JUDGMENT No. uh 22% pL CATCHWORDS INCOME TAX - Allowable deductions - Company carrying on business as producer and exporter of wood chips ~ Contribution towards estimated cost of widening, re-routing, upgrading and sealing of part of an existing road and construction of new section of road in order to allow traffic on Princes Highway to by-pass Merimbula - Whether outgoing properly characterised as an outgoing of capital or of a capital nature Income Tax Assessment Act 1936 (Cth), s.51(1) HARRIS-DAISHOWA (AUSTRALIA) PTY LIMITED v COMMISSTONER OF TAXATION No. ACT G 48 of 1993 Neaves J. 20 December 1994 Canberra AUSTRALIA PRINCIPAL REGISTRY L +90 Qeoo 8 tus a — i NB w IN THE FEDERAL COURT OF AUSTRALIA AUSTRALIAN CAPITAL TERRITORY No. ACT G 48 of 1993 DISTRICT REGISTRY ee eee ee ee aed GENERAL DIVISION BETWEEN: HARRIS-DAISHOWA (AUSTRALIA) PTY LIMITED Applicant AND: COMMISSTONER OF TAXATION Respondent MINUTE OF ORDER JUDGE MAKING ORDER Neaves J. DATE OF ORDER cry 20 December 1994 WHERE MADE Canberra THE COURT ORDERS THAT: 1. The application be dismissed. 2. The decision disallowing the applicant's objection to its assessment to income tax in respect of the accounting period ended 31 December 1991 (adopted in substitution for the year of income ended 30 June 1992) be affirmed 3. The applicant pay the respondent's costs of and incidental to the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) AUSTRALIAN CAPITAL TERRITORY ) ) No. ACT G 48 of 1993 DISTRICT REGISTRY ) ) ) GENERAL DIVISION BETWEEN: HARRIS-DAISHOWA (AUSTRALIA) PTY LIMITED Applicant AND: COMMISSIONER OF TAXATION Respondent CORAM: Neaves J. DATE: 20 December 1994 REASONS FOR JUDGMENT The applicant, Harris-Daishowa (Australia) Pty Limited, has applied to the Court by way of appeal from the decision of the respondent, the Commissioner of Taxation, disallowing an objection against the applicant's assessment to income tax in respect of the accounting period ended 31 December 1991 (adopted in substitution for the year of income ended 30 June 1992). By that decision, the respondent declined to allow as a deduction from the applicant's assessable income for that accounting period an amount of $750,000 expended by the applicant in circumstances to which it will be necessary to refer. It is common ground that the resolution of the appeal in relation to the accounting period ended 31 December 1991 will determine whether amounts of $750,000 expended in each of the accounting periods ended 31 December 1989 and 31 December 1990 are allowable as deductions from the applicant's assessable income in respect of those accounting periods. The essential question, then, is whether the total sum of $2,250,000, comprising the three payments of $750,000, is allowable as a deduction under subs.51(1) of the Income Tax Assessment Act 1936 (Cth). The sum of $2,250,000 represents the contribution made by the applicant towards the estimated cost of the widening, re-routing, upgrading and sealing of part of a road, then known as the Millingandi Road, and the construction of a new section of road in order to allow traffic on the Princes Highway to by-pass the township of Merimbula. The crucial issue is whether the expenditure is properly characterised as an outgoing of capital or of a Capital nature. In support of the appeal, the applicant relied on the two several affidavits of Haruo Fujieda affirmed 2 December 1993 and 19 April 1994 respectively and the two several affidavits of Peter Glanville Went sworn on the same dates. From July 1986 until 1991, Mr Fujieda was the managing director of the applicant. At all material times, Mr Went was the general manager and a director of the applicant. Both Mr Fujieda and Mr Went were cross-examined. No other evidence was adduced on behalf of the applicant. No affidavits were filed on behalf of the respondent. The applicant is a company that was incorporated in New South Wales on 20 December 1967. It commenced business as a producer and exporter of wood chips in 1969. Its ultimate holding company is Daishowa Paper Manufacturing Co. Ltd, a company incorporated in Japan. At the material time, the applicant operated a eucalyptus wood chip mill at Eden on the south coast of New South Wales. Its business activities were directed solely to the export of wood chips to Japan. During each of the years ended 31 December 1989, 1990 and 1991, the applicant exported in excess of 900,000 tonnes of wood chips to Japan. A large proportion (approximately 70%) of the wood chips exported to Japan was produced from logs processed at the applicant's mill at Eden. The remaining proportion (approximately 30%) was purchased by the applicant from various sawmills in New South Wales and Victoria, those sawmills producing the chips from waste off-cuts from sawn timber operations. The logs were obtained from three sources in the district surrounding Eden, that is to say from New South Wales State forests, from private land and, with the consent of the relevant Minister, from National Estate land controlled by the Commonwealth. The timber cut by the applicant was either natural forest or regrowth forest. The logs cut in the areas referred to above were transported by truck from the place where they were harvested to the chip mill at Eden. The wood chips were then transferred from the mill to the applicant's harbourside loading facility adjacent to the chip mill awaiting shipment. Wood chips purchased from sawmills were transported by truck to the loading facility. The transport of the logs and the purchased wood chips was carried out, not by the applicant, but by independent operators under contract. The applicant's licence from the New South Wales Government to cut timber in New South Wales State forests fell due for renewal in 1989 as did the applicant's export licence. In February 1989, the applicant successfully negotiated a renewal of its cutting licence with the New South Wales Government, the renewed licence conferring on the applicant the right to cut timber in certain State forests of New South Wales over a period of 