Chapter 9
[9.1] The phrase “to the extent to which” appears twice in s. 51(1). The significance of the second use of the phrase for the debate as to the function of the exceptions—whether they are merely stated by way of contradistinction or are true exceptions—was the subject of some comment in [5.9] above. The phrase was first included in the general deduction provision in the 1936 Act. At the same time a requirement that an outgoing to be deductible must be “wholly and exclusively” for the purpose of deriving assessable income was omitted from the Assessment Act. The changes were noted in Ronpibon Tin N.L. (1949) 78 C.L.R. 47 at 55:
“[Section 51(1)] is in great part made up of expressions taken from ss 23 (1)(a) and 25(b) of the Income Tax Assessment Act 1922–1934, expressions that have been elucidated by many decided cases. But there are very important differences between the operation which the present s. 51(1) is framed to produce and the manner in which the former s. 23(1)(a) and s. 25 worked. Some of these differences it is desirable to mention. In the first place the principle expressed by the former s. 25(e) has been abandoned. The principle was, in the words of that provision, that a deduction should not in any case be made in respect of money not wholly and exclusively laid out or expended for the production of assessable income. Instead of imposing a condition that the expenditure shall wholly and exclusively be for the production of assessable income the present s. 51(1) adopts a principle that will allow of the dissection and even apportionment of losses and outgoings. It does this by providing for the deduction of losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income.”
[9.2 The omission of the requirement that an expense must be wholly and exclusively for the purpose of deriving assessable income has some significance. If the phrase remained, an outgoing such as the travel expense referred to in [8.51] above and the entertainment expense referred to in [8.85] above would be denied deduction. The omission of the words has the consequence that the outgoing may be deductible notwithstanding that one of its purposes is not relevant to the derivation of income. If it is deductible, it is deductible as to the whole of its amount.
[9.3] But the omission of “wholly and exclusively” is not significant where an expense may be dissected or apportioned. In the United Kingdom, where a “wholly and exclusively” requirement remains (s. 130(a) of the Income and Corporation Taxes Act 1970), the view is taken that an expense that can be apportioned may in relation to a part of the expense be seen as wholly and exclusively for the purpose of the derivation of income. Thus, Lord Reid in Ransom v. Higgs [1974] 1 W.L.R. 1594 at 1604 said of the United Kingdom section:
“It seems to me that the section could well be read as meaning that if it can be shown that a part of the expenditure was in fact wholly and exclusively for trading purposes, then that part is a proper deduction.” What is true in an apportionment situation, is a fortiori true in a dissection situation.
[9.4] The addition of the phrase “to the extent to which” has made no difference to the operation of the general deduction section, where a dissection would be available in any event. Where an expense is capable of dissection, there are in fact several outgoings, and each may be separately judged for deductibility. The significance of the phrase where a dissection would not be available raises questions of the scope of apportionment that would be available in any event, and what further scope for apportionment is given by the phrase. To the extent that apportionment would be available in any event, the phrase simply confirms an aspect of the interpretation of the section.
[9.5] The phrase confirms another aspect of the interpretation of s. 51(1). There is no principle, akin to that in McLaurin (1961) 104 C.L.R. 381 and Allsop (1965) 113 C.L.R. 341 discussed in [2.558]–[2.569] above, which would allow a deduction of the whole of an outgoing if there is a part of the outgoing which would be deductible if it stood alone, and if the remainder cannot be dissected or apportioned so as to separate it from the part that would be deductible. The consequence of McLaurin and Allsop is that the whole of a receipt escapes inclusion in income, if there is a part of it which would not be income if it stood alone and the remainder cannot be dissected or apportioned so as to separate it from the part that would not be income. In this regard a narrow view has been taken of what can be apportioned: indeed it is difficult to know when an apportionment, as distinct from a dissection, can be made under McLaurin.
