Labrilda Pty Ltd v Deputy Commissioner of Taxation [1996] FCA 224

CATCHWORDS

INCOME TAX - Allowable deductions - Accreditation fee paid as initial lump sum by petroleum reseller to oil company - whether an outgoing of capital or a capital nature or an expenditure of a revenue nature - Income Tax Assessment Act 1936 (Cth) s. 51(1)

John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30

Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337

Hallstroms Pty Ltd v Federal Commissioner of Taxation (1965) 112 CLR 386

Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645

BP Australia Ltd v Federal Commissioner of Taxation (1965) 112 CLR 386

J. Gadsden & Co Ltd v Commissioner of Inland Revenue (NZ) (1964) 14 ATD 18

LABRILDA PTY LTD v DEPUTY COMMISSIONER OF TAXATION

QG 68 of 1995

Lockhart, Spender and Ryan JJ

Brisbane

26 March 1996

IN THE FEDERAL COURT OF AUSTRALIA)

QUEENSLAND DISTRICT REGISTRY ) No. QG 68 of 1995

GENERAL DIVISION )

ON APPEAL from the General Division of the Administrative Appeals Tribunal

BETWEEN : LABRILDA PTY LTD

(ACN 010 149 952)

Applicant

AND : DEPUTY COMMISSIONER OF TAXATION

Respondent

CORAM: Lockhart, Spender and Ryan JJ

PLACE: Brisbane

DATE: 26 March 1996

MINUTES OF ORDER

THE COURT ORDERS THAT:

The application by way of appeal be dismissed.

THE COURT GRANTS liberty to apply with respect to costs order, but must be exercised within 14 days of today if application is to be made.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

)

NEW SOUTH WALES DISTRICT REGISTRY ) No. G 103 of 1995

)

GENERAL DIVISION )

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL, GENERAL DIVISION

BETWEEN: LABRILDA PTY LIMITED

Applicant

AND: DEPUTY COMMISSIONER OF TAXATION

Respondent

COURT: Lockhart, Spender and Ryan JJ.

DATE: 26 March 1996

REASONS FOR JUDGMENT

LOCKHART J.

This appeal from the decision of the Administrative Appeals Tribunal, General Division, involves the question whether a payment made by the applicant, Labrilda Pty Limited ('Labrilda'), pursuant to an agreement with Mobil Oil Australia Limited ('Mobil'), was an outgoing of a capital, or of a revenue nature. The Deputy President of the Tribunal decided the payment was of a capital nature, but the other two members decided that it was of a revenue nature. The Deputy President's decision prevailed by virtue of s. 42 of the Administrative Appeals Tribunal Act 1975.

The case involves the application of well established principles to its facts. There is no dispute about the facts; but there is dispute about the inferences to be drawn from them. The question of which inferences are to be preferred is one of impression, as it often is in cases of this kind.

The undisputed facts are as follows.

Labrilda operates a service station in Tingalpa, Queensland, and has done so since 5 October 1989. Previously, from about November 1987, it had operated another service station at Murarrie, Queensland. Labrilda transferred to the service station at Tingalpa because it had 'a much better exposure' and a 'significantly higher turnover' than the one at Murarrie.

Labrilda was a Mobil dealer. About two months after Labrilda had purchased the business of the first service station, Mobil introduced a marketing programme. Mobil approached a director of Labrilda - Mr N A K Wolno - to participate in the programme. Mr Wolno appears to be in charge of Labrilda's business. They reached agreement, and they executed a document to implement the marketing programme. Subsequently, Labrilda moved to Tingalpa.

Labrilda entered into four agreements with Mobil in relation to the service station at Tingalpa, which all commenced on 5 October 1990. The first agreement was the lease of the premises ('the Lease'). The Lease was for a term of three years commencing on 5 October 1990 (clause 2(1) and paragraph 5 of the Schedule). The Lease gave the right of occupation to Labrilda for the term of the Lease. There was no provision for renewal. The demised premises had to be used as a Mobil service station (clause 4(13)). Where either the MTP Agreement or the Reseller Agreement ended, (I shall describe them more fully later) then the Lease also was to end automatically (clause 2(2)(b)). Labrilda agreed with Mobil that it would comply with all 'the Team Pak Agreements' and 'the Team Pak Standards' (expressions I shall explain later), as specified in the Mobil Team Pak Reference Manual as updated from time to time (clause 4(1)) (again an expression I shall explain later).

The second agreement of Labrilda and Mobil was the 'Reseller Agreement', whereby Mobil agreed to sell to Labrilda, and Labrilda agreed to purchase from Mobil, Labrilda's requirements of petrol, petroleum products and liquid petroleum gas for resale on the Site of the service station, together with certain other products. The period of operation of the Reseller Agreement was expressed to be co-extensive with the period of the Lease (clause 2).

The third agreement was the 'Meter Wholesale Agreement', about which little is known from the evidence, and on which nothing turns.

The final agreement, with which this case is primarily concerned, was the agreement termed the 'Mobil Team Pak Agreement' ('the MTP Agreement'). It is a lengthy document. It contains six recitals which I summarize as follows:

. Mobil has the right to the use within Australia of a system 'for the identification, lay-out and operation of service stations for the retailing of petroleum products and associated services, including know-how, the trade name and mark "Mobil", a distinctive Flying Horse trade mark, distinctive Mobil signage and graphics, and the Mobil Prime Sign'. This is all collectively referred to in the agreement as 'the Mobil System' (recital A).

. Mobil has developed considerable goodwill toward the Mobil System, and has established a considerable reputation for the Mobil System within Australia (recital B).

. Mobil and its dealers have been co-operating in order to develop and introduce at Mobil service stations in Australia a particular business package, comprising new and improved products, methods of marketing, merchandising and promotion, and a new and improved means of customer service (collectively called 'the Team Pak Programme'). Thus, Mobil and its dealers have sought to achieve and to maintain market leadership in the petroleum retailing industry (recital C).

. Labrilda wishes to be granted the right to carry on its service station business at Tingalpa, selling petroleum products acquired from Mobil, using the Mobil System in the conduct of its business, and participating in the Team Pak Programme (recital D).

. Mobil and Labrilda propose to enter into the other agreements in relation to Labrilda's business at Tingalpa, namely, the Lease, the Reseller Agreement and the Meter Wholesale Agreement (all four agreements collectively called 'the Team Pak Agreements') (recital E).

. Team Pak Agreements are new agreements and are not entered into by way of renewal (recital F).