20 years. Neither the form of the licence nor the conditions subject to which it was issued are in evidence. In August 1989, after protracted negotiations, the applicant's woodchips export licence was extended for a further 17 years. Again, there is no evidence as to the operative terms of the licence. During the year ended 31 December 1991, approximately 25% of the logs came from the Bega, Narooma and Bateman's Bay districts, which are to the north of Eden, and 10% of the purchased wood chips came from sawmills in those districts. The evidence is that the proportions did not change greatly from year to year. The trucks that hauled the logs and wood chips from those districts travelled, in the main, along the Princes Highway which, at that time, passed through the township of Merimbula, the main street of the township forming part of the highway. Merimbula is a coastal township. Its main industry and source of employment has, at all material times, been the provision of tourist and holiday facilities, its population increasing substantially during the summer months. When it is recognised that each timber truck was approximately 15 - 17 metres in length and, when fully laden, weighed 40 - 42 tonnes and that a very large number of journeys through Merimbula occurred in each direction every day, the adverse effect on the desirability of the township as a tourist resort is obvious. Apart from anything else the presence of so many trucks increased the potential for road accidents, including fatal accidents, on that part of the highway. According to Mr Went, he was approached in about July or August 1989 by Mrs Edna Duncanson, the then president of the Bega Valley Shire Council, and informed that there was pressure from the public to keep trucks out of the main street of Merimbula; that there was an alternative route planned; but that the road along that route would not be built for many years as the New South Wales Government was not in a position to make sufficient funds available. It appears that the Bega Valley Shire Council had previously over a period of some years spent approximately $2m. to seal a portion of the Millingandi Road, a portion that was to form part of the proposed deviation of the existing Princes Highway. Mrs Duncanson asked Mr Went whether there was any possibility that the applicant could assist by making a financial contribution to the project. Mr Went deposed that, at a subsequent meeting, held in or about September 1989, at which Mr Russell Smith, the member for Bega in the Legislative Assembly of New South Wales, was present, the estimated cost of the road works was put at $4.5 million and it was said that, if the applicant was prepared to contribute half, the New South Wales Government would make available the balance of the funding. The matter was again raised with Mr Went by Mrs Duncanson on 9 September 1989. Mr Went deposed that, after the first conversation on the subject with Mrs Duncanson, he had raised the matter with Mr Fujieda and it was discussed at meetings of the Management Committee of the applicant. That committee consisted of Mr Fujieda, Mr Went and the Planning and Administration Manager of the applicant, Mr H. Honda. According to both Mr Fujieda and Mr Went, no minutes of the meetings of the Management Committee were taken, each member making his own notes. No notes taken of any relevant meeting were adduced in evidence, any notes taken by Mr Fujieda or Mr Went having, according to their evidence, been destroyed some time ago. Mr Went recommended to the Management Committee that the contribution be approved. According to Mr Fujieda, Mr Honda was also in favour of making the contribution. Following the meeting on 9 September 1989, Mr Went signed a memorandum dated 11 September 1989 addressed to Mr Fujieda reading as follows: "Res Millingandi Road Project As advised following the meeting I had with the Shire last week and meetings on Saturday night with Bill Kruzinga and later with Edna Duncanson and Russell Smith, I now wish to receive formal approval from you for Harris-Daishowa to become involved in the 'Millingandi Road Project'. The basic program will be that the costs of Millingandi Road to be realigned and sealed from the present point of sealing is estimated to cost $4.5 M and will take three years, Preliminary expenses will be commencing January 1990 and the roadworks will commence in July with an estimated completion date of July 1993. Russell Smith has confirmed that the State Government have indicated that they will enter a joint venture with Harris-Daishowa and the Shire with Harris~Daishowa providing 50% of the cost over three years at the rate of $750,000 p.a. The State Government will do the same and the Shire have provided all the engineering works in the last five years in surveys and they will be responsible for the supervision of the road construction and also will guarantee to meet the cost of any over-runs on cost estimates. Once we have indicated our willingness to participate in the venture, both the State Government and the Shire will confirm their involvement in writing and this will form the basis of the venture and will enable the project to proceed. Attached is a letter which is being sent to the Shire following your approval. For your information the letter from the Shire and a map is attached showing the new route of the road which will be used to bypass Merimbula. At the meeting with Bill Kruzinga he confirmed that the Eden truckies would be solidly behind Harris-Daishowa in the project and would be very pleased when trucks do not have to pass through Merimbula. May I have your approval this morning if possible please." On the same day, 11 September 1989, Mr Fujieda approved the recommendation. In his affidavit sworn on 2 December 1993, Mr Went, referring to his recommendation to the Management Committee, stated: "9, 10. I considered it extremely unlikely that the Shire Council would (at least in the short to medium term) limit trucks carrying logs being transported to the Applicant's mill at Eden