Lister Blackstone Pty Ltd v Federal Commissioner of Taxation

[1976] HCA 46

HIGH COURT OF AUSTRALIA

Barwick C.J., Gibbs and Jacobs JJ.

LISTER BLACKSTONE PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION

(1976) 134 CLR 457

9 September 1976

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Deductions—Expenditure in removal of stock to new premises—Outgoings incurred in gaining or producing the assessable income—Exception of outgoings to extent to &hich outgoings of capital—Income Tax Assessment Act 1936 (Cth), s. 51(1).

Decisions

September 9.
The following written judgments were delivered:-
BARWICK C.J. I have had the advantage of reading the reasons for judgment prepared by my brothers Gibbs and Jacobs. I agree with their conclusions and the reasons they each give for them. (at p458)

2. I would allow the appeal. (at p459)

GIBBS J. I have had the advantage of reading the reasons for judgment prepared by Jacobs J. and am in agreement with them. The principles governing the appeal are explained in the judgment of Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337, at pp 359-363 . A consideration, in relation to the circumstances of the present case, of the three matters mentioned in that judgment (1938) 61 CLR, at p 363 confirms the view that the expenditure was not of a capital nature. The advantage sought by the expenditure incurred in moving the stock to the new business at Revesby was to have the stock conveniently available, so that the business operations of the taxpayer could be carried on in a normal way and without interruption. This was an advantage which enured to the taxpayer in the continuous process of carrying on its business by using the stock for the purpose of making profits, but it was not an advantage of a lasting character because the stock was turned over in the ordinary course of the business and the advantage of moving that particular stock to Revesby lasted only as long as the stock remained unused. The manner in which the advantage was to be enjoyed was by having ready access to the stock from time to time in the course of trade - there was recurrent access to the stock so long as it remained in use. Both these matters indicate that the expenditure was of a revenue nature. The third matter - the means adopted to obtain the advantage - provides a rather less definite indication one way or the other. On the one hand the expenditure was not made periodically, but no doubt was met more or less at the time of the movement of the stock. On the other hand it took the form of the payment of wages to the employees of the taxpayer and the payment of freight, hire and travelling expenses; that is, it was expenditure of a kind that normally, or at least frequently, is of an income character. When all the circumstances of the case are considered it should be concluded that the expenditure was made in the process of operating the business for the purpose of earning profits rather than in establishing or strengthening the structure of the business itself and should properly be referred to revenue account. (at p459)

2. I would allow the appeal. (at p459)

JACOBS J. From 1957 until about March 1969, the appellant taxpayer occupied for the purpose of carrying on its business certain premises in Unwin's Bridge Road, St. Peters, New South Wales. They were leased premises and had become too small. It had to use other premises for storage and servicing. So it acquired new premises at Revesby, New South Wales, and moved its whole business there over a period of some weeks in February and March 1969. Some money was spent on the new premises and certain partitioning and plant were moved to the new premises but the main expense was the movement of stock from the old premises to the new. This cost was $15,943, made up of labour costs, freight charges, hire of a forklift truck and certain travelling expenses of the staff. The labour was partly casual and partly use of the services of permanent employees, the time spent by them in removal of stock being calculated in the ascertainment of the abovementioned sum. (at p460)

2. The business was that of Australian distribution of a range of products which, or the parts for which, were manufactured by an English company of which the taxpayer was a wholly owned subsidiary. The products were mainly agricultural equipment, particularly sheep shearing machinery. The taxpayer was also a distributor of diesel engines. Some goods were imported and distributed in a completely assembled state. Others were assembled and finished at the business premises. A repair service was provided for the machinery and the diesel engines and there was some sale of spare parts and engines and machinery to individual customers. There were in all about 10,000 different items of stock, some large and some small. (at p460)

3. Thus the whole business was relocated and it is on that fact that the Commissioner has relied in support of his view that the whole expense of the move was not a loss or outgoing incurred to any extent in the gaining or producing of assessable income, or, even if it was, then it was an outgoing of a capital nature and did not fall at all within s. 51 of the Income Tax Assessment Act 1936 (Cth). The year in which the outgoing was incurred was the year ended 30th June 1969 but as there was in any case a loss in that year, it was sought to carry the outgoing over as a loss into the next financial year and it is to the assessment for that year that objection was made. (at p460)

4. The objection was disallowed and the taxpayer appealed to the Board of Review which by majority decided in favour of the taxpayer. The Commissioner appealed to the Supreme Court of New South Wales (Sheppard J.) which allowed the appeal, overruled the objection and restored the Commissioner's assessment (1975) 5 ATR 475; 75 ATC 4165. . The taxpayer now appeals to this Court. (at p460)

5. It was not claimed before Sheppard J. that the outgoing for removal of stock was incurred in gaining or producing assessable income. The taxpayer claimed that the outgoing was necessarily incurred in carrying on the business of the company and was not of a capital nature within the meaning of s. 51 (1). The Commissioner denied both these claims. Sheppard J. found that the outgoing was necessarily incurred in carrying on the business of the company. He said (1975) 5 ATR at p 480; 75 ATC at p 4169. :

"The prime reason for the move was the need to have more space, to avoid having to use the premises jointly with the lessor and to be able to conduct all the company's operations from the one set of premises. If the company were to remain efficient and to continue to trade to the utmost advantage, the necessary consequence was that it had to go. It seems to me that the expenditure which was incurred in connection with the move was, therefore, incurred in carrying on the plaintiff's business and was necessarily incurred for that purpose and for the purpose of gaining income within the meaning of those expressions as used in the section."