The relevant operative clauses of the MTP Agreement are summarized as follows:

. Mobil grants to Labrilda the right to carry on the service station business at Tingalpa, selling petroleum products acquired from Mobil, along with certain other products, using the Mobil System in the conduct of Labrilda's business, and participating in the Team Pak Programme (clause 1).

. The MTP Agreement is expressed to operate for a period of three years, with provision for renewal (clause 2).

. Mobil agrees to provide assistance and training for Labrilda and its employees in the efficient operation of a Mobil service station in accordance with the Team Pak Programme, and to provide Labrilda with 'Team Pak Support' in relation to the carrying on of the business (clause 3). Clause 3 is important, so I shall set out its terms:

'3. TRAINING AND TEAM PAK SUPPORT

(1) Training:

Mobil shall, from time to time as Mobil deems appropriate, provide assistance and training for Dealer and its employees in the efficient operation of a Mobil service station in accordance with the Team Pak Program including:-

(a) if Dealer is a new Mobil dealer, a free Mobil Team Pak pre-installation course, covering, amongst other things, customer relations, money management, merchandising and safety; and

(b) free accreditation training in accordance with the Mobil Team Pak Reference Manuals.

(2) Team Pak Support:

Mobil shall, in addition, from time to time as Mobil deems appropriate, provide further support to Dealer including:-

(a) advice and assistance in relation to Dealer's business plans, financial affairs and accounting systems;

(b) obtaining national offers for Dealer and all other Mobil Team Pak dealers through preferred suppliers;

(c) conducting incentive programs for Mobil dealers and their employees;

(d) advice based on extensive analysis and testing carried out with suppliers, in relation to allocation of shelf space;

(e) advice in relation to sales room and service station lay-out;

(f) point of sale material in Mobil graphics;

(g) advice on merchandising;

(h) advice on signage;

(i) the planning and execution of marketing programs specifically directed to the benefit of Mobil service station network.'

. Mobil, in conjunction with its dealers, has produced Mobil Team Pak Reference Manuals containing detailed information in relation to the operation of a Mobil service station, including standards (collectively called 'the Team Pak Standards'), in relation to (a) customer service; (b) service station appearance; (c) marketing; (d) business management; (e) staff management; (f) safety; (g) operations; (h) hygiene;
and (i) other subjects where appropriate. The Team Pak Reference Manuals are updated from time to time by Mobil (clause 4(1)).

. Labrilda agrees to adhere to the Team Pak Standards at all times, and to the policies and other requirements of the Team Pak Program, which it acknowledges to be essential for the 'success, goodwill and reputation of the Mobil dealer network and Mobil System and Team Pak Program' (clause 4(3)).

. Labrilda agrees to use its best endeavours to efficiently promote and maximize the sale of Mobil products at the Site (clause 5(a)); to conduct its business at the Site generally in a manner calculated to protect and enhance the Mobil System (clause 5(b)); and to comply with the provisions of the other Team Pak Agreements (clause 5(c)).

. Labrilda acknowledges that the continuation and success of the Team Pak Programme necessitates the incurring of costs and expenses in introducing and maintaining that programme (clause 6(1)); and it therefore agrees to pay to Mobil an Accreditation Fee in the sum of $55,000. This is the amount with which this case is concerned (clause 6(2)). Sub-clauses 6(2) and (3) recognize that the Accreditation Fee may be payable in one lump sum or by instalments. But the effect of those two sub-clauses, taken together with paragraphs 6 and 7 of the Schedule, makes it clear that in the case of Labrilda the Accreditation Fee of $55,000 was payable as one initial payment, with no periodical instalments.

. Mobil agrees to use the Accreditation Fee in paying for Mobil Team Pak expenses (clause 6(4)).

. Mobil and its dealers have formed a Team Pak Marketing Council, which includes dealer representatives, for the purpose of developing an annual Team Pak Marketing Programme and Budget for network related marketing and promotion (clause 7(1)).

. Clause 7(2) provides for the establishment of a second source of monies payable to Mobil by Labrilda, namely, it entitles Mobil to allocate from the rent paid by Labrilda monthly under its lease of the Site, one-tenth of a cent for each litre of petrol, other petroleum products and liquefied petroleum gas purchased by Labrilda from Mobil in the month. The amount so allocated, plus similar allocations for other Mobil Team Pak lessee dealers, and marketing fees received from Mobil Team Pak owner dealers, shall be used by Mobil, together with a matching amount provided by it, in paying for the Marketing Program (clause 7(2)). Provision is made by clause 7(3) for Mobil to provide Labrilda with a written statement each calender year showing the total allocations and marketing fees referred to in clause 7(2).

. Labrilda acknowledges Mobil's interest and right to the Mobil System and agrees that, except with the written consent of Mobil, it would not infringe, use or imitate any element of the system, and would keep confidential the Team Pak Reference
Manuals and all other elements of the Mobil System that were not in the public domain (clause 8(1)).

. Labrilda agrees to use Mobil's trade marks, brand names and other elements of the Mobil System only in accordance with the Co-Operation Programme Agreement (clause 8(2)).

. Labrilda is required to take out and maintain adequate insurance in respect of the premises (clause 10).

. Labrilda agrees to make all the payments to Mobil that are required under the Team Pak Agreements in accordance with Mobil's direction, as specified in the Team Pak Reference Manuals, or as otherwise specified to Labrilda from time to time (clause 11).

. Neither Mobil nor Labrilda may assign, charge or otherwise encumber any of its rights or obligations under the Team Pak Agreement, or other Team Pak Agreements, without the prior written consent of the other party (clause 14(1)).

. Clause 16 deals with breach and determination of the MTP Agreement, including provision in clause 16(4) for notice by Labrilda of breach of the Team Pak Standards by Mobil, referral of the breach to the Mobil Team Pak Standards Council, and thereafter the right of Labrilda to terminate the agreement if the
breach is not rectified. Alternatively, Labrilda may seek specific performance of the agreement, but then not being entitled to claim damages or any other remedy in respect of the breach.

. On termination of the agreement, Labrilda is required immediately to cease use of all elements of the Mobil System and to deliver to Mobil all manuals, books, maps, graphs and other material relating to the Team Pak Program and the operation of a Mobil service station on the Site (clause 17).

The only oral evidence in the case was given by Mr Wolno. He was accepted by the Tribunal as a witness of truth and reliability. Mr Wolno gave evidence about the manner in which Labrilda came to enter into the MTP Agreement with Mobil at its first and second service stations.