and using the main street of Merimbula. The applicant is a large employer in the local community employing directly and indirectly approximately 680 persons. It was, however, possible that the Shire Council would impose conditions on the time and frequency with which such trucks could use the road. Although this could have caused problems for the applicant's business schedule trucks could (and some always did) use an alternate route which, though unsealed, involved the trucks travelling no further distance than using the Merimbula road. It was only during times of major flooding (which had occurred in 1988) that it was absolutely necessary for trucks to pass through Merimbula. It was, however, my perception that the community of Merimbula and the Shire Council were concerned at the possible danger posed by reason of the fact that the main street of Merimbula was then the main road. Indeed, there had been, from time to time, a number of minor accidents in Merimbula some of which had involved trucks carrying logs to the Applicant's mill. I perceived that the opportunity to contribute towards the cost (although substantial in immediate monetary terms) was a 'golden opportunity' for the Applicant to take a leading and positive part in progressing community affairs by contributing to the cost of the bypass and thereby attracting State funding for the remainder of the cost which would not otherwise have been made available in the short to medium term. Further, as the New South Wales Roads and Traffic Authority was responsible for the construction of the Merimbula Bypass the Applicant had an opportunity to develop and maintain its good relationship with the New South Wales State Government." In par.11 of the same affidavit, Mr Went said: "At the time the Applicant's business was extremely profitable and the contribution could be funded out of the Applicant's own profit reserves .... I recognised that the contribution proposed to be made by the Applicant to the cost of the proposed by-pass would, in relative terms, effect very modest saving (in the order of $90,000 to $100,000 per annum) deduction of the Applicant's ongoing cost. However, it was apparent to me that a contribution of such a size would raise the Applicant's stature and standing in the local community and with the State Government generally." Mr Fujieda deposed in his affidavit affirmed on 2 December 1993 that, prior to making the decision to contribute to the cost of the by-pass road, he mentioned the proposal in telephone conversations with Mr Toshi Shimmyo in Japan. Mr Shimmyo was a director of the applicant and of Daishowa International Co. Ltd. Mr Fujieda was informed that he, Mr Shimmyo, would raise the matter with Mr Ryoei Saito, the Honorary Chairman of Daishowa Paper Manufacturing Co. Ltd. According to Mr Fujieda, a day or so later, during a further conversation with Mr Shimmyo, he, Mr Fujieda, was told that the decision whether or not to make the contribution was a matter for him and that, provided the applicant could find the donation from its current revenues, neither Daishowa Paper Manufacturing Co. Ltd nor Daishowa International Co. Ltd would raise an objection. Paragraph 16 of Mr Fujieda's affidavit affirmed on 2 December 1993 read: "16 I approved the recommendation as I thought that it was in the applicant's best interests if the contribution were made. It seemed to me (in contrast to a request made to the applicant by the Forestry Commission in 1988 for the applicant to contribute to the cost of a 14 kilometre upgrading of a forestry access road which proposal I rejected) that the contribution would be an appropriate way of marking 20 years' activity by the applicant, that it was a way of thanking the State government for renewing the cutting licence and would also substantially improve the applicant's standing in the local community and generally in Australia. In contradistinction the improvement of the forestry road would have done nothing to improve the standing of the applicant in the community. In addition the construction of the by-pass would effect some savings in transport costs incurred by the applicant." A letter dated 11 September 1989 was sent by the applicant to the Bega Valley Shire Council. The letter was signed by Mr Fujieda and Mr Went and read: "Following the many discussions held between Harris-— Daishowa and the Shire including the meeting last week attended by yourself, Councillor White and Engineer Terry Campbell, we are pleased to advise that our Board of Directors has approved for Harris-Daishowa to be part of the joint venture for the further construction and sealing of Millingandi Road as discussed. We believe the cost of the project will be in the order of $4.5 M and that the actual project will commence in early 1990 and take approx three years to complete. We also understand that preliminary costs will be incurred in early 1990 for the purchase of road material. Harris-Daishowa's contribution to the 'Millingandi Road Project' will be $750,000 over each of the three years 1990, 1991 and 1992 with the first payment to be made in January 1990. The Liberal Member for Bega, Russell Smith, has indicated that the State Government will be matching the Harris- Daishowa contribution and this will give the total required for the road costs. We further understand that the Bega Valley Shire has carried out extensive engineering and survey work over many years at their cost and this, together with overall supervision and control of the road building program through to completion, will be their contribution to the project. We also understand that the Bega Valley Shire will be responsible for any cost 'over-runs' which may occur in the building of the road. We propose that the project be classified as a 'joint venture project between Harris~Daishowa, the State Government and the Bega Valley Shire' and at the appropriate time we would liease [sic] with you as to a suitable public announcement and permission to ensure that the community recognizes the project. We would ask that at the earliest opportunity both the Bega Valley Shire Council and the State Government give us the necessary written approvals of their part in the project. We have already made it very clear of the reasons for Harris-Daishowa's involvement in this project, but for yourself and the State's records we wish to repeat the following policy statement. 