed in Housing Management Centres and ADF Orderly Rooms.
From the Bank's point of view, the subsidy payable in respect of subsidised loans is paid by the Authority directly to the Bank each month and the Bank then credits the subsidy to the relevant individual home loan account. The amount of the subsidy is calculated as for a term of 25 years, irrespective of the actual term agreed between the Bank and the customer.
For a number of reasons, the performance of the scheme has been disappointing for the Bank. Results are well below original expectations. The level of home ownership amongst ADF members (21 per cent) is less than half of that of the general population (56 per cent), due to involuntary postings and a younger age profile. As interest rates and inflation have declined, the relative attraction of the interest subsidy has decreased in comparison with the alternative rental allowance, which is up to five times greater. Moreover, recruitment to the ADF has declined significantly. The rental allowance is in some ways more attractive.
The extent of the under-performance can be gauged by a comparison of the number of subsidy payees by the end of calendar 1995 (1,665) with the assumed figure on the computer model for that time (10,094).
The Bank's Business
The Bank is one of the four major trading banks in Australia. In its present form it is the product of a merger in 1981 between the National Bank of Australasia Limited and the Commercial Banking Company of Sydney Limited. The old National Bank was established in 1858 in Victoria and the CBC Bank goes back to 1834 in New South Wales. Both those banks were established institutions in Australian life. In 1878 Ned Kelly had some dealings with the Euroa branch of the National Bank, although the transactions were by way of withdrawal rather than deposit.
Since the mid 1980s the Bank has pursued an active strategy of acquisition of regional banks in Australia and overseas. It has acquired the Bank of New Zealand, the Clydesdale Bank (Scotland), Northern Bank (Northern Ireland), National Irish Bank (Republic of Ireland) and Yorkshire Bank (England). In terms of net profit amongst banks worldwide it ranks 27th. As at 30 September 1994, the assets of the Australian and overseas operations of the Bank totalled $125.9 billion. It had approximately 49,163 employees and 1307 branches and other outlets.
Lending on real estate mortgages has grown to be the Bank's largest sector of lending. In 1991 such lending accounted for 22 per cent of the Bank's loan portfolio. However at that time home loan lending was set to become a major growth area. That has come to pass. For the year ended 30 September 1994 real estate mortgage lending accounted for 38.4 per cent of the Bank's lending, the largest percentage of lending by industry classification. Home loan lending, already on the increase in 1991, has continued so that by the year ended 30 September 1994 the Bank's market share of the owner/occupied housing market had increased from 14.5 to 15 per cent.
Since the mid 1980s, the home loan market has become the major retail banking focus of the Bank. Deregulation of the Australian banking system, which came into effect about this time, has meant greatly increased competition between the banks. Banks no longer dole out rations of credit to customers who earn it by making deposits over a qualifying period. Unlike the Commonwealth Bank, which had a long history as a savings bank, the Bank has had to develop innovative and specialised strategies in an attempt to
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attract customers, and increase its share of the home loan market.As part of this strategy the Bank has introduced the concept of segmentation. This means directing the Bank's marketing strategy towards particular segments of the community who are likely to produce the most valuable long term relationships for the Bank. An example is targeting University campuses with financial services packages tailored to the needs of tertiary students. The Bank has branches on approximately 27 campuses throughout Australia, including Melbourne University.
Home loans are a key relationship product between a bank and its customers, because the purchase of a home is generally a customer's most significant and long term purchase. Once a bank has acquired a customer as a home loan customer, it is more likely that the bank will have successful opportunities to provide other products to that customer.
Against this general background, the opportunity to gain exclusive access to the segment of the market constituted by ADF borrowers was seen by the Bank as completely consistent with its strategy. In 1990 there were about 70,000 members of the ADF. Another advantage was that ADF members are by and large located at Army, Navy and Air Force bases throughout Australia and other Defence establishments. Therefore specialised products for this segment of the market can be provided at a limited number of branches. Training, administration and other costs which would be required if products had to be available throughout the entire Australian branch network are considerably reduced.