The evidence of Mr Wolno has probative value for the purpose of determining the matrix of facts which surrounded the making of the agreements, the purpose of entering into them, and the nature of their practical operation.

Mr Wolno said that the service station business is highly competitive, that petroleum companies other than Mobil have also developed very effective campaigns to attract customers to their dealerships, and that there was not a great deal of 'customer loyalty' among members of the public. He said that it was imperative for the continuing profitability of Labrilda that it enter Mobil's Co-Operation Programme System; otherwise revenue would be lost and the service station's profitability would be reduced. He expected that Labrilda would, by entering into the MTP Agreement, at the very least maintain its existing market share, and so maintain its levels of revenue and profitability. But what is more, he was optimistic that Labrilda would produce increased revenue and profits as a result of Mobil's promotions. By comparison, Mr Wolno said that Labrilda would find it almost impossible to run its own marketing programme and promotions, as it could not meet the costs of, for example, giving away free fuel for a two month period. It was important to work with Mobil.

For its dealers, including Labrilda, Mobil provided ongoing training for the staff, marketing advice as and when required, advertising and promotion. Mobil also supplied copies of the Co-Operation Programme Reference Manuals, which were updated regularly. But importantly, no changes were made to the lay-out of the service station at Tingalpa, and no plant equipment, fittings or fixtures were supplied to Labrilda under the MTP Agreement.

In relation to the advertising and promotions conducted under the Co-operation Programme Agreement, Mr Wolno said:

'The advertising and promotions provided by ... [the Petroleum Company] usually apply for quite a limited period of time - no more than two or three months. It is my experience that the promotional campaigns organised by each of the major oil companies for their dealerships tend to change very rapidly, as each of them struggles to maintain its competitiveness with the others. There is no way that the Taxpayer would be able to develop such rapidly changing advertising and promotional campaigns, without the assistance of ... [Petroleum Company] through the ... [Co-operation
Programme model] system. It is my experience that, once a particular advertising or promotional campaign has expired, it has little or no on-going benefit for the Taxpayer's business; such advertising and promotional campaigns only seem to influence potential customers whilst they are current, and as soon as a particular advertising or promotional campaign has finished motorists have a tendency to take their business to the Taxpayer's competitors unless and until a fresh advertising or promotional campaign is undertaken.'

The relevant principle which governs the determination of the question whether outgoings are of a capital, or of a revenue nature are well established and need little reference. It is not necessary to recite the seminal passage from the judgment of Dixon J. in Sun Newspapers Limited and Associated Newspapers Limited v Federal Commissioner of Taxation (1938) 61 CLR 337 at 359-360; but I shall set out the oft-cited passage at 363 where his Honour said:

'There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.'

It must be borne in mind that these statements of Dixon J. are not exhaustive or ultimately definitive of the relevant matters to be considered in each case.

In Commissioner of Taxes v Nchanga Consolidated Copper Mines Limited [1964] AC 948 Viscount Radcliffe said at 959:

'Nevertheless, it has to be remembered that all these phrases, as, for instance, "enduring benefit" or "capital structure" are essentially descriptive rather than definitive, and, as each new case arises for adjudication and it is sought to reason by analogy from its facts to those of one previously decided, a court's primary duty is to inquire how far a description that was both relevant and significant in one set of circumstances is either significant or relevant in those which are presently before it.'

In B P Australia Limited v Commissioner of Taxation (1965) 112 CLR 386, Lord Pearce, who delivered the judgment of the Privy Council, referred at 394 to the judgment of Dixon J. in Sun Newspapers, including the passage in Sun Newspapers at 362 where his Honour said:

'[t]he expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.'

Lord Pearce went on to say at 397 that:

'The solution to the problem [that is whether expenditure is properly attributable to revenue or capital] is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions
of emphasis and degree. That answer "depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process" (per Dixon J. in Halstrom's Case (1946) 72 CLR 634 at 648). As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallize particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.'

See also Colonial Mutual Life Assurance Society Limited v Federal Commissioner of Taxation (1953) 89 CLR 428; and Commissioner of Taxation v South Australian Battery Makers Pty Limited (1978) 140 CLR 645.

The question in the case is what was the sum of $55,000 paid for? On the one hand, counsel for Labrilda argued that the payment was made on revenue account. He submitted that if the payment had not been an 'up-front' lump sum payment, but a series of periodical instalments, then clearly they would have been of a revenue nature. Counsel continued by saying that the fact that there was only one payment does not alter its revenue character. The payment related to the day to day activities of Labrilda; it was not a payment for the right to carry on its business as a Mobil service station operator.

On the other hand, counsel for the Deputy Commissioner argued that the payment of $55,000 was of a capital nature. He submitted that this conclusion was supported by the following considerations:

. It was essentially an accreditation fee for the right to purchase the business of a service station, or gain access to it; and thus it was a right to acquire a business structure.

. It was in part a payment for the right to have access to, and use, the intellectual property of Mobil.

. The monies once paid were not refundable.

. Once paid to Mobil, the disposition of the monies was a matter for Mobil's discretion. Mobil could use them for whatever purpose it wished, subject to the fact that it had to use the monies at least in part for the purpose mentioned in clause 6(4) of the MTP Agreement, namely 'the expenses of training, marketing advice and support, advertising and promotions, and general set-up and operating expenses'.

. The levy payable pursuant to clause 6(2) of the MTP Agreement constituted the part of the funds expended by Mobil as marketing expenses. They, not the Accreditation Fee, were of a revenue nature.

It is necessary to examine all four agreements entered into by Mobil and Labrilda in order to determine the true character of the payment of $55,000. Although the MTP
Agreement is the primary agreement with which this case is concerned, the four agreements are interlocking.

Nevertheless, from all of the agreements, clause 6 of the MTP Agreement stands out as particularly important. As mentioned earlier, it envisages the possibility of payment of the Accreditation Fee by more than one instalment (sub-clauses 6(1), (2) and (3)); but the Schedule provides (at paragraphs 6 and 7) that in this case the Accreditation Fee of $55,000 was to be paid by the initial Accreditation Fee payment, leaving the balance as nil. The first sentence of clause 6(4) requires Mobil to use 'initial Accreditation Fee payments' to pay for the Mobil Team Pak expenses. It goes on to provide in the second sentence that, when received, all the Accreditation Fees are to belong to Mobil, and that they may be used at its discretion, subject to the commitments described in the preceding sentence. I do not think this clause on its proper construction entitles Mobil to use the Accreditation Fees, if any, that are paid after the initial Accreditation Fee for whatever purpose it wishes; although the point is perhaps academic in this case because the initial Accreditation Fee and the Accreditation Fee are one and the same.

