Commissioner of Taxation v Madad Pty Ltd

CATCHNORDS

Income Tax

- allowable deduc tlons

- pecunlary penalties

paid by taxpayer for breaches

of Trade Practlces Act

whether outgolngs lncurred

In galnlng or producing assess-

able income

- penaltles Incurred for actlvltles relating to

the manner

of carrylng on busmess - whether deductlble ltems

- public policy.

Income Tax Assessment Act (Cth.) 1936

- s.51(1)

Trade Practlces Act (Cth.) 1974

- ss.48, 16, 77, 78

MADAD PTY. LIMITED	V. THE COMMISSIONER OF TAXATION
No. 35 of 1984

Fox, Flsher and Beaumont,

JJ.

5 October 1984.

Sydney.

IN THE FEDERAL COURT OF AUSTRALIA	)
)

QUEENSLAND	DISTRICT	REGISTRY	1
)

GENERAL DIVISION

)

No. 35 of 1984

ON APPEAL from the Supreme Court

of Queensland

BETWEEN :

MADAD PTY. LINITED

Appellant

AND :

THE COMMISSIONER OF TAXATION

Respondent

ORDER

Judges maklng order:

Fox, Fisher

and Beaumont,

JJ.

Date order made:	5 October 1984.
Where made:	Sydney.
THE COURT ORDERS THAT:

1. The

appeal be dlsmlssed.

2. The appellant pay the respondent's costs in the

proceedings.

IIJ THE FED-

COURT OF AUSTRALIA )

QUEENSLXiD

ISTRICT

REGISTRY

)

No. 35 of 1984

ON APPEAL FROM THE

SUPREME COURT	OF OUEENSLAND
BETWEEN:

I W A J 3 PTY.

LIMITED

Appellant

THE COI~~lISSIOIJEX

OF TAXATION

Respondent

10F.AM:	FOX. FISHER and BEXJUNOI~T	JJ.
DATE:	5 October 1984.

REASONS FOR

JUDGMENT

THE COURT:

This appeal from a decision of the Supreme Court of

Queensland (Kelly

J.)

concerns the question whether a penalty

mposed on the taxpayer under 5.76 of the Trade Practlces Act 1974 fur a breach of 5.48 of that Act is deductible bp it under

s.51 of the Income

Tax Assessment Act

1936.

The sections of

the Eade Practices Act referred to dt-e

dS follows:

"48. A corporation or other person shall not engage

in the practice of resale price maintenance."

CThe particular acts which constltute the practice of

resale prlce maintenance

are set out

In s.96(3).3

I , - -

t o . (lj If the Court is satisfied that

person -

(a)

has contravened d provision of Part

IV:

(b) has attempted to contravene such a provision;

(c)	has alded, abetted, counselled or procured a person to contravene such a provision;

id) has induced, or attempted to induce,

a person,

whether by threats

or promises or otherwise, to

contravene such a provision;

(e) has been

in any way, directly

or indlrectly,

knowlngly

concerned

in,

party

to, the

contravention by

a person of such a provision;

( f ) has conspired

with others to contravene such

provlslon,

the

Court

may

order

the

person

pay

the

Commonwealth

such

pecuniary

penalty

(not exceeding

$50,000 in the case of a person not being

a body

corporate, or $250,000

in the case

of d body corporate,

in respect of each act

or omisslon by the person to

which this section applies) as the Court determines to

be appropriate havinu reuard

all relevant matters

lncludina the nature and extent of the act or omlssion and uf ~ n y loss or damaue suffered as d result of the

dct	or omission, and whether or not the person has

previvusly been found by the Court

m proceedings under

this Part to have enuaued in

a slmilar conduct.

( 2 ) Nothin9 in sub-section

t l ) authorizes the maklnq

of an order against a person not beinu a body corporate

by reason that the person has contravened

or attempted

to contravene,

or been involved in a contravention of.

section 45D or 45E.

( 3 ) If conduct constitutes a contravention of two

provisions

Part IV, a proceeding

may

instituted under this Act against a person in relation to the contravention of any one or more of the

provisions but

a person 1s not liable to more than one

pecuniary penalty under this section in respect

of the

same conduct.

[Section 48 lies in Part

IV of the Act.]

Section 51(1)

of the Income Tax Assessment Act is well

known, but

for convenience of reference we set It out:

"51.

