HIGH COURT OF AUSTRALIA

                                     Sun Newspapers Ltd.

                                                Vs.

                                Federal Commr. Of Taxation

                                             (Rich J.)

                                      17 September 1938

                                            Judgment

Rich J

1. These are two appeals, heard together, from assessments to income tax for
the financial year beginning 1st July 1933.

2. The assessments are based upon returns by the respective appellants for an
accounting period of twelve months ending 24th September 1933 accepted by the
commissioner under sec. 32(3) of the Income Tax Assessment Act 1922-1933. The
appellant, Sun Newspapers Ltd., was incorporated on 29th March 1920. For some
years it conducted the Sydney evening newspaper called the Sun and the Sunday
Sun. It also conducted theNewcastle Sun and, as part owner, the Daily
Pictorial and Sunday Pictorial. It was conducting these newspapers in the year
1929. Rival newspapers called the Evening News and the Sunday News, as well as
a weekly paper called the Women's Budget, were at that time conducted by a
company called S. Bennett Ltd. The two companies resolved upon an
amalgamation of their interests. On 9th August 1929 they entered into an
agreement with a trustee for an intended company to be called Associated
Newspapers Ltd. This company, which was registered on 9th September 1929, is
the other appellant. Under the agreement it was to issue a large part of its nominal
capital to the shareholders of the two constituent companies in exchange for their
shares in those respective companies. The number and proportions are set out in
the agreement, but they are not material to the questions raised for determination.
What is material is the fact that at that time 56,000 shares in Sun Newspapers Ltd.
of the face value of 10s., half the face value of the remaining shares, but bearing
twice the rate of dividend, were held by employees in that company and upon
special terms. These shares were dealt with specially under the agreement and
under a supplemental deed dated 31st July 1930. It is sufficient to say that as a
result 22,600 of these employees' shares were outstanding at the beginning of the
accounting period upon which the assessments were based and were not held by
the appellant Associated Newspapers Ltd. In the agreement for the merger that
company was described as a holding company but it did not rigidly adhere to that
character. On 24th December 1929 it entered into an agreement for the acquisition
of two further existing newspapers, the Daily Guardian and the Sunday Guardian,
which under the agreement passed to it on 31st January 1930. In consequence of
this transaction Associated Newspapers Ltd. took over an overdraft which was
maintained in its name for various purposes. The Daily Guardian and the Sunday
Guardian were for a time printed and published at the office of the vendors, and
then they were transferred to the offices of S. Bennett Ltd. On 19th August 1931 an
agreement was executed between Associated Newspapers Ltd. and Sun
Newspapers Ltd., the purpose of which was to end the publication by the former of
the Daily Guardian and by the latter of the Daily Pictorial and Sunday
Pictorial and to provide for the publication at the Sun offices of a daily paper to be
named the Daily Telegraph and for the printing and publishing of the Sunday
Guardian by Sun Newspapers Ltd. on behalf of Associated Newspapers Ltd. This
was quickly followed by an agreement of 14th October 1931, the purpose of which
was to provide for the cessation of the Sunday Guardian and the publication of
the Sunday Sun and Guardian in continuation of the Sunday Sun. Shortly
afterwards, namely, on 10th November 1931, the two companies entered into a
further agreement by which Sun Newspapers Ltd. undertook to print and publish
the Daily Telegraph on certain terms, which included a division of profits with
Associated Newspapers Ltd. In the meantime, under the authority of Associated
Newspapers Ltd., the publication of the Evening News by S. Bennett Ltd. had
ceased. Its last issue was published on 21st March 1931. But another evening paper
came into the field, the World. This was published by a company called Labor
Papers Ltd. By an agreement dated 1st November 1932 this company granted an
option to an "investor" until 9th November 1932 for a "lease" of the newspaper,
including its premises, machinery and plant, at a rent. The optionee was to form a
company. This he did under the name of Sydney Newspapers Ltd., and with the co-
operation of a journalist who was a son of the managing editor of the appellants'
newspapers he made preparations for launching a new evening paper in succession
to the World, to be called the Star. It was announced that this paper would be sold
for one penny. The existing morning and evening papers sold for a penny
halfpenny. The appellants took alarm and their managing editor was entrusted with
the task of preventing the sale at one penny of the threatened evening newspaper.
Some doubt is cast on the extent of his authority, but, however that may be, he
made an agreement with Sydney Newspapers Ltd. and its two sponsors by which
in consideration of a sum of £86,500 they undertook for three years not to be
associated with the production or publication of a daily newspaper within three
hundred miles of Sydney, and to control for three years the plant, machinery and
premises used in the production of the World. The agreement contained other
stipulations of minor importance. If during the three years Associated Newspapers
Ltd. required it, Sydney Newspapers Ltd. were to produce a daily or a Sunday
paper by means of the plant, and if the plant of the former broke down, the latter
company was to produce any of its publications. A place was to be found by
Associated Newspapers Ltd. on its staff for the son of its managing editor and the
same thing was to be done for another journalist who had been employed for
the World. That newspaper went out of existence on the same day as the agreement
was made, 9th November 1932. The agreement was honoured by the appellant
companies' boards. During the course of the accounting period with which these
appeals are concerned, payments amounting to £44,830 were made under the
agreement in respect of the £86,500. Under the provisions of the agreement for
taking over the various responsibilities connected with the World, a further sum
was paid during the period amounting to £2,831, which with the former sum
made £47,661. Although the agreement was made in the name of Associated
Newspapers Ltd., these payments were all made by Sun Newspapers Ltd. In the
profit and loss account of that company the burden of the £86,500 was spread
over three years and for the accounting period under consideration a debit of
£24,363 0s. 8d. was made. In the return of the company for income tax it was
shown as a deduction. The Commissioner of Taxation disallowed the deduction,
and one of the grounds of appeal from the assessment is that a deduction either of
£47,661, of £44,830 or of £24,363 0s. 8d. should be allowed from the
assessable incomes either of Associated Newspapers Ltd. or of Sun Newspapers
Ltd.