What clause 6 means is that the whole of the Accreditation Fee, whether payable by one initial payment or by instalments, must be applied for the purpose specified in the first sentence of clause 6(4); but since the monies are not trust monies and may be mixed with Accreditation Fees paid by other Mobil dealers, the second sentence is designed to ensure that the monies, once paid, are Mobil's monies, and the method of their
application is at the discretion of Mobil. In any case, the Accreditation Fee is to be for the Mobil Team Pak expenses. The discretion of Mobil is in regard to the time and method of the payment of the monies. Even if the construction of the second sentence of clause 6(4) for which counsel for the Deputy Commissioner contended is correct, it would be but one circumstance to consider in determining the true character of the payment.

Counsel for the Deputy Commissioner is correct in submitting that there is no express obligation imposed upon Mobil to refund the Accreditation Fee if the agreement should be terminated. But if the agreement is breached by Mobil, Labrilda would be entitled to sue Mobil for damages; and a component of the damages would be the proportion of the Accreditation Fee paid by Labrilda that had not been used by Mobil for the payment of the Mobil Team Pak expenses. Clause 16(4) of the MTP Agreement previously mentioned, whereby, if Mobil breaches that agreement Labrilda may seek specific performance, but not be entitled to claim damages, is but one situation which the MTP Agreement addresses.

Fundamentally, the MTP Agreement enabled Labrilda to obtain access to the assistance and training provided by Mobil for the efficient operation of a service station, and to participate in Mobil's marketing and merchandising programmes. The agreement was not concerned with establishing or preserving the business structure of the service station, but rather with improving Mobil's market share, and increasing the revenue and profitability of its dealers, including Labrilda. It was directed to the provision of services which related to the day to day operations of a service station. To the mutual advantage
of Mobil and its dealers, the services which Mobil agreed to provide under the MTP Agreement were directed to the income producing activities of Labrilda. Indeed, Labrilda paid $55,000 to Mobil to receive benefits of a revenue nature. In fact, Labrilda did not receive the increased profitability that it had expected, but that is not to the point. None of the services and promotions provided under the MTP Agreement had an enduring quality in the sense of enhancing Labrilda's service station's business structure.

The $55,000 was expressed to be an Accreditation Fee in the MTP Agreement. Essentially, however, the payment was made to enable Labrilda 'to use the Mobil System in the conduct of its business at the Site and to participate in the Team Pak Program' (recital D).

Among the rights conferred upon Labrilda under the MTP Agreement was the right to have its Accreditation Fee applied to Mobil Team Pak expenses - expenses connected with the use within Australia of the Mobil System, including training of staff, marketing advice and support, advertising and promotion, and the general 'set-up' and operation of the Mobil Team Pak Marketing Program. In my opinion this stamps them with the character of revenue, not capital.

Although one of the rights obtained by Labrilda under the MTP Agreement is the right to use Mobil's know-how, the trade name and mark 'Mobil', the distinctive Flying Horse trade mark, and distinctive Mobil signage and graphics - all being intellectual property of Mobil - this does not automatically clothe the $55,000 with the character of capital. It simply means that Labrilda is entitled to use intellectual property of Mobil in the course of carrying on its business at the Site, the purpose plainly being to increase its business, revenue and profits, and at once those of Mobil.

In my opinion, the payment of $55,000 was an outgoing on revenue account, and therefore deductible under s. 51 of the Income Tax Assessment Act 1936.

It is agreed between the parties that, if Labrilda succeeds in this matter, s. 82KZM of the Assessment Act will apply, so that an apportionment will be necessary to spread the deduction over the relevant years of income. The matter must therefore be remitted to the Tribunal to determine the deductibility of the sum of $55,000 pursuant to that section.

I would order that:

1. The appeal be allowed.

2. The decision under review be set aside.

3. The matter be remitted to the Tribunal to determine the appropriate deduction in accordance with s. 82KZM of the Assessment Act.

4. The Deputy Commissioner of Taxation pay the costs of Labrilda Pty Limited of the appeal.

I certify that this and the preceding nineteen (19) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart.

Associate

Dated: 26 March 1996

IN THE FEDERAL COURT OF AUSTRALIA)

QUEENSLAND DISTRICT REGISTRY ) No. QG 68 of 1995

GENERAL DIVISION )

ON APPEAL from the General Division of the Administrative Appeals Tribunal

BETWEEN : LABRILDA PTY LTD

(ACN 010 149 952)

Applicant

AND : DEPUTY COMMISSIONER OF TAXATION

Respondent

CORAM: Lockhart, Spender & Ryan JJ

PLACE: Brisbane

DATE: 26 March 1996

REASONS FOR JUDGMENT

SPENDER J:

I agree that the appeal from the Administrative Appeals Tribunal should be dismissed with costs, for the reasons for judgment of Ryan J.

I certify that this is a true copy of the reasons for judgment herein of the Honourable Justice Spender.

Associate

Date: 26 March 1996

IN THE FEDERAL COURT OF AUSTRALIA )

QUEENSLAND DISTRICT REGISTRY ) QG 68 of 1995

GENERAL DIVISION )

ON APPEAL FROM THE GENERAL DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL

BETWEEN: LABRILDA PTY LTD

(ACN 010 149 952)

(Applicant)

AND: DEPUTY COMMISSIONER OF TAXATION

(Respondent)

CORAM: Lockhart, Spender and Ryan JJ

PLACE: Brisbane

DATE: 26 March 1996

REASONS FOR JUDGMENT

RYAN J: This is an application by way of appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") constituted by Miss Forgie, (Deputy President) and Messrs Beddoe (Senior Member) and Horrigan (Member). Because the issue on which the decision turned was perceived to be a question of law, the view of the learned Deputy President prevailed pursuant to s 42(1) of the Administrative Appeals Tribunal Act notwithstanding that the other two members reached a different conclusion.

