Deductibility of payment made to extinguish a liability under Australian Taxation Law

AUSTRALIAN TAXATION LAW
Issue
Can the taxpayer claim a deduction for a payment made to extinguish a liability?
Law
Section 40-880 of the Income Tax Assessment Act, 1997 (ITAA, 1997)
Taxation Ruling TR 96/23
John Fairfax & Sons Pty Ltd v. Federal Commissioner of Taxation (1959) 101 CLR 30
GP International Pipecoaters Pty Ltd v. Commissioner of Taxation (1990) 170 CLR
124
Californian Copper Syndicate v. Harris (Surveyor of Taxes) (1904) 5 TC 159)
Myer Emporium v. Federal Commissioner of Taxation (1987)
Anglo-Persian Oil Co. Ltd. v Dale (1932) 145 L.T at 262.
Argument
While arriving at the historic judgement in this case between Sun Newspapers Ltd. and
Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337;
(1938) 5 ATD 23; (1938) 1 AITR 403 (commonly referred to as Sun Newspapers Ltd v
FCT), the Honourable Judge Dixon relied mainly on Section 40-880 of the ITAA, 1997,
as per Sadiq, (2017). As per this statute, and I quote –
“The object of this section is to make certain business capital expenditure deductible
over 5 years, or immediately in the case of some start-up expenses for small businesses,
if:
(a) the expenditure is not otherwise taken into account; and
(b) a deduction is not denied by some other provision; and
(c) the business is, was or is proposed to be carried on for a taxable purpose.”
Unquote.
Dixon J in his historic judgement stated that the purpose of the taxpayer did not fulfil
any of the three prepositions stated in the section. He cited the following criteria for
arriving at his judgement.
 Character of advantage sought –

What advantage did the taxpayer get?
Was it a one-off or did it have a lasting impact on the business structure of
taxpayer?
 Manner in which it was to be used –
Was the taxpayer going to continue and rely on the benefit?
 Means adopted to obtain it –
Was it a periodical payment or was it a one-off payment for future use?
In order to consolidate his criteria, Dixon J cited the case of Californian Copper
Syndicate v. Harris (Surveyor of Taxes) (1904) 5 TC 159) in which it was held that the
amount received was in nature of income as the taxpayer always intended to sell the
land, albeit in pieces, for making a profit and this is also corroborated by the fact that
the taxpayer did not have sufficient funds for mining, as per Sadiq, (2017).
This is also established by sections 6-10 and 8-1 of ITAA, 1997 which state that if a
gain has been realised from an asset and this was done by the taxpayer with a profit
making motive, it is an operating income. This is also corroborated by Myer Emporium
v. Federal Commissioner of Taxation (1987) where it was established that the profits
made by the taxpayer under the contracts was assessable as ordinary business income as
it was an isolated business transactions entered by the taxpayer with the intent of
making a profit, states Sadiq, (2017).
Conclusion
In the commercial field of finance, the distinction between deductible expenses and
capital expenditure is the most critically and widely discussed topic, both at the
accounting as well as the judicial level. Taxpayers, in order to reduce their tax liability
do make an attempt of claiming an expense as ‘deductible’ over a period of time which
may be spread over three to five accounting years. The authorities have been opposing
such moves by businessmen and courts have been delivering judgments, some of which
have become milestones and are referred to by other judges dealing in similar cases.
The judgment by the honourable judge Dixon being cited in this case study