FC of T v EMAIL LTD

Judges:
Hill J
Drummond J
Sackville J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [1999] FCA 1177

Judgment date: 13 September 1999

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Hill, Drummond and Sackville JJ

The Commissioner of Taxation appeals against the judgment of a judge of this Court upholding appeals brought by Email Ltd (``Email'') against objection decisions of the Commissioner disallowing objections to assessments of income tax for substituted accounting periods in respect of the years of income ended 30 June 1990 to 1996 inclusive [ reported at 99 ATC 4208].

2. The issue in each substituted accounting period was whether amounts paid in that period by Email pursuant to an obligation imposed upon it by an indemnity it gave to Boral Cyclone Limited (``Boral'') on the sale of shares in Dowell Australia Limited (``Dowell'') by Overseas Corporation (Australia) Limited (``OCAL'') to Boral were allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 (``the Act'').

3. Email was at all relevant times a listed public company. It owned all the share capital in McIlwraith Davey Industries Ltd (``MDI''), which in turn owned all the shares in OCAL. OCAL was the owner of 50% of the shares in Dowell. The remaining 50% of the issued share capital of Dowell was owned by Alcoa of Australia Limited (``Alcoa''), a company unrelated to Email.

4. On 4 May 1988 Alcoa and OCAL agreed to sell the whole of the issued capital of Dowell to Boral. As part of the terms and conditions of the deeds of sale Email and OCAL on the one hand and Alcoa on the other gave certain warranties and indemnified Boral Cyclone against any losses that it might suffer as a result of a breach of the warranties. It suffices to say that Alcoa and OCAL as vendors warranted that Dowell had not breached any contracts or incurred liabilities for work done or advice given to customers. Under the indemnity OCAL

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and Email jointly and severally covenanted to indemnify the purchaser in respect of half of any losses, damages, claims or demands arising out of any breach of the warranties.

5. The possibility that there would be claims against Dowell from its customers was not remote as at the time of the sale. Dowell's business was selling fully fabricated windows and associated timber window facilities. It had undertaken a number of major projects. Problems had developed with its window systems whereby windows/glass had fallen out and window leakage had occurred on certain large projects in CBD major buildings. No doubt the extent of possible claims was unknown but in its accounts Email raised a provision of $5 million for claims under the indemnity.

6. In the period to which the assessments related Email paid a total of $5,207,752.89 under the indemnity. In most part the payments it made were reimbursement of monies paid by Dowell in settlement of claims made by dissatisfied customers; a portion related to legal costs in connection with those claims.

The judgment appealed from

7. The primary judge held that the amounts which Email had been required to pay under the indemnities were allowable deductions under s 51(1) of the Act, and in particular, were not outgoings of capital or of a capital nature.

8. In arriving at his conclusion the learned primary Judge found that Email was at all material times carrying on a business which his Honour described as ``acting as the holding company of a group of companies''. It was not a merely passive holding company doing nothing but receiving and distributing dividends. Rather it was active in the administration of the affairs of its subsidiaries in various ways. In particular it provided services to its subsidiaries such as management of cash flows, currency fluctuations and interest rate exposure, legal, taxation, internal auditing and accounting services, training, information technology, recruitment and human resources. It provided guarantees for borrowing undertaken by subsidiaries and provided warranties and indemnities on sales of shares or businesses of subsidiaries. It is common ground that warranties and indemnities had been given by Email in respect of sales by its subsidiaries of business between 1985 and 1989 on at least four occasions.

9. His Honour found that the sale of any companies within the group was not a sale in the ordinary course of any business that was being conducted by Email as the holding company. However, his Honour also found that the giving of an indemnity by Email with respect to the sale of businesses or shares in controlled entities was part of the ordinary business activities of Email.

10. His Honour appears to have accepted evidence given before him by Mr Brink, who at the time was Finance Director of Email, that Email's business activities as a holding company were directed at ensuring that profits, including capital profits were ``available and ultimately returned to Email by way of dividends''. It may be interpolated here that no doubt this would be true of every publicly listed holding company. However, the conclusion can not really be taken too far.

