South Australian Battery Makers Pty. Limited v. Federal Commissioner of Taxation.

Judges:
Mahoney J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 23 April 1976.

Mahoney J.: The taxpayer company is the lessee of certain premises situated in South Australia from the South Australian Housing Trust. During the income tax years in question it paid substantial sums being the rent specified in that lease. The Commissioner of Taxation has assessed the taxpayer to income tax upon the basis that portion only of the amounts so paid constitutes in each year an allowable deduction for purposes of calculation of the taxpayer's taxable income.

The taxpayer has in respect of each of the income tax years in question appealed to this Court against such assessments and the only question which has in the proceedings been in issue between the parties is whether some part of each of the payments made by the taxpayer as payments of rent is properly to be categorised as a payment of capital or of a capital nature within sec. 51(1) of the Income Tax Assessment Act 1936 (as amended).

The facts by reference to which this issue arises are in general as follows. The group of companies here in question is engaged in the business of manufacturing and selling chloride batteries in different parts of the world. The parent company in this group is Chloride Group Limited, incorporated in the United Kingdom. Associated Battery Manufacturers of Australia Pty. Limited (now Chloride Batteries Australia Limited) is a company incorporated in Australia, the shares in which have at all relevant times been held by the United Kingdom parent company.

(A ``family tree'' in relation to the relevant companies is in evidence before me as Ex. B.)

Associated Battery Makers of Australia Pty. Limited (``Abmal'') was prior to 1963 carrying on its business activities from premises in New South Wales. It was considering setting up a manufacturing enterprise in South Australia and the South Australian Housing Trust (``the Trust'') on its part was minded to persuade Abmal to do so.

The Trust, with a view to persuading Abmal to set up business in South Australia, had discussed proposals for the acquisition of land and the building of factory facilities in South Australia for the use of Abmal. On 5th August 1963, the Trust made to Abmal certain proposals in this regard. The proposals which are set forth in the letter dated 5th August 1963, Annexure B to the affidavit of K.G. Phillips of 22nd February 1974, (``the Phillips' affidavit'') were (1) that there should be ``a straight lease'' of land and premises, the lease to contain an option to purchase the land at cost or (in certain events) at valuation; or (2) ``a form of lease which carries with it some substantial advantages for purchase'', being a lease at a rental equivalent to ten per cent of the cost of the land and buildings, coupled with an option to purchase ``which confers on the (grantee) the advantages of the annual amortized amounts''.

With the letter of 5th August 1963, the Trust forwarded specimen documents to be used if the second proposal was accepted (these documents are Annexures B1, B2, B3 and B4 to the Phillips' affidavit).

By a letter dated 10th September 1963 (Annexure E to the Phillips' affidavit) Abmal stated that it wished ``to accept the Trust's offer to enter into a special leasing arrangement as outlined in'' the second proposal in the letter of 5th August 1963. In general terms, that proposal envisaged that, on the land selected, the Trust would cause to be erected buildings in accordance with specifications approved by the Trust and Abmal and that the land and buildings would, on completion, be leased to Abmal for sixteen years at a rent equivalent to ten per cent of the final capital cost thereof. The amounts so outlaid by the Trust would be ``amortized'' by those rent payments and, in effect, Abmal would be entitled to purchase the land during the term of the lease for the amount which had not been recouped or amortized to the Trust by such payments. (I

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have stated the general nature of this proposal at this stage only in outline; considerable argument has been directed to the precise effect of the proposal or arrangements at particular points of time and to these arguments I shall return in due course).

Further discussions took place between the parties and on 8th October 1963, the Trust resolved to build for Abmal ``a factory and office premises as generally outlined in drawing No. SK2261 at an estimated total cost (including land) of approximately $85,000'' (Annexure G to the Phillips' affidavit).

Thereafter the Trust proceeded with the erection of the premises and the parties engaged in the drafting of documents (based upon the drafts forwarded with the letter of 5th August 1963) ultimately to be executed by them. In the course of these discussions as to the form of the documents, Abmal, in its letter of 12th November 1963 (Annexure H to the Phillips' affidavit) for the first time referred to the possibility that the option to purchase contemplated in the original proposal should be granted to a company other than Abmal.

By its letter dated 21st February 1964, the Trust forwarded to Abmal an agreement for ease (with a form of lease in the schedule of the agreement), and a memorandum of option to purchase (with a form of encumbrance annexed thereto), these documents having been ``prepared from the drafts previously accepted by you''. In its letter of 21st February 1964 (Annexure J to the Phillips' affidavit) by which these documents were forwarded, the Trust said:

``The memorandum of option to purchase with form of encumbrance attached is submitted at this stage for identification purposes only. Identification is to be effected by the initialling of each page and both copies of the option agreement are also to be returned to the Trust.

This memorandum of option to purchase will be executed when final costs have been determined as with the memorandum of lease.

The encumbrance will be engrossed for execution and registration as and when the option to purchase is exercised.

Upon the return of all documents duly processed, I shall arrange for their acceptance by the Trust and then the return of one copy to you.''

On 19th May 1964, there was executed the agreement for lease here in question. It is relevant at this stage to refer to the form of this document. The agreement for lease (Annexure J to the Phillips' affidavit) was an agreement made between the Trust and Abmal. It provided that upon the plans of the building proposed to be erected by the Trust being approved by the Trust and ``the lessee'', i.e., Abmal, the Trust would cause to be erected on the relevant land a building in accordance with those plans. From the day after the date upon which the building was completed, the lessee would be entitled to occupy and use the land and the building ``under the provisions set out in the lease'', i.e., the form of draft lease in the schedule to the agreement and until the Trust notified the lessee of the amount of the ``actual or final quarterly rent to be inserted in the lease'', the lessee was to pay a provisional quarterly rent of $4,250.

The agreement then provided for the calculation of the ``actual cost price'' of the land and building. This price was to include the actual costs of the land and the erection of the building ``together with capitalised interest at the rate of £6.0.0 per centum of all such costs and expenses and upon'' the agreed value of the land. Upon the Trust ascertaining the actual cost price, the Trust was to calculate ``the final quarterly rent'', to be equal to £2.10.0 for every £100.0.0 of the actual cost price and thereafter the lessee was to pay to the Trust the final quarterly rent as so determined. The Trust was then to cause a lease to be prepared in accordance with that in the schedule to the agreement and the parties were to execute the lease.

The form of lease as it was contained in the executed agreement, provided for a term of sixteen years from 1st July 1964. It contained covenants of a kind which might be anticipated to be included in such a lease but did not contain any option for purchase.