The appellant at all relevant times conducted a "Mobil" service station at Tingalpa. It had earlier conducted a similar business, since November 1987, from leasehold premises at Murrarie. About two months after commencing business at Murrarie, Mobil Oil Australia Ltd ("Mobil") introduced a new marketing program which required resellers of Mobil products to enter into a Co-operative Program Agreement under which each reseller apparently agreed to pay to Mobil an accreditation fee. The fee paid by the appellant in respect of the Murrarie premises was $25,000. After about two years, the appellant took advantage of an opportunity to move its business to another "Mobil" service station at Tingalpa. To achieve that transfer, it entered into four agreements with Mobil - a "Mobil Team Pak Agreement" which was in the form of the earlier Co-operative Program Agreement, a lease, a reseller agreement and a meter wholesale agreement. The agreements, as the Tribunal found, were "inter-locking and inter-dependent" in the sense that one could not be entered into without the others and upon the determination of one, the others fell with it.

The Team Pak Agreement was prefaced by, amongst others, the following recitals:

A. Mobil has the right to the use within Australia of a system for the identification, lay-out and co-operation of service stations for the retailing of petroleum products and associated services, including know-how, the trade name and mark "Mobil", a distinctive Flying Horse trade mark, distinctive Mobil signage and graphics, and the Mobil Prime Sign (hereinafter collectively called "the Mobil System").

B. Mobil has developed considerable goodwill and reputation in the Mobil System within Australia.

C. Mobil and its dealers have been co-operating in order to develop and introduce at Mobil service stations in Australia, a business package with the objective of Mobil and its dealers achieving and maintaining market leadership in the petroleum retailing industry and comprising new and improved products, methods of marketing, merchandising and promotion, and new and improved means of customer service (hereinafter collectively called "the Team Pak Program").

D. Dealer wishes to be granted the right to carry on a service station business at the address specified in paragraph 3 of the Schedule ("the Site") selling petroleum products acquired from Mobil and other associated products and services, to use the Mobil System in the conduct of its business at the Site and to participate in the Team Pak Program and Mobil is willing to grant to Dealer the right to do so on the terms and conditions set out in this Agreement.

This general description of the rights acquired by the Dealer was contained in cl 1 of the Team Pak Agreement:

RIGHTS TO USE SYSTEM AND PARTICIPATE IN TEAM PAK

Mobil hereby grants to Dealer (subject to the terms and conditions contained in this Agreement and subject to Dealer entering into the other Team Pak Agreements and thereby acquiring the rights granted thereunder) the right, in carrying on a service station business at the Site selling petroleum products acquired from Mobil and other products and services of a type approved by Mobil, to use the Mobil System in the conduct of Dealer's business at the Site and to participate in the Team Pak Program.

Pursuant to the Team Pak Agreement, the appellant paid the sum of $55,000 which has given rise to the present proceedings. That sum was described in the Team Pak Agreement as an "accreditation fee" and was provided for by cl 6 of the Agreement which was in the following terms:

6. TEAM PAK EXPENSES AND FEE

(1) Accreditation Fee:

Dealer acknowledges that the continuation and success of the Team Pak Program necessitates the incurring of costs and expenses in introducing and maintaining the Team Pak Program. Dealer therefore agrees to pay to Mobil, subject to this Agreement, an Accreditation Fee in the amount specified in paragraph 6 of the Schedule.

(2) Initial Accreditation Fee Payment:

On or prior to the execution of this agreement, Dealer shall pay to Mobil at least that amount of the Accreditation Fee as is specified in paragraph 7 of the Schedule.

(3) Balance of Accreditation Fee:

Where after the payment under (2) there is a balance of the Accreditation Fee still payable, it shall be paid subject to and as required in Attachment A (after adjustment for inflation and otherwise as provided in that Attachment).

(4) Use of Accreditation Fee:

Mobil shall use the initial Accreditation Fee payments under (2) by Dealer and other Mobil dealers in paying for Mobil Team Pak expenses, including but not limited to, the expenses of training, marketing advice and support, advertising and promotions, and general set-up and operating expenses. When received, all Accreditation Fees belong to Mobil, and may be used at its discretion subject to the commitment described in the preceding sentence.

(5) No Further Fee on Renewal:

Dealer shall have no obligation to pay to Mobil any further Accreditation Fee on any renewal of this Agreement during the period of nine (9) years commencing on the Commencement Date.

(6) Where Mobil holds under Lease with less than Nine Years remaining:

Where this Agreement has an Attachment B, an extra accreditation fee may be payable under the provisions of that Attachment, including, notwithstanding (5), under the provisions of a renewal of this Agreement.

The corresponding references in the Schedule were:

6. Accreditation Fee: FIFTYFIVE THOUSAND DOLLARS ($55,000.00)

7. Initial Accreditation Fee Payment: FIFTYFIVE THOUSAND DOLLARS ($55,000.00) (then the balance remaining is nil).

The appellant's Team Pak Agreement did have annexed to it both an Attachment A and an Attachment B. Attachment A apparently recognized the fact that the Team Pak Agreement was in a standard form under which some Dealers, unlike the present appellant, might pay the accreditation fee in more than one instalment. It provided for payment of the balance of the accreditation fee by stipulating:

1. BALANCE OF ACCREDITATION FEE

Where, after the payment required by clause 6(2) of the Mobil Team Pak Agreement, a balance of the Accreditation Fee is still payable, it is to be paid as provided in clause 3 of this Attachment after re-calculation under clause 2 of this Attachment.

Then followed a prescription of a formula for calculating the amount payable by adjusting the unpaid balance in accordance
with the Consumer Price Index applied over the time which had elapsed since the Team Pak Agreement had been entered into. The formula had the effect that the amount payable was reduced to nil. Clauses 3, 5 and 6 effectively provided a release from the obligation to pay the balance of the accreditation fee if the "Dealer as constituted" continued to operate the site for six years or some person not associated with "the Dealer as constituted" became the operator of the site as a result of the death or incapacity of that Dealer or a person nominated to be personally present.

Attachment B was prefaced by these recitals:

A. Mobil holds the Site under a lease (the "Lease") which is due to end within nine (9) years.

B. It is not known whether the Lease will be extended, renewed, or replaced.

C. Because of the uncertainty referred to in B, the Accreditation Fee and the minimum initial Accreditation Fee payment under Clause 6 of the Mobil Team Pak Agreement have been reduced.

