Case: BP Australia Limited v Commissioner of Taxation of the Commonwealth of Australia [1965] HCA 35 ; (1965) 112 CLR 386
Outcome: discussed
To not dissimilar effect, see the judgment of the Privy Council in BP Australia Limited v Commissioner of Taxation of the Commonwealth of Australia [1965] HCA 35 ; (1965) 112 CLR 386 at 399. 38 The character of the expenditure and the character of the advantage sought by the making of the expenditure is the chief, if not critical, factor in determining the character of what was paid: GP International Pipecoaters Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [1990] HCA 25 ; (1990) 170 CLR 124 at 137; Mount Isa Mines Limited v Commissioner of Taxation of the Commonwealth of Australia [1992] HCA 62 ; (1992) 176 CLR 141 at 147-149; Commissioner of Taxation of the Commonwealth of Australia v Melbourne Citylink Limited [2006] HCA 35 at [1] , [3], [76], [77] and [148]; and BP Australia 112 CLR at 394 and 398. 40 It is also helpful to reflect upon the revenue character of the payments made by the taxpayer and discussed in BP Australia [1965] HCA 35 ; 112 CLR 386. The payments were made to service station owners to tie them to selling BP's petrol. Shell and others had been tying up solo outlets, thereby threatening the business of BP and others. The Privy Council (in a judgment delivered by Lord Pearce) agreed with the approach of Dixon CJ and Kitto J who were in dissent in the High Court. The Privy Council set out with approval, at 112 CLR at 391-92, the following parts of the reasons of Dixon CJ and Kitto J: (Dixon CJ) "I do not think it was acquiring a capital asset or doing any more than so conducting its business on revenue account as to increase it and make as certain as it could that its business was continuing and also would continue, if possible, to expand. For my part I cannot think that all the course adopted changed the character of the transactions of the company from those of a continual attempt to establish its product in a consumers' market and to meet all the obstacles which arose in a long and rather troubled period to obtaining a reputation for its product." (Kitto J) "But a promise by a service station operator not to deal with oil companies other than the appellant or its allies was only the negative side of the substantial positive advantage which it was the purpose and practical effect of the agreement to produce, namely the advantage of a practical certainty that the whole of the custom of the service station, for motor spirit, would be given to the appellant or its allies for the agreed period; and what the appellant really paid its money for was that positive advantage. The purpose was not to create a situation in which to set about selling motor spirit; it was to secure the particular sales which would be necessary for the satisfaction of the service station's requirements of the period. The payment of the money was analagous to expenditure in sending a commercial traveller on his rounds to secure orders; it was part and parcel of the business of effecting sales ... The change in the organization of the wholesale trade in motor spirit from the old system of multiple pump service stations to the new `solo' system meant inevitably that every oil company, if it wanted to sell motor spirit to service stations in the future, had to accept the necessity of spending money, not at the beginning once and for all, but at the beginning and from time to time, to ensure that it would receive from as many service stations as possible the whole of their orders for limited periods" ... "... the advantage was not the acquisition of a new market, not a new framework within which to carry on trade for the future, not an extension of the appellant's selling organization to include a regiment of resellers. It was not such an exclusion of competition as adds to goodwill a negative right and thus increases the value of goodwill. It consisted simply of the practical assurance of receiving bundles of orders for motor spirit , the circumstances being such that for the foreseeable future it would be only by getting similar bundles of orders that such a trade as the appellant's could be carried on" [emphasis added] 41 As these passages reveal, the regular payment of sums to secure customers, to add incrementally to a customer base and thus to expand a business and to obtain revenue from such customers is easily able to be seen to be on revenue account. 