RK] OF AUSTRALIA. 543 [HIGH COURT OF AUSTRALIA.] Me re St: APPELLANT'; AND FEDERAL COMMISSIONER OF TAXA- EION ResPoNnvENT. e Tax (Cth.)}—Assessment—Deductions—Outgoings—Whether of capital nature HC. o A. _ —Construction of road for purpose of winning timber — Income Tax Assessment 1946. Act 1936-1938 (No. 27 of 1936—No. 46 of 1938), ss. 51, 69, 70. eed z a BRISBANE, Section 51 of the Income Tax Assessment Act 1936-1938 provides for the June 13, 14, deduction from assessable income of all losses and outgoings incurred in gaining """""99, or producing assessable income 'except to the extent to which they are losses === or outgoings of capital bore Held that expenditure by a company (whose assessable income was derived from royalties paid for timber cut on its lands) for the construction of roads solely for the removal of timber from its lands was a capital expenditure and therefore not deductible within the meaning of s. 51. AppeaL under Income Tax Assessment Act. _ Maurice Stanley Herring, as receiver of Brisbane Timbers Ltd., appealed against three assessments of the company to income tax the years ended 30th June 1937, 1938 and 1939. The greater of the company's income for these years consisted of royalties in respect of timber obtained from land belonging to the com- any. During these Years the company incurred certain _expendi- w the deductions and the company lodged "ela to the sments, which were also disallowed. H.C. or A. 1946. Ww HERRING v. FEDERAL Commas- SIONER OF TAXATION. Tune 20. HIGH COURT The appeal was heard by Rich J., in whose judgment the re facts are sufficiently set forth. Bennett and Cross, for the appellant. Fahey, for the respondent. : Cur. adv. vult. — Ricu J. delivered the following written judgment :— These are three appeals from assessments for income tax upon timber company in the hands of a receiver. The company's account- ing period ends on 13th September and the assessments are for the three financial years beginning on Ist July 1936 and ending on 30 June 1939 and are made in respect of the years of income extendii part of the assessable income for this period consists in royalty p to the taxpayer company in respect of timber obtained from lant any deduction should be made from the assessable income on account of some part of the expenditure incurred by the company in connec: tion with the construction of a road made, as the taxpayer compan) claims, so that the timber could be won and royalties obtained. Commissioner refused to allow any such deduction in assessing the R taxable income, on the ground that the expenditure is of a cap nature. The taxpayer company carried in an objection to th ments to the effect that there ought to have been allow " taxpayer necessarily and solely for the purpose of getting such tim! from the said land and for obtaining the royalty charged thereon of certain survey and other fees and other expenditure incidenta thereto." understand the matter it is necessary to go back as far as 1921 On 20th January of that year a company called Laheys Ltd. sold to the War Service Homes Commissioner a large area of timber country — worked out and removed. I gather that the date was Ist July 1937 On 11th February 1924 the War Service Homes Con entered into a contract with the taxpayer company to sell to it u terms the lands comprised in the sale by Laheys Ltd. to him OF AUSTRALIA. 1927 the taxpayer company decided to sell to another company, ed Standply Timber Co. Ltd., the right to cut timber from an of 1,231 acres of the lands comprised in the before-mentioned ment. This area seems to have been upon a not very accessible teau of some elevation. An agreement dated 27th April 1927 entered into between the two companies. The consideration for the sale was a royalty or, rather, royalties, varying with the e of the timber, calculated on the quantity in superficial feet of the timber got or removed from the area by Standply Timber Co. , the purchaser. But the purchaser was also to pay down a sum of £5,000. The agreement was to operate until 31st October 1936 and during any extension the taxpayer could obtain from, I imagine, Laheys Ltd. of its right to the land. In the event, on or about July 1937, the taxpayer company in fact bought in the option interest of Laheys Ltd. The agreement between the taxpayer any and Standply Timber Co. Ltd. contained a stipulation the taxpayer company would on the payment of the £5,000 ly mentioned carry on with all due diligence the construction of .road from a named point on a public road to one of the boundaries the area over which the cutting rights of the Standply Timber Ltd. extended. The road was to be made according to certain ifications and was to be suitable for lorry traffic. Endeavours were to be made to complete it within two years. The purchaser ipany was to be entitled to use the road for the removal of er not only from the contract area but also from any other s it might acquire and the taxpayer company was also to be to use it but not to grant rights to others for its commercial without the consent of the purchaser, Standply Timber Co. Ltd. arently, as to one block of the contract area, a block of 160 the taxpayer company was to cut the timber and deliver toad would serve this block. The latter company was to advance to the _taxpayer company against royalties such further sum not £28,000 as might be found necessary for meeting the cost y Standply Timber Co. Ltd. The construction of the road in fact upied ten years and it cost in all £39,479 7s. 5d. It was com- about September 1938. But in the meantime the lengths time to time completed were used for hauling timber. On 27th y 1940 the taxpayer company sold its right in the road to the ner of Main Roads for £10,290. The taxpayer company af constructing the road. The amount advanced