The form of ``memorandum of option of purchase'' forwarded with the letter of 21st February 1964 (being Annexure J2 to the Phillips' affidavit) and, as the parties have agreed, initialled for purposes of identification in the transaction, was in the following terms:

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``MEMORANDUM OF OPTION TO PURCHASE

SOUTH AUSTRALIAN HOUSING TRUST of Adelaide in the State of South Australia (hereinafter called `the Trust') HEREBY AGREES with ASSOCIATED BATTERY MAKERS OF AUSTRALIA PTY. LIMITED whose registered office is situated at 59 Bryant Street Padstow in the State of New South Wales (hereinafter called `the grantee') that IN CONSIDERATION of the payment by the grantee to the Trust of the sum of £100 (the receipt whereof the Trust hereby acknowledges) the grantee (or its nominee as hereinafter mentioned) shall have an option TO PURCHASE the estate in fee simple of the Trust in THAT PIECE of land situated in the Hundred of Munno Para County of Adelaide consisting of Allotments 15 16 17 and 18 and portion of Allotment 10 portion of Allotment 13 and portion of Allotment 19 of the subdivision of Section 3245 and other land laid out as Elizabeth West and being the whole of the land comprised in the Certificate of Title Register Book Volume 3212 Folio 131 subject to an easement to the Electricity Trust of South Australia over the portion marked `Easement' in the plan in the margin of the said Certificate of Title (hereinafter called `the said land') at the price and upon and subject to the following conditions that is to say: -

1. BY WHOM OPTION EXERCISEABLE:

(a) This option is granted to Associated Battery Makers of Australia Pty. Limited as the intended lessee of the said land under a proposed Memorandum of Lease (hereinafter called `the lease') intended to be executed and registered under the Real Property Act 1886-1961 pursuant to a certain agreement for lease dated the 19th day of May 1964 between the Trust and the grantee and shall be exerciseable by Associated Battery Makers of Australia Pty. Limited or any associated company to which the Lease may be transferred with the consent in writing of the Trust and such transferee shall be hereinafter included in the term `the grantee'.

(b) When exercising this option the grantee may in the notice exercising the same nominate any (or any other) associated company to pay the price and take a transfer of the said land on completion of the purchase thereof in lieu of the grantee.

(c) `Associated Company' for the purposes of this paragraph 1 means a limited company incorporated or registered in South Australia under the Companies Act 1962 and which is to the satisfaction of the Trust a land-holding company for or is otherwise directly associated with the grantee.

(d) PROVIDED ALWAYS that at the time of the exercise of this option the grantee shall not be in default in any manner howsoever as lessee under the Lease.

2. OPTION: The said option shall be exerciseable by notice in writing to be given by the grantee to the Trust at any time after the commencement and not later than two calendar months before the expiration or sooner determination of the term granted by the lease PROVIDED THAT at the time of the exercise of the said option by such notice the grantee is not in default in any way as lessee under the Lease.

3. NOTICE OF EXERCISE: The grantee shall when giving notice in writing to the Trust of the grantee's intention to exercise the option nominate in such notice a date for completion of the purchase (hereinafter called `the completion date') which shall be within two calendar months after the date of the notice and prior to the expiration of the Lease.

4. PRICE: If the date so nominated is at any time during the first year of the term granted by the Lease the price shall be the amount appearing in the table at the foot hereof and written opposite the term `first year' and if the date so nominated occurs during the second or any subsequent year of the said term the price shall be the amount appearing in the said table opposite the reference to such second or subsequent year of the Lease during which the completion date so nominated occurs PROVIDED THAT if there shall occur any `rent suspension period' under the proviso in that behalf contained in the lease then (for the purposes of the application of the said table of prices to the exercise of this option to purchase) the year referred to in the first column of the said table during which such rent suspension period commences shall be deemed to have been lengthened by a period equal to such rent suspension period and the commencement of the next and each subsequent year referred to in the first column of the said table shall be correspondingly postponed.

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5. COMPLETION AND TRANSFER: The grantee shall on the completion date pay to the Trust the price and execute in favour of the Trust a memorandum of encumbrance in the form annexed hereto over the said land and comply with paragraph 6 hereof and thereupon the Trust will execute a transfer to the grantee (to be prepared stamped and registered by or at the expense of the grantee) of the said land free from encumbrances subject to paragraphs 6 and 7 hereof.

6. THE LEASE: The grantee shall on completion of the purchase execute as lessee a proper Memorandum of Surrender to the Trust of the lessee's interest under the Lease and stamp and register such surrender at the expense of the lessee so as to complete the merger of the leasehold interest in the fee simple estate transferred to the grantee hereunder.

7. ENCUMBRANCE: The said memorandum of encumbrance shall be prepared by the solicitors for the Trust and be registered as a first encumbrance on the said land in priority to any other mortgage charge or encumbrance whatsoever (the said Lease having been surrendered pursuant to paragraph 6 hereof).

8. RATES AND TAXES: All rates taxes duties charges assessments impositions and outgoings payable in respect of the said land shall be paid by the grantee as lessee under the Lease up to the completion date and thereafter by the grantee as owner.

9. FIRE RISK: Notwithstanding any provision of the Lease all buildings and fixtures on the said land shall be at the risk of the grantee as regards loss or damage by fire or otherwise occurring on or after the date of the said notice of exercise of the said option.

10. DEFAULT: If the grantee having given notice of exercise of the said option shall make default in the payment of the price on the completion date (not due to any default on the part of the Trust) then and in such case the Trust may by notice in writing immediately rescind the contract for sale consequent upon the exercise of such option and the grantee's right to complete the purchase under such option shall cease to be exercisable.

11. NOTICES: Any notice or demand by the Trust upon the grantee hereunder shall be sufficient if signed by or on behalf of the Trust and left at or posted to the registered office for the time being of the grantee in the State of South Australia or if left on the said land and any notice by the grantee to the Trust shall be sufficient if signed by or on behalf of the grantee and left at or posted to the principal office of the Trust for the time being in Adelaide aforesaid.

12. ASSIGNMENT: The option hereby granted is intended to be exercisable only by the lessee for the time being under the Lease and shall not be assignable by the grantee (or by any permitted assignee of the grantee) separately from the assignment of the lessee's interest under the Lease without the previous consent in writing of the Trust and if any such separate assignment shall be attempted without such consent the said option shall cease to be exercisable.
          DATED the           day of         196

                       TABLE OF PRICES

      Year of lease                          Price

      First year
      Second year
      Third year
      Fourth year
      Fifth year
      Sixth year
      Seventh year
      Eighth year
      Ninth year
      Tenth year
      Eleventh year
      Twelfth year
      Thirteenth year
      Fourteenth year
      Fifteenth year
      Sixteenth year

      SIGNED for and on behalf of        ]
      the SOUTH AUSTRALIAN HOUSING       ]
      TRUST by                           ]
                                         ]
      the Deputy Chairman of the said    ]
      Trust in the presence of           ]

             ..............................................
             Deputy Chairman''
          

The memorandum of encumbrances referred to in the option to purchase was a document directed to restricting the use to which, after the exercise of the option, the land could be put. Nothing has been urged in the present case to turn upon the terms of this encumbrance.

The form of option to purchase did not contain the actual amounts for which the land could be purchased, as contemplated by the

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schedule to the draft document. At the time when the agreement for lease was executed, the Trust had not calculated the final capital cost and, therefore, (if those amounts were to be fixed as, or as determined by reference to, the unamortized part of the actual cost price) the actual amounts to be included in the document could not be calculated. It was, in my opinion, plainly contemplated by the parties that in due course these amounts would be calculated and would be inserted in a memorandum of option to purchase in the form of the draft and that that document would be executed by them.

On or about 12th June 1964, possession of the relevant land and premises was taken by one of the companies of the Chloride group of companies. The probability is that this company was the taxpayer, although the evidence in this regard is not completely clear; see Annexures L M and N to the Phillips' affidavit.

By a letter dated 18th June 1964 (Annexure K to the Phillips' affidavit) Abmal sought the approval of the Trust ``to assign the use of'' the premises to ``its wholly owned subsidiary'', the taxpayer, and on 30th June 1964, the Trust approved such assignment.

On 22nd June 1964, the Trust notified Abmal that a certificate of practical completion in respect of the premises built by it had been issued and indicated that it would advise the final rent to be included in the lease ``when the actual cost of the factory'' had been established. It said:

``The memorandum of option to purchase which has been initialled by both parties for identification purposes will also be executed at that time. If and when the option to purchase is exercised the encumbrance will be engrossed for execution and registration.''

