Griffin Coal Mining Company Limited v The Commissioner of Taxation

[1991] HCATrans 214

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth Nos P33 and P34 of 1990

B e t w e e n -

THE GRIFFIN COAL MINING

COMPANY LIMITED

Applicant

and

THE COMMISSIONER OF TAXATION

Respondent

Application for special

leave to appeal

MASON CJ
DEANE J

McHUGH J

,,,

TRANSCRIPT OF PROCEEDINGS

FROM PERTH BY VIDEO LINK TO CANBERRA

ON FRIDAY, 9 AUGUST 1991, AT 10.33 AM

Copyright in the High Court of Australia

Griffin 1 9/8/91

MR R.A. CONTI, QC: If the Court pleases, I appear with my

learned friend, MR W.S. MARTIN, for the appellant.

(instructed by Corrs Australian Solicitors)

MR D.R. WILLIAMS, QC: If the Court pleases, I appear with

my learned friend, MR R.E. BIRMINGHAM, for the

Commissioner respondent. (instructed by Australian

Government Solicitor)

MASON CJ: Yes, Mr Conti.

MR CONTI:	Your Honours, in the making of my submissions, could I refer to the State Energy Commission of
Western Australia as SECWA, as does the application
book throughout, for brevity.
MASON CJ:	You can call it what you like, Mr Conti.
MR CONTI:	It was called other names at a certain litigious

stage in the past.

MASON CJ: Well, perhaps you had better confine yourself to

SECWA.

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 section 51(1) - the text

of it is in the application book at page 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 page 60 of the application

book, this Court encapsulated, if I may put it that

way, the law generally as section 51(1), albeit

that the immediate context of the case was

concerned with receipts and not expenditure, and it

put the concept of section 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

Griffin 2 9/8/91

generally the disqualification provisions of

section 51(1) relating to capital?

Now, here, what we are concerned with can be

characterized 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 section 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 page 209. At page 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

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 characterized

as income.

Griffin 9/8/91

Then, over on page 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
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

page 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 51(1) obversely, obviously not in parallel

or co-terminously, but nevertheless widening its

scope to bring 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; 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

Griffin 4 9/8/91

concepts, or relatively ancient concepts, of

expansion of business or enlargement of business or

extension of business as capital.

McHUGH J: But if the project had gone through this

expenditure would have been part of the capital

cost of setting up the smelter, would it not?

MR CONTI:  No, with respect, not, Your Honour. Once the

commitment was made - the only commitment that had

been made was to a joint venture as to feasibility. There was no joint venture yet formed for erecting

the smelter, there was only a joint venture for

study.

McHUGH J: These were claimed as smelter feasibility study

costs, although they included things like travel

and so on.

MR CONTI: Relatively minor, Your Honour, and highly

incidental. They were essentially studies paid to

professional people.

McHUGH: Consultants.

MR CONTI: Yes. Your Honours, leaving aside the

imperfection of the analogy, give the situation of

a builder who is a building contractor and

recessionary times strike him and he cannot get any

more government work, so he decides to undertake

the feasibility of development of town houses, if

you like, as a speculator, building them himself.

He hires consultants and decides to do so,

probably in a joint venture as it is beyond the

scope of his own financial resources. So he hires

consultants to look into the feasibility, the

market-place and so on, and the cost of

construction at a given position.	Why should that
not be deductible?

McHUGH J:  It may be, but it seems to be an imperfect

analogy. A better analogy might be if the builder

decided to do a feasibility study to set up a

cement factory.

MR CONTI: Yes, or go into building supplies. I appreciate

the analogy is closer, but again where is the

logical stopping place. I mean, it is done in a

business context, for the purpose of the business,

in furtherance of the business, it may be done

through, ultimately, a subsidiary; that does not
matter if at end income is earned through the

subsidiary. But why should there be a stopping

place there, why should that disincentive to

diversification.

Griffin 9/8/91

Now, in answer to your earlier question, what would be a cost incidental to the capital

construction of the smelter would be such matters

such as architect's fees for the actual plans,

legal costs of conveyance and that sort of thing,

but this was well antecedent - all this activity

was well antecedent to that kind of activity.

