(delivered a judgment in which Richardson P, Gault J & Keith joined)
Five service station proprietors and a used vehicle dealer appeal from a judgment of Laurenson J in the High Court at Auckland on 9 November 1999, reported at (1999) 19 NZTC 15,493, in which it was held that lump sum payments made to them by Mobil Oil (New Zealand) Ltd in connection with their entry into certain agreements requiring them to purchase motor spirits exclusively from Mobil were revenue payments and accordingly assessable in their hands.
The appeal concerns ten contractual arrangements made in the years 1988 ó 1993 for periods varying between three years and ten years. Counsel were agreed that these involved essentially similar terms and conditions and the Court was accordingly not invited to endeavour to make distinctions between them, although the differing lengths of the agreements must be considered.
There is also an 11th arrangement ó with Kenlock Motors Ltd ó made for a period of 15 years in 1993. This was accompanied by a lease from Kenlock to Mobil of its service station property with a sublease back to Kenlock, thus giving Mobil the security of an interest in Kenlockís land and buildings. Counsel agreed that because of this additional feature, this arrangement (which we will call Kenlock 2) requires separate consideration by the Court.
For many years prior to 1988 the four petroleum wholesalers operating in New Zealand, namely BP / Europa, Shell, Mobil and Caltex, had been prohibited from acquiring ownership of petroleum retail businesses. So a typical service station was independently owned and operated. But each retailer was allied with one wholesaler only. The evidence was that by 1988 there were no longer any multi-brand retailers.
The industry was deregulated by the Petroleum Sector Reform Act 1988 which came into force on 9 May 1988. That Act repealed the Motor Spirits Distribution Act 1953 and with it the ownership restrictions on oil companies. The four wholesalers set about acquiring service stations which were regarded as prime outlets ó those that sold the largest gallonages of motor spirits. Between them the wholesalers soon came to own 40 percent of the service stations in New Zealand doing 73 percent of sales of motor spirits. This case is concerned with some smaller retailers who were not acquired by a wholesaler. In four out of five instances they had been retailing Mobil products exclusively and were willing to continue to do so. One appellant, Birkdale Service Station Ltd, had sold BP products but was induced to change to Mobil.
Each retailer initially signed up with Mobil in 1988 or 1989 for a period of three or five years. Subsequently each renewed the arrangement for further periods varying between five and ten years (but there was the longer term in the case of Kenlock 2).
The used vehicle dealership, the sixth appellant, Wincott Holdings Ltd, accepted a five year tie relating to oil purchases for its service department in 1991. We are not concerned with the subsequent arrangements between Wincott and Mobil.
The Commissioner also brings an appeal against the refusal of the Judge to award costs in his favour.
THE CONTRACTUAL ARRANGEMENTS
The documentation in each case consisted of a compensation agreement, a retail supply contract and an equipment loan contract.
[a] Compensation agreement
A typical compensation agreement contained recitals as follows:
The Dealer requires funds to improve its facilities and the services offered to the public at the Outlet in order to compete effectively with other service stations in the same area and recently has been approached by competitors of Mobil who have offered substantial payments to the Dealer to assist with those improvements on condition that the Dealer terminates its supply arrangements with Mobil.
The Dealer considers that it will receive offers in the future to make arrangements to its own substantial advantage if, at that future time, it would terminate its supply arrangements with Mobil.
The Dealer has agreed to forego those present and future offers in consideration of the payment referred to below and Mobil, at the Dealerís request has agreed to enter into an exclusive supply agreement ("the supply agreement") with the Dealer.
The Guarantors have beneficial interests in the Dealer and have requested Mobil to make the compensation payment, which Mobil has agreed to do on the condition that the Guarantors enter into and execute this agreement and the guarantee set out below.
In the operative portion of the document it was provided:
Mobil shall pay to the Dealer the compensation payment in return for the Dealerís agreement to enter into the supply agreement and to continue loyally and faithfully to comply with the supply agreement.
Mobil and the Dealer acknowledge that the payment by Mobil of the compensation payment is not the making of an advance by Mobil to the Dealer but a payment for the consideration recorded in this agreement.
Clause 3.1 provided for Mobilís rights if it became entitled to cancel the supply contract because of a breach by the retailer. At Mobilís option it could in such circumstances:
Cancel the supply agreement and claim liquidated damages for its loss of profits; or
Require specific performance by the retailer; or
Claim general damages.
Clause 3.2 contained a warranty by the retailer that it would during the term of the supply contract purchase a particular quantity of motor spirits (called a quota) from Mobil and would pay liquidated damages if at the expiry of the term it had, whatever the reason, failed to purchase the full quota.