11. The evidence disclosed, as his Honour observed, that while generally, profits of MDI were distributed by way of dividends, those of OCAL were not. In the thirteen accounting periods from 31 March 1985 to 31 March 1997 MDI paid out dividends identical with those it received. In two periods no dividends were either received or paid out. In the 1993 period the dividend paid by MDI of $5,895,921 was less than the $7,295,375 that company had received. OCAL's profit on the sale of the shares in Dowell, a profit made in the accounting period ending on 31 March 1989, appears substantially not to have been distributed by it by way of dividend. OCAL's balance sheet for the financial year ended 31 March 1988 showed retained profits of $9,207,827. The capital profit on the sale of the shares in Dowell was in excess of $5.6 million. Dividends declared by OCAL in the accounting periods ending on 31 March 1989 to 31 March 1992 were, respectively, $262,794, $1,116,338, $822,405 and $30,691. Cross examination did not elicit any convincing explanation of the discrepancy.

12. Nevertheless, as a general proposition, it can readily be accepted that Email desired ultimately to receive dividends from its subsidiaries which could be available to it, so as to enable it to declare dividends to its shareholders. No doubt, until dividends were declared, any retained profits, including capital profits would be utilised for the purposes of the group. In the present case it seems that the

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ATC 4871

monies representing the capital profit of OCAL were substantially lent to Email. Indeed, as at 31 March 1997 OCAL had retained profits of $15,139,261, although it may well be that not all of that amount would have been available to permit a dividend to be declared. These matters were not explored in any detail in the evidence.

13. The explanation for the conclusion by the learned primary judge that the payments under the indemnity were on revenue rather than on capital account is to be found in the following passage in his Honour's judgment [at 4219]:

``... in the circumstances of this case, the giving of the indemnity by Email had the potential to allow its subsidiary company (OCAL) to achieve a greater capital profit (which would in due course be available for the declaration of a dividend in favour of Email). Thus, payments made as a consequence of that indemnity were payments on account of revenue and therefore deductible under both limbs of subs 51(1) of the Act.''

14. As is clear from other passages of the judgment, it was his Honour's view, having regard to the nature of the business of Email as being that of a holding company, that the giving of the indemnity and thus the payments made under it were part of the normal business activities of Email. Applying the accepted tests in
Sun Newspapers Ltd v FC of T (1938) 61 CLR 337 at 361, to which reference will later be made, his Honour held that the advantage sought by Email was an increase in the likely flow of dividends that it would ultimately receive. The indemnity, his Honour held, was given to promote and preserve the size of future dividends. Further, the revenue character of the expenditure was strengthened, his Honour held, by the element of repetition. By this, we understand, his Honour meant not the fact that the expenditure under the indemnity involved payments of multiple claims over a number of years, but rather that indemnities of the present kind had been given by Email on a number of occasions when subsidiaries had disposed of businesses and perhaps (although the evidence is silent on the matter) sales of shares.

Other relevant factual matters

15. Before turning to discuss the relevant law and its application to the facts of the present case, three factual matters should be referred to.

16. First, it is not suggested that the shares in Dowell were otherwise than a capital asset of OCAL. OCAL did not trade in shares. The precise reasons why the shares were sold is not dealt with in the evidence. All that is known is that a decision was made by the two joint venturers to sell the shares in Dowell.

17. Secondly, there was uncontradicted evidence from Mr Brink, indeed it may well be said to be self evident, that it was common commercial practice that a purchaser of an existing business or shares in a company carrying on a business would require security in the form of a guarantee or indemnity from a responsible commercial entity against unascertained liabilities. The shares in Dowell would not have been saleable, at least at a satisfactory price, had no such warranty/ indemnity have been given in the present case. As Mr Brink said, it was clear to him that, but for the indemnity given by Email, Boral would not have gone ahead with the proposed purchase and the shares would not have been saleable at a satisfactory price. This accords with ordinary commercial experience and indeed common sense. Despite a submission from senior counsel for Email to the contrary, it is clear that at least one purpose of the giving of the indemnity was both to further the sale and to ensure the best price. In a case such as this, price will depend upon the terms and conditions of sale. Even if OCAL could have sold the shares in Dowell without the indemnity, the price would have been considerably reduced. The giving of the indemnity therefore, ensured that a higher price would be received than would have been the case had no indemnity been given.

18. Thirdly there was evidence that the companies forming the Email group were run on what is referred to as a ``divisional'' basis. Matters such as consumer claims over a certain amount were dealt with by the head office legal department. Legal costs were defrayed generally by the head office and occasionally recharged to the division and the eventual costs of settlement of claims, where defrayed by the head office, were normally charged to the division in question. Despite a suggestion to the contrary in argument, the evidence hardly supports the proposition that consumer claims were borne by Email itself. Given that such claims would clearly be tax deductible by the company against which the claims were made it

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ATC 4872

would defy belief that, wherever the funds may have initially come from to meet them, the claims were not charged in the accounts of the relevant subsidiary as a business expense. Nothing in Mr Brink's evidence suggests the contrary. No doubt this would be particularly the case where the claims were made against an entity the shares in which were only 50% owned by the Email group, whether or not the general divisional practice was adopted in respect of Dowell, a matter in respect of which the evidence is silent.