D. This Attachment is to clarify what is to happen in each of the possible circumstances.

Attachment B then went on to provide that, in the event of the Lease not being extended, renewed or replaced within nine years, each of the Team Pak Agreements should end immediately before the end of the Lease without Mobil incurring any liability to the Dealer because the Team Pak Agreement had not continued for at least three years. Clauses 2 and 3 of Attachment B provided as follows:

2. MOBIL RIGHTS CONTINUE

(a) Where the Lease is extended, renewed, or replaced; or

(b) where Mobil purchases the freehold of the Site, or its landlord's interest in the Site;

the Team Pak agreements shall continue in accordance with their provisions, and

3. CALCULATION OF EXTRA ACCREDITATION FEE

The extra accreditation fee is calculated in accordance with the formula:-

A = CPI (B - C)

Where:-

A is the amount payable

CPI is the movement in the consumer price index, arrived at by dividing the index number for the quarter of the year in which the amount is paid by the index number for the quarter of the year in which the Team Pak Commencement occurs. The index numbers from time to time used under s 160ZJ of the Income Tax Assessment Act of the Commonwealth of Australia shall apply.

B is

(being the minimum initial accreditation fee payment if the uncertainty referred to in Recital B did not exist).

C is the amount specified in paragraph 7 of the Schedule to the Mobil Team Pak Agreement as the initial Accreditation Fee payment.

The Team Pak Agreement obliged Mobil to conduct promotional campaigns and provide training for each reseller and its employees, advice and assistance, including the obtaining of "national offers from preferred suppliers", and "point of sale material in Mobil graphics". Mobil was also required to provide each Dealer with "Team Pak Reference Manuals" embodying standards and guidance for the operation of a Mobil service station. It was contemplated that those manuals would be updated from time to time. There was a corresponding obligation on each Dealer to comply with the standards stipulated in the manuals.

The rights of the Dealer and Mobil to certain items of Mobil's intellectual property were set out as follows in cl 8 of the Team Pak Agreement:

TRADE MARKS AND BRAND NAMES

(1) Dealer Acknowledgement:

Dealer acknowledges and recognises Mobil's interest and right to the Mobil System. Except with the written consent of Mobil, Dealer agrees not to infringe, use or imitate any element of the Mobil System (including any manuals, operating guidelines, forms, or other literature or advertising of Mobil relating to the Mobil System). Dealer shall keep confidential the Team Pak Reference Manuals and all other elements of the Mobil System that are not in the public domain.

(2) Use only under Agreement:

Dealer may use Mobil's trade marks, brand names and other elements of the Mobil System only in accordance herewith, and the Team Pak Reference Manuals only in connection with the promotion, handling and sale of Mobil products and other products or types of products and services approved by Mobil.

(3) Quality Control:

Dealer shall not adulterate, mix, or otherwise interfere with the quality of Mobil products sold by Dealer, and shall keep them in good condition and strictly adhere to the quality control and testing procedures specified in the Team Pak Reference Manuals or otherwise by Mobil from time to time.

(4) Not to misrepresent:

Dealer shall not pass off or represent any goods as Mobil goods if they are not Mobil goods.

Notwithstanding cl 6(4) of the Team Pak Agreement which I have already quoted, the accreditation fee was not seen as the sole source of funds for promotional and marketing activities to be carried on by Mobil. Another source was the fund contemplated by cl 7 of the Team Pak Agreement in these terms:

7. MARKETING AND SALES PROMOTION

(1) Team Pak Marketing Council:

Mobil and its dealers have formed a Team Pak Marketing Council, which includes dealer representatives, for the purpose of developing an annual Team Pak Marketing Program and budget for network related marketing and promotion.

(2) Marketing Allocation:

Commencing on the later of the Commencement Date or 1st January, 1990, Mobil shall allocate from the rent paid by Dealer monthly under the Dealer's lease of the Site, one-tenth of a cent for each litre of petrol, automotive distillate and automotive liquefied petroleum gas the Dealer purchases from Mobil in the month for sale at or from the Site. The amount so allocated, plus similar allocations for other Mobil Team Pak lessee dealers, and marketing fees received from Mobil Team Pak owner dealers, shall be used by Mobil, together with a matching amount provided by Mobil, in paying for the marketing program referred to in (1).

(3) Information:

At least once each calendar year Mobil shall provide to Dealer a written statement showing the total of the allocations and marketing fees referred in to (2) in the period since the previous year's statement, and the total expenditure on the marketing program in that period.

The Team Pak Agreement was expressed to remain in force for three years from its commencement with an obligation on Mobil to renew it in accordance with the Petroleum Retail Marketing Franchise Act 1980 as amended from time to time. Sub-cl (3) of cl (2) provided, in that context:

(3) Notwithstanding (1) and (2):-

(a) where Mobil itself holds the Site under a lease and sub-lets occupancy of the Site to Dealer, the life of this Agreement shall not endure beyond the period which ends immediately before the end of the lease to Mobil;

(b) where either the Lease or the Reseller Agreement, being other of the Team Pak Agreements in relation to Dealer's business at the Site, ends, this Agreement shall end automatically.

The ability to assign the benefit of the agreement was governed by cl 14 in these terms:

14. ASSIGNMENT

(1) No Assignment Without Consent:

Neither party hereto shall assign, charge or otherwise encumber any of its rights or obligations under this Agreement, or the other Team Pak Agreements, without the prior written consent of the other party. Where legislation requires it, that consent is not to be unreasonably withheld.

(2) Unauthorised Assignment Void:

Subject to the Act, any assignment, charge or other encumbrance of either rights or obligations shall be void unless the prior written consent of the other party is first obtained.

(3) Change in Company or Trust:

Where Dealer is a company, or the trustee of a trust, and the legal or beneficial interest in any share(s) in that company (which give control of the company or which confer the right to receive fifty per cent (50%) or more of any dividends of the company), or the beneficial ownership of the trust, is transferred to or held by a person other than a person who holds that interest at the commencement of this Agreement, the following provisions shall apply:

(a) Unless Mobil otherwise agrees, Dealer shall within fourteen (14) days thereafter serve on Mobil a notice in writing (the date on which Mobil receives the notice being hereinafter called "the offer date") offering to Mobil to assign Dealer's rights and obligations under the Team Pak Agreements for a consideration equal to their then market value, to such person as Mobil may nominate.

(b) Dealer shall specify in the notice Dealer's assessment of such consideration. If Mobil disputes Dealer's assessment, Mobil may within thirty (30) days of the offer date notify Dealer that it requires the consideration to be determined by the arbitration of an independent valuer to be, at the request of Mobil, nominated by a Director or other Senior Office bearer of the Australian Institute of Valuers (Incorporated) or its successor, and the arbitrator's costs of such determination shall be paid by Mobil and Dealer equally, with each party bearing its own costs. Mobil and Dealer shall co-operate to expedite the arbitration, and the determination of the consideration by arbitration shall be binding on Dealer.