However, Sheppard J. went on to find that the outgoing was of a capital nature, and on this ground upheld the Commissioner's appeal. In my opinion, Sheppard J. was clearly correct in his finding that the expense was necessarily incurred in carrying on the business. It is not necessary to add anything to what he has said in that regard. However, in finding that the outgoing was of a capital nature, he based his conclusion on a finding that "The stock here was not moved for any purpose connected with its sale to customers nor use in the respondent's manufacturing operations" (1975) 5 ATR at p 483; 75 ATC at p 4172. . With respect I cannot agree with that finding. (at p461)

6. I do not think that it is necessary to traverse the principles once again. I shall simply apply them to the circumstances of this case. Useful as the authorities all are in their determinations and in their expression and application of principle and as examples of the distinction between expenditures on capital account and those on revenue account, they with one or possibly two exceptions deal with factual situations distinctly different from that now before us. The exceptions are the South African case reported as Income Tax Case No. 272 in 7SATC 173 where the facts were indistinguishable from those in the present case and possibly Granite Supply Association Ltd. v. Kitton (1905) 5 Tax Cas 168; 8 SC 55. . (at p461)

7. The taxpayer moved its place or places of business from St. Peters to Revesby. It was a matter for the appellant to decide where it would carry on its business and the starting point for a consideration of the matter is that the appellant was to carry on its business at Revesby and not at St. Peters. The cost of preparing the new premises and of moving plant and equipment thereto was, it is conceded, an item of expenditure on capital account. But it was at the same time necessary to have its stock in trade at the new place of business. This stock was described by Sheppard J., and, it is conceded, correctly described, as "used for such purposes as the assembling, finishing and repairing of agricultural machinery, including shearing comb cutters, and the assembling, modifying and repairing of diesel engines" (1976) 5 ATR at p 476; 75 ATC at p 4167. . To have kept the stock elsewhere than at the new place of business would have not only affected the efficiency of the business as a whole but in particular would have had that effect by adding an element of cost in respect of each item of stock. There would have been the cost of its safeguarding at a separate place and there would have been the cost of transport of each item as required to the new place of manufacture and distribution. Therefore the stock was wholly removed to the new place of business. In practical terms no other course was open but on the inquiry whether the removal of the stock added value thereto in the hands of the taxpayer and whether the removal was an advantage to the stock it is not sufficient to look at the business as a whole and the relocation thereof as a single activity. The stock must be looked at separately and when that is done, it is apparent that the removal was for the purpose of the more economical utilization and distribution of that stock. A component of cost which would otherwise have arisen from time to time and attached to the stock was in one move or a limited number of moves incurred in respect of the stock. (at p462)

8. The cost of removal of the stock was in no way an expenditure on the structure within which the profits were to be earned. For the reasons stated above the expenditure was necessarily incurred in the money earning process once the business was moved from St. Peters to Revesby. Although in one way it is true that the moving of the stock was part and parcel of a single activity of relocating the business, there is no more reason why costs should not be dissected between capital and revenue outgoings on a relocation of a business than on an initial location of a business. The cost of the initial location of stock at the place of business is not an outgoing of a capital nature. The express provision made by s. 51 (2) in respect of expenditure incurred in the purchase of stock overcomes a possible difficulty whereby initial stocking might be regarded as an expenditure of circulating capital (John Fairfax and Sons Pty. Ltd. v. Federal Commissioner of Taxation (1959) 101 CLR 30, at p 35 per Dixon C.J.), but there can be no doubt that the cost of, for instance, sorting and convenient locating of the initially purchased stock at the place of business is not an outgoing of a capital nature in any sense of the word "capital". Nor in my opinion, for the reasons which I have expressed, is the cost of relocating stock at a new place of business. (at p463)

9. Having reached this conclusion it is unnecessary to deal with a second and subsidiary argument advanced on behalf of the appellant that the expenditure on wages paid to employees of the appellant, whatever may have been the work which they were doing on particular days or at particular times, was not an outgoing of a capital nature. (at p463)

10. I would allow the appeal. (at p463)

Orders

Appeal allowed with costs.

Order of the Supreme Court of New South Wales (Administrative Law Division) set aside with costs, and in lieu thereof order that the appeal to that Court be dismissed with costs.

Matter remitted to the Commissioner to re-assess in accordance with the reasons for judgment of this Court.