The relevant statutory background and concession made by the Commissioner

19. Section 51 (1) of the Act was at relevant times the section which provided for the allowance of a deduction for what one might generally refer to as ``business expenses'' or ``working expenses''. It provides relevantly:

``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... nature...''

20. It may be noted that to come within the subsection a taxpayer must show that it satisfies one or other of the so-called positive limbs (``incurred in gaining or producing the assessable income'' and ``incurred in carrying on a business for the purpose of gaining or producing such income'') and that the deduction is not excluded from being allowable by virtue of the exclusory part of the subsection, here the requirement relating to the character of the deduction, in whole or in part, as one of capital or of a capital nature.

21. In the present case it is conceded by the Commissioner that the outgoings in question satisfy the second positive limb of s 51(1). That is, the Commissioner concedes that the outgoings were incurred by Email (that is to say in the course of) carrying on a business, which business had the purpose of gaining or producing assessable income by way of dividends. It may well be, that the outgoings would satisfy the first positive limb also, for the two are not mutually exclusive in the case of a taxpayer carrying on a business. We do not pause to consider whether the concession was properly made.

22. It follows that the only issue on the appeal is whether the payments made by Email under the indemnity were outgoings of capital or of a capital nature.

Discussion

As Burchett J observed in
FC of T v Ampol Exploration Limited 86 ATC 4859 at 4881; (1986) 13 FCR 545 at 573, in a passage cited by the learned primary Judge:

``The difficulty of cases concerned with the question of whether an outgoing is of capital or of a capital nature or whether it is a revenue outgoing is not a difficulty of comprehension of the principle involved, but of its application to the infinite variety of business circumstances.''

23. A similar thought was later expressed in the unanimous judgment of all seven justices of the High Court in
Mount Isa Mines Ltd v FC of T 92 ATC 4755 at 4757; (1992) 176 CLR 141 at 147, where their Honours referred to the practical application of the basic principles underlying the distinction as giving rise to ``difficulties of degree, rather than kind.''

24. The first step in reaching a conclusion involves, as Dixon J, as his Honour then was, albeit in a dissenting judgment, made clear in
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190 at 196; (1946) 72 CLR 634 at 648-649, identifying what the expenditure is for. As his Honour said:

``... What is an outgoing of capital and what is an outgoing on account of revenue 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.''

The identification of what expenditure is calculated to effect involves both a consideration of the character of the expenditure and in many cases an examination of the business structure and the operations of the business in the course of which the expenditure has been incurred.

25. Over the years in which the need to distinguish income from capital has been discussed, colourful analogies have been employed in an attempt to elucidate the principle underlying the distinction. So in the well-known passage in
Eisner v Macomber 252 US 189 at 206-207 (1920) (cited recently by the

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majority of the High Court (Gaudron, Gummow, Kirby and Hayne JJ) in the context of the question whether a receipt or advantage derived was capital or income in
FC of T v Montgomery [99 ATC 4749 at 4761]; [1999] HCA 34 at 23-24), Pitney J of the Supreme Court of the United States said:

``The fundamental relation of `capital' to `income' has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measure by its flow during a period of time.''

26. Dixon J in Sun Newspapers at 359 referred to the distinction:

``between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and the returns representing profit or loss.''

27. However, as his Honour pointed out at 360, there is a practical difficulty in drawing a clear distinction between what Lord Blackburn in
United Collieries Ltd v Inland Revenue Commissioners (1930) SC 215 at 220 had referred to as ``the profit-yielding subject'' on the one hand and the process of operating it on the other. As his Honour said:

``The basal difficulty... lies in the fact that the extent, condition and efficiency of the profit-yielding subject is often as much the product of the course of operations as it is of a clear and definable outlay of work or money by way of establishment, replacement or enlargement.''

Indeed, it is that difficulty which, as we shall shortly explain, besets the present case.

28. In Hallstroms Dixon J at ATC 194; CLR 647, summarised the distinction between capital and income in the context of business outgoings, in the following words:

``... the contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.''