[9.6] There is, it is true, some suggestion of a principle in regard to deductibility akin to that in McLaurin and Allsop, in the judgment of Fisher J. in the Federal Court in Phillips (1978) 78 A.T.C. 4361 at 4371:
“It is only if the taxpayer obtains, for a consideration which is identifiable and quantifiable, an additional advantage unconnected with the business activity that it can be said that portion of his expenditure is laid out for a purpose other than the acquiring of assessable income. It is in this circumstance that the identifiable portion would not be an allowable deduction.”
There is no other judicial authority to support such a view, and it is inconsistent with the apportionment ordered by the High Court in Ronpibon (1979) 78 C.L.R. 47.
[9.7] The apportionment contemplated by Fisher J. in the passage quoted from his judgment in Phillips may have been intended to state what he thought was the converse of the principle in McLaurin and Allsop. As such a statement it is as much lacking in precision as the statement of principle in McLaurin. As a statement of when an apportionment is proper under the phrase “to the extent to which” it is inconsistent with the judgment of the High Court in Ronpibon Tin N.L. (1949) 78 C.L.R. 47 quoted in [9.12] below. Ronpibon would support an interpretation of the phrase that would allow and require an apportionment of an outgoing to achieve a number of distinct purposes wherever a separate payment could have been made to achieve that distinct purpose.
[9.8] That interpretation of the phrase would support an apportionment in the circumstances of Cecil Bros Pty Ltd (1964) 111 C.L.R. 430. A separate payment could have been made to the supplier of the shoes to serve the purpose of conferring a benefit on the shareholders of that company beyond a payment for the shoes. An apportionment in these circumstances is on its face required by s. 51(1) so as to deny the deduction of some part of what was paid. In Cecil and later cases this has become obscured by the approach described as extended form and blinkers and explained in [9.17]ff. below.
[9.9] Ure (1981) 81 A.T.C. 4100 would support a view that the phrase makes a further extension of the requirement to apportion. Ure is an illustration of a number of circumstances where deductibility of what might be seen as a service cost of the holding of property is made to depend on the use that is made of the property. Ure was concerned with interest on money borrowed and used to serve distinct purposes only some of which related to the derivation of income. Other circumstances will involve the letting of property to serve such purposes, or the use of property directly for distinct purposes, of which the home-study cases considered in [8.28]ff. above afford illustrations. In all these circumstances some separate action is open to the taxpayer that will give effect to the purpose to derive income or the purpose that does not relate to the derivation of income. In Ure the taxpayer might have lent some of the money borrowed at a commercial rate of interest and made an interest free loan of the remainder. In the circumstances of a letting of property partly out of charity, the taxpayer might have let at a commercial rent and made a gift to the tenant of the amount of rent foregone in the charity letting.
[9.10] Ure does not however support a view that the phrase “to the extent to which” requires an apportionment in the circumstances of the travel expense referred to in [8.51] above, the entertainment expense referred to in [8.88] above and the health expense referred to in [8.16] above. Nor would it support a view that apportionment is required in the circumstances of Magna Alloys (1980) 80 A.T.C. 4542 considered in [9.11] below.
[9.11] It is the view of this Volume that where an issue is raised as to the relevance of an expense, a decision to compromise by apportioning and allowing a deduction of part of the expense is not appropriate. In circumstances such as Magna Alloys & Research Pty Ltd (1980) 80 A.T.C. 4542, if the board of directors is moved in part by a purpose of conferring a gratuitous benefit on the officers of the company—a benefit that is not a reward for services— it is not appropriate to allow a deduction of some part of the expense. A decision must be made as to the whole expense. An apportionment would simply express a doubt about relevance: it would not identify an element within the expense that is relevant to income derivation. Meeting the expenses of the company’s officers for the purposes of furthering the company’s interests could not have been the subject of an expense distinct from the expense of conferring a gratuitous benefit on the company’s officers by meeting the expenses. The same point has already been made in regard to a travel expense ([8.51] above), in regard to a health expense ([8.16] above), and in regard to an entertainment expense ([8.88] above). A health expense may be incurred for the purpose of restoring some bodily function necessary to the derivation of income, and for the purpose of restoring a bodily function which contributes to the taxpayer’s well-being. But an apportionment is not appropriate. A medical expense for the first purpose could not be made the subject of a payment distinct from the payment to serve the second purpose. If it be assumed that a purpose of regaining a bodily function for use in income derivation may give relevance to an expense, it can give relevance to the whole of the expense, but not to a part of it.