( 1 )

All

losses and outgoings to the extent to

whlch they are lncurred In

gaming or

producing the

assessable mcome, or are

necessarily

incurred

carrying on

a business for the purpose of gainlng

producing

such income, shall be allowable deductions

except to the extent to which they are losses

outgoinus of capital, or of

a capltal, private or

domestlc nature.

are lncurred

in relation to the

ualnlnu or production of exempt income."

The appellant taxpayer was for some years prior to 1977

enuaued In trade, principally in the manufacture of mattresses.

111

1969

~t had commenced to manufacture

a certain type

mattress under licence and it	sold them to retailers. In 1976
what was described in evidence	as a "prlce war" developed, and a

number of retailers reduced their mark-up on the mattresses to

ten per cent. This margin was reaarded by the managing director

of the appellant as too low and he endeavoured to persuade the

retailers to increase their mark-up, and hence their prlces.

The

action taken to this end came to the notice

the Trade

Practlces Commission and action

was

taken in January 1978 for

breaches of 5.48 alleged to have occurred in

or about March 1977.

Three of the alleTations were admitted. They were to the effect

that the taxpayer had attempted to lnduce

a named retailer not to

sell the mattresses at

price less than that specified by the

taxpayer (see s.96(3)(b)). Convictions

were

recorded

and

penalties imposed of $7,000

on each charge.

Kelly J. made the following comments and finding:

"The learned judge

who heard the matter accepted that

the conduct had been engaged in by the appellant in the

belief that

such conduct would be in the interests of

all concerned in the industry including the financial interests of the appellant. In his evidence before me

Mr	Dyer said that when he made the decision to do

whatever was done

he was not aware that it was

a breach

the Act

and as there is

no evidence which would

suagest otherwise I am prepared to accept that this was

the case".

Section 77 of the Trade Practices Act provides

that the

Minister

(i.e.

the

Attorney-General)

or the

Trade

Practices

Commission may institute a proceeding "for the recovery on behalf

of the Commonwealth of

a pecuniary penalty referred to

in sectlon

76". and 5.78 in effect provides that criminal proceedinus do not

lie. It is established that mens rea

1 s

not necessary in order

to prove contravention

of a provision of Part

IV of

the Act.

That part is entitled "Restrictive Trade Practlces".

There is

no case whlch, In polnt of decision. uoverns

the present question. There are, however, a

number of dicta, not

least In the Hlgh Court. which assist in its resolution.

In Commissioner of Inland Revenue v.

Warnes & Co. Ltd.

C19191 2 K.B.

444, a penalty was imposed by a court

on a trader

for breach of orders and proclamations concerning customs export the General Commlssioners was successful. The surveyor of taxes appealed to the Court. Rowlatt J. characterised the liability,

procedure. Costs were incurred in defending the proceedings.

which arose under the Customs (War Powers)

Act 1915, as belng of

"penal character". In

referrirlu to the terms of the Engllsh

leqlslation he said (p.452):

" . . . it seems to me that

a penal

liability of thls kind cannot be regarded as a loss connected

with or

arising out of a

trade". It would seem that the costs

incurred were treated as being as one with the penalty. His

Lordship was of course very experienced in revenue matters. His

decision should be seen in the light

the argument for the

taxpayer, submitted by the Honourable

W. Flnlay, Q.C., which can

usefully be studied in full. We set

out three passages:

"The penalty and costs were the direct result of the

carrying out by the respondents

of a business contract,

under which they consiuned the oil

to Norway." (p.448)

"The respondents must, no doubt be assumed to have

partially failed to have

taken

all

reasonable

precautlons, but

it was due to

carelessness, and that

was a buslness risk which every exporter to Scandanavia

took. " ( p. 449

"Another illustration would be that

of a bookmaker who

incurred a fine for street betting. That would clearly

be deductible as a loss incurred by hlm in carrying on

his

vocation.

The question is, would an ordinary

commercial man consider any particular expense as a

loss or not?" p.449)

Sir Ernest Pollock had been stopped In chief, but a part	of his
submisslon in reply was as follows:

"They failed to take care which was

necessary in order

to keep their business and thelr

trdde within the

limits and restrictions imposed by

the municipal law,

and they cannot deduct the fine as a loss incurred in

that business which they never ought

to have carried on

in that manner, In breach

the restrictions imposed

upon them by municipal law."