Clause 3.3 stated the liquidated damages by reference to a sum for each litre of the shortfall in the quota requirement (a figure varying between 0.8 cents per litre and 1.73 cents per litre; but 17.5 cents per litre for Wincottís oil quota). In some instances, including Kenlock 2, the liquidated damages were fixed on a daily or monthly rate basis rather than per litre.
There was in each case a personal guarantee by one or more shareholders of the retailer company of its performance under the supply contract.
[b] Retail supply contract
A typical retail supply contract provided that during its term Mobil would sell and the retailer would buy from Mobil the retailerís requirements of bulk petrol, diesel, kerosene and lubricants ("products"). The prices to be paid were to be Mobilís posted or listed prices at the time and products were to be paid for in accordance with Mobilís terms at the time of delivery.
Among other obligations undertaken by the retailer were requirements that it should operate its business so as to promote and maximise the sale of Mobil products and maintain an adequate inventory of such products. The retailer was permitted with Mobilís approval to advertise Mobil products and use Mobilís trademarks, signs, advertising material and markings etc. It was required to ensure that all staff were dressed in clean and tidy Mobil uniforms. There had to be qualified and competent staff who were to be made available for such Mobil training courses as Mobil directed. The retailer was only entitled to display advertising and signage which complied with Mobilís standards and graphics and had to keep visible and legible Mobilís signs, logos, trademarks and service marks. It also had to accept Mobil endorsed credit or electronic funds transfer cards in payment for any Mobil products or goods sold by the retailer.
There was nonetheless a provision that nothing in the agreement was to be construed so as to create any right of Mobil to exercise any control over or to direct the conduct or management of the retailerís business and neither the retailer nor any person performing work at the outlet was to be deemed an employee or agent of Mobil.
In the event of any default by the retailer Mobil was entitled to suspend deliveries. The agreement could be cancelled by Mobil on 14 days notice in writing on the happening of certain events which included the cessation of the operations of the retail outlet for a period of seven days. Cancellation notice could also be given if the retailer committed a breach of the agreement and failed to remedy it within 10 business days of the giving of a written notice of default, and if the principal employee of the retailer in Mobilís view ceased to take active involvement in the operation of the retail outlet on a daily basis.
Mobil could also cancel if it made a determination in good faith and in the normal course of business to withdraw from marketing some or all products through retail outlets in the geographic market area in which the outlet was situated. (This did not require any breach by the retailer but simply a decision by Mobil.)
The contract form also provided for a right of first refusal in favour of Mobil for a period of 30 days if the retailer wished to sell its business or the land upon which the outlet was located. Mobil also had a right to cancel the agreement if the retailer sold the business or land to any party other than Mobil.
The typical retail supply contract contained an "entire agreement" clause stating that it superceded all previous agreements and that there were no understandings, representations or warranties relating to the supply of products which were not set out therein.
The retailer was not permitted to assign its interest in the agreement without Mobilís consent.
Once again, there was a personal guarantee by one or more shareholders of the retailer.
[c] Equipment loan contract
In each case there was also an equipment loan contract covering Mobilís supply to the retailer of tanks, pumps and other equipment. Mobil did not warrant or guarantee the condition or performance of the equipment and was not obliged to repair or replace it. Where that was necessary the dealer was either to repair the equipment or return it to Mobil at its own expense (unless Mobil agreed to do the work). The contract was to continue until terminated by either party by written notice or the termination for any reason of the retail supply contract, whichever was the earlier. The retailer then had the right to elect to purchase any underground tank or lines at current replacement cost less 10 percent for each full year for which the tank had been installed at the premises.
THE ASSESESMENT AND OBJECTION PROCESS
The judgment below records that some 261 retailers had arrangements of this kind with Mobil. Of those, 111 are affected by the present proceeding, the remainder having accepted the Commissionerís assessment or had their objection allowed in full. The Commissioner considered that the six cases now brought to appeal would determine all remaining issues and therefore invoked the test case procedure in s 137 of the Tax Administration Act 1994.
THE DECISION IN THE HIGH COURT
In the High Court, Laurenson J concluded that the payments were revenue in nature. Saying that he was following the approach stated by the Privy Council in CIR v Wattie  1 NZLR 529, 536, he looked at what the expenditure was calculated to effect from a practical and business point of view. He rejected the appellantsí argument that the payments were calculated to effect the sale of a capital asset ó the right to deal with whomsoever they chose. He pointed out that in the environment following deregulation of the petrol industry, the commercial reality was that independent petrol station operators such as the appellants had no choice but to tie themselves to a major wholesaler for the purposes of exclusive supply. The Judge said that in linking themselves with one of these wholesalers, the appellants were therefore not giving up any rights related to the whole structure of their profit-making.
