High Court of Australia Mason CJ Deane and McHugh JJ Griffin Coal Mining Co Ltd v Commissioner of Taxation Cur. adv. vult. Mason CJ, Deane and McHugh JJ Mr Conti: Your Honours, there is a matter of fundamental importance arising in relation to law of taxation in this case. Mason CJ: What is it? Mr Conti: It is not easy to encapsulate in one sentence, but can I get to it in this way. If I may be pardoned for saying that s 51(1) — the text of it is in the application book at p 64, if you want to have a look at it. Your Honours, we are conscious of the circumstance that in GP International Pipecoaters Pty Ltd , in a passage which is extracted at p 60 of the application book, this court encapsulated, if I may put it that way, the law generally as s 51(1), albeit that the immediate context of the case was concerned with receipts and not expenditure, and it put the concept of s 51(1) in terms of: character of the advantage sought by the making of the expenditure — That leaves for consideration in, of course, each individual case but particularly in this case, as an ideal example, what is the full scope of the expression "advantage" where there used. Must the advantage be something in the ordinary course of business or can there be circumstances where it is outside the ordinary course of business where one is addressing the so-called second limb — the business test limb — or where one is considering generally the disqualification provisions of s 51(1) relating to capital? Now, here, what we are concerned with can be characterised as something extraordinary albeit something occurring in the course of the business life of the taxpayer and it is a once-off matter, although, of course, expenditure can often be once off. What we wish to submit to the court is this, that s 51(1) should be construed — and this is the ideal vehicle, with respect, for such a construction to be entertained — in effect, obversely to the approach the court took in Myer , and McHugh J: We have already taken a case on which raises that sort of point concerned with the demolition of an existing plant, as to whether that is capital expenditure or income. Mr Conti: Specifically, can I just take you to the passage I have got in mind in Myer . Can I hand you three copies with the passages outlined in the highlighter, commencing on p 209. At p 209, in the last paragraph, the judgment proceeds as follows: Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. And then the discussion to that theme proceeds to the foot of the page. At the foot of the page: Generally speaking — that is four lines from the bottom — however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by the reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterised as income. Then, over on p 215, on a further passage which is highlighted, dicta to the same effect. McHugh J: But those passages are talking about the immediate purpose, are they not, and the most you could say in this particular case was that there was a long-term purpose in this particular case? Mr Conti: Of course, length of purpose does not disqualify us, but immediate purpose is always a more convenient aid in aid of success. Your Honour, Myer , of course, if I may say so, conceptually added to the existing learning on s 25(1). It reversed the Full Federal Court who had applied what one might call traditional approaches, and the traditional approach which has been applied in this area is what appears in the judgment of Mr Justice Dixon in Vacuum Oil, delivered at the same time as the BP Australia legislation, referred to in the judgment of Mr Justice Davies. If we could pass the passages up to you. Vacuum Oil, of course, is reported in 110 CLR 419, the passage at 434, and it has been highlighted. There, his Honour is referring to expenditure identified outside the ordinary conduct of business, and if one reads that theme in conjunction with what his Honour was saying in the BP case contemporaneously, which is picked up at p 49 of the application book, one can see that very much at the heart of the second limb, the business test limb, is the notion of an advantage having as its scope something occurring in the ordinary course of business. What we are saying here is that this is a suitable vehicle for discussion as to widening the scope of s 51(1) obversely, obviously not in parallel or co-terminously, but nevertheless widening its scope to bring s 51(1) more into the Myer line, philosophical line, of thinking. It is, if I may say so, your Honours, an issue which is arising in practice, in the practice of tax law, that Myer has gone a certain way; s 51(1) is perceived not to have gone conversely the same distance. Your Honours, here is, with respect, philosophically an excellent example. Really, if expenditure is undertaken in a business context, but it is expenditure in the nature of a diversification and, if you like, although as has been said the distinction is debatable, the money is expended out of circulating capital. Why should not business have deductibility in that context? Why should it be narrowed by ancient concepts, or relatively ancient concepts, of expansion of business or enlargement of business or extension of business as capital. Deane J: Was Myer referred to in the Full Court of the Federal Court? Mr Conti: I do not think so. I have no recollection of it. Your Honour, there was one case referred to below which I should just make passing reference to, and that was the Softwood Pulp and Paper Ltd case, which is picked up in Mr Justice Lee's judgment