42 Lord Pearce explained the matter as follows at 112 CLR at 398: Its real object however was not the tie but the orders which would flow from the tie. To obtain ties it had to satisfy the appetite of the retailers by paying out sums for a period of years, whose amount was dependent on the estimated value of the retailer as a customer and the length of the period. The payment of such sums became part of the regular conduct of the business. It became one of the current necessities of the trade. The test of whether these sums were payable out of fixed or circulating capital, ... tends in the present case in favour of regarding these payments as revenue expenditure. Fixed capital is prima facie that on which you look to get a return by your trading operations. Circulating capital is that which comes back in your trading operations. The sums in question were sums which had to come back penny by penny with every order during the period in order to reimburse and justify the particular outlay. If one imagines a B.P. agent justifying the price of petrol to a retailer or discussing whether price reduction was possible, it is hard to imagine him omitting the lump sum so paid (divided by the estimated gallonage) as an item in the cost per gallon. It is doubtful if he would even relegate it to overheads since it was in the forefront of the wholesaler's selling costs. Nor can one imagine the retailer demurring at such a calculation. Prima facie therefore the lump sums were circulating capital which is turned over and in the process of being turned over yields a profit or loss; they were part of the constant demand which must be answered out of the returns of the trade. This however is merely one indication and by no means concludes the matter. [emphasis added] 45 At present, I am dealing with the legal framework of the case. I will deal with the submissions of the parties shortly. For present purposes, it is unnecessary to explore the concepts of fixed and circulating capital beyond the relevant elements of the notions seen as important to the Privy Council in BP Australia [1965] HCA 35 ; 112 CLR 386 and to Dixon J in Sun Newspapers [1938] HCA 72 ; 61 CLR 337. That is, here, whether the Assignment Fees would come back, to use Lord Pearce's words, "penny by penny with every order during the period in order to reimburse and justify the particular outlay": BP Australia 112 CLR at 398. 46 It is also important to recognise that the analysis requires "both a wide survey and an exact scrutiny of the taxpayer's activities": Western Gold Mines (NL) v Commissioner of Taxation (WA) [1938] HCA 5 ; (1938) 59 CLR 729 at 740. That is, one must examine the whole business context of what was done: BP Australia 112 CLR at 399 (the "whole picture"); and see also National Australia Bank Limited v Commissioner of Taxation (1997) 80 FCR 352 at 363. 60 These submissions were, in particular in the written submissions, emphasised by seeking to draw close parallels with BP Australia [1965] HCA 35 ; 112 CLR 386. There, the advantage sought was not the tieing of the retailer sellers or the changing the capital structure of the business, but was the promotion of sales and the winning of customers. Likewise here, it was submitted, the real object was not the purchase of the rights as such, but the revenue and orders flowing from them. The payments, it was submitted, were part of the regular conduct of the business. 61 The change to the AD Program (from the use of employees) was merely a new strategy to achieve the ordinary and continuing business aim of winning customers and their orders. 62 TAPL's submissions stressed the aptness of viewing the payments as circulating capital, as Lord Pearce did in BP Australia . They also stressed the artificiality of viewing each payment and each assignment of rights in isolation and the stressed the need to look at the "whole picture". The AP Program was merely a business model adopted to deal with a continuous demand in trade (the acquisition of customers and orders) and with the recurring themes of marketing and finding the best way to organise a sales force to obtain customers on a regular and incremental basis. 63 TAPL's submission highlighted the relatively short life of the contracts which, together with the individual payments, supported the notion of incremental and regular acquisition of custom. 64 TAPL submitted that the accounting treatment was an unsafe basis for treating the payments as structural assets. 73 The above is adequate to identify the essential structure of the debate. Various refinements were made to the arguments by reference, in particular, to the terms of Sun Newspapers [1938] HCA 72 ; 61 CLR 337 , Hallstroms Case [1946] HCA 34 ; 72 CLR 634 , BP Australia [1965] HCA 35 ; 112 CLR 386 and Regent Oil v Strick [1966] AC 295 . For the reasons expressed by Barwick CJ in Cliffs International 142 CLR at 147-148 nothing further is to be gained by analysing these other cases too finely once the underlying principle is clear.