Case: Sun Newspapers Limited v The Federal Commissioner of Taxation; Associated Newspapers Limited v The Federal Commis s ioner of Taxation [1938] HCA 73 ; (1938) 61 CLR 337
Outcome: discussed
The starting point for analysis is the judgment of Dixon J (as he then was) in Sun Newspapers Limited v The Federal Commissioner of Taxation; Associated Newspapers Limited v The Federal Commissioner of Taxation [1938] HCA 73 ; (1938) 61 CLR 337 at 359-363. A number of passages in that classic analysis at 359, 360, 361, 362 and 363 are worthy of repetition here: The distinction between expenditure and outgoings on revenue account and on capital account corresponds with 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 returns representing profit or loss. The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called goodwill, that is, widespread or general reputation, habitual patronage by clients or customers and an organized method of serving their needs. At the other extreme it may consist in a great aggregate of buildings, machinery and plant all assembled and systematized as the material means by which an organized body of men produce and distribute commodities or perform services. But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a "profit-yielding subject," the phrase of Lord Blackburn in United Collieries Ltd. v. Inland Revenue Commissioners ... As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue . ... But the practical application of such general notions is another matter. The basal difficulty in applying them 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 . ... But for the same or a like reason it is even harder to maintain the distinction in relation to the intangible elements forming so important a part of many profit-yielding subjects. For example, a profitable enterprise such as the sale of a patent medicine may depend almost entirely on advertisement. In the beginning the goodwill may have been established by a great initial outlay upon a widespread advertising campaign carried out upon a scale which it was not intended to maintain or repeat. The outlay might properly be considered to be of a capital nature. On the other hand the goodwill may have been gradually established by continual advertisement over a period of years growing in extent as it proved successful. In that case the expenditure upon advertising might be regarded as an ordinary business outgoing on account of revenue. ... In the attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or to revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made "once for all", and to a still greater extent upon a distinction to be discovered in the nature of the asset or advantage obtained by the outlay. If what is commonly understood as a fixed capital asset is acquired the question answers itself. But the distinction goes further. The result or purpose of the expenditure may be to bring into existence or procure some asset or advantage of a lasting character which will enure for the benefit of the organization or system or "profit-earning subject." It will thus be distinguished from the expenditure which should be recouped by circulating capital or by working capital. ... But the idea of recurrence and the idea of endurance or continuance over a duration of time both depend on degree and comparison. As to the first it has been said it is not a question of recurring every year or every accounting period; but "the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all" ... By this I understand that the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely. Thus, in Anglo-Persian Oil Co. Ltd. v. Dale ... the establishment and reorganization of agencies formed part of the class of things making the continuous or constant demand for expenditure, but the given transaction was of a magnitude and precise description unlikely again to be encountered. Recurrence is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure. ... 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. [emphasis added; footnotes omitted] 56 In Hallstroms Proprietary Limited v The Federal Commissioner of Taxation [1946] HCA 34 ; (1946) 72 CLR 634 , Dixon J incorporated his reasons in Sun Newspapers 61 CLR at 359-363 and elaborated upon them saying the following at 646, 647 and 648: As a prefatory remark it may be useful to recall the general consideration that 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. ... 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. [emphasis added] 60 Thus, it is not helpful to ascertain the subject matter for characterisation otherwise than by (subject to sham etc) straightforward analysis of the legal relationship of the parties and the ascertainment from that analysis of the legal context and character of the payment. The conclusions drawn from that analysis will, of course, be relevant to the central task assessing, from a practical business point of view, the true business character of the outgoing by reference to the notions of capital and revenue illuminated by Dixon J in Sun Newspapers and Hallstroms Case. 64 Before examining the relevant aspects of the overall arrangement to answer this question, it is necessary to say something about the submissions about interest and deductibility. The expression of views by the judges in cases as to the usual approach to interest in this context should be seen for what they are, and are not. They are the discussion of the kinds of consideration discussed by Dixon J in Sun Newspapers and Hallstroms Case in the context of interest on a loan. Thus, it can be accepted that, ordinarily, interest will be an allowable deduction under s 8-1, if incurred in the course of an income-producing activity or business: Texas Co (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9 ; (1940) 63 CLR 382 at 468 and Steele v Deputy Commissioner of Taxation 197 CLR at 469-70 [27]. This acceptance does not lay down some independent rule to be engaged and analysed beyond the characterisation enquiry discussed earlier. Rather, interest is usually deductible because, usually, it is a recurrent or periodic payment securing an advantage not of an enduring kind, but the use by the borrower of money during the term of the loan: Steele v Deputy Commissioner of Taxation 197 CLR at 469-470 [27]. But, as was noted in the same paragraph, "there may be particular circumstances where it is proper to regard the purpose of interest payments as something other than the raising or maintenance of the borrowing and thus, potentially, of a capital nature." To this passage there was footnoted Parsons RW op cit [6.11]. The possibilities referred to by Professor Parsons in that paragraph do not form an exhaustive universe of non-deductible interest. See also the discussion by Hill J at first instance in Macquarie Finance Limited v Commissioner of Taxation 210 ALR at [47].