Subsequently, on 3rd July 1964, the Trust notified Abmal of the approval of the ``assignment'' and by its letter of that date (Annexure M to the Phillips' affidavit) stated that the assignment ``as now intended means that the Memorandum of Lease to be prepared and executed when final costs of the factory premises have been determined will be in favour of'' the taxpayer.

It was not until 9th December 1965, that the Trust, by its letter of that date (Annexure Q to the Phillips' affidavit) notified Abmal of the final cost and rent of the premises; and by that letter it detailed the ``table of prices for inclusion in the memorandum of option to purchase''. The amounts then detailed were the amounts which ultimately were included in the option to purchase executed by the parties.

In that letter, the Trust asked Abmal to ``advise me... if it is desired to effect any change in respect of the companies nominated previously for responsibility in the respective documents''.

At some stage on or before 31st July 1964, Abmal had indicated to the Trust that it desired that the option to purchase be granted to Property Options Pty. Limited. This company was incorporated in South Australia on 27th April 1964. Its shares were held at all times here relevant in trust for Edro Industrial Finance Co. Limited, a company incorporated in the United Kingdom and a subsidiary of Chloride Group Limited. The shares were held by persons who were partners in Fitzgerald, Gunn & Partners, chartered accountants, who appear to have been the income tax advisers to the Chloride Group of companies in Sydney.

By a letter dated 11th February 1966 (Annexure R to the Phillips' affidavit) the Trust wrote to Abmal as follows:

``Mr. G.T. Alkin,

11th February 1966

General Manager,

Associated Battery Makers of

Australia Pty. Ltd.,

Box 141, P.O.,

BANKSTOWN, N.S.W.

Dear Sir,

FACTORY PREMISES - ELIZABETH WEST

I refer to Trust letter dated 9th December 1965, and in particular to the penultimate paragraph wherein it was indicated the Trust's solicitors would be instructed to engross the memorandum of lease and memorandum of option to purchase.

As we all know, the memorandum of lease is to be in favour of South Australian Battery Makers Pty. Limited, a wholly owned subsidiary of Associated Battery Makers of Australia Pty. Ltd. The formalities of assignment of the agreement for lease from ABMAL to the South Australian company are recorded in your letter of 18th June 1964 and Trust reply of 3rd July 1964. By such exchange of letters it follows that it is quite proper for the actual

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memorandum of lease to be engrossed in favour of South Australian Battery Makers Pty. Limited and the Trust's solicitors are, in fact, currently attending to this.

However, a problem has arisen concerning the granting of the option to purchase to Property Options Pty. Limited in lieu of Associated Battery Makers of Australia Pty. Ltd. which is the company described as `the grantee' in the identified copy of the form of option to purchase.

On the advice of the Trust's solicitors this letter is being written to seek clarification.

At this point, I would mention the assignment of the lease to South Australian Battery Makers Pty. Limited means that this company is eligible to exercise the option to purchase should it so wish as it now comes within the ambit of clause 1(a) (b) and (c) of the proposed option document.

However, a search at the company's office with regard to Property Options Pty. Limited indicated that this company seems totally unconnected with your company or your South Australian company. Its paid up capital is £2.0.0 consisting of the two subscribers' shares of £1.0.0 each, the subscribers being two members of a local firm of accountants and the two directors named in the list of directors filed in the company's office are two members of a local firm of solicitors.

Based on this information alone, Property Options Pty. Limited does not meet the requirements of clause 1(c) of the form of option to purchase, a fact of which the Trust was not aware prior to the search at the company's office.

The grant of an option to purchase to a company other than ABMAL, the lessee company or `an associated company' within the meaning of the aforesaid clause 1(c) is inconsistent with the Trust's original conception under which an option to a lessee company was to be an incentive to such a company to take a lease. In addition, an option to purchase at an annual reducing price is a valuable asset especially to a company which has not paid any of the rent. However, the possibility or fact that South Australian Battery Makers Pty. Limited may be making a valuable gift to Property Options Pty. Limited is more the concern of the shareholders of the former company than of the Trust.

The Trust does require, however, an assurance that South Australian Battery Makers Pty. Limited and Property Options Pty. Limited are or are to be or will be associated with and in what manner and within what period.

May I suggest that you give very thoughtful consideration to this letter and to clause 1 of the option to purchase document of which you have a copy and then advise the Trust appropriately.

Yours faithfully,

K.H. LAWRIE,

Assistant Industries Promotion Officer''

The decision to seek the grant of the option to Property Options Pty. Limited was made at least partly as the result of advice given to Mr. Alkin by Fitzgerald Gunn & Partners. That advice, the precise date of which does not clearly appear, appears to have been given in order to ensure that the rental payments under the lease should be completely deductible, the view having been taken that the option should be granted to a company ``removed'' from the lessee company. As was said by the accountants, ``Property Options Pty. Limited was formed for the express purpose of holding the option'' so that ``the option should be granted to a company as remote as possible from the company paying the rent'' (Annexure S to the Phillips' affidavit).

Discussions subsequently took place between the Trust and Abmal and on 27th May 1966, the Trust forwarded the final form of the memorandum of lease to Abmal for execution. The lease itself was dated 16th June 1966 (Annexure V1 to the Phillips' affidavit). It was in the form of the draft previously agreed between the parties but was a lease to the taxpayer and not to Abmal.

In the discussions which continued, the Trust had indicated that Property Options Pty. Limited ``does not meet the requirements of cl.1(c) of the option document'' previously initialled between the parties but ultimately the Trust agreed to the grant of the option to purchase to that company and on 25th October 1966, the Trust entered into a memorandum of option to purchase with Property Options Pty. Limited. This document (Annexure BB1 to the

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Phillips' affidavit) was in the form of the draft previously agreed between the parties but as executed contained in the schedule the amounts to be paid upon exercise of it, as notified by the Trust to Abmal by its letter of 9th December 1965.

The taxpayer has at all relevant times been the lessee of the land and premises and, during the years in question, had paid the rent as provided by the lease.

In his assessments for the relevant years, the Commissioner of Taxation disallowed, as a deduction, portion of the rents so paid as being ``capital or of a capital nature''. The appeals have been conducted upon the basis that, if an apportionment is to be made at all in relation to the rents paid, that adopted by the Commissioner is correct; the sole question before me is whether any portion of the rents paid is not to be an allowable deduction.

In order to be an allowable deduction in the present case, the rent payments must fall within sec.51(1) of the Act. That subsection provides:

``51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

Three questions arise in such a case as the present in determining the application of sec. 51(1) to an outgoing:

(1) Whether the outgoing is an outgoing incurred ``in'' one of the contexts referred to in the opening portion of the subsection;
(2) Whether it is an outgoing of capital or of a capital, private or domestic nature; and
(3) If it is an outgoing which is only part of a revenue nature, to what extent it is of that nature.

The words ``... to the extent to which they are incurred in gaining... or are necessarily incurred in carrying on...'' might suggest that a single payment may be partly ``incurred in'' one of these two contexts and partly in some other context; and that the former part may itself be subject to a further dissection having regard to ``the extent to which'' the payment is, e.g., an outgoing of a capital nature.

It was submitted by Mr. Powell Q.C. that in
Poole & Dight v. F.C. of T. (70 ATC 4047 at p. 4051; 122 C.L.R. 427 at p. 435) Walsh J. expressed the view that, if an outgoing is incurred in gaining or producing the assessable income or is necessarily incurred in carrying on a business for the purposes of gaining or producing such income, then that outgoing is totally deductible even though the outgoing may have been made to secure another benefit; and that the only question to be determined is whether, in such a case as the present, the outgoing is of capital or of a capital nature.