Laurenson J considered the liquidated damages regime provided for in the agreements to be of particular importance, distinguishing the present case from others where independent petrol station owners had received payments from major wholesalers which were held to be capital payments. The evidence indicated to the Judge that the compensation payments were "inextricably related" to the liquidated damages regime, especially given the correlation that existed between the total possible liquidated damages and the amount of the compensation payments. In his view, this correlation was more than mere coincidence. He therefore found that the payments were not "one-off" inducement payments, but rather were "preparatory payments" designed to secure compliance with the supply agreement. According to Laurenson J, the payments were in the nature of "payments made in advance", which were written off over the term of the supply agreement. As the appellants purchased the products making up the quota, they progressively earned the advance payment and reduced their contingent liability to pay liquidated damages. This reduction in liability was equivalent to a gain in the course of ordinary business, and was therefore assessable income.
There were three cases in which this correlation did not occur. But Laurenson J put this down to individual commercial considerations arising during negotiations, noting that these three cases all involved second loyalty agreements between the retailers and Mobil. In each case, the amounts in the first loyalty agreement did correlate, and therefore, the lack of correlation in the second agreements was not sufficient to displace Laurenson Jís overall conclusion.
THE CORRECT APPROACH
It has not been suggested by the Commissioner that the arrangements between Mobil and its retailer were shams. The contractual documents are therefore to be construed in the ordinary way. As this Court said in CIR v Renouf Corporation Ltd (1998) 18 NZTC 13,914, 13,919:
In determining in a taxation case the true meaning and effect of a transaction which is not alleged to be a sham the Court examines and construes the transaction in the same way as it would do if the parties to it were in dispute about its meaning and effect. The Court assumes that the parties were intent on achieving a result which makes commercial sense.
The documents in this case are obviously intended to be read together as a package. The Court must construe them with that in mind. In fact, they complement rather than contradict one another.
Laurenson J in the High Court adopted the correct approach in order to determine whether the lump sum payments were capital or income. It was that followed by the Privy Council in Wattie and to be found in the following passage from the advice of the Privy Council delivered by Lord Pearce in B.P. Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia  AC 224, 264:
The solution to the problem 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:
THE BACKGROUND TO THE TRANSACTIONS
In applying that approach the background to the present transactions is of considerable importance. Some of it has already been described. There were no multi-brand retailers in New Zealand. It is common ground that the evidence reveals that if the appellant retailers were minded to continue to operate their service stations in the deregulated environment they had in reality no choice other than to tie themselves exclusively to one of the four wholesalers. They would not otherwise have been able to obtain regular and reliable supplies of petroleum products. Multi-brand trading was simply not an option. Mr Faesen Kloet of Kenlock said in cross-examination that he was concerned with small service stations being "put out of business" by oil companies. "They couldnít survive on their own and had to have an alliance with [a] major partner to enable them to survive".
Therefore the retailersí contractual freedom was in practical terms limited to their ability to make a choice between the four wholesalers and to negotiate the term and amount. But the evidence also showed that there was comparatively little competition between those wholesalers in relation to these service stations. Each wholesaler was aware that if it enticed a retailer to change over to it from another brand, retaliatory action was likely on the part of the deprived wholesaler. Witnesses called this a "knock for knock" approach by the wholesalers to one another. There was in addition the problem of wholesaler ownership of underground tanks which had to be resolved if there were to be a brand change.
The businesses of the appellants were described by one witness as marginal. The evidence suggested that, because of the comparative lack of competition between the wholesalers, the packages being offered to retailers in the position of the appellants were quite similar. The competition for service stations whose gallonage throughput was relatively modest was quite limited. It was conceded for the appellants that the representation in Recital A of the compensation agreement concerning approaches by competitors of Mobil offering substantial payments was contrary to the true position. Nor were offers subsequently made as contemplated in Recital B (see para ), except, it would seem, in relation to Kenlock.
EXTENT OF THE CONSIDERATION
There was some debate between counsel about the extent of the consideration provided by the retailer but it seems to us to be quite elementary that it involved all the contractual promises to be found in the applicable compensation agreement and retail supply contract. It seems scarcely necessary to state that acceptance of a payment made to induce entry by the payee into an agreement necessarily requires more than mere signature by the payee and extends to compliance with what has been promised in the agreement. The payments in this case therefore induced acceptance by the retailer of the agreed quota and the remedies for breach, including any liquidated damages provision.
REDUCTION IN VALUE?
Counsel for the Commissioner, Mr White QC, argued that the payments were not capital in nature because the appellants were not giving up anything of commercial value in exchange for receiving them.
It is difficult to reconcile the willingness of the oil company to make lump sum payments to the appellants with the notion that they had nothing of value to exchange for them. It was conceded for the Commissioner that the arrangements had value to the wholesaler but counsel suggested that the retailers did not correspondingly surrender any value. We think, however, that the mere fact that Mobil was prepared to make substantial upfront payments casts serious doubt upon this argument.