[9.12] In Ronpibon Tin N.L. (1949) 78 C.L.R. 47 the High Court made some observations on the appropriateness of apportionment when “the problem is to apportion outgoings which have a double aspect, outgoings that are in part attributable to the gaining of assessable income and in part to some other end or activity”. The court observed (at 59):
“It is perhaps desirable to remark that there are at least two kinds of items of expenditure that require apportionment. One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently. Of this directors’ fees may be an example. With the latter kind there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income. It is an indiscriminate sum apportionable, but hardly capable of arithmetical or ratable division because it is common to both objects.”
Those observations may be thought to conflict with the principle that one cannot express a doubt about relevance by apportioning an expense and allowing a deduction of part of the expense. So far as directors’ fees are concerned, there is no conflict with the principle. “Arithmetical or ratable division” may not be possible, but it is none the less possible to contemplate a separate payment being made to directors for work that is relevant to the derivation of income by the company and a separate payment for work that is not. Nor is there any conflict with the principle in the observation, in relation to the expenses of things or services, that apportionment may be made in accordance with the application of those things or services. The services of lawyers in Magna Alloys were not the subject of distinct applications by the company. They were applied only in the defence of the company’s officers. Where an apportionment is proper so as to allow a deduction of that part of an expense that serves a purpose that will justify deductibility, the appropriate amount to be apportioned to the service of that purpose is not necessarily the amount that would have been paid to serve that purpose alone. To apportion in this way would in effect be to allow deduction of a notional expense. The view of Kitto J. in Western Suburbs Cinemas Ltd (1952) 86 C.L.R. 102 in relation to deductibility under the specific provisions of s. 53 that a notional expense is not deductible, is equally applicable to deductibility under s. 51(1). The view of Kitto J. is considered in [9.14] below. Where a taxpayer whose own travel expenses are deductible pays for a double room and shares with his wife, he is not necessarily entitled to a deduction of what he would have paid for single occupancy of that room, or for occupancy of a single room.
[9.13] A principle has been asserted above that an apportionment may not be made so as to express a doubt about relevance. There is a similar principle when the issue is the working character of an expense. One cannot save an expense from denial of deduction as a non-working expense by apportioning the expense and allowing a deduction of part of it as a working expense. Every element in the expense, unless it can be shown that there is an element whose purpose or function is working, will retain its character as non-working despite the apportionment. The expenses of a massive advertising campaign directed to an extension of business goodwill is very likely a non-working expense. If it is, an apportionment is not available so as to allow a deduction of an amount the taxpayer might have spent had his purpose been merely to maintain existing goodwill. Apportionment could not, in regard to the amount apportioned and claimed to be working, change the character of the expense.