29. Another matter, often relevant to the distinction between income and capital will be whether the expenditure is made ``once for all'' on the one hand, when it will usually be capital, or is ``repeated, recurrent or continual'' when it will usually be on revenue account: cf Sun Newspapers at 361. As is clear enough, there are certain sorts of outgoings, interest and rent being the most obvious, which through their recurrence are clearly deductible, at least in the usual case: cf
The Texas Co (Australasia) Ltd v FC of T (1940) 5 ATD 298 at 356; (1940) 63 CLR 382 at 468. The majority of the High Court in
Steele v DFC of T 99 ATC 4242, however, left open the question whether there could be a case where interest was to be regarded as being on capital account. But whether this is so, the difficulty of applying the degree of recurrence as a test is that a revenue outgoing may never recur or be likely to recur, and in that sense be a once off outgoing. Similarly, a series of purchases of capital assets will nevertheless be on capital account, though repeated.

30. One thing is clear, and that is that recurrence will be an aid to the determination of the question to consider the essential character of the outgoing or liability. In Sun Newspapers, Dixon J propounded three matters which in his Honour's view fell to be considered. His Honour said at 363:

``There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.''

31. Of these three factors, it is the character of the advantage sought which will generally provide the greatest guidance for it tells most about the essential character of the expenditure itself. More recently, albeit in a rather different context, the High Court in a unanimous decision in
GP International Pipecoaters Pty

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Ltd v FC of T 90 ATC 4413 at 4419; (1990) 170 CLR 124 at 137 looked at the question how the character of expenditure may fall to be determined. Their Honours said:

``The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the 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.''

32. Where moneys have been employed in the acquisition of the asset, the nature of what is acquired will ordinarily cast light on whether the outgoing is of a capital or revenue nature. But an outgoing may be of a capital nature, notwithstanding that no asset has been acquired as a consequence of the outgoing, as where an obsolete and dangerous large scale structure is demolished: cf Mount Isa Mines at ATC 4757-4758; CLR 147-148 citing
John Fairfax & Sons Pty Ltd v FC of T (1959) 11 ATD 510 at 512; (1959) 101 CLR 30 at 36. The present is, of course, a case where no asset has been acquired. The outgoings in question have been made to discharge an obligation. But in the present case the occasion for the outgoings is to be found in the giving of the indemnity, not directly in the outgoings themselves. Indeed, it is common ground that it is the character of the advantage which the indemnity was calculated to effect, not directly the character of the payments themselves which must fall for consideration.

33. In arriving at the conclusion he did the learned primary judge focussed on what may be said to be the ``ultimate'' advantage which the giving of the indemnity gave rise to, namely the dividend flow which some time in the future would be expected to reach Email. We have a difficulty about this approach for two reasons. The first is that it may be said of any outgoing effected by a listed company, indeed any outgoing effected by any company which is carrying on business, that the ultimate hope and expectation will be that it will produce profits which can be translated into dividends to shareholders. Had Email outlaid funds for a head office, the expenditure would give rise to the ultimate advantage that, at some time in the future, there would be increased profits available for distribution to its shareholders. Yet it could hardly be disputed that an outlay of monies for the purpose of a head office would be on capital account. This leads to the second difficulty. Many outgoings will produce both immediate and longer term advantages. The example of the head office demonstrates that. So do the facts of the present case.

34. The immediate advantage which the giving of the guarantee was designed to effect was the sale at the maximum price possible of the shares in Dowell by OCAL. Of course, unless the sale was forced upon OCAL by Alcoa, Email had a choice to continue to have OCAL hold the shares in Dowell or seek to sell those shares. But it was part of the decision to sell, born of the commercial necessity that a full price could only be realised for the shares in Dowell if an indemnity was provided, that Email gave the indemnity which it did. The only conclusion open on the evidence was that the giving of the indemnity was in furtherance of the sale and maximising the price.

35. We are conscious of the fact that in
FC of T v South Australian Battery Makers Pty Ltd 78 ATC 4412 at 4417; (1978) 140 CLR 645 at 655 Gibbs ACJ, as his Honour then was, pointed out that the advantage, to which the phrase ``the character of the advantage sought'' refers, is an advantage to the taxpayer, and that an incidental advantage which some other person, such as even a subsidiary or holding company of the taxpayer derives, but which is not shared by the taxpayer will not be enough to give the outgoing a character of capital. This comment may need to be treated with some caution having regard to the criticism levied of it by Brennan J in
Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 at 4548; (1980) 49 FLR 183 at 190. It may well, if taken too far, unduly prefer form to substance and ignore too the requirement that the task has to be undertaken in a practical and business like way.