In Poole's case (at ATC p. 4051 and C.L.R. p. 435) Walsh J. said:

``I think that the outgoing (or at least part of it) answers both the description that it was `incurred in gaining or producing the assessable income' and the description that it was `necessarily incurred in carrying on a business for the purpose of gaining or producing such income'. It might perhaps be argued that because the land could have been used throughout the term of thirty years from 1958 under the former tenure, it follows that so much of the outgoing as exceeds the lower rent payable under that tenure need not have been incurred to gain the income and was not necessarily incurred in carrying on the business. But I do not accept that view as stating correctly how sec. 51(1) should be applied. If a sole lessee of freehold land on which his business was carried on agreed with the owner to buy it and to pay the price by annual instalments, I am of opinion that the whole of each instalment would be an outgoing within either limb of sec. 51(1), whether or not it exceeded in amount the yearly rent which had been payable under the lease.

The real question is whether or not the exception contained in sec. 51(1) operates to exclude its application. In the case which I have just supposed, I think it is clear that the outgoing would be an outgoing of a capital nature, for the reason that it would be part of the price for which a capital asset was being acquired. It has commonly been considered that a payment of the price or part of the price of a capital asset, whether payable in a lump sum or by deferred instalments over a period, is a clear case of an outgoing of a capital nature. The

ATC 4046
Commissioner contends that each annual payment ought to be regarded as rent paid for the use for one year of the land. The question to be decided is what is the true character, having regard to the provisions of The Land Acts and to the facts of the case, of these payments: see
Sun Newspapers Limited v. F.C. of T. (61 C.L.R. 337 at p. 363).''

It is not, in my opinion, necessary for present purposes to consider whether his Honour did construe sec. 51(1) in the fashion submitted by Mr. Powell. If the words ``to the extent to which they are incurred in...'' in the opening words of sec. 51(1) require a dissection to be made of a particular outgoing, the principle upon which the dissection is to be made is, in my opinion, the same principle as that required to be applied to make the dissection required by the subsequent words ``... except to the extent to which they are...outgoings of capital or of a capital... nature''. The problem remains, on either construction of sec. 51(1) to determine what that principle is.

In considering the deductibility of an outgoing claimed to be of a revenue nature Fullagar J., in
Colonial Mutual Life Assurance Society Limited v. F.C. of T. (89 C.L.R. 428 at p. 454) said:

``The questions which commonly arise in this type of case are (1) what is the money really paid for? - and (2) is what is really paid for, in truth and in substance, a capital asset?''

In the present case, there is no issue but that the land, the buildings and, therefore, the option to acquire them would, in the hands of Abmal or the taxpayer, constitute a capital asset. The first question to be determined in the present case is what the rent payments were ``for'', or, more precisely, whether those payments were, in part, ``for'' such assets.

In most of the cases referred to in argument, this question has raised no difficulty; the payment has been ``for'' the right or property to which the payment entitled the taxpayer. Thus, in the Colonial Mutual Life case (supra), the payments made by the Society were made pursuant to a rent charge which had been given ``in consideration of the transfer'' to the Society of the land there in question: ibid, at p. 433; cf. the form of the agreement referred to at pp. 429-432.

It is not, in my opinion, essential that that right or property be in the strict sense the consideration for which the payment is made. It would not be necessary, as in a prejudicature Act form of pleading, for the payment to be seen as the condition upon which the entitlement to the right or property would arise: it may, in the appropriate case, be sufficient that the payment be made and the right or property arise in the one contract between the parties. Thus, in
Darngavil Coal Co. Limited v. Francis (1913) 7 T.C. 1, the lessees paid the amount in question ``as rent or hire for the use of'' the coal waggons: at p. 6; and the option to purchase the waggons at the expiration of the term of the lease was not in terms conditional upon the due payment of the amounts in question, but was merely one of the several covenants entered into by the parties in the agreement: p. 7. Notwithstanding this, portion of the rent paid was held to be paid for the acquisition of the option.

Nor is the Commissioner of Taxation bound by the description used in the transaction by the parties to categorise the payment:
Martin v. Routh (42 T.C. 106);
Martin v. Davies (42 T.C. 114). Mr. McGregor Q.C., on behalf of the Commissioner of Taxation, pointed out that in the Darngavil case the amount was described as ``rent or hire'' but part of it was held to be ``for'' the option. As Mr. Powell Q.C. readily conceded, the amount paid as ``hire'' under a normal form of hire purchase agreement, under which the purchaser acquires an option to purchase, can be treated as, as to part, ``for'' the option to purchase.

It may be also that that for which the payment is made may be a single promise to do two separate things (one related to capital and the other not) or to provide one type or group of services which may have results of two different kinds (one in the field of capital and the other in the revenue field): see
Ronpibon Tin N.L. v. F.C. of T. (78 C.L.R. 47 at p. 59); and, in an appropriate case, the Court will then dissect the payment.

In none of these cases has it been found necessary to consider in detail what is the relationship which must exist between the payment made and the right or property in question for the payments to be categorised as ``for'' that right or property. However, consideration was given to that question by their Lordships in the Privy Council in
Commr. of I.R. v. Europa Oil (N.Z.) Limited

ATC 4047
70 ATC 6012; (1971) A.C. 760. It was in the present case not argued (and in my opinion, rightly not argued) that the principles stated in that case are not applicable to the Australian legislation. The Privy Council was dealing with a section, sec. 111 of the Land and Income Tax Act 1954, which provided for a deduction in respect of ``any expenditure or loss exclusively incurred in the production of assessable income...''. However, in order to determine the applicability of the section to a particular expenditure it was, as Lord Wilberforce (in delivering the opinion of the majority of their Lordships) said (at ATC p. 6019 and A.C. p. 772A) necessary ``to ascertain for what the expenditure was in reality incurred''. This is the same question as in cases such as the present, requires to be answered in order to determine, under sec. 51, whether the outgoing is an outgoing of capital or of a capital nature.

In the Europa Oil case, the taxpayer paid for gasolene at the posted price, but as the result of complex arrangements made by the taxpayer with the seller, there accrued to a company in which a wholly owned subsidiary of the taxpayer had a fifty per cent interest, an amount in respect of each gallon of gasolene so purchased. The question was whether the amount paid by the taxpayer for purchase of the gasolene was, as to part, for the gasolene and as to the remainder for the benefit which so accrued to it in relation to its subsidiary company.

Lord Wilberforce (at ATC p. 6019 and A.C. p. 772E) said:

``For a claim to disallow a portion of expenditure incurred in purchasing trading stock to succeed, the Crown, in their Lordships' judgment, must show that, as part of the contractual arrangement under which the stock was acquired some advantage, not identifiable as, or related to the production of, assessable income, was gained, so that a part of the expenditure, which can be segregated and quantified, ought to be considered as consideration given for the advantage. Taxation by end result, or by economic equivalence, is not what the section achieves.

This test, the strictness of which their Lordships consider should be emphasised, can only be satisfied after a rigorous and objective examination of the contractual arrangements under which the expenditure is made.''

Subsequently (at ATC p. 6020 and A.C. p. 774D) his Lordship, after having referred to the contractual documents, said:

``On this summary it is now possible to decide between the rival contentions: whether, as Europa asserts, there was a contract for the purchase of gasolene at a price representing nothing but expenditure on gasolene accompanied it may be by some collateral, incidental, uncovenanted advantage, which did not form part of the consideration for Europa's expenditure; or whether, as the Commissioner contends there was a single inter-related complex of agreements under which Europa should be considered as incurring expenditure for a compound consideration consisting partly of gasolene to be supplied and partly of advantages, i.e., profits, to be derived through Pan Eastern.''