The Bank also engages in advertising and sponsorship to raise and broaden its profile so that it can continue to attract customers. Some of these activities have direct commercial benefit to the Bank, such as its sponsorship of the Institute of Chartered Accountants through the Institute's seminars, conferences and newsletter. But the Bank also engages in sponsorship with less immediate tangible commercial benefit, such as the purchase of a valuable sculpture for the National Gallery of Victoria and support for Australian Commonwealth and Olympic Games bids.
A final aspect of the Bank's business said to be relevant to the present case is the dealing of its Treasury Department in bonds and derivative instruments. The latter include floating rate agreements, interest rate swaps and options. I do not think it is necessary to go into detail on these matters. Suffice to say they form an important part of the Bank's business and with many of them the Bank has to estimate the possible income flows from the acquisition of a particular product or a particular right. It must make a judgment about future income flows based on the information available to it at a particular time, place a dollar figure on that income stream and then pay out that dollar figure to another party.
Was the Payment Capital?
The most recent authoritative pronouncement is that of the High Court in
GP International Pipe Coaters Pty Ltd v FC of T 90 ATC 4413 at 4419; (1990) 170 CLR 120 at 137:
``The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid.''
See also
Mount Isa Mines Ltd v FC of T 92 ATC 4755 at 4758; (1992) 176 CLR 141 at 149. The answer ``depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process'':
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190 at 196; (1946) 72 CLR 634 at 648.
In the present case, the advantage sought was the exclusive right to make home loans to a significant segment of the market for home loan borrowers, that segment being members of the ADF who were or would become eligible for subsidised loans under the HLA Act. So viewed, the right obtained was in the nature of a monopoly over that particular class of business. Moreover, access to those borrowers was calculated to gain not only profits of the subsidised loans, the subject of the monopoly, but the profits on the top-up loans and other Bank products such as personal loans and credit cards which could be reasonably expected to be sought by the subsidised borrowers.
I do not understand the passage in Hallstroms cited above to mean the Court should not undertake an examination of the legal rights obtained by the Bank under the Agreement of 5
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November 1990 and the HLA Act. In any event, in the present case those rights are not especially arcane and may reasonably be supposed to have been in the actual contemplation of the parties.First, the Bank would be entitled to injunctive relief to restrain the Commonwealth from breaching the agreement by giving loan subsidies to ADF members borrowing from any other bank or lending institution:
Metropolitan Electric Supply Co Ltd v Ginder [1901] 2 Ch 799,
James Jones & Sons Ltd v Earl of Tankerville [1909] 2 Ch 440,
O'Keefe v Williams (1910) 11 CLR 171 at 191, 211.
Secondly, the Bank's rights and obligations under the agreement can be assigned. True it is, the agreement on its face requires the Commonwealth's consent to any such assignment and there is no contractual stipulation that such consent not be unreasonably withheld. However, it is possible that remedies might be available under the Administrative Decisions (Judicial Review) Act 1977 (Cth) if a refusal of consent disclosed some error of law: see
James Richardson Corporation Pty Ltd v Federal Airports Corporation (1992) 117 ALR 277. More importantly, practical considerations suggest that if for any reason the Bank wished to give up its rights there would be every reason for the Commonwealth to keep the scheme running and to agree to a smooth transition to an appropriate assignee with whom the Bank had reached an agreement. And since assignment of rights under the agreement is lawful - indeed expressly contemplated by statute - there is no reason in law why the Bank should extract a price from the assignee.
The rights the Bank obtained were comparable to acquisition of goodwill. There was an expectation that custom would accrue to the Bank. Goodwill is
``... the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom.''
Inland Revenue Commissioners v Muller & Co's Margarine Ltd [1901] AC 217 at 223-224 per Lord Macnaughton. In a way, the present case is stronger, because the Bank acquired the positive right to have the Commonwealth direct this particular class of business to it. There was not merely an expectation that business of a particular kind would accrue, ``the probability that the old customers would resort to the old place'' (
Cruttwell v Lye (1810) 17 Ves 335 at 346 per Lord Eldon LC), but a standing and enforceable obligation on the Commonwealth to direct that business to the Bank. Moreover, there was also a negative element of goodwill in that the agreement excluded competitors from this particular class of business:
Sun Newspapers Ltd v FC of T (1938) 5 ATD 87 at 96; (1938) 61 CLR 337 at 363,
Broken Hill Theatres Pty Ltd v FC of T (1952) 9 ATD 423 at 424; (1951-1952) 85 CLR 423 at 434,
John Fairfax & Sons Pty Ltd v FC of T (1959) 11 ATD 510 at 511; (1958-1959) 101 CLR 30 at 36.
