Case: Sun Newspapers Ltd v Federal Commissioner of Taxation [1938] HCA 72 ; (1938) 61 CLR 337
Outcome: applied
The classic test for resolving the distinction between capital and revenue is that stated by Dixon J in Sun Newspapers Ltd v Federal Commissioner of Taxation [1938] HCA 72 ; (1938) 61 CLR 337 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." See also Citylink (High Court) at [147] and GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation [1990] HCA 25 ; (1990) 170 CLR 124 at 137. 83 An examination of the character of the advantage sought is assisted by asking two questions: (1) what was the Prepayment really paid for? and (2) is what it was really paid for, in truth and in substance, a capital asset?: Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation [1953] HCA 68 ; (1953) 89 CLR 428 at 454 and Sun Newspapers Ltd at 359-360. The advantage must be identified and characterised. The answer to those questions is not assisted by an analysis of the contractual right or rights secured under the contract, as distinct from the activity itself: see FCT v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 at 99 (per Davies, Gummow and Hill JJ) citing Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34 ; (1946) 72 CLR 634 at 648. As Dixon J said in Hallstroms , the answer: "...depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." See also Citylink (High Court) at [148] (per Crennan J) (with whom Gleeson CJ, Gummow, Heydon and Callinan JJ agreed). 85 This distinction between acquisition and use was articulated by Dixon J in Sun Newspapers : " whether on the one hand [the payment] is a capitalized sum payable by deferred instalments or on the other hire or rent accruing de die in diem, or at other intervals, for the use of the thing " (363). More recently, the test was re-stated by Stephen J in his dissenting judgment in Cliffs International Inc v FCT [1979] HCA 8 ; (1979) 142 CLR 140 at 160 where his Honour said: "The important distinction between ... [recurrent capital outgoings] ... and instances of leases of land or the licensing of patents is that in those cases rent or royalties are paid for the right to occupy or use the property or rights of another. But here the vendors, upon exercise of the option, retained nothing and the taxpayer thereafter made no use of anything to which the vendors retained any claim." See also Gibbs ACJ in Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd [1978] HCA 32 ; (1978) 140 CLR 645 at 655.