His Lordship stated the conclusions of the majority of their Lordships in the following terms:

``The contemporaneous date of all of the agreements... the recital of the Products Contract in the Organisation Contract'' (and other documents) ``point to a single complex agreement, rather than a series of independent bargains. The reference in the organisation contract to the Processing Contract as a major inducement to Europa to enter into the Products Contract and the similar reference in the Processing Contract itself, taken by themselves, might be ambiguous and open to the contention that the Processing Contract and the benefits to be derived from it were merely some collateral advantage and not part of the consideration for the Products Contract. Their Lordships do not think that such a contention, in the whole context, has much force, but any plausibility it might seem to possess is destroyed by the agreement (numbered V). This shows beyond doubt that Europa never intended to bind itself to buy gasolene from Gulf without the benefit of the advantage to be gained, through Pan Eastern, from the Processing Contract...'' (at ATC pp. 6020-6021 and A.C. pp. 774F-775A).

His Lordship, in accordance with findings of McGregor J., accepted:

``... that Europa would not have entered into an agreement to buy at posted prices

ATC 4048
but for Gulf's agreement to provide a concession and given the contemporaneity and interlinkage of the contracts, this leads only to the conclusion that the `processing' benefits formed part of the consideration for Europa's expenditure.''

(at ATC p. 6021 and A.C. p. 775F).

Similarly (at ATC p. 6022 and A.C. p. 776), his Lordship, in relation to the second group of agreements referred to in evidence, held that the contract governing the purchase of the gasolene ``cannot be isolated: as part of the consideration for it... Gulf accepted the obligations of the Processing Contract''.

In the Europa Oil case, the relationship which existed between the Products Contract (under which the agreement for purchase of gasolene at posted prices was made) and the Processing Contract or Organisation Contract (under which the arrangements were made for the setting up of the joint company and the benefit to the taxpayer's subsidiary) was not one of ``consideration'' in the strictest sense; the documents or transactions were simply all contemporaneous and part of the one contractual complex. But the benefits to be enjoyed by the taxpayer company because of its interest in the joint company and the carrying out of the arrangements for the giving of benefits to the joint company under the Processing Contract were stated in the documents to be ``a major inducement to Europa to enter into the petroleum sales contract'' and an associated contract and were available to Europa as benefits which it could ensure that it received by enforcing the contractual arrangements entered into by it. Such a relationship between the payment of the posted price and the obtaining of the indirect benefit through the joint company was sufficient for the particular price paid to be held to be partly ``for'' the indirect benefit.

I come now to consider the application of these principles to the facts of the present case.

Mr. McGregor Q.C., on behalf of the Commissioner of Taxation, put his argument, in substance in two steps. He argued (1) that if the lease and the option had, as orginally arranged, been granted to Abmal itself, the rent paid by Abmal would have been in part for the option or the land and premises; and (2) that (if this be so) it is irrelevant that in fact the lease was granted or assigned to the taxpayer and the option was granted to Property Options Pty. Limited.

(1) If there had been, when the agreement for lease was made (19th May 1964), a legally binding arrangement that there should be granted to Abmal the lease and the option to purchase, then the payments under the lease ultimately granted would have been, in my opinion, payments for both the use of the demised premises and the option. The transaction as outlined in the letter of 5th August 1963, and the documents drawn upon the basis of that letter were such that, on the assumption which I have made, the relationship between the rent payments and the option would have been sufficient to make the rent payments partly for the option.

However, it would not necessarily follow from this that if, when the agreement for lease was made or when the lease became finally binding, the Trust was not legally obliged to enter into the option agreement with Abmal, the rent payments would be both for the use of the demised premises and the option. Counsel were not able to refer me to any authority (other than Littlewood's case, to which I shall subsequently refer) upon this aspect of the matter, and there appears to be little judicial or other consideration of this kind of case: see generally, Ziegel ``Some Income Tax Aspects of Hire Purchase Agreements'' (1961) British Tax Review 155; Whiteman and Wheatcroft ``Income Tax and Sur-tax'' (1971) p. 338.

Mr. Powell Q.C., for the taxpayer, submitted that where the option to purchase (or more accurately the prospect of obtaining it) is something which still lies legally in the power of the Trust to give or withhold, then the obligation entered into at the time when the lease is granted and accepted, viz., to pay the rent, relates only to the use of the demised premises and the subsequent payments of rent made will not relate to a subsequently granted option.

It may be that in some special cases a payment may be ``for'' something which is not then granted and in respect of which there is no legal obligation to grant. However, normally, in my opinion, rent paid for the use of land is not as to part attributable to an option to purchase subsequently granted or agreed to be granted. In the Europa Oil case, Lord Wilberforce, in the passages to which I have referred, emphasised the contractual nature of the relationship which must exist before the payment, prima facie, for one right or piece of

ATC 4049

property may be held to be partly for another right or property.

Lord Donovan, delivering the opinion of Viscount Dilhorne and himself, was content to take ``the test of purpose'' as determining for what the payment was made. His Lordship expressed the view that the argument for the Revenue fell into the error of ``confusing inducement with purpose: by mistakenly equating the thing promised with the method of earning it'': 70 ATC at p. 6023; (1971) A.C. at p. 781C. His Lordship said:

``The argument for the taxing authority in the Australian case of
Cecil Bros. Pty. Limited v. F.C. of T. (1964) 111 C.L.R. 430, exhibited a similar flaw and the High Court of Australia rightly made short work of it. The taxpayer had paid more for its stock in trade than it need have done, being induced to do so by a desire to prosper the supplier. The dual purpose argument was advanced by the taxing authority and rejected.''

(at ATC p. 6025 and A.C. p. 781D).

A similar principle was, in my opinion, formulated by Walsh J. in Poole & Dight v. F.C. of T. (70 ATC 4047; 122 C.L.R. 427). In that case, the question to be determined was whether the ``annual rent'' of a lessee of a grazing homestead freehold lease was an outgoing of a capital nature. Under sec. 144A of The Land Acts, a person who took a lease of that kind did so upon conditions, inter alia, that ``the purchasing price under the new tenure shall be the unimproved value determined as prescribed by this Division and shall be payable by way of annual rent''; and that the annual rent reserved should be one-thirtieth of the purchasing price; and that that person could at any time complete the purchase of the land by paying the unpaid portion of the purchasing price plus interest (at ATC pp. 4049-4050 and C.L.R. pp. 432-433). Walsh J., (at ATC p. 4054 and C.L.R. p. 436) said:

``But in my opinion, the basic question for decision is whether or not the true character of the payments is that they are made as the consideration for the acquisition of a capital asset. Unless they have that character there is no other ground in the present case upon which they could be found to be of a capital nature. If they do have that character, then in my opinion, the proper conclusion is that they are capital outgoings or at least that to some extent they fulfil that description. The question cannot be answered in my opinion, by ascertaining whether the rights of occupation and use of land would have been any less secure or any less valuable if the lessees had elected to continue to occupy it under the former tenure. They elected to apply to have it converted and, when the unimproved value had been determined, they elected to proceed with the application and thus to become liable for the payment and entitled to the rights applicable to the new tenure. Their reasons for doing so, whether or not sound from a business point of view, seem to me to be immaterial to the determination of the question which has to be decided. This is to be decided by considering the nature of the rights acquired by the lessees, in return for the obligation imposed upon them to make the annual payments.''