1. Harris-Daishowa and the Timber Industry would wish at the very earliest opportunity to ensure that no logging or chip trucks are routed through the town of Merimbula due to the nature of the road outlay and also the amount of other vehicular and pedestrian traffic which use Market Street Merimbula, this has always been considered a dangerous situation and one which should be avoided at the earliest opportunity. 2. The Company will always ensure that routes used by vehicles delivering logs and chips to the Mill will use the shortest, most economical and safest routes. When we have received all the necessary approval for the joint venture program it is recommended that a further meeting be held by all parties to finalise the program for the Millingandi Road route. We trust you will be able to carry out the necessary actions in regard to this letter at your earliest convenience." The Bega Valley Shire Council replied by letter dated 14 September 1989 in the following terms: "Thank you very much for your letter of llth September, 1989 confirming aspects of discussions which have taken place in regard to expediting the construction of the northern section of the Millingandi Road, from the point where the current bitumen sealing finishes to the new junction with the Princes Highway. At Council's meeting on 12th September, Councillors were informed, in confidential session, of the outcome of the discussions held with your Company representative, the Shire Engineer Terry Campbell, Councillor White and myself. Council recognises that the very considerable financial contribution offered by Harris Daishowa has been a catalyst for the State Government to accelerate funding for this road and, most importantly, will result in heavy transports being re-routed away from the central business district of Merimbula, many years earlier than would otherwise have been possible. I have forwarded a copy of your letter of 11th September 1989 to Mr Russell Smith, MP, Member for Bega, and trust that he will be in a position to confirm the State Government's contribution within a very short time. It is anticipated that the road can be constructed within the estimated figure of $4.5 million. However, should this figure be exceeded then it is appreciated that no further contribution will be expected from Harris Daishowa towards the completion of the road. Council, in its discussions on Tuesday, gave some consideration to the need for traffic controls at the southern end of the road at the approach into Pambula and Council may, in the future, expend funds in this location to further upgrade the road prior to the completion by the Road Traffic Authority of the deviation of the southern section. Council is very grateful for your Company's generous contribution to the construction of the road and believes that it will have very considerable benefits for the transport operators, to residents of the Shire and to tourists who may wish to use an alternative traffic route to that which passes through Merimbula. Technical details in regard to construction of the road, who will supervise and control the road building programme and other relevant matters will be further discussed between Council, the Road Traffic Authority and will involve Mr Smith. We look forward to completion of this vital road link in the shortest possible time. Once there has been a formal commitment from the State Government we will organise a joint meeting between your Company, the Road fraffic Authority, Mr Smith and representatives of Council to finalise details." On 14 November 1989, Mr Went issued a press release prepared by him reading as follows: "On 14th November, 1989, Harris-Daishowa (Aust) Pty Ltd announced that it would contribute $2.25 million, over the next three years, to bring forward the relocating, upgrading and sealing of Millingandi Road, west of Merimbula. The first of three $750,000 yearly contributions was presented to Bega Valley Shire President, Mrs Edna Duncanson, today by Harris-Daishowa General Manager, Peter Went. 'We are very pleased to be making this contribution, not only to the citizens of Merimbula, who will have heavy vehicles bypass their town on the new road, but to all residents of the Bega Valley Shire who may benefit from other roadworks made possible indirectly as a result of our gesture,' said Mr Went. 'The Company is delighted that the New South Wales Government has seen fit to match our contribution so the road construction can proceed now rather than in 9 years time as previously planned.' 'This cooperative approach between the New South Wales Government, Bega Valley Shire Council and Harris-Daishowa could be used as an example for others to follow in the future,' concluded Mr Went. The proposed new route for Millingandi Road is expected to be 4 kilometres shorter than the existing Princes Highway route through Merimbula. Creation of this bypass for heavy vehicles is expected to reduce traffic problems in the township, as well as provide a significant traffic safety improvement in the main business area. Work in the new road is expected to commence in mid 1990 and to be completed within three years." The subject consequently received some press coverage in newspapers published in the immediate area. On 22 November 1989, a board meeting of the applicant confirmed the decision that the contribution be made. Paragraph 10 of Mr Fujieda's affidavit affirmed on 29 April 1994 read: "10. Subsequently I received a telephone call from a manager of Daishowa International who advised me that the decision of Mr Simmyo [sic] to endorse my decision to make the payment presently in issue had not been confirmed by the Board of Directors of Daishowa International. He