3. But a more sweeping claim is made in respect of taxation of the income
derived from the newspaper undertakings. It is claimed that Sun Newspapers Ltd.,
which is now in liquidation, was a mere agent of Associated Newspapers Ltd. for
the purpose of conducting the publications and that all the taxable income derived
therefrom during the accounting period ended 24th September 1933 should be
included in the assessment of Associated Newspapers Ltd. and none of it in the
assessment of Sun Newspapers Ltd. One consequence which it is sought to
attribute to this view is that none of the income reached Associated Newspapers
Ltd. as dividends or in any other guise or form than as income from personal
exertion. Under sec. 5(1) of the Income Tax Act 1933 (No. 41 of 1933) a further tax
of six per cent has been imposed upon a portion of the taxable income of
Associated Newspapers Ltd. as income from property, amounting to £137,842,
that is, a tax of £8,270 10s. 5d. This income from property represents after the
allowance of deductions the amount paid as dividends by Sun Newspapers Ltd. to
Associated Newspapers Ltd. The objection that it is not liable to the further or
special tax of six per cent constitutes the third question for determination in the
appeals. The contention that the business is conducted by Sun Newspapers Ltd. on
behalf of Associated Newspapers Ltd. in such a sense that all the profits are
assessable as income of the latter company only is based on certain authorities
decided under the British Income Tax Acts or at any rate the citation of those
decisions was the commencing point of the argument. They are conveniently set
out in a note in the article on income tax in Halsbury's Laws of England, 2nd ed.,
vol. 17, p. 91, note (b), under a part of the text which explains the principle on
which they rest. The text is as follows:â""There are certain examples of English
companies holding all or practically all the shares in foreign companies which may
appear to be exceptions to the rule that mere shareholding control is not sufficient
to establish control of a business. The explanation of the decisions is that in each
case there is more than mere shareholding control. The foreign company has been
found not to own or carry on a business, but the business has been owned and
carried on by the English company, and the foreign company has merely existed to
hold land, &c., to conform to local law in that respect. The question to be decided
is, Does the foreign company carry on its own business or is the business in fact
carried on by the English company? Where a company whose shares are thus held
in their entirety, or practically so, by another company is merely acting as a trustee
or agent for the shareholding company, or where the company is a mere
sham, simulacrum, or cloak, or is kept in being for the purpose of presenting the
fiction that property is owned by it, it is competent for the commissioners to look
at the reality of the situation, and find that the business is carried on by the
shareholding company." To the cases cited in the note, which I shall refrain from
setting out, it is necessary to add a reference to the discussion of the same
authorities by Phillimore J., as he then was, in Kodak Ltd. v. Clark[1] [2] . The
recent decision of the Privy Council in E.B. M. Co. Ltd. v. Dominion
Bank[3] marks the limits of the principle invoked by the appellants. There, after
remarking that one of the judges below had been misled by some remarks
ofCozens-Hardy M.R. in Gramophone and Typewriter Ltd. v. Stanley[4] , which he
quotes, Lord Russell of Killowen[5] :â""But this can mean only that, on the facts
of a case, it may appear that the legal entity has not become the owner of a
business, but is merely carrying on, as agent for another person, a business which
is the property of that other person; just as, on the facts of a case, it might appear
that an individual who was carrying on a business was not the owner thereof, but
was carrying it on as agent for another person who was the owner thereof. Sir H.
H. Cozens-Hardy M.R., did not mean, and, in the face of the Salomon Case[6] ,
could not mean, that, notwithstanding that a business is in fact and in law the
property of a separate legal entity, a limited company, it could be held, for taxation
purposes, that the business was the property of some other person, and that the
company was carrying on the business as agent for that other person." In the
present case the great degree of control exercisable and exercised by the board of
Associated Newspapers Ltd. over the conduct of the newspaper business is relied
upon. The managing editor was appointed by an agreement of 9th September 1931
made with Associated Newspapers Ltd. and under it he was given wide powers of
managing the editing, production and distribution of newspapers controlled
through other companies as well as newspapers owned by it. During the accounting
period, the Sun, the Sunday Sun and the Daily Telegraph were published at
theSun office and also the Women's Budget. S. Bennett Ltd. remained in existence
until 1936, but at that time it did not operate. About 98½ per cent of the shares of
Sun Newspapers Ltd. were held by Associated Newspapers Ltd., the rest being in
effect employees' shares. In the proceedings of the boards of directors, excepting
perhaps the matter of remuneration, no practical distinction was made between the
separate individualities of the two companies. The personnel of the two boards was
not however quite identical. But as against all this, Sun Newspapers Ltd. acted in
every way as the proprietor of the newspapers and the publishing business, kept
separate accounts, made separate returns for taxation purposes, declared dividends
on its shares and was treated in every way as continuing to be, as it originally was,
the company conducting on its own behalf, that is, in the interests of its
shareholders, its own extensive enterprise. In the accounts of both companies a
moiety of the Sunday Sun profits, amounting to £15,084 15s. 1d., was shown as a
credit of Associated Newspapers Ltd. against Sun Newspapers Ltd. I am clearly of
opinion that there was no relation of principal and agent but that the property in the
whole undertaking conducted by Sun Newspapers Ltd. was vested in it and vested
in it beneficially, that is, for its shareholders whoever they might be. In fact the
employees' shares would have made it difficult to ignore the separate personality of
that company even if there had been any resolve to do so. Mr. Weston for the
commissioner contended that, even if there had been an agency, yet, as Sun
Newspapers Ltd. had declared dividends and Associated Newspapers Ltd. received
the income under that guise, sec. 16(b)(i) of the Income Tax Assessment Act and
sec. 5(1)(b) of the Income Tax Act would apply, and this may well be so. But on
the facts I think that it is clear that these provisions apply to the sum brought under
tax as net dividends, namely, £137,842 (£147,015 gross).