If the ``rights acquired in return for the obligation'' to pay the rent did not include the right to have the option to purchase, then, according to the principle as formulated by Walsh J., the relevant payment would not be ``for'' the option.

I accept Mr. Powell's submission that if at the relevant time the Trust was not obliged to grant the option then a subsequent decision by it to grant the option would not render the rent payments partly for the option.

In the present case, even if it be assumed that the Trust was not (when the lease was granted to the taxpayer) obliged to grant the option of purchase, the option had been granted by the time a substantial part of the 1966 rent and all the remaining rent was in fact paid. However, the obligation to pay the rent (if the use of the land remained available to the taxpayer as lessee) was undertaken when the lease was granted and that for which the rent was paid should, in my opinion, be determined at latest at that date.

However, Mr. McGregor submitted that there was, at the date when the agreement for lease was made and at the date when the lease was in fact entered into, an obligation upon the Trust to grant the option of purchase.

At the date of the agreement to grant the lease (19th May 1964) there were, as Mr. Powell has submitted, three things concerning the option transaction which had then not been agreed, viz.:

ATC 4050

(1) the actual price at which in each year of the lease the land and buildings could be purchased;
(2) the rate of interest at which the cost of the land and buildings was to be amortized; and
(3) the period (yearly, half yearly or quarterly) at which the calculation of the amount amortized was to be made, for the purpose of the calculation of that purchase price.

Therefore, Mr. Powell submitted, even if there had been an agreement to grant an option, the terms of the option were not fully agreed upon and, therefore, there was no legally binding agreement to grant that option.

I am not satisfied that at the date of the agreement for lease any of these three matters had in fact been agreed upon between the parties. The actual price at which the land and buildings could be purchased had not then been specified. Mr. McGregor argued that the price at any particular date could have been calculated from the financial details already agreed between the parties, but in my opinion, without agreement upon the second and third matters to which Mr. Powell referred, that calculation could not have been made.

Mr. McGregor argued that it was to be inferred that the required calculation was to be made yearly (and not half yearly as the rental payment periods might have suggested) but I doubt if this can be inferred as a term of a contractual arrangement between the parties. Similarly, he argued that the rate of 6% for the amortization of the cost of the land and buildings had been specified in the documents as agreed between the parties. And he referred by way of example to the terms of the letter dated 5th December 1963. However, the 6% figure there referred to was, in my opinion, referable to a period ending at the date of completion of the buildings and, whilst it might be thought likely that that figure would be adopted subsequently, I do not think that, in respect of the period between completion of the building and exercise of the option to purchase, any figure had been contractually agreed. Mr. Phillips' evidence, insofar as I accept it, and the inferences to be drawn from it, satisfy me that the fixing of the particular price at which the option could be exercised in each year was left to the Trust and was not (as to the matters here relevant) settled or agreed in discussion between the parties or to be settled merely by the application of a particular set of agreed figures. Indeed, as Mr. Powell pointed out, the prices ultimately incorporated in the option agreement were not amounts which could be calculated precisely from the details ultimately available between the parties, but represented at the least a ``rounding off'' of amortization of the cost of land and buildings on a 6% interest factor.

If the matter had been left at the stage of the agreement for lease, there would have been considerable room for argument whether there was a legally binding contract for the grant of the option. Looking merely at the terms of the documents, it is, in my opinion, clear that when the agreement for lease was executed (19th May 1964) there was no final agreement as to the terms of the option to be granted. The letter of 21st February 1964 forwarding the agreement for lease (Annexure J to the Phillips' affidavit) may be accepted as making clear that the Trust was promising, as part of the transaction of which the agreement for lease was part, that an option would be granted but the terms of the option would be granted but the terms of the option would be granted but the terms of the option were, as to the three matters to which Mr. Powell Q.C. has referred, not finally agreed. How these terms were to be finally formulated is not the subject of any specific agreement between the Trust and Abmal or the taxpayer. It was not specifically agreed that the Trust could unilaterally fix the terms. I do not think that the Trust could have bound Abmal or the taxpayer (whoever was the appropriate party) by such terms as it, the Trust, might see fit to determine, irrespective of what they might be; it was not argued that the determination of these terms was committed to the Trust in the manner contemplated in
Godecke v. Kirwan(47 A.L.J.R. 543).

It might be arguable that the promise by the Trust was in effect a promise to grant an option, some of the terms of which were to be but were not yet formulated and that such a promise was then valid and enforceable because, if the outstanding terms were not agreed by the parties, they were such as would be settled by the Court as on the working out of a conveyancing document: cf.
Axelson v. O'Brien(80 C.L.R. 219 at pp. 226-8). No submissions were made upon this aspect and in view of the conclusions which I have formed upon other aspects, it is not necessary that I consider this in detail. I would, however, incline to the view that in the context of this case, the absence of agreement upon all of the

ATC 4051

terms of the option would have resulted in there being no binding agreement in respect of the option at the date of the making of the agreement for lease. The effect of this upon the agreement for lease and the significance of the fact that the Trust had commenced building on the land before the agreement for lease was executed might, had the dispute arisen at the date of the making of the agreement for lease, have given rise to the question whether in the light of all of the facts a Court of Equity would have imposed upon Abmal some liability qua the Trust of the kind referred to by Jacobs P. (as he then was) in
Australian Mutual Provident Society v. Overseas TeleCommunications Commission (Australia) (1972) 2 N.S.W.L.R. 806 at p. 814B. However, it was not suggested in argument that any such liability would have arisen in the circumstances of the present case and I do not think that such a matter need be determined.

However, by the time the lease was actually granted (16th June 1966) the parties had agreed upon the actual figures to be added to the schedule to the option for purchase as the purchase price at particular times: by the letter of 9th December 1965, these figures had been stated by the Trust and, I infer, accepted as such by Abmal and by the taxpayer. Even if it be assumed that until that acceptance there was no binding contract, the parties had, in the working out of their arrangement, rendered certain the terms of those arrangements and this, in my opinion, resulted in there being then a binding contract between them, even if the agreement be properly regarded as still in the executory stage: contrast
British Bank of Foreign Trade Limited v. Novinex Limited (1949) 1 K.B. 624.

I therefore agree with the submission of Mr. McGregor Q.C. that, if the lease and option had been granted to Abmal, rents paid by Abmal would have been, in part, for the option or the land and buildings.

(2) However, it does not necessarily follow that, the lease having been taken by the taxpayer and not by Abmal, the payments of rent by the taxpayer should be similarly treated. Whether they should be so treated depends, in my opinion, upon the contractual position of the taxpayer.

Mr. McGregor Q.C., argued strongly that, whatever be the taxpayer's contractual position, once it is clear that the payments of rent related to the option and that the taxpayer knew of the relationship, the taxpayer must be taken to have made the rent payments ``for'' the option.

It may, in my opinion, be inferred that the taxpayer when it took the lease, knew of the circumstances surrounding the grant of it and, in particular, knew that if rent was paid by it under the lease this would entitle the grantee of the option to exercise the option or at least would affect the price at which that company could exercise the option. The option was subject to the proviso that ``at the time of the exercise of the said option by such notice the lessee is not in default in any way under the lease'': cl.2; and the price to be paid was in terms related to payments of rent under the lease: cl.4.

However, I do not think that knowledge of the facts, as postulated by Mr. McGregor Q.C., is alone sufficient to warrant a dissection of the rent payments.