Your Honours, Hallstroms was on the respondent's list. Can I draw your attention to

one well known passage of Mr Justice Dixon which we

say, as it were, reflects more the thinking of

former times which might now be ready for

qualification. Hallstroms is reported in 72 CLR

634 and the passage is at 647, and it is the short

passage and it is a well known one, it is at the

top of 647, really starting at the foot of 646 the

last line of 646:

As a prefatory remark it may be useful to

recall the general consideration that the

contrast between the two forms of expenditure

corresponds to the distinction between the

acquisition of the means of production and the

use of them; between establishing or

extending a business organization.

Why should there not be a variety of situations

where extending a business organization,

particularly studying the feasibility of extending
a business organization, should not fall within

51(1).

McHUGH J: 

Were these expenses to be taken into account

under Part IIIA in determining the capital gains
provisions in respect of the smelting plant?

MR CONTI: 

No, Your Honour, they would have to be expenses

that could truly be referable. I mean, there is not

a great amount of definition in Part IVA of what is

an incidental cost but I would venture to say that

no person would advise that they would form part of

the cost. But I really have said that off the top

of my head.

Your Honours, here, if we could put it

precisely, a long established coalminer expended

moneys in the acquisition of information as a guide

to a future decision to invest in an aluminium

smelter in joint venture, firstly being a smelter

which would use up surplus available energy - I am

referring now to the gas bubble. If one puts

oneself in the context there are two coalminers in

Western Australia, Griffin and its neighbour,

Western Collieries. As the evidence indicates,

Griffin had what Mr Justice Wilcox cited as the

"edge", although the affidavit material in fact

Griffin 6 9/8/91

said "unbeatable edge", over Western Collieries

because of the overburden in Western Collieries

mine.

One had a single aluminium plant and one had

this enormous source of energy in the north west,

and a gas bubble creating an enormous problem for

Griffin Coal, particularly in its relationship with

SECWA. So it was that problem that Griffin had to

try and solve for the purpose of its own business.

Your Honours, as indicated in the application book

at page 68, energy is a major raw material in the

production of aluminium.

So for the benefit indirectly - this is within

the first matter, as it were, of purpose and
motivation - of Griffin's relationship with SECWA,

its relationship being governed by its contentious

coal mining agreement, there was a lot to be gained

by Griffin coming into this scenario and that was
one of the purposes. But, of course, that is an

intangible purpose and we accept that and

Mr Justice Davies referred to it as an intangible

purpose, but it was a very real purpose to a

businessman.

The second matter was this, that this was a

smelter in relation to which - as I said, there

were only two prospective suppliers of energy and

Mr Justice Lee referred to Western Collieries and

Griffin as being the two suppliers at page 30.	Of
these two prospective suppliers, as I indicated,

Griffin had the edge - that is referred to at the

top of page 86 of the application book but, in

fact, the passage if cited entirely accurately said

"unbeatable edge".

Your Honours, it is enough for us to say that

we were just a prospective supplier of this energy.

One out of two. It is not essential for the way we put our case, the case we put below - namely that

we were inevitably going to be the supplier and we

did not need to have any contractual linking

because we had an unbeatable edge on our opponents

who had the problem of overburden - it is

unnecessary to go that far. It was enough for us

to say, "Well, look, we expended this money because

we were interested and there was a prospect that we
would be involved in this operation and there was a

prospect that it would help us with our

relationship, and we expended these moneys during

the year ended 30 June 1985, and it was in June

1985 - largely, the greater bulk of them - the

litigation was settled.

Now, Your Honours, it is well established authority that to expend money in the enhancement

Griffin 7 9/8/91

of markets or market opportunities relating to an

existing business is clearly to be characterized as

revenue, at least within the second limb, and it is

enough for me to cite the passage BP at page 49 of

the application book.

MASON CJ: But that is only to say, is it not, that the Full

Court made a mistake in characterization, because

you are saying, according to existing principle,

properly applied, it should have produced the

converse result?