[9.14] An expense for repairs to property used for the purpose of producing income may be denied deduction as a non-working expense. It would not be appropriate to apportion the expense and allow a deduction of a part which, if it were the repair expense, would have been a working expense. The fact that s. 51(1) includes the phrase “to the extent to which” does not require a different operation for s. 51(1) from that given to the specific provision in s. 53 by the decision of Kitto J. in Western Suburbs Cinemas Ltd (1952) 86 C.L.R. 102. Kitto J., in denying a deduction of the whole expense, refused to allow a deduction, under s. 53, of a lesser amount than the expense incurred, the lesser amount being what the taxpayer asserted he would have spent had he repaired in a way that did not involve an improvement. The interpretation of s. 53, it will be seen, has identified non-working or capital expenses by way of repairs as expenses which involve an improvement or the reconstruction of an entirety. The decision of Kitto J. is put on the ground that no deduction is allowable for a “notional” expense—an expense the taxpayer might have incurred, but did not incur. It might equally have been put on the ground that part of a repair expense is not deductible when the whole expense is denied deduction, whether as an improvement or a reconstruction of an entirety. The line between an expense for restoration of a part which is a working expense, and an expense for reconstruction of an entirety, which is not a working expense, may not be easy to draw, but any part of an expense whose purpose is to reconstruct an entirety must have the purpose of the whole and an apportionment to allow deduction of a part is not appropriate. Apportionment and the allowing of a deduction of part of the expense would simply destroy the principle that the reconstruction of an entirety is not a working expense. Each and every apportioned part of the expense, would qualify as a repair. Apportionment would not wholly destroy the principle that an improvement is not a working expense. It would still be possible to deny a deduction of that part of the expense that may be said to improve—the fibrous plaster ceiling in Western Suburbs Cinemas. None the less apportionment so as to define and allow deduction of other parts of the expense which do not improve, is not appropriate. Apportionment cannot take away the character that each part has, as part of an expense that does improve.
[9.15] The analysis that is here adopted in regard to an apportionment will equally apply to a dissection, where dissection can be made. A dissection will give rise to several outgoings, each calling for judgment as to relevance and working character. But it may not be possible to distinguish the purpose of each such outgoing from the purpose of the others. It is in these circumstances that allowing a dissection so as to justify deduction of one of the outgoings would be to override the principle that an expense, to be deductible, must be a working expense. The builder who reconstructed the entire slipway in Lindsay (1961) 106 C.L.R. 377 might have quoted and charged separately for replacing distinct sections of the slipway, so that the total charge could be dissected. None the less each outgoing would take its character from the total charge. There will of course always be a question whether the outgoings identified by the dissection are related by one purpose. A number of outgoings for repairs may, in the aggregate, have the effect of reconstructing an entirety. They are not necessarily related by one purpose whose concern is to reconstruct the entirety.
[9.16] An illustration of a proper apportionment which will identify some part of an expense as a working expense is afforded by the facts of Ronpibon Tin N.L. (1949) 78 C.L.R. 47. The fees of directors and the legal manager of the company were paid for services which related in part to the non-working purpose of re-establishing the company’s mining business in South-East Asia after the war and in part to the working purpose of maintaining the company’s current investment activity. The identifying by an apportionment of how much was paid for the latter purpose does not challenge the principle that a non-working expense is not deductible under s. 51(1). The amount apportioned to the working purpose does not when apportioned retain any of the purpose it might have had by its association with that part of the expense that had a non-working purpose.
[9.17] The appropriateness of apportionment depends on a conclusion that the expense has as one of its purposes, a purpose that would give the expense a working character if it were the sole purpose of the payment. It is implicit that there is another purpose which does not support relevance or working character. A number of references have been made in earlier paragraphs of this chapter to a judicial approach characterised as “form and blinkers”. In the context of outgoings, this approach limits the circumstances that may be considered in seeking a conclusion as to the purpose of an outgoing. The approach begins with the adoption of a rule, for example that the cost of purchasing trading stock is a relevant and working expense (Cecil Bros Pty Ltd (1964) 111 C.L.R. 430, Europa Oil (N.Z.) Ltd v. C.I.R. (N.Z.) (No. 2) (1976) 76 A.T.C. 6001) or that rent of premises used in a process of income derivation is a relevant and working expense (South Australian Battery Makers Pty Ltd (1978) 140 C.L.R. 645). The approach then takes the view that when the taxpayer’s actions involve the adoption of some legal form, for example a contract to buy or a lease, which in its terms identifies an expense as a cost of purchasing stock or as rent for premises, the rule must be taken to be satisfied and circumstances other than the legal form may not be considered so as to question the satisfaction of the rule. Some strange consequences follow from the approach. In Europa Oil (No. 2) the Privy Council had need to explain a statement in I.R.C. (N.Z.) v. Europa Oil (N.Z.) Ltd (No. 1) [1971] A.C. 760 at 772 that “the Crown is not bound by the taxpayer’s statement of account, or by the heading under which expenditure is placed. It is entitled to ascertain for what the expenditure was in reality incurred.” The explanation given is that “the reference to ‘reality’ was directed only to the legal character of the payment and not to its economic consequences” (1976) 76 A.T.C. 6001 at 6007). The explanation asserts a distinction between legal reality and commercial reality or, as it is also called in the Privy Council judgment in Europa Oil (No. 1), “economic equivalence” (at 772). The idea of levels of reality is at the least mystifying. The irrelevance of commercial reality was earlier asserted in Cecil, despite an acknowledgement by the court that a purpose in the purchase of the shares from the family company was to divert profit to that company. The approach invites, for example, the obtaining of a deduction for a contribution to a political party by making the contribution in the legal form of a payment for an advertisement in the party’s journal, the payment being an over-payment for the advertising service.