If the benefit which as the taxpayer knows will accrue to the third party does so not as the result of a contractual obligation but, e.g., merely as a result of the voluntary though predictable act of the payee, I do not think that a dissection should ordinarily be made. To make a dissection without the benefit accruing to the third party as the result of the appropriate contractual arrangements would, in my opinion, ordinarily be contrary to the views of all of their Lordships in the Europa case.

Mr. Powell Q.C., at one stage in his argument, submitted that unless the benefit in question accrues as a result of a contractual arrangement enforceable by the taxpayer then the taxpayer's outgoing is not to be dissected. I do not think that a submission in these broad terms should be accepted. In the first place, I do not understand the principles formulated by their Lordships in the Europa Oil case to exclude the possibility of special cases. Thus, if the parties in the Europa Oil case had, in their agreements, provided specifically that the agreement should not give rise to contractual or other legal obligations, but be enforceable only in honour: cf.
Rose and Frank Co. v. J.R. Crompton & Bros (1923) 2 K.B. 261; their Lordships would still, in my opinion, have held the payments made by the Europa Oil Company should be dissected.

In the second place, it may be that the principle formulated in the Europa Oil case is to be understood as limited to the case where

ATC 4052

the taxpayer's outgoing is clearly an outgoing for stock or for rent or otherwise for something which is of a revenue nature and where the question at issue is whether it is to be taken to be also for something else which is not qua the taxpayer of a revenue nature. The principle is formulated consistently with such a limited view of it: 70 ATC at pp. 6019-6020; (1971) A.C. at pp. 772E-F; and such a principle would accord with the reasoning of Walsh J. in Poole's case (supra).

Where the question at issue is to determine whether the taxpayer's outgoings is ``for'' X or something else, it would in my opinion, be open to a Court to hold that the outgoing was for X even though X did not accrue as a result of any contractual obligation to the taxpayer. Thus, a gift made by a taxpayer employer to an employee on retirement might in appropriate circumstances be held to be a revenue outgoing even though it was made without any contractual obligation and even though the staff goodwill which arose from it (and which gave to it its revenue nature) did not arise as the result of any contractual obligation imposed upon any employee.

Mr. Powell Q.C. submitted alternatively that, even if the additional benefit which accrued from the taxpayer's outgoing accrued as a result of contractual obligations, that of itself was not sufficient to make the outgoing to be dissected and to be treated as being, as to part, for that benefit.

This submission is, in my opinion, correct. Thus, if a lessee pays rent to his lessor and that lessor is, to the lessee's knowledge, contractually bound to X (but not to the lessee) to sell the property to X at a price calculated by reference to the total of rent paid by the lessee under the lease, the lessee's rent payments would not thereby be subject to dissection and disallowance as to part. In the present case, if the Trust had agreed with Property Options Pty. Limited to give an option to that company provided Abmal had paid the rent payable under the lease and Abmal had transferred the lease to an independant manufacturer, I do not think that that independent manufacturer could be subject to a dissection of the rent paid by it because of the arrangements made between Property Options Pty. Limited and the Trust. If the manufacturer saw fit to bind himself to pay such a rent, I do not think that his right to a deduction for it should be affected because he knows the Trust is contractually bound to Property Options Pty. Limited to provide a benefit for that company.

This conclusion is, in my opinion, in accordance with the decision in Poole and Dight v.F.C. of T . (70 ATC 4047; 122 C.L.R. 427). In that case, Poole and his wife owned the so-called leasehold interest in the land in question. They, together with their two daughters (of whom Mrs. Dight was one) entered into a partnership agreement under which the partnership was given the right to graze the lands, as consideration for which the partnership agreed to pay the rents payable in respect of the lands (at ATC p. 4049 and C.L.R. p. 430). Poole and his wife were entitled, under sec. 144A of The Land Acts to pay ``the purchasing price'' of the land by ``an annual rent'' equal to one-thirtieth of the purchasing price and they could at any time, by paying the amount then unpaid plus interest, acquire the freehold in the land (at ATC pp. 4049-4050 and C.L.R. pp. 432-433). The so-called rent was paid by the partnership and in due course Mr. and Mrs. Poole elected to acquire the freehold and it was transferred to them. Mr. Poole and Mrs. Dight were assessed to tax on their share of the partnership income calculated upon the basis that, in each case, no deduction should be allowed for the rent paid by the partnership, this on the basis that it had been paid in the acquiring of the capital asset, the freehold of the land. Walsh J. upheld the assessment in relation to Poole but not in relation to Mrs. Dight. In relation to her, his Honour (at ATC p. 4056 and C.L.R. p. 443) said:

``In the case of the appellant Mrs. Dight the position is quite different. She has no interest in the lease. The partnership of which she is a member has the right to use the land but has no other rights in respect of it. She will get no benefit if an estate in fee simple is acquired by payment of the purchasing price. Therefore, the payment made by the partnership was not related in any way to the acquisition by her of a capital asset. From her point of view it was simply a payment made in fulfilment of a condition which attached to the right of the partnership to use the land. The share to which she was entitled in the profits of the partnership was ascertainable on the basis that the payment was a deduction properly made in arriving at its net profits. Her taxable income should not have been

ATC 4053
increased by adding to the amount of her interest in the partnership income any part of the amount so deducted in arriving at the income of the partnership as shown in the partnership return. In her case the appeal should be allowed and the assessment should be varied, on the basis that her taxable income is reduced by one-eighth of the sum of $2,148 paid by Cooinda Pastoral Company in respect of the lease.''

A more difficult question arises as to whether in cases where the taxpayer's outgoing results from a contract to which the taxpayer is a party in a benefit accruing to a third party, there can be no dissection of the taxpayer's outgoing unless it appears that the benefit to the third party results also in a non-revenue benefit to the taxpayer.

There is some support for this view in the cases to which Mr. Powell Q.C. referred in his argument. Such a view is consistent with the approach adopted by the Privy Council in the Europa Oil case. In that case, there was a benefit conferred, by the amounts paid for the gasolene, upon the subsidiary of the taxpayer, Pan Eastern. The decision in that case might have been based merely upon the fact that, as the taxpayer knew and intended, that benefit to Pan Eastern was part of the contractual provisions into which the taxpayer entered; or it might have been based upon the fact that that benefit to Pan Eastern conferred a direct benefit upon the taxpayer and that it was the benefit to the taxpayer which was the crucial factor.

The argument for the Revenue was that there was ``a real and substantial benefit to the respondent company (Europa) through Pan Eastern'': (1971) A.C. at p. 762E; and the reference to a benefit ``through Pan Eastern'' was repeated: at pp. 762F, G and H, p. 763B and at p. 765E: compare also at pp. 764D, F. In the judgment of the majority of their Lordships, this formula was adopted as the proper statement of the nature of the advantage to be found in order to warrant dissection: at pp. 774D-E, H. The matter was similarly stated in the dissenting judgment: at pp. 777E-F.

Had their Lordships been of the view that it was sufficient, to warrant dissection of the payment, that there be to the knowledge of the taxpayer the contractual result from its payment of a benefit to Pan Eastern, or a fortiori, to another non-subsidiary company, the principles, as stated in both the majority and minority judgments, might well have been stated differently.

In
Littlewood's Mail Order Stores Limited v. I.R. Commrs. (1969) 1 W.L.R. 1241; 45 T.C. 519; the members of the Court of Appeal each relied upon the fact that the relevant benefit was a benefit to the taxpayer making the payment and not merely to its wholly owned subsidiary. The judgments in that case indicate, in my opinion, that their Lordships were not of the view that it was sufficient that there be a benefit to a wholly owned subsidiary, a fortiori if the benefit was to a third party or to an associated company.