requested me to prepare a formal submission for confirmation by the Board. In response to that request I prepared and forwarded the letter the original Japanese text and an English translation of which is annexed and marked 'D'". The English translation of the letter, which is dated 6 December 1989 and addressed to Mr Yomoji Saito, President and Executive Director of Daishowa International, contained the following statements: "1. Details of the request from the State of NSW and the Bega Valley Shire Council for a contribution. eonee (4) Background of request: a. Since the start of chipping plant operations by this company, all the transport trucks carrying woodchips and raw timber extracted from the area north of Merimbula have been' using National Highway 1, which passes through the tourist resort of Merimbula. Since 1977 (and the granting of an export licence for 850,000 tons) in particular, the number of logging trucks passing through Merimbula has risen to an average of 100 per day, giving rise to complaints from local residents and visiting tourists about traffic congestion, noise and the risk of accidents during the tourist holiday season. Construction by the State government on the Millingandi agricultural road that forms the Merimbula Bypass north road began in 1980. However, the annual construction budget is small, and now, nine years after the start of construction, the progress has advanced to the stage that only 30% of the widening and sealing (?) construction work has been completed. The effects of bridge piers and sections of the road being washed away by floods in the first half of this year have meant that, at the current rate of progress, there is little prospect of the project being completed in 20 years' time. In response to strong demands from _ local residents for the early completion of the bypass, the State and local governments have requested a contribution by this company, as one of those to benefit from the completion of the project, of half of the total construction costs. 3. Items to consider (1) (2) After the granting this year of a 20-year cutting license by the NSW State Government and a 17-year export license by the Federal Government, protest action by environmental protection groups against the timber industry and against chip exports in particular has become intense. In view of the long-term outlook for this company's business operations, we intend to cooperate actively with regional council and State government policies. Problems have arisen with residents and businesses along National Highway 1 in Merimbula over issues such as noise, exhaust gases, vibration and dust caused by trucks. Strong demands are also being made by local residents regarding this project. For these (3) reasons, we intend to actively cooperate in gaining the support of residents. The use of this bypass by trucks after completion of this project could result in savings in trucking charge payments by our company of A$100,000 annually. Given the above considerations, we wish to cooperate fully in this project." Paragraph 11 of Mr Fujieda's affidavit affirmed on 29 April 1994 read: "11. That submission did not record fully and accurately the matters which I had taken into account in making my decision in September 1989. In particular: (a) (b) (c) (a) the reference to savings of $100,000 annually was included because the manager who requested me to provide the submission suggested to me that it would assist the Board to be told of any direct savings which flowed from the expenditure. a matter which was of particular concern to me was that the company should show its appreciation to the State government for the benefit obtained by grant of the rights under the cutting agreement. I was very conscious of the need to be perceived by the State government as a good corporate citizen and a business whose continued presence in the State was desirable. being seen aS a good corporate citizen was group policy as explained to me from the time I joined the Daishowa group. Mr Simmyo [sic] in particular repeatedly emphasised the importance of the group and the Applicant in particular being seen to show 'good face and good faith'. the Commissioner of the NSW Forestry Commission, Dr Wal Gentle, had been especially helpful to the company in its dealings with the Government, and I saw the contribution by the company toward a State expense (upgrading the highway network) as something which Dr Gentle could point to as justifying his support of the company in forestry matters. (e) I thought that the contribution to the road and to the consequent improvement in the quality of life of Merimbula residents would preserve the favourable view of the company held by those residents of the town who were disposed to favour it, and help convert others to a like view. (£) I was aware that a bad accident involving a truck carrying the Applicant's timber in Merimbula would prejudice the continued use of the road through the town, but although it was a constantly present possibility, it was not one which ranked high on my list of concerns, as the company had been operating in the area for 20 years (as of September 1989) without a single serious accident involving its trucks." In the course of his cross~examination, Mr Fujieda said that the letter dated 6 December 1989 had been prepared in Japanese by an officer in Japan and sent to him for signature. He said that he approved of the contents of the letter before signing and dispatching it but that it had been "dressed up" for the purpose of getting approval from Japan: "it didn't tell a lie - but a bit bent". I take his evidence to be that he did take into account each of the matters referred to in sub-sub-pars (a) to (f) in sub-par.1(4) of the letter with the exception of sub-sub-par.