[9.18] The form and blinkers approach has been questioned in earlier paragraphs on two fronts. There is no warrant for treating a rule that may, in most circumstances, be a useful expression of the principles expressed in s. 51(1), as if it were part of the statute itself. Second, there is no warrant for treating the adoption of a form suggested by the rule as excluding all other circumstances from which a conclusion might be drawn that the principles expressed in s. 51(1) do not justify deductibility of the expense. Lord Wilberforce dissented in Europa Oil (No. 2), though he had been a member of the majority in Europa Oil (No. 1). His dissent asserted that it is too narrow a view of Europa (No. 1) “to confine the decision to a case where the benefit obtained by the expenditure is contractually secured in the sense that as part of the purchasing contract, or even as a part of a separate but integrated contract the seller agreed with the buyer to pay it” ((1976) 76 A.T.C. 6001 at 6013). He affirmed (at 6013) an approach which would look to reality beyond legal reality: “What was the expenditure for? What was it intended to gain? What did it gain? What elements entered into the fixing and acceptance of it? These are the questions to be asked. To rephrase this so as to ask, ‘What did the other party legally bind himself to pay or do’, is to confine the cases where no deduction is allowed to one special case: to substitute a legalistic test for a commercial test. I think in this context of the often quoted words of Dixon J. [in Hallstroms Pty Ltd v. F.C.T. (1946) 72 C.L.R. 634] where he said in a different but analogous context that what is an outgoing of capital and what is an outgoing on account of revenue 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…in the process’” (at 648).
[9.19] There are indications in judgments of the High Court and of the Federal Court of a retreat from the form and blinkers approach. Gibbs A.C.J. in South Australian Battery Makers (1978) 140 C.L.R. 645 adopted a qualification which will allow reference to a benefit which the person incurring the expense has in fact derived, even though that benefit is not stipulated for in the terms of the legal form that has been adopted. It is true that the concept of benefit in the qualification adopted by Gibbs J. is a narrow one. The acquisition of property by a company that is a subsidary of the taxpayer, is a benefit for purposes of the qualification. Jacobs J., in dissent, adopted the qualification, but took a less restricted view of “benefit”.
[9.20] Gibbs J. thought that a qualification on the form and blinkers approach taken by the majority in Europa (No. 2) (which it should be noted was a New Zealand appeal) was called for so as to give significance to the judgment of Dixon J. in Hallstroms, more especially to the judgment in the passage cited by Lord Wilberforce in Europa (No. 2). It is true that Dixon J. was not concerned with a question of relevance, but with a question of working character. There is, however, no reason why the form and blinkers approach should be the more applicable on questions of relevance than on questions of working character.