MR CONTI:  Your Honour, the existing principle only clearly

takes me to the position of an existing business

and market opportunities within an existing

business. Existing authority does give me some

assistance on one of the two aspects of our case

below, namely that our relationship with SECWA

would be assisted, that is true, because that was

to protect existing sales, although the Full Court

said that merely to protect existing sales and not

earn any more sales was not within 51(1) which,

with respect, is wrong in principle. Magna Alloys,

Snowden v Wilson, all those cases show that

expenditure was appropriate under the second limb,

even though you were not getting one more sale that
you could prove.

But, Your Honours, really what we are saying

here is that given that the Full Court made the
findings which - on the inferences we fought

against but made the findings that Griffin was by

no means certain of getting into this project, and

only had a prospect, we say, "Well, so what? We

were still entitled to a deductibility where the

expenditure was directed towards the possible

participation in this venture, and where it was

expended at a stage which was anterior to capital

commitment".

Your Honours, we would even go further. We

would submit that even if the door had been

entirely shut on us and we were told, "You cannot

sell coal to the smelter because you have already

got the contract with us and it has got to go to

Western Collieries, and you are out, and there is

no prospect", but we still went ahead with the

feasibility study, so we are a coalminer looking at

the possibility of diversifying our business into

aluminium, why should we not, in principle,

consistent obversely with Myer, have tax
deductibility available for an expenditure in the
course of business, an expenditure which, as

Mr Justice Davies pointed out, was one and three quarter million dollars or so against gross income

annually of that year of $70 million. It is not as

if there is some huge financial size out of our

Griffin 9/8/91

financial capacity. In principle, why not, with

respect?

DEANE J:  What would you say was income here, or outgoing,

the expenditure as it was incurred, or the loss

involved when it became apparent that the

expenditure was wasted?

MR CONTI:	No, the expenditure as it was incurred.
DEANE J:	Are you sure that is the way you put it? You see,

one can look at this as a two-stage process. If

the venture had gone ahead, then the argument

against you is rather strong, or stronger.

MR CONTI: Stronger, yes.

DEANE J: But if the venture does not go ahead one then has

a situation where the expenditure is wasted and

there is a loss or there is a sale of the proceeds

of the investigation and there is a profit. Well

now query whether, on your argument, the stronger

case is to treat the profit or the loss as revenue

rather than the expenditure, because if you treat

the expenditure you have the problem where it spans

the tax year.

MR CONTI:  That is true. To put it on the basis it is an

expenditure - - -

DEANE J: But do not let me force you into a position. I

was just wondering.

MR CONTI:  No, we would take every alternative we can

conceivably find, but Your Honours one can see,

with respect, if we can embrace this proposition

that, where one can have expended money - I am just

trying to think of the precise analogy - one can

have expended money which cannot be brought to

account for the moment, because its coming home is

postponed by reference to subsequent events. In

other words, it is somewhat the obverse of the

dancing-lesson case, the Arthur Murray case, but

Your Honours, we primarily put it, wherever that

line is, we are still well short of a line when you
have only settled your percentage in a venture for

sharing feasibility studies and have not even got

any further. It is true that part of the cost of

expenditure included looking at putting out for
tender various stages of construction of the

smelter, that was only to ascertain what was going to be the capitol cost if one was going to go into

the venture in the first place and, if so, to what

extent was one going to go into the venture.

DEANE J: But, even if one accepts that the question of the

implications of Myer, so far as section 51 is

Griffin 9 9/8/91

concerned, is one of importance, what exactly is

your response to Justice McHugh's comments that

there already is a pending case, which raises that

in a possibly more obvious form than does this

case?

MR CONTI:  Not unfortunately knowing any of the circumstance

of that case I - - -

McHUGH J: It is Mount Isa Mines v The Commissioner

of Taxation.

MR CONTI:  I am unable to put up comparisons, but all I

would like to say is this, that this was a large

amount of money.	It would be unjust for my client
to, as it were, -

DEANE J: But that argument is that we should grant leave in

every section 51 case - - -

MR CONTI:	Yes, I appreciate that, Your Honour.
DEANE J:	- - - and we will sit for the rest of this year and all next year dealing with section 51 cases.

MR CONTI:  I appreciate that. I suppose another response -

to test the water, if I could - can our application

be adjourned until the other case is dealt with?