As to the payment itself, it was a once and for all payment, not a recurrent payment, or one linked to or conditional on the acquisition of any particular piece of business.
A number of analogies which counsel for the Bank sought to make in support of a conclusion that the payment was on revenue account are in my respectful opinion not persuasive. The payment was not comparable to a commission paid on a loan or other business introduced. In such a case there is a direct connection between the commission paid and the income or profit received by the taxpayer as a result of the commission. Here, as subsequent events were to show only too well, the payment of the $42 million did not guarantee or reward any particular piece of business obtained and was not related to any particular transaction or transactions either in number or amount.
The comparison with advertising, promotional or marketing expenses in my opinion is not valid since in such cases the customer has a discretion whether to do business with the advertiser. Here, to put it crudely, the custom of this particular segment of the market was bought. Borrowers of subsidised ADF loans had no choice but to deal with the Bank. In any case, as counsel for the Commissioner pointed out, even advertising expenditure can be of a capital nature if it can be regarded as non-recurrent and directed towards the establishment of a market for a new business or new product:
Sun Newspapers Ltd v FC of T (1938) 5 ATD 87 at 94-95; (1938) 61 CLR 337 at 360-361.
Counsel for the Bank laid considerable stress on the calculations which led to the payment of $42 million being arrived at. These calculations, I accept, were a genuine and conservative
ATC 4507
attempt to estimate the profits it was hoped would accrue from the outlay of the sum. But the same may be said of many classes of expenditure which would undoubtedly be on capital account. For example, the potential buyer of a mine might, in working out an offer, estimate the profits that would accrue over the life of the mine. But the purchase price would not be on revenue account.Similarly, the fact that the payment was directed to increasing the Bank's revenue and profit is irrelevant. Section 51 assumes that there will be outgoings incurred in the gaining of assessable income, but which are nevertheless of a capital nature. Virtually any payments made by a company must be assumed to be made, with varying degrees of directness, with a view to obtaining some financial benefit for the company. Were this not so, the shareholders would have cause for complaint. To quote the well-known aphorism of Bowen LJ:
``The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.''
Hutton v West Cork Railway Company (1883) 23 Ch 654 at 673.
Similarly while it is no doubt true that, in the case of a bank or money-lender, money is trading stock of the business and forms part of its circulating capital (
Avco Financial Services Limited v FC of T 82 ATC 4246 at 4251, 4259; (1981-1982) 150 CLR 510 at 518, 531), that cannot mean that any payment of money by a bank must be on revenue account.
The fact that the Bank initially stipulated for a periodical form of payment is not to the point. If the Bank had wished to acquire the use of premises under a lease, but the owner insisted on sale, the purchase price would not be on revenue account even though rental under the hoped-for lease would have been.
Nor is the present case to be seen as the converse of cases such as
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1987) 163 CLR 199 and
Henry Jones (IXL) Limited v FC of T 91 ATC 4663; (1991) 31 FCR 64 which hold that a lump sum received for the assignment of an income stream is itself income. Here there was no income stream to which the Commonwealth was entitled and for which the $42 million was exchanged. Put another way, it was not a pre-payment of future obligations on the part of the Bank.