at p 37. I only refer this to you as a matter of distinction. That was a case where a taxpayer had never previously been in any business at all. It undertook feasibility expenses with a view to going into paper and pulp for the first time. It abandoned the idea of going into that, and then it some years down the track got some investment income and tried to set off the investment income against the earlier expenditure on the feasibilities and was denied. But one could not say that was an expense in a business context because the company was not then in business. It had not started in business. Whereas here, of course, we are in business, albeit a different business. That is the only area where we can offer any assistance in that regard. Your Honours, could I trouble you just with one last submission. So as to illustrate that there were some other areas of force in the case, it is not a case, with respect, where one could say that the inherent likelihood would be failure. Could I just take you very briefly to what appears at the foot of p 92 of the application book in the judgment of the majority. This was on our second point where we were saying, "Look, we were spending this money because it would improve our relationship with our main source of income." Mr Justice Lee dismissed that and said, "Well, there's no evidence that you lost one sale as a result of your averred purpose of improving your position with SECWA." At the foot, the last three lines: Lee J pointed out that the assessable income gained by Griffin Coal pursuant to that contract was gained irrespective of the subject outgoings. He said — and this is adopted by the majority: At best it could be said that the outgoings had the object of creating a situation that would protect the source of assessable income, the Coal Sale Agreement, or would remove the risk of possible destruction of the existing business by removing the threat of termination of that agreement. Outgoings upon such an object would be capital in nature with respect, no, your Honours. That is contrary to Magna Alloys; Snowden & Wilson; Maryborough Newspapers, cases on our list. One is entitled to protect existing income; that is appropriate within the second limb. Deane J: Mr Conti, in one sense it seems to me to come to this, I must say, and that is, if Myer was not mentioned in the Full Court it is apparent that the case was not put in the Full Court in terms of the relationship between income and outgoings and the effect of the developments in relation to the income side of the equation, and I am using equation loosely, not in the way you would like me to use it, but that being so, it is relevant. Mr Conti: I accept that. One last matter is this: the majority did not deal with whether this expenditure was capital or not although Mr Justice Davies, in his judgment, said this is income, not capital. The judge at first instance, at p 42, reasoned that the expenditure was capital in a way which, we would respectfully submit, could not stand. It is the large paragraph on p 42, and his Honour says this: In so far as aspects such as the creating a new source of demand or effecting a reconciliation with SECWA may have been within the contemplation of the Board at the time outgoings were incurred or investigating and promoting either event was to be a benefit to accrue from establishing and, hopefully, participating in a new profit-earning structure. It was not the case that the acquisition of an interest in that structure was a mere ancillary to the discharge of an imperative expenditure of the business directed at reducing the "gas bubble". The expenditure by Griffin Coal was part of the necessary cost of securing participation in, and assessing the worth of involvement in, a new operation. So, his Honour went on to say it is capital. With respect, your Honours, that cannot stand, the expenditure was not: part of the necessary cost of securing participation - the expenditure was pursuant to the contractual arrangement that we would share feasibility studies and that was all, well anterior to achievement of the objectives. His Honour, with respect, seems to run together the achievement of the objective and the process of, in the early stages, antecedently to it. And that is where Mr Justice Davies departed, robustly, from the judge below and, as I say, the majority above did not touch the matter. Your Honours, there is nothing that I can add. Mason CJ: Yes, thank you, Mr Conti. The court need not trouble you, Mr Williams. The applicant seeks to argue that in consequence of the decision in FCT v Myer Emporium Ltd (1987) 163 CLR 19918 ATR 693, with respect to income, the scope of expenditure deductible under s 51 should be expanded. However, it is conceded that an argument directed to the relationship between income and expenditure, based on the decision in Myer Emporium was not put to the Full Court of the Federal Court. That is a question of considerable importance which may well need to engage the attention of this court on a future occasion. In the circumstances of this case, however, it would not be right to grant special leave to raise this point. In other respects the characterisation of the expenditure in question turns on the particular facts of this case. It is therefore not an appropriate case in which to grant special leave. The application is refused. Mr Willams: The respondent seeks an order for costs? Mason CJ: You do not oppose an order for costs, Mr Conti? Mr Conti: No. Mason CJ: The application is refused with costs.