(d) of which he said he did not take significant account. Mr Russell Smith, the member for Bega in the Legislative Assembly of New South Wales, forwarded to the applicant a letter dated 11 December 1989 reading: "This letter will confirm the verbal arrangements we have made between yourselves, Bega Valley Shire Council, and myself as local Liberal Member for Bega. The Shire 1s very anxious to complete the new road which will bypass Merimbula and allow heavy traffic to divert away from the crowded area and, as you know, over the last few years there has been much criticism of heavy traffic users generally, but especially the many log trucks which come through Merimbula and create unsafe conditions through the crowded town. Because of State Government road budgets covering all necessary road building over the next few years, it would not be possible to complete the new bypass road for at least nine years without some local assistance. If Harris-Daishowa is able to make a contribution over a three year period equal to approximately 50% of the cost of the new Millingandi Road, the State Government will be prepared to fund the balance, and I believe the Bega Valley Shire would carry out overall supervision of the project. At the completion of the new road in approximately 1992, it will then form part of the Princes Highway and be dedicated as a State road, and the old Princes Highway through Merimbula will be passed over to the Shire as a Shire road. The Minister for Transport, the Hon Bruce Baird, informed me that State monies will be made available for Millingandi Road, and a copy of his letter is attached. I look forward to receiving the contribution towards the road funding from Harris-Daishowa, and I can assure you that not only will the State Government and the Shire be grateful, but I know that this project will be most appreciated by the residents of Bega Valley Shire." The first instalment of $750,000 was paid by the applicant to the Bega Valley Shire Council on 19 December 1989. There was lodged with the applicant's income tax return in respect of the accounting period ended 31 December 1989 a letter dated 19 September 1990 addressed by the applicant to the respondent. The letter was prepared by Nelson Parkhill BDO, the applicant's auditors, and signed by Mr Went. It sought a determination concerning' the deductibility for income tax purposes of the amounts totalling $2,250,000. The letter after making reference to the background to the applicant's business operations, contained the following paragraphs: "The Princes Highway is the main street of Merimbula and the volume of timber and chip trucks through the town has the potential both to impact adversely the towns reputation as a tourist resort and also to increase significantly the potential for serious and even fatal road accidents. On the present log intake volumes we have estimated that on average there are 64 log truck journeys' through Merimbula each day (32 out/32 in). A fully laden log truck would weigh approximately 40 tonnes and would be about 15 metres long. It is also estimated that there are 6 chip truck journeys through Merimbula each day (3 out/3 in). A fully laden chip truck weighs approx 42 tonnes and measures approx 17.2 metres long. It appears to the Company that the use of the Princes Highway through Merimbula by contractors could not be expected to be permitted to continue in its present form indefinitely. Informal discussions with the Bega Valley Shire Council have confirmed this view. Accordingly, the Company has judged that it would be in its best interest to co-operate at this time with the Shire and the State Government in finding a solution to this problem to avoid a potentially damaging business interruption at a later time. During 1989, the parties negotiated a mutually satisfying agreement which involved a financial contribution by the Company, the provision of survey and engineering services by the Shire and the construction of road works by the State Government. The road works will result in construction of a sealed road linking the Princes Highway at a point north of Merimbula to Millingandi Road which rejoins the Princes Highway South of Merimbula. The Company requests a ruling from the Commissioner that the expenditure of $750,000 incurred by the Company in 1989 is - 1) deductible under §.51.1 as an expense incurred by the Company in gaining or producing assessable income; As regards (1) it is submitted that the expenditure is and will be incurred for the purpose of avoiding business interruption that would arise as a consequence of Bega Valley Shire Council acting to impose conditions as to the time and frequency with which timber trucks could use the road passing through Merimbula. It will be appreciated that the operation of the mill involves complex planning downstream from a shipping schedule agreed with the customer. It is essential in maintaining scheduled shipments that there is certainty as to log and chip intake volumes. Should delivery of logs and chips be severely interrupted, the Company's capacity to Maintain production volumes is impaired and hence its capacity to meet shipping schedules. Taken to its logical conclusion, this could lead to curtailment of sales volume and hence taxable income. The payments which the Company has undertaken to make have as their purpose, the avoidance of the circumstances described above. The nature of the payments is for the facilitation of day to day operations of the Company and is not of a capital nature. The nature of the payment is to facilitate the movement of trading stock and is not of a capital nature. It should also be pointed out that there is also a major positive cost advantage to the Company arising out of the expenditure. This arises from a shortening of some 4KM in the distance timber trucks operating to the North and North West of Merimbula have to travel to the mill site at Eden. This reduction in hauling distance on present trading patterns would save the Company in the order of $80,000 to $100,000 per year. Viewed from this perspective, the payments can be seen as similar to a toll fee for use of a road paid in a lump sum rather than by individual truck journey. In relation to the letter dated 19 September 1990, Mr Went, in his affidavit sworn on 2 December 1993, stated (par.17): "At the time I recommended the contribution, it was my belief that the contribution (as with all other contributions made by the Applicant) would be tax deductible. I did not give any specific attention to this matter at the time I made my recommendation or later until in the course of a review of the company's accounts by the Applicant's auditors, Messrs BDO Nelson Parkhill ("BDO"), for the purpose of preparing the 1990 income tax return of the Applicant, the question of the contribution was raised by BDO. I informed BDO of the circumstances under which contribution was made but did not outline to BDO my primary reason in recommending the payment, namely, the substantial positive effect on the applicant's goodwill and standing in the community. The letter, sent to the Deputy Commissioner under my signature, was prepared by BDO and apart from making one or two minor textual changes the letter was not altered by me prior to its being sent." In cross-examination, Mr Went said that the statements in the letter to the effect that, on average, the number by log truck journeys through Merimbula each day totalled 70 was incorrect. Asked to explain why the statement was made in the letter, Mr Went said: "I can only presume that there was a slight misinterpretation of comments that I made to our tax agents." He persisted in his assertion that the figure was overstated notwithstanding his agreement that he had seen the letter in draft and had had some alterations made to the text before he signed it. Mr Went also disputed the statement in the English translation of the letter dated 6 December 1989 sent by Mr Fujieda to Daishowa International Co. Ltd that the number of logging trucks passing through Merimbula had risen to an average of 100 per day. Mr Went also said in cross-examination that the letter dated 19 September 1990 did not accurately reflect his view which was that it was more likely than not that the applicant could go on using the road through the township of Merimbula without restriction though he qualified this statement by saying that such use could not continue without strong criticism. He also disagreed with the statement in that letter that the imposition of restrictions on the use of the road through the township would have resulted in a potentially damaging business interruption. In answer to further questions concerning the letter dated 19 September 1990, Mr Went said: "I can only answer by saying that at the particular time that we wrote the letter we were trying to take the best line of action to get what we had always believed would be a right of ours to have a tax deduction for this amount." Mr Fujieda, in his affidavit affirmed on 2 December 1993, stated that he did not see the letter dated 19 September 1990 before it was sent and first saw it when his affidavit was being prepared, Nelson Parkhill BDO also forwarded to the respondent a letter dated 28 March 1991 to which was attached further submissions in support of the contention that the expenditure in question was properly allowable as a deduction. The submissions included the following: "During each of the income years of 1989, 1990 and 1991, Harris Daishowa (Australia) Pty Limited made a financial contribution of $750,000 to the NSW State Government in relation to the construction by the government of the Millingandi Road, a by-pass to the Princes Highway through Merimbula. There are a number of factors which influenced the company to make such contributions and these are summarised as follows: 1. The continuous use of the Princes Highway through Merimbula by the company may seriously damage that section of the road with undesirable consequences such as fatal road accidents. At several points on the stretch of highway involved there had been accidents which suggested that the risk of fatality was significant. The company draws a significant part of its workforce from the district. The public damage caused by such an accident would be likely to have severely affected its standing in the local community. The company believed that there were good reasons to expect that the local Council would eventually take action against the company given this unsatisfactory situation. Possible action by the local authority included levies relating to road use and restrictions on operating hours. This could of course have resulted in a prolonged interruption of the company's business operation. 2. The company may also have heen required to pay compensation should the road have been severely damaged. It should also be borne in mind that the majority of the company's workforce is drawn from the surrounding districts and that there was a very real prospect of increased costs by way of damages in the event of injury or death. On the other hand, there will be some positive cost advantages to the company of the construction of the new by-pass due to a lower rate of tariff and a shortening of distances travelled through the use of the new road. 3. For further detarled information in relation to the company's business operation, please refer to our earlier request for the Commissioner's interpretation dated 19 September 1990." Later in the submissions it was said: "Should the taxpayer choose not to subsidise part of the cost of building a new road, it may be forced to face prolonged interruption of its activities due to the possible actions taken against it by the Council or other parties. It should also be noted that the expenditure in question was vital to maintain a good public relationship with the community and to preserve the company's reputation (both of which are essential for a successful business) ." Mr Went, in his affidavit sworn on 29 April 1994 (par.4), said that he was not consulted by Nelson Parkhill BDO concerning the content or the sending of those submissions. Both Mr Fujieda and Mr Went deposed that since its establishment the applicant had experienced protests against its activities, mainly by conservationists. Reference was made to the conflict between, on the one hand, the need to