Counsel for the Bank argued that the case was on all fours with the decision of the Privy Council in
BP Australia Ltd v FC of T (1965) 14 ATD 1; (1965) 112 CLR 386. This case arose in the context of the change in retail petrol marketing in Australia in the early 1950s to a ``solo site service station system''. Previously various brands of petrol were sold in competition with each other at each service station, with each petrol company owning particular tanks and pumps at the service station. Under the new system a service station would only stock the one brand. BP and three other oil companies joined together to offer direct financial inducement to retailers to join in a solo site plan in which one site would sell only petrol purchased from the co-operating companies. A lump sum payment was offered to retailers who would tie themselves to the co- operating companies for at least three years. A payment was made of £100 for every 1000 gallons per month estimated with a maximum of $1000 for a three years tie. In some cases the sum might be increased to £150 for every 1000 gallons provided the tie was for five years. The Privy Council, reversing a majority of the High Court, held that these payments were on revenue account and not capital. Among the dissentients in the High Court was Kitto J who said of the payment (at ATD 4-5; CLR 392):
``... The purpose was not to create a situation in which to set about selling motor spirit; it was to secure the particular sales which would be necessary for the satisfaction of the service station's requirements of the period. The payment of the money was analogous to expenditure in sending a commercial traveller on his rounds to secure orders; it was part and parcel of the business of effecting sales... The change in the organization of the wholesale trade in motor spirit from the old system of multiple pump service stations to the new `solo' system meant inevitably that every oil company, if it wanted to sell motor spirit to service stations in the future, had to accept the necessity of spending money, not at the beginning once and for all, but at the beginning and from time to time, to ensure that it would receive from as many service stations as possible the whole of the orders for limited periods.''
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The Privy Council pointed (at ATD 5; CLR 393):
``... There can be no doubt that the only ultimate reason for any lump sum payment was to maintain or increase gallonage.... The fact that the amounts of the lump sums were influenced or even decided by competition does not greatly affect the matter. Every price or rebate is influenced and largely decided by competition. The trader offers the rebate the competition renders necessary or desirable. So too with lump sums paid to retailers. The more they were based on a particular retailer's gallonage the more closely they were tied to the immediate cost of selling to an individual customer. But even where the overall gallonage rather than the immediate gallonage influenced the sum paid it could still be one of the revenue expenses of marketing.''
Later their Lordships pointed out (at ATD 6; CLR 395) that BP:
``... was not achieving a monopoly nor buying off competition nor obtaining any substantial area for its own domain. Although one retailer was tied to BP, the retailer next door could still buy some other brand and the passing motorist could do likewise.''
And (at ATD 9; CLR 399) their Lordships said that each payment was of a recurrent nature because ``it was made to meet a continuous demand in the trade''.
The Privy Council then turned to deal with the question of the length of the restraint. Their Lordships said (at ATD 9; CLR 399):
``What additional indication is given by the actual length of the agreements? That must be a question of degree. Had the agreements been only for two or three year periods that fact would have pointed to recurrent revenue expenditure. Had they been for twenty years, that fact would have pointed to a non- recurring payment of a capital nature. Length of time, though theoretically not a deciding factor, does in practice shed a light on the nature of the advantage sought. The longer the duration of the agreements, the greater the indication that a structural solution was being sought. In this case the periods varied between 3 and 15 years, but the average appears to be something just under 5 years and the predominant number of agreements was for a five-year period. The case was argued before their Lordships as in the Courts below on the footing that 5 years was the length of the tie and neither side sought to make any differentiation because a few of the ties were very much longer. That length of time appears to be neutral, and in itself indicates neither capital expenditure nor revenue by its mere length. It therefore does not add effectively to the argument either way. The question must be decided by other weights in the balance.''
The contrast with the present case, where the term was 15 years and might secure loans near the end of that period which extended to the year 2031, is obvious enough.
By the end of the relevant tax year (the year ended 30 June 1952) BP had entered into agreements with 791 dealers and it continued thereafter to sign up more: (1961) 12 ATD at 294; (1961-1964) 110 CLR at 391. A bird's eye view of BP's operations at the time would therefore reveal a continuous signing up of hundreds of dealers, the making of lump sum payments to them, and the selling of petrol to them at a profit which as time went on would return to BP the lump sum payments. As agreements expired, new agreements would be made with further lump sum payments, the sale of more petrol and more recoveries. And new dealers would be continually sought, again with agreements, lump sum payments, the sale of petrol and the recovery of the lump sums. If I may respectfully say so, one is struck with the aptness of Kitto J's analogy of salesmen on the road, all being given advances on expenses, and securing sales which recoup those expenses.
In my opinion, the present case is quite different. There was one, very large, once and for all payment which secured a captive market for 15 years with consequent benefits extending up to a further 25 years beyond that. No part of that payment ``came back'' to the Bank from the Commonwealth in the way that the lump sum came back from BP's dealers in the form of petrol purchases.
For those reasons I find that the payment was of a capital nature.
The Court orders that:
The application be dismissed with costs, including reserved costs.
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