(p.451)

Although

the

decislon

was

one

legislation

significantly

different from

s.51, it is evident that it was based on rather

broad cvnsderations related to the penal nature of the loss (or

"outgoing"

i .

B later declsion

of Rowlatt J., raising again the

question In Warnes (supra), was taken on appeal to the Court of

Appeal (Inland Revenue Commissioner v.	Von G 1 m C19203	2 K.B.
553).

On the nature of the amount paid, again as a result of

proceedings

under

the

Customs

(War

Powers)

Act

1915,

Lord

Sterndale M.R.

there said (pp. 562-563):

"Now	we had several authorities cited to us which

seemed to establish that such proceedings as those are

not technlcally crimirlal proceedings.

I do not think

that matters.

They certainly are proceedings in which

a penalty 1s being sued for

by the Attorney-General as

representing the Crown, for an infraction of

the law,

whether technically crimlnal for the purpose of appeal seems to me to be unmaterld. The money which is paid

is money paid as a penalty, and

does not matter in

the least that the Attorney-General elected to take

treble the value of the goods, nor does it matter that

It may be called in the informations a forfeiture.	It
is in fact. under the section, a penalty".

After referring to Strons

v. Wxdfield C19063 A.C.

448, and

considerlng the terms of the English legislation, he said

(p.

566) :

"It is perhaps a little difficult to put the dlstlnction

into very exact language, but there seems to me to be a

difference between a commercial loss in tradina and a

perlalty imposed upon a person or a company for a breach

of the law which they have committed in that trading".

Warrinrrton L.J. said (p.569):

"Now is the expenditure in this case a

loss connected

with or arising out

of a trade or manufacture? That it

arises out of the trade I think may well be conceded.

It does arise out of the trade, because if it had not

been that the company were carrying on the trade they would not have had to incur this expendlture; but, in

my opinion, it is

not a loss connected with or arisirlu

out of the trade. It is a sum whlch the persons conducting the trade have had to pay because in

conducting it they had

so acted as to render themselves

liable to this penalty. It is not a commercial

loss,

and I

think when the Act speaks of

loss connected

with or arisinc out of such trade

lt means a commercial

loss connected with or arising out of the trade".

He was of the

n e w that the payment

of the penalty was not

"made in any way for the purpose

of the trade or for the purpose

earning the profits of the trade" (p.569). Scrutton

L.J.

confined himself closely to the particular legislation, as his

final statement shows (p.573):

"But on this particular question, whether

In the case of

these penalties imposed on the traders because they had

so acted in exporting goods as to break the law, they

can say that the penalties were pald for the purpose of

earnina profits

or were expenditure necessary to earn

the profiLs, I have no doubt that they cannot. and for

that reason I think the L ~ p p c d

should be dismissed."

The Court affirmed the declsion in Commissioner of Inland Revenue

v. Warnes &.

Co. Ltd. (supra).

Herald and Lieekly Times Llmited v. Federal Commissioner

of Taxation (1932)

48 C.L.R.

113 was a decision under the Income

Tax Assessment Act 1922-1929. The appellant had paid damages for

defamation, and costs, and it

was held that

those amounts were

deduc tlble. They were "wholly and exclusively laid out

expended for the production of assessable income" (vide s.25(e)).

Gavan Duffy C.J. and Dixon	J.	(two of	the majority) said. at
p.119:

"The distinction between such a case as the present

and Stronq & Co. v.

Woodfield C19063 A.C.

448, apart

from any differences in the English and Commonwealth

provlsions, lies

m the degree of connection between

the trade or business carried on and the cause of the

liability for damages.

At p.120 they dealt brlefly	wlth	the cases to which we have been
referrlng:

Glehn C19203 2 K.B. 553. and Inland Revenue

"The cases of Inland Revenue Commissioners v . -m

Commlssloners v. Warnes & Co. C19193 2 K.B. 444. which decide that penalties imposed for breaches of the law

committed in the course

of exercising a trade cannot be

deducted. are distinguishable for a somewhat similar

reason.

The penalty is imposed as a punishment of the

offender

considered

as a responsible

person owmg

obedience to the law. Its nature severs It from the expenses of tradinq. It is inflicted on the offender

a5 a personal deterrent. and it is not incurred by him

in his character

of trader."

In Robinson v.

Commissioner of Inland Revenue (1965)

N.Z.L.R.