(i) the offer date; or

(ii) where the consideration is arbitrated, the aware of the arbitrator;

within which to accept Dealer's offer.

It was accepted on both sides that the Team Pak Agreement was not a sham and that entry into it was believed by the appellant to be necessary to maximize the income to be derived from the dealership. The Tribunal made the following finding of fact in respect of the intention of the director of the appellant who seems to have been accepted by both parties as its governing mind and will:

62. ... The Director understood that the taxpayer paid it so that it could take advantage of the system of advertising and promotion in place for the Petroleum Company's dealerships. This would replace the taxpayer's individual efforts and maintain its profitability in a highly competitive industry. The director also said that the taxpayer would be provided with training of its staff in the standards required of a Co-operation Programme service station network by providing manuals which the Petroleum Company would update from time to time.

Earlier findings of fact bearing on the state of mind of the same director were:

24. In his experience, the director said, the service station business is highly competitive. Other petroleum companies have developed very effective campaigns to attract customers to their dealerships. He also believed that there was not a great deal of "customer loyalty" among the general public and the dealership they choose is influenced by a number of factors. Those factors include price and promotions. If there is a "price war", they will choose the dealership with the cheapest price but, if that is not a factor, the public is attracted by promotions such as "free give-aways".

25. As he was aware of the highly competitive nature of the retail fuel industry, the director considered it imperative for the continuing profitability of the taxpayer that it enter the Petroleum Company's Co-operation Programme system. He could envisage that, unless the taxpayer did so, revenue would be lost and the service station's profitability would be reduced. As a member of the Petroleum Company Co-operation Programme Agreement, he expected that the taxpayer would, at the very least, maintain its existing market share and so maintain its then current levels of revenue and profitability. He was also optimistic that the taxpayer would produce increased revenue and profits as a result of the Petroleum Company's promotions.

26. At the time the taxpayer took up the lease of the second service station,it also entered a new Petroleum Company Co-operation Programme Agreement. As the director had previous experience with the system at the first service station, he did not think it necessary to discuss the details with anyone at the Petroleum Company about the way in which it operated and what it involved.

27. As it turned out, the director felt that the Co-operation Programme was not as successful as he had hoped it would be. Despite that, he was convinced that it was necessary that the taxpayer remain a Co-operation Programme dealer when it acquired the second service station. This was based on the director's view that it was necessary in order to maximise the potential revenue and profitability of the business. Indeed, the director considered that the high exposure and greater turnover at the second service station meant that it was imperative to be associated with advertising and promotions which would enhance the taxpayer's competitiveness against other petroleum companies.

28. The director said that the Petroleum Company provided on-going training for the staff, marketing advice as and when required, advertising and promotions. The Petroleum Company supplied copies of the Co-operation Programme Reference Manuals. Those manuals, which are updated regularly remain the property of the Petroleum Company. No changes were made to the structure of lay-out of the service
station and no plant, equipment or other fittings or fixtures were supplied to the taxpayer under the Co-operation Programme Agreement.

29. In relation to the advertising and promotions conducted under the Co-operation Programme Agreement, the director said that:

"The advertising and promotions provided by ... [the Petroleum Company] usually apply for quite a limited period of time - no more than two or three months. It is my experience that the promotional campaigns organised by each of the major oil companies for their dealerships tend to change very rapidly, as each of them struggles to maintain its competitiveness with the others. There is no way that the Taxpayer would be able to develop such rapidly changing advertising and promotional campaigns, without the assistance of ... [Petroleum Company] through the ... [Co-operation Programme model] system. It is my experience that, once a particular advertising or promotional campaign has expired, it has little or no on-going benefit for the Taxpayer's business; such advertising and promotional campaigns only seem to influence potential customers whilst they are current, and as soon as a particular advertising or promotional campaign has finished motorists have a tendency to take their business to the Taxpayer's competitors unless and until a fresh advertising or promotional campaign is undertaken." (Exhibit 2, paragraph 18)

30. In his oral evidence, the director said that, if looked at overall, promotions normally operate on a "break-even" basis. This means that if the taxpayer is required to give away fuel, for example, it is usually reimbursed its value. In cross-examination, he was asked whether the effectiveness or otherwise of the marketing campaigns affected the taxpayer's profitability. He said that some led to increased profits and, some led to the taxpayer's incurring a loss. The marketing campaigns were never judged by reference to individual dealers, however, but by their overall national effect.

31. The director said that the taxpayer would find it almost impossible to run its own marketing programme and promotions as it could not meet the costs of, for example, giving away free fuel for a two month period. It was important to work with the Petroleum Company or with any other petroleum company with whom a dealer might be associated. This meant that the taxpayer had to run promotions whether they were a success or a failure.

The question which the Tribunal saw itself as required to resolve was whether the accreditation fee of $55,000 was an outgoing of capital or of a capital nature for the purposes of s 51(1) of the Income Tax Assessment Act or whether it was a pre-payment of expenditure of a revenue nature. Section 51(1) provides:

All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a
capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.

It is clear, and apparently common ground, that the taxpayer has been carrying on the business of a service station operator for the purpose of gaining or producing assessable income. The questions for resolution can therefore be characterised as whether the outgoing in the form of the accreditation fee was necessarily incurred in carrying on that business and, if so, whether it came within the exception as wholly or partly an outgoing of capital or of a capital nature. In my view, those questions, in the circumstances of this case, come down to alternative expressions of the same issue. I say that because, if the outgoing was incurred, as the respondent contends, as an establishment expense directed to the acquisition organization and structure of the business and not to carrying it on, the factual question of whether it was of capital or of a capital nature almost answers itself as in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30.