4. It remains to deal with the claim to a deduction on account of the moneys
paid by Sun Newspapers Ltd. to the optionees over the World. It was shown that
this transaction or rather the extinguishment of the World and the removal of the
immediate fear of a penny paper led to some substantial improvement in the net
profits of the Sun and was the occasion of the making of some economies. But the
obligation to make the payment was that of Associated Newspapers Ltd., and I am
not prepared to find that within the meaning of sec. 25 (e) the money so far as it
was concerned was wholly and exclusively laid out or expended for the production
of assessable income. So far as Sun Newspapers Ltd. is concerned the
commissioner contended that the moneys, although actually paid by it, were no
more than a voluntary payment made to meet an unfortunate transaction to which
the holding company had committed itself. However this may be, I think that the
expenditure could not be deducted by either company because it is in the nature of
an outgoing of capital: See sec. 23 (1) (a). It is not expenditure of a recurrent
nature. It is not an incident, whether normal or unusual, of the regular conduct of
the organization for earning profits. The purpose was to buy out opposition and
secure so far as possible a monopoly. The fact that the benefit was not perpetual
does not deprive it of its capital attributes. If physical assets of a terminating or
wasting description were bought, no one would say on that account that the money
was a revenue expenditure. The case may not be so striking as Ward & Co. Ltd. v.
Commissioner of Taxes[7] , but it is more like that case and those mentioned in
Lord McMillan's opinion in Van Den Berghs, Ltd. v. Clark[8] than such a case
as W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation[9] , upon which the
appellants rely: See, further, Glenboig Union Fireclay Co. Ltd. v. Inland Revenue
Commissioners[10] ,Dott v. Brown[11] and Collins v. Joseph Adamson & Co.[12] ,
a case similar to the present case of the elimination of competition.

I think the appeals should be dismissed with costs.

Appeals dismissed with costs.