36. However, the advantage to which attention in the present case has to be given, is the advantage to Email. Having regard to the undoubted fact that the giving of a guarantee operated to permit the shares of Email in MDI (as a result of the latter's holding of shares in OCAL and OCAL's holding of shares in Dowell) to attain a value they could not have without the giving of the indemnity (which correspondingly increased the liabilities of Email, albeit that overall there would be no adverse consequence to the net assets of Email) there was an undoubted advantage to Email

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itself. That advantage was not of a revenue nature.

37. No doubt it is true that no capital profits could emerge in OCAL unless there was a sale. It is also true that the entirety of the activities of the Email group were directed at the production of profits (whether income or capital profits) out of which ultimately dividends would flow to Email (and one can assume to the shareholders of Email). But neither of these factors necessarily leads to the conclusion that the giving of the indemnity produced an advantage of a revenue kind. The fact that the ultimate result of an outgoing and a result to which the outgoing is directed is the receipt of income is, in a case such as the present, too remote from the immediate advantage which the outgoing is designed to effect. The advantage here obtained goes rather to the dividend yielding structure than to the process by which the dividends themselves were to be earned. As the subsequent dividend-paying experience of OCAL illustrates, the enlargement of the ``profit-yielding subject'' (to use Dixon J's phrase in Sun Newspapers, at 360) does not necessarily produce the consequence of generating a flow of income to the proprietor.

38. The learned primary judge placed considerable emphasis on the repetitive nature of the expenditure, by which we assume his Honour meant rather the repetitive nature of the giving of indemnities. His Honour referred to the fact that the giving of the indemnity was not an isolated transaction but accorded with an established practice. After referring to
Fanmac Ltd v FC of T 91 ATC 4703 and remarks of Hill J in
Goodman Fielder Wattie Ltd v FC of T 91 ATC 4438; (1991) 29 FCR 376, his Honour said [99 ATC at 4221]:

``... the principle of law remains constant: expenditure having the hallmarks of capital expenditure, can, in appropriate cases, because of the repetitive nature of the expenditure, assume the character of revenue expenditure.''

39. In his statement of both the first and second of the matters to be considered in determining whether an outgoing was of a capital or revenue nature, Dixon J pointed to the fact that recurrence played a part. But it is important to bear in mind what his Honour meant by this. As appears earlier in the judgment his Honour had in mind the distinction drawn by Rowlatt J in
Ounsworth v Vickers Ltd [1915] 3 KB 267, between expenditure to meet a continuous demand and expenditure which is made once and for all. That case concerned the deductibility of dredging expenses incurred by the taxpayer shipbuilding and engineering company which it was necessary for the taxpayer to incur in order to enable the taxpayer company to deliver a battle cruiser which it had contracted to build. It was found to be of a capital nature. By recurrent expenditure it is not meant expenditure which may be incurred more than once, even if incurred on a number of occasions. Expenditure as we have already stated may still be capital, albeit that it is repeated. Recurrent expenditure is rather expenditure which is part of ``the constant demand which must be answered out of the returns of a trade or its circulating capital'': Sun Newspapers at 362. Rates, rent, interest, even premiums of insurance of capital assets (
Australian National Hotels Limited v FC of T 88 ATC 4627), notwithstanding that the proceeds of the insurance would themselves be capital, are examples of recurrent expenditure ordinarily on revenue account if incurred in the course of a taxpayer's business. Whether the expenditure is, in the sense used, recurrent, will depend more upon the nature of the expenditure than the number of times on which it is repeated.

40. We, like the learned primary judge, were referred in the course of argument to a number of cases, some going one way, some the other. As we hope is evident from the above discussion, the question of whether an item of expenditure is of a capital nature will much depend upon the particular facts of a case and the relationship which the expenditure has to the particular taxpayer's business. In deference to the submissions presented we will refer briefly to some of them.

41. The case of
FC of T v EA Marr & Sons (Sales) Ltd 84 ATC 4580; (1984) 2 FCR 326 was relied upon by senior counsel for Email and said by the learned primary judge to ``bear some resemblance to the facts of this case''. In that case the taxpayer, a holding company, made payments for the benefit of related companies which had gone into receivership and/or liquidation to leasing financiers in respect of equipment which had been leased for use by the subsidiaries. The holding company was liable on the equipment leases and was held

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entitled to a deduction. Two factors distinguish the case. The first was the hiring charges do ordinarily partake of the character of recurrent expenditure. The second, and more important, is that the leasing activities were activities of the taxpayer and were part of its business. There seems to have been no separate argument that the hiring charges were on capital account.