What has become accepted for present purposes as the classic formulation of the distinction is that by Dixon J in Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 where his Honour observed, at 359:

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or oganization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss. The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to
comprehend under one description all the forms in which it may be manifested. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called goodwill, that is, widespread or general reputation, habitual patronage by clients or customers and an organized method of serving their needs. At the other extreme it may consist in a great aggregate of buildings, machinery and plant all assembled and systematized as the material means by which an organized body of men produce and distribute commodities or perform services. But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a "profit-yielding subject," the phrase of Lord Blackburn in United Collieries Ltd v Inland Revenue Commissioners (1930) SC 215, at p 220; (1929) 12 Tax Cas 1248, at p 1254. As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose. But the practical application of such general notions is another matter. The basal difficulty in applying them lies in the fact that the extent, condition and efficiency of the profit-yielding subject is often as much the product of the course of operations as it is of a clear and definable outlay of work or money by way of establishment, replacement or enlargement. In the case of machinery, plant and other material objects, this is illustrated by the commonplace difficulty of saying what is maintenance and what are renewals to be referred to capital. But for the same or a like reason it is even harder to maintain the distinction in relation to the intangible elements forming so important a part of many profit-yielding subjects. For example, a profitable enterprise such as the sale of a patent medicine may depend almost entirely on advertisement. In the beginning the goodwill may have been established by a great initial outlay upon a widespread advertising campaign carried out upon a scale which it was not intended to maintain or repeat. The outlay might properly be considered to be of a capital nature. On the other hand the goodwill may have been gradually established by continual advertisement over a period of years growing in extent as it proved successful. In that case the expenditure upon advertising might be regarded as an ordinary business outgoing on account of revenue. More often than not an outlay of capital in establishing an organization or obtaining an asset of an intangible nature does not produce a permanent condition or advantage. Its effects are exhausted over a period of time. In such cases the commercial practice of writing off the expenditure against revenue over a term of years or making a reserve to replace exhausted capital lessens the importance of the contrast. But in the assessment of income for taxation purposes severe limitations are placed upon the application of such a practice, the allowance of which is exceptional.

In later cases the focus of the inquiry has been narrowed to the advantage sought by the taxpayer to be derived from the expenditure in question. That advantage must be identified from a practical and business point of view (Hallstroms Pty
Ltd v Federal Commissioner of Taxation (1965) 112 CLR 386 at 397). The identification does not depend solely on the subjective intentions of those who sought to derive the advantage, nor on the characterisation of the legal rights (if any) acquired in consideration of the expenditure. It must be undertaken without regard to the nature of the advantage gained by another party to the transaction pursuant to which the expenditure has been incurred. Thus, in Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 Gibbs ACJ at 660 applied the test in this way:

The outgoings in the present case were genuinely made in payment of rent. The only advantage that the taxpayer sought or gained for itself by making the payments was that which it obtained as lessee under the lease. There was nothing to suggest that the taxpayer could or would share in the advantage which Property Options would derive from the making of the payments, and the taxpayer had no legal right, or for that matter any power, to ensure that Property Options did secure its rights under the option. The advantages gained by Property Options are therefore irrelevant in deciding upon the character of the advantage sought by the taxpayer in making the payments. That advantage was of a revenue character, namely the interest of a lessee, it was to be enjoyed in the ordinary way that such an interest is enjoyed, and it was to be obtained by periodical payments. The outgoings were not of a capital nature.

The advantages sought by the taxpayer were complex. They included the right to conduct a Mobil service station, with the concomitant use of trademarks, signs and other intellectual property, and the right to receive promotional assistance and advisory services as Mobil might choose to make them available during the term of the Team Pak Agreement. From a practical and business point of view, some of those rights could be regarded as of a revenue, and some of a capital nature. The determinative features seem to be the time at which they were required by the expenditure in question, the "once for all" nature of the payment and the character which the rights bore at the time of their acquisition.

The length of time, three to nine years, over which the rights were exercisable seems to be neutral to the present issue; see B P Australia Ltd v Federal Commissioner of Taxation (1965) 112 CLR 386 where the Privy Council observed at 399:

What additional indication is given by the actual length of the agreements? That must be a question of degree. Had the agreements been only for two or three year periods that fact would have pointed to recurrent revenue expenditure. Had they been for twenty years, that fact would have pointed to a non-recurring payment of a capital nature. Length of time, though theoretically not a deciding factor, does in practice shed a light on the nature of the advantage sought. The longer the duration of the agreements, the greater the indication that a structural solution was being sought. In this case the periods varied between three and fifteen years, but the average appears to be something just under five years and the predominant number of agreements was for a five-year period. The case was argued before their Lordships as in the Courts below on the footing that five years was the length of the tie and neither side sought to make any differentiation because a few of the ties were very much longer. That length of time appears to be neutral, and in itself indicates neither capital expenditure nor revenue by its mere length. It therefore does not add effectively to the argument either way. The question must be decided by other weights in the balance.

Confining attention, for the purposes of illustrating the character of the rights, to an expenditure directed to rights to use intellectual property, a payment of a royalty paid to the registered owner of a trademark on each occasion when the mark is attached to goods produced by the taxpayer is clearly of a revenue nature. (See eg J Gadsden & Co Ltd v Commissioner of Inland Revenue (NZ) (1964) 14 ATD 18). On the other hand, a licence fee paid as a lump sum for the right to apply a trademark to any goods produced by the taxpayer for the ensuing ten years is equally of a capital nature.

There was no evidence before the Tribunal that the sum of $55,000 was a genuine pre-estimate of the value of promotional services, advice and similar assistance to be provided by Mobil over the period during which those services were to be supplied. On the other hand, there was evidence of a discrete arrangement, in cl 7 of the Team Pak Agreement to defray the costs of an annual co-operative marketing programme from contributions by dealers of 0.1 cents per litre of fuel purchased and a matching contribution by Mobil. It is significant in the balancing exercise which the authorities ordain that the advantage (whatever it was) to be obtained by the taxpayer was not generally assignable and that the balance of the accreditation fee, where not paid in a lump sum, could be amortized to the point where it reached nil after six years. These indications tend to suggest that the rights acquired by the assumption of the obligation to pay the fee were capital in nature, albeit constituting a wasting asset.

It might have been possible, as contemplated by the language of s 51(1), to apportion the outgoing between revenue and capital account. However, the case was conducted before the Tribunal, and before this Court, on an "all or nothing" basis and, as already indicated, the evidence does not permit an apportionment to be made.

For these reasons, I have been led, on balance, to conclude that the accreditation fee is to be characterized as expenditure upon establishing the profit-yielding subject of the taxpayer's business. It is true that when it was incurred, the taxpayer believed that it would derive from the expenditure advertising and other sales promotional benefits and business advice. However, in my view, the nature of the payment and the time at which it was made militate against its characterization as having been made in return for those benefits as the need for them might arise from time so as to be on revenue account. Accordingly, I would dismiss with costs the application by way of appeal.

I certify that this and the preceding sixteen (16) pages are a true copy of the Reasons for Judgment of his Honour Justice Ryan.

Associate:

Counsel for the applicant : Mr D F Jackson QC and Mr A J H Morris QC

instructed by : George Conomos

Counsel for the respondent : Mr A Slater QC and

Mr M Bland

instructed by : Australian Government Solicitor

Date of Hearing : 6 November 1995

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