develop and expand the applicant's business and, on the other, the perception of conservationists that the activities of the applicant were not environmentally sound. According to Mr Fujieda, during 1988 and 1989 the applicant was continuously receiving public and political attention. He further said that support for the applicant was mostly found in the areas where it operated and then mainly from those whose livelihood was connected with the timber industry or industries supporting that industry. Both Mr Fujieda and Mr Went said in their respective affidavits that the applicant had always followed a policy of fostering and maintaining good relations with the local community and with the Bega Valley Shire Council. The policy was to integrate with the local community and to be seen as a good corporate citizen. To this end, the applicant frequently contributed to various community projects. Mr Fujieda said that because of the public and political attention the applicant was then receiving, he was, in 1988 and 1989, more conscious than ever of the need to maintain good public relations. It was also important, he said, to ensure the applicant's future over the 20 years then in prospect and, to this end, to have good relations with the Bega Valley Shire Council and the Government of New South Wales. As a witness, Mr Went was unimpressive. Observing him in the witness box, I formed the opinion that the answers he gave to many of the questions asked of him did not reflect the true position as at the time the contribution to the cost of the by-pass road was approved but were conditioned by a desire on his part to give answers which he believed would best advance the applicant's case. In the light of that opinion, I am not prepared to accept or rely upon any of the evidence given by him in his affidavits or orally purporting to identify the reasons why he made the recommendation to Mr Fujieda that the applicant make a substantial contribution to the cost of construction of the by-pass road. Further, his evidence does not rise above assertion made some time after the relevant events, his assertions not being supported by any contemporaneous confirmatory documents and, indeed, being inconsistent with such contemporary documents as are available, including documents signed by Mr Went himself. Mr Fujieda's evidence suffered to some extent from the save vice. The evidence he gave as to the reasons why he approved the making of the contribution was unsupported by any contemporary documentary material and was based solely on his recollection - or, perhaps more accurately, on his reconstruction of events in the light of hindsight - and his desire to support the applicant's claim to a deduction for the expenditure incurred. I regard the contemporaneous documents, including the documents prepared by Nelson Parkhill BDO, as providing a surer guide to the considerations that led to the making of the relevant expenditure. It may be accepted that there were many factors taken into account in deciding that the applicant's interests would be served by incurring the expenditure. It is, in my view, unrealistic to regard the situation simply as one in which the applicant was making, and wished to be seen as making, a contribution to a community project in the same way as it had done in respect of other such projects. The size of the expenditure and its character differentiate it from the other projects in relation to which the applicant had donated comparatively small sums of money or had contributed materials and labour. It 1s also clear that the applicant, far from regarding the matter as one in which it was making a contribution to a community facility, had itself a real and abiding interest in the early completion of the by-pass road. I have no doubt that the decision to contribute was made in the context of planning over the long term for the continuance of the applicant's business activities, involving as they did the necessity to ensure, as far as possible, that the applicant's existing licences, State and Federal, would continue during their present terms and would, in due course, be renewed or extended. As part of that overall strategy, the applicant sought substantially to improve its standing in the local community and with the Bega Valley Shire Council and not only to maintain, but to develop further, the good relationships it considered it then enjoyed with the governments of the Commonwealth and the State of New South Wales. I should add that, while the comparatively small annual saving in the cost to the applicant of having the logs and wood chips transported to the mill at Eden was a factor in the decision, it was not, in my view, a factor of particular significance. On the whole of the material before the Court, I am satisfied that the applicant's main objective in making the contribution was the preservation of the business well into the future. While the expenditure did not result in the applicant acquiring any tangible asset or any specific rights in relation to the by-pass road, I am of opinion that the expenditure was seen by the applicant as resulting in an enduring benefit to it. Although the expenditure was made in three instalments, the payments are properly characterised as a "once and for all" outlay and not as recurrent. In my opinion the amount of $2,250,000 was an outgoing of a capital nature. The application is, therefore, dismissed. The decision disallowing the applicant's objection to its assessment to income tax in respect of the accounting period ended 31 December 1991 is affirmed. The applicant must pay the respondent's costs of and incidental to the application. I certify that this and the preceding 27 pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Népves Dated: 20 December 1994 Counsel for the applicant Mr A.H. Slater QC and Mr S.J. McMallan Barker Gosling Solicitors for the applicant Counsel for the respondent Solicitor for the respondent Mr J.W. Durack Australian Government Solicitor Date of hearing 29 April 1994 Date of judgment 20 December 1994