Tyco Australia Pty Ltd v Federal Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 1137 of 2005; NSD 319 of 2006; NSD 320 of 2006)
Judgment date: 20 July 2007
Date published: 11 February 2008

Summary of decision:

Overview of facts:
The taxpayer is an electronic security monitoring company which, in the relevant income years, derived income in the form of fees paid by home owners and small businesses for security monitoring services. The taxpayer engaged contractors (Authorised Dealers under a programme established by the taxpayer) to secure customers and to enter into alarm monitoring contracts directly with those customers. The taxpayer then paid these contractors a lump sum for the novation of each contract. The amount of each lump sum payment was calculated by reference to a multiple of the monthly fee payable by the customer. The lump sum represented most, if not all, of the total of the fees payable under the life of the contract. | Issues decided by the court or tribunal | The issue in the case was whether the payments made by the taxpayer to the authorised dealers were of a capital nature and therefore not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | His Honour held that the payments were not of a capital nature. They were held to be on revenue account and therefore deductible under section 8-1 of the ITAA 1997. | Although the rights under the contracts could be seen to be assets purchased by the taxpayer, and the amount paid for each contract represented almost the whole of the contracted revenue stream, his Honour held that this did not make the matter an affair of capital. | It was held that the advantage sought by each payment was the winning of a customer to be retained for future revenue for services to be provided. Each payment was made to secure an incremental accretion to the customer base of the taxpayer and the expenditure was incurred in the ordinary business activity of winning customers. | This did not represent the purchase or creation of a business structure. Rather, it was "the building of the extent of the profit-yielding subject (being the customer base...) as the product of the course of operations, by the incremental winning of customers by the chosen method of organising and remunerating an independent, but controlled, sales force". | It was also held that the accounting treatment (the booking of the payments as assets to be amortised against the profit and loss account) could not be determinative of the issue and, in the circumstances of the case, it was of little assistance in characterising the payments as capital or revenue.

Issues decided:
The issue in the case was whether the payments made by the taxpayer to the authorised dealers were of a capital nature and therefore not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? His Honour held that the payments were not of a capital nature. They were held to be on revenue account and therefore deductible under section 8-1 of the ITAA 1997. Although the rights under the contracts could be seen to be assets purchased by the taxpayer, and the amount paid for each contract represented almost the whole of the contracted revenue stream, his Honour held that this did not make the matter an affair of capital. It was held that the advantage sought by each payment was the winning of a customer to be retained for future revenue for services to be provided. Each payment was made to secure an incremental accretion to the customer base of the taxpayer and the expenditure was incurred in the ordinary business activity of winning customers. This did not represent the purchase or creation of a business structure. Rather, it was "the building of the extent of the profit-yielding subject (being the customer base...) as the product of the course of operations, by the incremental winning of customers by the chosen method of organising and remunerating an independent, but controlled, sales force". It was also held that the accounting treatment (the booking of the payments as assets to be amortised against the profit and loss account) could not be determinative of the issue and, in the circumstances of the case, it was of little assistance in characterising the payments as capital or revenue.

ATO view of decision:
This case was decided on its facts in accordance with long established authorities. The Tax Office considers that the application of principles relating to the capital/revenue distinction by his Honour was consistent with those authorities even though the Tax Office had previously reached a different conclusion on the particular facts of the case. Accordingly, the decision has no broader implications for Tax Office publications or administration.

Administrative treatment:
Implications on current Public Rulings & Determinations | None.

Legislative references: Income Tax Assessment Act 1997 8-1
Case references: Sun Newspapers Ltd v Commissioner of Taxation (Cth) (1938) 12 ALJ 411 [1938] ALR 498 (1938) 5 ATD 23 (1938) 61 CLR 337 Commercial and General Acceptance Ltd. v Federal Commissioner of Taxation (1977) 51 ALJR 842 (1977) 16 ALR 267 (1977) 77 ATC 4375 (1977) 7 ATR 716 (1977) 137 CLR 373 B.P. Australia Ltd. v Federal Commissioner of Taxation [1966] AC 224 (1965) 39 ALJR 190 [1965] 3 All ER 209 [1966] ALR 274 (1965) 14 ATD 1 (1965) 112 CLR 386 [1965] 3 WLR 608 [1965] TR 317 (1965) 44 ATC 312 Hallstroms Pty Ltd v Commissioner of Taxation (Cth) (1946) 20 ALJ 277 [1946] ALR 434 (1946) 8 ATD 190 (1946) 72 CLR 634
Subject references: Income tax Deductions Capital v revenue expenditure