Colonial Mutual Life Assurance Society Ltd v. Federal Commissioner of Taxation (13 October 1953)

89 CLR 428

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(Decision by: Webb J)

Between: Colonial Mutual Life Assurance Society Ltd
And: Federal Commissioner of Taxation

Court:

Judges: Williams ACJ

Webb JFullagar J
Kitto J
Taylor J

Subject References:
Taxation and revenue
Income tax
Assessment
Capital or income
Deduction
Outgoings incurred
Transfer of land
Outgoing of capital nature

Legislative References:
Income Tax Assessment Act 1936 No 27 - s 51(1)

Hearing date: 9 June 1953; 10 June 1953
Judgment date: 13 October 1953

MELBOURNE

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Decision by:
Webb J

The payments made by the appellant taxpayer to the Justs are required by their agreement to be measured by the rents from the three shops and basement situate on land of the appellant not acquired from the Justs, but still part of a building erected on both the appellant's and the Justs' land. These payments represent the consideration for the land acquired from the Justs, and the only purpose of the payments is to provide that consideration. They are not to any extent designed and they do not tend to make the shops and basement rent-producing. They have, and can have, no effect on the amount of rent from the shops and basement, or indeed from any other part of the building, as would, say, expenditure on repairs to the building. They cannot then be said to be "outgoings actually incurred in gaining or producing the assessable income". Taking the most favourable view for the appellant the payments are in substance part of the revenue from the building; but they are also expenditure for the acquisition of a capital asset, i.e. the Justs' land, and not expenditure in the working of that or any other asset with a view to making it income-producing, although this asset is to be used for rent-production.

But deductions under s. 51 (1) of the Income Tax Assessment Act 1936-1943 also include "outgoings ... necessarily incurred in carrying on a business for the purpose of gaining or producing such income". I confess I cannot see how this expenditure could be an outgoing under this part of s. 51 (1) and not also be at the same time an outgoing actually incurred in gaining or producing the assessable income. But in any case s. 51 (1) excepts all outgoings of a capital nature, and it seems to me that the payments to the Justs are necessarily that. It is beyond question expenditure to acquire a capital asset, and, in my opinion, it is nothing else. It would be remarkable if the payments could at the same time be the consideration for the purchase of a capital asset and expenditure for the working of that or any other capital asset. Egerton-Warburton v  Deputy Federal Commissioner of Taxation, ^[F35] is not, I think, a decision that the same payments might serve both purposes. Although the written arrangement in that case referred to the arrangement as a purchase, the court pointed out that the transaction bore "all the marks of a family settlement", ^[F36] and that there was nothing inconsistent with the supposition that the transaction might have resulted in an immediate benefit to the sons in the nature of a gift. The Court thought then that it was impossible to treat the annuity payable to the sons as mere instalments of purchase money. It will be observed that the court appreciated the difficulty of treating the annuity as purchase money and at the same time as outgoings in producing income.

The fact that these payments to the Justs represented assessable income to them, as I held in Just v  Commissioner of Taxation ^[F37] has, I think, no bearing on the question whether such payments are outgoings of the appellant within s. 51 (1). The scope of s. 51 (1) was not considered in that case, and, in my opinion, was not relevant in any event.

I would answer the question in the case: "No".