246,

Tompkins J. held, in rellance in part upon Warnes (supra), Von Glehn (supra) and Herald and Weekly Times (supra), that fines imposed by the New Zealand Law Society Disciplinary Committee on a law practitioner were not a loss "exclusively incurred in the production of the assessable income" of the

taxpayer.

the

course

his judgment,

his

Honour

said

p. 249)

"It is clear In

my oplnion that fines and penalties

levied on a taxpayer by the Courts for breaches by him

of the law

are not deductible items."

He went on to consider whether the fines levled

the case

before him came wlthin the same principle, and held that they

did.

Federal Commissioner of Taxation v. Snowden & Willson Ptv.Ltd. (19581 99 C.L.R. 431 was a

case

concerning

the

deductibility of advertising expenses incurred in countering

detrimental publicity. The question arose because the dissenting

member of the Board of Review, which had heard the appeal at an

earlier stage, had relied on the penalty cases by way of analogy.

In the course of deciding the case, Dixon C.J. said (p.437):

"There is no analogy here to cases In which

fines

or penalties are incurred.

There

the character of the

expenditure and the reasons why the ldw lmposes a fine

or penalty separate the

expenditure from the conduct of

the business. It is not to the point that the conduct penalised found Its motlve In busmess considerations.

Nothing of the kind can be said

of the expenditure now

under conslderation nor is any principle of public policy affected by allowing the deduction."

Fullauar J.,

with whom Williams

J. concurred. was of

the same

new.	He expressed approval of the explanation given by Gavan

Duffy C.J. and Dlxon J.

Herald and Weekly Times (supra).

Taylor J. simply sald there was no analoqy with the case where a penalty is imposed for breaches of the law committed in the

course of a trade

or business.

The facts in Mauna Allovs and Research Pty. Ltd.

Federal Commls-er of

Taxation (1980) 49 F.L.R. 183 were closer

to Lhose of the present case. There it was held by

a Full Court

this Court that leaal expenses lncurred

by the taxpayer in

1 %

(unsuccessfully)

defending

various

criminal

charues

brought

against its directors and agents were deductible under s.51 as

being

necessarily

incurred

carrying

on the

taxpayer’s

business.

The payment of penalties by

a taxpayer was separately

considered (see	per Brennan J.	at p.199 and Deane and Fisher	JJ.
at p.214).

In relation to penalties, Deane and Fisher

JJ. made the

€ollowlng comments (pp.214-215):

“It is somewhat difficult to understand how

it can

be maintained, as an unquallfied proposition, that the

nature of

a penalty severs it from the expenses of

tradina. Recurrent penaltles for parking lnfringements

Incurred by a delivery man and per diem penalties for

unlawfully using premises for business or commercial

purposes in contravention of zoninu requirements are

not, for example, logically severed from the expenses

of trading.

The same can be said

of fines imposed for

actually enuaginq in

some unlawful activities, such as

illeual bookmaking

or soliciting, for the purpose of

earning

assessable

income.

If, when

the

matter

directly arises for

decision In the Australlan courts,

it is to be held that all fines and penalties are

to be

denied deductibility under the

Act, It would seem

preferable that

it be on

the basis of some perceived

overridinu

consideration

publlc

policy

which

precludes deductibility.“

Mavne NickleE Llmlta V .

Federal Commissioner of

Taxation (1984) 84 A.T.C. 4458 Ormlston J. held that fines and

penalties paid by the taxpayer were not deductible.

The ma~ority

of the offences in respect of whlch the

fines and penalties were

paid were for parkinu infrlngements and the overloading

vehicles.

The rest were for speeding, defective tyres, and

number of other offences. Some of the

fines and penalties were

imposed

on the taxpayer itself, although the majority were

imposed on its employees and third party contractors. In

a full

and

careful

judgment

his

Honour

examined

all

the

relevant

authorities, includinu those to which we have referred, and the

declslon of Kelly J. now under appeal, which he did not reaard as

bindinu on

him.

His conclusion was that none of the outgolnas

were deductlble. In relation to the fines imposed dlrectly on the dicta. In doing so he was influenced by the approach adopted In

company and paid by It, he was of the view that he should follow

what had conslstently been said n the cases, up to and includinu

Lunnev v. Federal Cornmissloner of Taxatlon

(1958) 100 C.L.R. 478.

That case concerned the deductibility of amounts paid for fares

to and from work. It was surprisina that deduckibllity in such a

cummon situatlon should have taken

so long to come to the courts.