MASON CJ:  I must say, for my part, I am not sure that a

favourable decision to the taxpayer in the Mt Isa

case would throw a great deal of light on your

case. The facts in the Mt Isa case are that part

of the industrial plant was demolished and the cost

of that demolition was sought to be deducted under

section 51. Now, the purpose of the demolition was

not as it usually is in the cases to clear the land

so an to enable improved and more efficient plant to be erected, but the purpose was to demolish it

so as to remove it as a danger to people who might

were walking around the plant, moving around the	come into its proximity; notably the people who
plant. Now, from my part, I do not see that a
favourable decision to the taxpayer in that case is
going to provide much assistance to you.

MR CONTI:	No, here, the danger was an economic danger, that unless something was done about the gas bubble this
enormous investment of Griffin Coal would be in
great difficulty, particularly if the litigation
was not resolved because the coal mining contract,
so the evidence indicated, was the source of
virtually the totality of Griffin's income.
MASON CJ:	It does seem to me the problem is the problem

that has been identified by Justice Deane. You, in

effect, want to expand the area of deductibility

Griffin 10 9/8/91

under section 51 and you want to do it by way of a

development which corresponds to what has occurred

in point of income in the Myer Emporium case. But

presumably every taxpayer who has a possible

deduction that lies on the outskirts of section 51

would want to be putting a similar argument. Now,

as Justice Deane has pointed out, we cannot take

all these cases aboard.

MR CONTI:  No. Your Honours, if leave was granted, there is

only one area upon which we would be urging you to

take a different view on the inferences so it would

be a relatively short case in argument in

principle. The area we would ask you to take a

different view is on the purposes of Griffin Coal

after SECWA announced that it was coming into the

consortium and the supply of energy to the plant

had to go up for tender. There were only

tenderers, Griffin and ourselves, and we would be

putting to you strongly that to say, therefore, it

is at large -

McHUGH J: Griffin and yourselves.

MR CONTI:  - - - and that we were going into this venture

and putting $200 million just for the sake of going

into something we never knew anything about,

without the coal supply, just does not stand up,

with respect, on the evidence and we would be

putting that strongly to you. That is the only

area, if this appeal was allowed - I know this

sounds like plea bargaining - where you would be

troubled with a factual disputation.

But, Your Honours, it is surely an important,

new, unexplored area that diversification, as

distinct from enhancing the existing market,

diverting into a new market to enhance the business

and spending money as a business taxpayer, not as a

private taxpayer - we are only putting this in the

basis of second limb, not first limb - with

respect, is an area that would be of importance to

the business community.

MASON CJ:  But why are not these new areas to be explored as

a general rule by the Full Court of the

Federal Court?

MR CONTI:  The Full Court here would have been trammelled by

what was said in Vacuum Oil, Your Honour, but one

has to look at expenditure within the ordinary

course of business and we cannot put this as within
the ordinary course of the business except,

conceivably, that second limb about protecting the

existing contract.

Griffin 11 9/8/91

MASON CJ:	One would have thought that it is open to the Federal Court to look at section 51 in the light of
the development that has occurred in point of
income.
MR CONTI:	Yes, we certainly below encouraged the Federal

Court to take the generous view of the circumstances by putting analogies as to

diversification and the desirability and the

reasonableness and the fairness of business having

the incentive of deductibility for business

diversification. That was strongly put. We

referred below, of course, to BP and to

Maryborough, the cases where they were all

protecting existing businesses. That was as far as

we could take it.

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

page 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 page 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

Griffin 12 9/8/91

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 page 42, reasoned

that the expenditure was capital in a way which, we

would respectfully submit, could not stand. It is

the large paragraph on page 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

Griffin 13 9/8/91

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 Federal Commissioner

of Taxation v Myer Emporium Ltd, (1987)

163 CLR 199, with respect to income, the scope of

expenditure deductible under section 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 characterization

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 WILLIAMS:	The respondent seeks an order for costs?
MASON CJ:	You do not oppose an order for costs, Mr Conti?

Griffin 14 9/8/91

MR CONTI:	No.
MASON CJ:	The application is refused with costs.

AT 11.15 AM THE MATTER WAS ADJOURNED SINE DIE

Griffin 15 8/8/91