Federal Commissioner of Taxation v Hatchett

The Federal Commissioner of Taxation (the Commissioner) appealed to the High Court of Australia against a decision of the Supreme Court of New South Wales, which had allowed an appeal by Mr. Hatchett against an assessment of income tax. The dispute concerned the deductibility of certain expenses incurred by Mr. Hatchett in relation to his business activities.

The primary legal issue before the High Court was whether the expenses incurred by Mr. Hatchett were of a capital nature, and therefore not deductible under section 26(a) of the *Income Tax Assessment Act 1936* (Cth) (the Act), or whether they were outgoings incurred in gaining or producing assessable income, making them deductible under section 51(1) of the Act. Specifically, the court had to determine the character of the expenditure in relation to Mr. Hatchett's business.

Menzies J reasoned that the expenditure was not of a capital nature. His Honour applied the principle that expenditure is of a capital nature if it is incurred once and for all, or if it is for the purpose of acquiring or improving a structure which has become the "profit-yielding subject" of the enterprise. In this instance, the expenditure was found to be part of the cost of carrying on the business, rather than an expenditure to acquire or improve the business itself. The expenses were incurred in the ordinary course of business operations and were not of a capital character.

The appeal was dismissed, and the Commissioner was ordered to pay Mr. Hatchett's costs.