42. Next, there is the case of
FC of T v Total Holdings (Aust) Pty Ltd 79 ATC 4279; (1979) 24 ALR 401. There the holding company borrowed at interest from a financier and onlent the funds to its operating subsidiary without interest. On the facts, the transaction was explicable by reason of the fact that the holding company, which was carrying on actively the business of a holding company in much the same way as Email, wished to establish the profitability of the subsidiary as soon as possible and to bring profits to the holding company by way of dividend or interest. A factual argument that it was readying the subsidiary for sale was rejected. The issue was framed in terms of whether the liability for interest was incidental and relevant to the derivation of the holding company's income and was part of its business activities, so as to come within one or both limbs of s 51(1). Here the outgoing was interest, clearly on revenue account. The argument was a different one, and largely concentrated on the question whether the parent company was intending to sell the shares in its subsidiary. The outcome was determined by a finding that the loans to the operating subsidiary were designed to render it profitable as soon as commercially feasible and to promote the generation of income by the subsidiary and through it to the holding company.

43. 
Hooker Rex Pty Limited v FC of T 88 ATC 4392; (1988) 79 ALR 181 concerned a claim for a deduction by a land developer. In order to obtain the consent of the Commissioner of Taxation to the liquidation of various companies which the taxpayer and a subsidiary of the taxpayer had purchased for the purpose of distributing in specie land owned by the companies, the taxpayer had guaranteed to the Commissioner the payment of any income tax to which the companies might become liable on the liquidation. It was held that the taxpayer was entitled to a deduction for the amount it was obliged to pay to the Commissioner on its guarantee of the tax liabilities of a company it had purchased but not in respect of the amount outlaid to guarantee the tax liabilities of companies purchased by its subsidiary, where land of that company was distributed in specie to the subsidiary. In the part of the case in which the taxpayer was successful the guarantee payment was in essence part of the cost of its trading stock and so held to be on revenue account. In the case of the guarantee in respect of the shares acquired by its subsidiary however, the amount outlaid was held to be on capital account. The fact that the taxpayer had given a number of guarantees did not change the character of the outgoing. The giving of the guarantee in respect of the acquisition by the subsidiary was capital because it was a step in a process which led to an increase in value of the shares held by the taxpayer in its subsidiary, just as in the present case the giving of the indemnity led to an increase in the value of the shares held by Email in MDI.

44. The facts of the English cases referred to by his Honour in the judgment appealed from are so remote from the present case that they give little assistance. We shall refer only to one of them to illustrate this. In the first of the English cases discussed by his Honour,
Morley v Lawford and Company (1928) 14 TC 229, the taxpayer, a firm of contractors guaranteed the British Empire Exhibition to the extent of 500 pounds. They did so because they had been advised that guarantors would be given preference in the allotment of contracts for work at the exhibition. In fact they were not given work. Nevertheless, it was held that moneys paid under the guarantee were wholly and exclusively laid out for the purposes of the taxpayer's trade and were thus deductible. No doubt that case was correctly decided and would probably be decided the same way in Australia under s 51(1). The guarantee was so much a part of the taxpayer's trading operations that it was properly to be regarded as a revenue outgoing. The case has more similarity with
NMRSB Limited v FC of T 98 ATC 4188, a decision of Sackville J where additional interest paid to continuing depositors as part of the merger of building societies was held to have a sufficient connection with the business of the payer to be deductible.

45. Generally, although not invariably, money paid by a taxpayer pursuant to guarantees the taxpayer has given has been held to be on capital account, notwithstanding that

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the guarantee is given in the course of some business activity of the taxpayer. A typical example is the recent decision of Hely J in
Bell & Moir Corporation Pty Ltd v FC of T [99 ATC 4738]; [1999] FCA 1009 which refers to a number of decisions of Taxation Boards of Review which have so held, but cf
Commissioners of Inland Revenue v Huntley & Palmers Ltd (1928) 12 TC 1209. We do not think it desirable in the present case to enter into a discussion of the circumstances where the occasion for the giving of a guarantee will result in moneys paid under it being on revenue account.

46. In our view the appeal should be upheld, the orders made by the learned primary judge set aside, and in lieu thereof the Commissioner's objection decisions should be affirmed, and Email ordered to pay the Commissioner's costs of the proceedings below and of the appeal.

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The orders of the primary judge be set aside and in lieu thereof the Commissioner's objection decisions be affirmed.

3. The respondent pay the appellant's costs of the proceedings below and the appeal.