In that case, as a result of a transaction of some complication, the Independent Order of Oddfellows Friendly Society (which had owned relevant land, subject to a lease to the taxpayer) transferred the land to a wholly owned subsidiary of the taxpayer (Fork Manufacturing Co. Limited) in consideration of the subsidiary company transferring to the Society a lease of the land for £6 per annum, then held by the subsidiary, with the benefit of a sub-lease of the land to the taxpayer at a rent of £42,450 per annum. It was held that part of the rent paid by the taxpayer under the sub-lease was paid for the acquisition of the land (as a capital asset) by the taxpayer's subsidiary.

The fact that the subsidiary which took the benefit of the capital asset, the freehold, was a wholly owned subsidiary of the taxpayer was an essential part of the decision of each of the Lords Justices. Lord Denning M.R., decided in favour of the Revenue, not upon the ground that the rent payments made by the taxpayer were intended to and did confer a benefit on the Fork Company, but upon the ground that the benefit or capital asset for which part of the rent was paid was, in fact, a benefit to or capital asset of the taxpayer itself. The Master of the Rolls declined ``to treat the Fork Manufacturing Co. Limited as a separate and independent entity'': ibid. at p. 1254B; he regarded it as ``the creature, the puppet, of Littlewood's, in point of fact'', and concluded that ``it should be so regarded in point of law. The basic fact here is that Littlewood's through their wholly owned subsidiary, have acquired a capital asset... So regarded the case is indistinguishable from the Land Securities case'': ibid. at p. 1254D.

Sachs L.J., accepted that portion of the rent was expended ``for the purpose of acquiring a

ATC 4054

capital asset which happened to be put into the ownership of Fork. It is thus in truth expenditure of a capital nature to secure the advantage of an enduring benefit. It was also an expenditure that was not made wholly and exclusively for the trade purposes of the parent company during the relevant years under consideration by the Commissioners...'': at p. 256B.

Karminski L.J. said:

``It is necessary, I think, to ask myself, after that examination of the details, who really benefited from getting hold of the freehold. To that in my view, there is only one answer, that it is Littlewood's and not Fork. If that view is right, then the distinction which has been sought to be drawn by Mr. Heyworth Talbot between the facts of the present case and those in the Land Securities Investment Trust Limited case does not really exist.''

ibid. at p. 1256H.

In the present case, the taxpayer was merely a ``sister subsidiary'' of Property Options Pty. Limited and (if such be relevant under the Australian legislation) did not derive any similar benefit from the option benefit which accrued to Property Options Pty. Limited and to the ultimate parent company of the group.

(No argument has been directed to any difference between the legislation in Australia and the legislation under which the decision in Littlewood's case was given. In the circumstances, it is not necessary for me to consider this aspect of that decision, or to consider whether the precise question to be answered in the Littlewood's case was the same as that to be answered in the present case).

The Commissioner of Taxation (in my opinion rightly) placed no significant reliance upon the decision in
Ransom v. Higgs (1973) 1 W.L.R. 1180; (1974) 1 W.L.R. 1594. The relevant part of that decision (that relating to the Kilmorie company: at pp. 1192, 1216,1224) concerned the deductibility under sec. 137 of the Income Tax Act 1952, of a payment found as a fact to have been made, as one of its main purposes, for the purposes of facilitating a scheme for avoiding liability to tax, and it was held that, in the light of that finding, the payment was not ``exclusively laid out or expended for the purposes of the trade'' in question so as to qualify as a deduction under sec. 137(a). The question there in issue, though having some similarity to the present, was essentially different, and does not assist in determining whether in the present case, it is proper to categorise the rental payments as ``for'' the option to purchase the land and buildings in question.

Mr. McGregor, in his argument, relied upon the Littlewood's case as conclusive in his favour. Mr. Powell, in reply to this, submitted that Cecil Bros. Pty. Limited v. F.C. of T.(111 C.L.R. 430) was conclusive in his favour. I do not think that the Cecil Bros. case concludes the present matter. As far as is relevant in the present proceeding, that case was based upon two propositions, first, that the payment there in question was ``for'' the stock purchased and ``for'' nothing else; and, second, that if that were so, the fact that the payment was greater than would have been made had the seller of the stock not been an associated company, did not justify a dissection of the payment. The Court may have arrived at the first proposition either by concluding that, as a matter of law, the payment in question could only be for the stock purchased, or by concluding that that was so as a matter of fact. Mr. Powell's argument, in effect, urged the former alternative. He submitted that the Cecil Bros. case established that a payment of for a purpose falling within the first portion of sec. 51(1) could not be dissected or, alternatively, could not be dissected merely because it was made for the purpose of benefiting an associated, company by payment of an over-generous price.

I do not think that the Cecil Bros. case decides that a payment falling within the first portion of sec. 51(1) cannot be dissected; the Ronpibon Tin case (78 C.L.R. 47 at pp. 59-60); referred to in the Cecil Bros. case assumes that it can. I take the Cecil Bros. case to decide that a payment, which, properly categorised, is for stock or some revenue purpose within sec. 51(1), cannot be dissected merely because the amount of the payment is higher than if the goods had been purchased elsewhere, and the reason for the higher payment is in order that an associate of the taxpayer may make a greater profit out of the transaction: (111 C.L.R. p. 434); compare Ransom v. Higgs (1973) 1 W.L.R. 1180 at pp. 1214-1215.

Where there is another right or piece of property which accrues by reason of the payment, then, in my opinion, the Cecil Bros. case does not preclude the argument that the payment was, as to part, for that other right or

ATC 4055

piece of property; whether the payment can be dissected is then to be determined according to the principles to which I have referred.

In the present case, there is such another right or piece of property, viz., the option, and I do not think that the Cecil Bros. decision is conclusive of the question whether the payments by the present taxpayer should be dissected accordingly. That question falls to be answered by determining whether the relationship between the payments and the option falls within the principles to which I have referred.

In the course of argument, Mr. McGregor submitted, at least by inference, that no distinction should be drawn between a case in which Abmal itself or its parent company in the United Kingdom holds the lease, and a case in which the lease is held by a subsidiary company upon the basis that the effect is the same and it is substance and not form which should determine the present question. I do not think that such approach should be adopted. The form of a transaction is often, for income tax purposes, of decisive importance: see the Europa Oil case 70 ATC 6012 at pp. 6019, 6022; (1971) A.C. 760 at pp. 772, 777; and see also the observations of Danckwerts L.J. in
I.R. Commrs. v. Land Securities Investment Trust Limited (1968) 1 W.L.R. 1446;45 T.C. 495; on appeal (1969) 1 W.L.R. 604; 45 T.C. 495. In the present case, the form of the transaction, as ultimately effected, is clear, and the consequences for income tax must be determined by reference to the rights and obligations arising under it.

In the course of argument in this matter, no separate head of argument was directed to the words ``to the extent to which'' in sec. 51(1) or to the decisions upon those words. It was not sought to be argued that those words provide a different test of dissection of payments to that to which I have referred. It is therefore not necessary for me to consider that aspect of the sec. 51(1) separately.

I am, therefore, of opinion, that the rental payments in question were made for the use of the relevant premises by the taxpayer and not for any other relevant right or advantage. If this be so, the payment was admittedly of a revenue nature and therefore deductible under sec. 51(1).

I direct the taxpayer to bring in Short Minutes of Order to give effect to the conclusions which I have formed.

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