[9.21] The retreat from the form and blinkers approach is the more evident in the Federal Court. In [6.84]–[6.85] above there is some discussion, in this regard, of the judgments of the Federal Court in Total Holdings (Australia) Ltd (1979) 79 A.T.C. 4279 and at first instance in Ure (1981) 81 A.T.C. 4100. The retreat is not a conscious retreat. Only Lee J. at first instance in Ure thought the form and blinkers approach was applicable where the question is not the maintenance purpose in the payment of interest for the use of money borrowed, but the purpose of the use made of that money, a purpose which, accessorially, bears on the purpose of the interest payment. But there is none the less a retreat. It is not possible to frame a reason why the approach should apply when the question is the maintenance purpose in the payment of interest, but not when the question is whether the payment has a purpose of serving the derivation of income.
[9.22] The retreat from form and blinkers increases the room for apportionment of expenses. Thus, in a Cecil Bros Pty Ltd (1964) 111 C.L.R. 430 situation an apportionment may be appropriate so as to deny a deduction of so much of the ostensible outgoing for trading stock as was incurred for the purpose of conferring a gratuitous benefit on the associated company and its shareholders. If an objective approach is taken to determination of purpose, an inference of such a purpose should be drawn from the fact of association between the companies and a higher payment made for the goods than the payment that would have been made to obtain them in an arm’s length transaction. An apportionment is, in other respects, appropriate on the facts in Cecil, because a separate payment could in theory have been made to serve the purpose of obtaining the supply of trading stock. There would be no departure from the principle that an apportionment may not be used to reflect a doubt about relevance.
[9.23] An apportionment becomes appropriate to allow deduction of some of the expense in facts such as Europa Oil (No. 2), but to deny deduction of the expense so far as it was incurred for the purpose of securing that payments would be made to the taxpayer’s associated company in the Bahamas.
[9.24] Despite the retreat from form and blinkers, an apportionment so as to deny part of the expense may remain inappropriate in facts such as in Phillips (1978) 78 A.T.C. 4361. The trial judge in that case found that the payment to the family trust for the services provided by the trust to the partnership were, in amount, what would have been paid for the same services to an arm’s length supplier. On this finding there was no basis for an objective inference that some part of the expenses incurred had the purpose of providing the family trust with a gratuitous benefit. No doubt doing business with a family trust made possible the making of profits by the trust, but this would be equally true of doing business with an arm’s length supplier.
[9.25] An inference of purpose other than securing the supply of goods or services will be appropriate where there is an association between the parties to the transaction and the amount of the outgoing exceeds a market value of the goods or services. And an inference may be drawn where a collateral benefit sought by the taxpayer is in fact obtained by the taxpayer who incurs the outgoing, or by some third party, even though the parties to the transaction are not associated and the amount of the outgoing does not exceed a market value.
[9.26] If it is thought that the demise of form and blinkers and the letting in of apportionment will upset what may be seen as the legitimate shifting of profits between associated commercial enterprises, the restoring of scope for such shifting should be achieved by specific statutory provisions, such as pro-such shifting should be achieved by specific statutory provisions, such as the provisions now adopted allowing shifting of losses between wholly owned subsidiaries in a group of companies (s. 80G).