was to be repaid ~ ubject to the option of re-purchase reserved by Laheys Ltd. In 4. ©. or A. 1946. Ww HERRING v. FEDERAL Comaas- SIONER OF TAXATION. Rich J. 1946. a Herring v. Feperat Conmtis- SIONER OF Taxarion. Rich J. HIGH COURT Beene income or necessarily incurred in carrying on a bus for the purpose of gaining or producing such income (s. 51 (1) 0 the Income Tax Assessment Act 1936-1938). The apportionment proposed is by taking the same rateable proportion of the total expenditure as the royalties of the given year bear to the total royalties. The actual expenditure in connection with the road i the income years in question was as follows :— Year ended 13th September 1936 .. £2,373 3s. 11d. pare 3 _ 1937... £1,206 Is. 1d) a2 " = 1938 .. £125 0s. 0d. Even if the contention of the taxpayer company that a deduction should be made on account of expenditure on the road were otherwise sustainable, I do not think that the proposed mode of calculating the deduction could possibly be adopted. What s. 51 authorizes as allowable deductions are losses and outgoings incurred in gaining or producing the assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. — In some sense at least the expenditure claimed by a taxpayer asa deduction must be " incurred" in the year of income. What that — sense is and what it covers have been the subject of discussion in this — Court more than once: See, for instance, Amalgamated Zine (De Bavay's) Ltd. v. Federal Commissioner of Tazation (1), and the cases there cited. But how in any sense could it be said that a propor- tionate part of the aggregate cost of such a work as the road was so _ incurred ? There are special provisions dealing with the cost to a timber business of land carrying standing timber and of rights to fell timber: See ss. 69 and 70. These provisions give a deduction — from assessable income of an aliquot part of that cost ascertained by _ reference to the timber felled in the year of income. Possibly the provisions are the source of the idea upon which the taxpayer com- pany's claim to proportion the cost of the road is founded. But they — do not cover such a case as this, and the fact that it was necessary to — make such a special enactment shows how little justification can be found for the process in the general rule laid down by s. 51. But in any case I have come to the conclusion that no deduction on account of the expenditure upon the road can be allowed at all. Section 51 expressly excepts from its operation losses and outgoings of capital or of a capital nature. In my opinion the expenditure by _ the taxpayer company is an outgoing of a capital nature. I do not (1) (1935) 54 C.L.R. 295, 2 C.L.R.] OF AUSTRALIA. tructed the road for a dual or secondary purpose and not simply enable the timber to be obtained. I accept the position that the road was constructed in pursuance of the agreement and because it ras necessary for the purpose of removing the timber. But even so it amounted, as I think, to an outlay of a capital nature. It is not to the point that the outlay was made in connection with the creation of an asset of which the value for the purpose of profitably working e timber or obtaining royalties therefrom would progressively That happens when capital is spent in acquiring patents, leases or concessions limited in point of time. Income tax w may not always be just in the provisions it makes for writing off inst assessable income the cost of such wasting or terminating But that does not make their acquisition or creation any the an affair of capital. The expenditure on the road formed a D y outlay to obtain the " enduring benefit" of the expected 'toyalties. Lord Cave L.C., in using the phrase " enduring benefit " a British Insulated and Helsby Cables Ltd. v. Atherton (1), was not of advantages that are permanent. There is a difference n the lasting and the everlasting. The time over which the g "endures" is a matter of degree and one element only to be sidered. Horses in the old days and motor trucks in these are and their acquisition for the purpose of transport in business ally involves a capital expenditure. But the horses were not nortal any more than the trucks have proved to be. Another test that of Lord Dunedin, when Lord President, a test almost as juently employed as Lord Cave's was, expenditure made " once and for all" (Vallambrosa Rubber Co. Ltd. v. Farmer (2)). That test think can give only one answer if applied to the case of the road. To deepen a shaft in a mine so that in the future the mine may be further worked involves an expenditure of a capital nature (Bonner Basset Mines Ltd. (3)). So is a lump sum payment. by a colliery ards drainage works to allow a coal seam to be worked (Bean v. ste Amalgamated Collieries Ltd. (4) ). Further examples are 'to be seen in United Collieries Lid. v. Inland Revenue Commissioners ; Boyce v. Whitwick Colliery Co. Lid. (6); Taupo Totara Timber 0. Ltd. v. Commissioner of Taxes (7); and Minister of National ev. Kellogg Co. of Canada Ltd. (8). (1) (1926) A.C. 205, at p. 213. (6) nes.) 18 Tax Cas. 655 ; 151 L.T. (1910) 5 Tax Cas. 529, at p. 536. 2) 108 L.T. 764; 6 Tax Cas. = (7) (isi) 31 N.Z.L.R. 617; (1913) A.C. 771, at p. 77. a) (194s) 171 LT. 214. (8) (1943) S.G.R, (Gan.) 58, at p. 60. (6) (1929) 12 Tax Cas. 1248. yund this opinion in any way on the suggestion that the company 4. ©: or A. 1946, we HeRrine ». FEpERAL Comanis- SIONER OF Taxarion, Rich J. 548 HIGH COURT i H.C. or A. 'These are but illustrations but they support my conclu 1946. the cost of the road is altogether an affair of capital. 2 twine I think that the appeals should be dismissed. - cae Anpeidirne SIONER OF ; ae Solicitors for the appellant, Morris, Fletcher & Cross. a Solicitor for the respondent, H. F. E. Whitlam, Crown sf for the Commonwealth.