The Hiah Court held that thev were not deductible. Dlxon C.J.

was of the view that old authorltp. in Enaland and Australla. had

settled the matter auainst allowance, and that the situatlon

should not be disturbed. His Honour said

(pp.485-486):

"The

question

having

been

agitated

it became

necessary to turn to the Australian authoritles

which it was settled lonu ago. It was

surprismq to

find how few they were and that they depended rather upon their persuasive authority than their imperative

character. But the judgment of Judge Murray in

Adalr (1894)

4 A.L.R. (C.N.)

42 was pronounced sixty

pears duo and the dicta

of a'Beckett and Hodges

JJ. in

the Vlctorlan Supreme Court in Re Income

Tax

Acts

(1903) 29 C.L.E.

298; 25

A.L.T.

110 implied the same

view over fifty years aqo. These views have remained

unquestioned

till this

case.

!The

r levant

provisions of the Enulish Income

Tax Acts are not in

the same terms

ds those of the Australian law,

but the

whole

course

of Enulish

authority involves a like

conclusion.

escape from the course of reasoninq on

which the decisions proceed requires the takinu of

refined

and

rather

insubstantial

distinctions.

confess for

myself, however, that if the matter

were to

be worked

out all over again

on bare reason, I should

have misgsvinqs about the concluslon. But this is just

what I think the Court ouuht not to do.

If the whole

subject

ripped

now it is

for

the

legislature and not the Court to do

It."

McTiernan J. dissented

that

case.

a joint

judgment,

Williams.

Kitto

and

Taylor

JJ. reached

the

same

concluslon as Dixon	C.J., but as	a	matter of constructlon of
s.51(1).

In relation to amounts paid

for

fines and penalties

imposed on employees and independent contractors, Ormiston

J. was

of the n e w that deductibility should be precluded on grounds of

publlc policy.

He sald, in this connection (pp.4473-4474):

“It follows in my opinion that the policy of the

law should support the enforcement of the crminal law whether that be the historical common law of crme or the widenmg array of regulatory offences. and should

strive to see that punishments for breaches

of the law

are not defeated or

frustrated by direct or indirect

means. About this there could be llttle argument.“

Hi5 reasoning would

also support the conclusion

he had reached In

relation to fines imposed on the taxpayer itself.

In the present case the offences related to the manner of carryinq on of the taxpaver’s

own business. The subject

the charges, that is to

say, resale prlce

mamtenance, can fairly

be regarded

ds central to its actlvlties. It has been accepted

that the taxpayer was not aware

that It was infringinq the Trade

Practices Act, or any other leglslation. However, what

it did

was contrary to one of the provisions

an Act designed to

regulate

commerce

the

publlc

Interest.

Although

the

contravention is not to be treated as

a criminal offence. there

are nevertheless heavy pecuniary sanctlons for its observance.

In addition, an action for damages will lie at the instance

of a

person who suffers	loss	o r damage by reason of the contravention
(5.82).

We are of the vlew that the deductions claimed should

not be allowed. We place thls declsion on the basis of the

acceptance in Snowden v. Willson (supra) of what was said

in the

cases we have referred to.

The acceptance

in the High Court,

albeit by

way of dicta, ,Jf the earlier

dicta in Enuland and in

W a l d arid Weekly Tings (supra) Indicates in our view an approach

to the construction

of s.51(1) whlch we should follow.

'he approach may well have its orluins in public policy.

111 any event, it has been of long standing, and havina in mind

the application

it must have had over many years, we should not

dlsturb it, for reasons similar to those stated by Dixon	C.J. in
Lunnev's case (supra).

A consrderation which may be regarded as tendlng agalnst

thls

result

the

deductlbility

of expenses

incurred

conductina

illegal

activities.

Starting

price

betting,

brothel-keeping. may be examples.

The fact 1 s . however, that the

income from such sources 1s reuarded as taxable (see Minister

Finance v. Smith

C19273 A.C.

1 9 3 ) . and deductibllity of expenses

flows almost necessarlly. Fines imposed for conducting these

activities would not, however, be deductible.

We are of the view that the appeal should be dismissed,

wrth costs.

l certrfy that

r \ e

precedlng

pages are a true copy of

- reasons for

judgment herein of chc Courc

[1984] FCA 311

5 Oct 1984