[9.27] Some of the judicial support for a form and blinkers approach might be explained by an unwillingness to multiply tasks of calculation, and arguments about calculations, that must arise when apportionment is let in. Provided that an objective approach to the determination of purpose bearing on deductibility comes to be established, the occasions of calculation will, however, be limited. Where they have to be made, the manner of their making is likely to be suggested by the facts. In Cecil the facts suggest the denial of a deduction of the difference between what was paid for the shoes by the taxpayer and what was paid for them by the associated company. In Europa Oil (No. 2) the facts suggest a denial of a deduction to the extent of the profit diverted to the associated company. In South Australian Battery Makers the facts suggest the denial of a deduction to the extent of the increase in the value of the option to acquire the property. There will be room for argument about calculation only where the item is one involving a “single outlay or charge which serves both objects indifferently”. Of that situation the High Court said in Ronpibon Tin N.L. (1949) 78 C.L.R. 47 at 59–60:
“…there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income. It is an indiscriminate sum apportionable, but hardly capable of arithmetical or ratable division because it is common to both objects. In such a case the result must depend in an even greater degree upon a finding by the tribunal of fact. The reason why the commissioner has adopted the practice of allowing two and one-half per cent on income from investments as a deduction is no doubt because generally speaking it has been found to produce an adequate allowance and because he is forced by the exigencies of administration to provide his assessors with some fixed rule. But it is a more or less arbitrary expedient to which it is scarcely possible to resort judicially when the court is called upon to decide an appeal from an assessment. The court must make an apportionment which the facts of the particular case may seem to make just, and the facts of the present cases are rather special. In making the apportionment the peculiarities of the cases cannot be disregarded. The taxpayers are companies. A directorate is necessary. The circumstances were such as to call for some consideration from time to time on the part of the directors of the investment of the money. Thus although the assessable income is only interest on government loans and fixed deposits, it is by no means a mere question of fixing a fair commission rate for handling the business. It is important not to confuse the question how much of the actual expenditure of the taxpayer is attributable to the gaining of assessable income with the question how much would a prudent investor have expended in gaining the assessable income. The actual expenditure in gaining the assessable income, if and when ascertained, must be accepted. The problem is to ascertain it by an apportionment. It is not for the court or the commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent: see per Ferguson J. in Tooheys Ltd v. C. of T. (1922) 22 S.R. (N.S.W.) 432 at 440; per Williams J. in Tweddle (1942) 7 A.T.D. 186 at 190. The question of fact is therefore to make a fair apportionment to each object of the companies’ actual expenditure where items are not in themselves referable to one object or the other. But this must be done as a matter of fact and therefore not by this Full Court.”
[9.28] Ronpibon Tin N.L. in the passage just cited, is a source in High Court judgments, of a dictum which has confused and confounded judicial decision: “It is not for the court or the commissioner to say how much a taxpayer ought to spend in obtaining his income.” Some observations on the dictum were made in [6.6] and [9.17]–[9.26] above. It should be observed that the effect of an apportionment, on the demise of the form and blinkers approach, will not be to tell the taxpayer how much he should spend. The effect will be to determine how much he has spent. This was the effect of the apportionment directed in Ronpibon Tin itself.
[9.29] The Assessment Act has included from an early stage in its history provisions which empower an apportionment, and a denial of a deduction of some part of an expense, in circumstances involving payments between associated persons: ss 65, 108 and 109. The existence of those provisions, more especially s. 65, has indeed been pointed to as confirming the form and blinkers approach. It is said that there is an implied rejection of apportionment under s. 51(1) in relation to such payments, by the express provisions for apportionment in those sections.
[9.30] Section 31c is a newcomer which provides expressly for an apportionment and the denial of some part of a deduction in the circumstances of Cecil Bros Pty Ltd (1964) 111 C.L.R. 430—a payment to a “connected” person for trading stock. It was inserted in the Act following the decision in Isherwood & Dreyfus Pty Ltd (1979) 79 A.T.C. 4031 which applied Cecil and Europa Oil (N.Z.) Ltd v. C.I.R. (N.Z.) (No. 2) (1976) 76 A.T.C. 6001.
[9.31] The most recent additions to the Act are ss 82KH, 82KJ and 82KL and Pt IVA. Sections 82KH, 82KJ and 82KL are an attempt to overcome the tax planning which followed the confirmation of the form and blinkers approach in Europa Oil (No. 2) and South Australian Battery Makers Pty Ltd (1978) 140 C.L.R. 645. The demise of form and blinkers will make these provisions unnecessary. One role of Pt IVA, which replaces the general provision against tax avoidance in s. 260, is to overcome tax planning that relies on form and blinkers.
[9.32] Sections 31C, 65, 82KH, 82KJ and 82KL, 108, 109 and Pt IVA are the subject of closer examination in Chapters 10 and 16 below.