Counsel for the appellants, Mr Harrison QC, argued for his part that the rights surrendered must have been of a capital nature because their surrender meant that the value of the business was reduced.
The experts differed on whether the acceptance of a tie affected the value of the business. We are prepared to assume that there may have been a subtraction from the value of the retail business remaining after the deregulation of the industry. Before entry into any tie that value may have included the prospect of an inducement payment. But someone acquiring the business of a retailer after the tie was made with Mobil would necessarily do so on the basis that no similar sum could now be expected from Mobil or another wholesaler until the tie accepted by the seller had expired. That a diminution in the value of the remaining assets may therefore have occurred upon the acceptance of a tie does not however necessarily lead to the conclusion that the transaction was an affair of capital. A sale of stock in trade can reduce the value of the remaining assets in the same way, but that is undoubtedly a revenue transaction. We make this obvious point only to reinforce the conclusion that reduction in value, if any, is not determinative.
RETAILERS' USE OF MONEYS RECEIVED
Mr Harrison accepted that the retailers were not restricted in the use they could make of the funds, but said that because some of them intended to use the funds for capital works and that was actually done in some cases, the funds must therefore represent capital payments. If there had been a contractual stipulation to this effect, that might possibly have given the payments a capital character, as in CIR v City Motor Service Ltd  NZLR 1010 and CIR v Dunlopís (Wanganui) Ltd  NZLR 1125 (even though in Dunlopís they were not actually so used). It is certainly difficult to see why there should be a distinction between expenditure by an oil company on the property of a retailer which produces a capital receipt for the retailer, and a payment to the retailer for the agreed purpose of identical expenditure by the retailer or to reimburse the retailer for such expenditure (City Motor Service). But the short answer in this case is that there were no such stipulations. The recipients could use the money as they chose. That some of the money may in fact have been used for capital purposes by the retailers some years later does not give the payments a capital character: factually there is an insufficient nexus.
CORRELATION BETWEEN PAYMENTS, QUOTAS AND LIQUIDATED DAMAGES
Mr White relied to a limited extent upon the correlation between the quotas, liquidated damages and lump sum payments in most of the arrangements to support the submission that in reality the lump sum payment were advances ó "prepayments by Mobil to the retailers which were earned over time and hence constituted income in the hands of the retailers". Although apparently regarding this as a subsidiary matter, counsel supported Laurenson Jís view that "each time a litre of produce was purchased or a period of the contract was maintained, a proportion of the compensation or inducement payment became the property of the dealer in the sense that the dealer was not liable to repay a corresponding amount by way of liquidated damages".
We took it that what was being argued was that the lump sum payments were actually rebates on petrol purchases given by Mobil in advance and subject to any necessary adjustment when actual quantities of purchases during the period of the tie became known (or, where quotas were fixed by reference to a daily rate, when the number of days for which the tie actually continued became known).
It does not follow that because the lump sum payments may have been calculated by reference to stipulated quotas, that they were necessarily of a revenue nature. That would be to confuse the measure of payment with the payment itself, as Lord Denning MR said in the Court of Appeal in Strick (Inspector of Taxes) v Regent Oil Co Ltd  1 WLR 1166, 1175 (as approved by Lord Wilberforce when the case went to the House of Lords as Regent Oil Co Ltd v Strick (Inspector of Taxes)  AC 295, 349). In the leading judgment in the House of Lords in The Glenboig Union Fireclay Co Ltd v The CIR (1922) 12 TC 427, 463-4, Lord Buckmaster remarked:
It is unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned. That, no doubt, is a perfectly exact and accurate way of determining the compensation, for it is now well settled that the compensation payable in such circumstances is the full value of the minerals that are to be left unworked, less the cost of working, and that is, of course, the profit that would be obtained were they in fact worked. But there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test.
Quite apart from the difficulty that in three cases there was no correlation between liquidated damages and sales volume / passage of time, we think that Mr Whiteís submission does indeed confuse the means used to measure payment with the payment itself. Payments of an undoubtedly capital nature are frequently calculated by reference to anticipated future revenues for the payer to be derived from the asset acquired by that means. The fact that the recipient may agree to adjust the payment on a measured basis if anticipated or warranted revenues are not achieved is in itself no basis for saying that the original payment is received on revenue account. Such an argument would not be made, based on the method of calculation, if there were a warranty of revenues but no pre-estimate of damages for breach of warranty. Yet a claim for general damages would produce the same result as an accurate pre-estimate of agreed damages. It should be noted that the property in the payments passed unconditionally to the retailers. We see no taxation relevance in the contingent obligation to pay liquidated damages if quotas were not met. We do not consider that the payments in this case can properly be regarded as advance payments or discounts or rebates ó except for Birkdale 1 where the parties chose to modify the printed form to provide that it was an advance.
NORMAL INCIDENT OF BUSINESS?
It is well established that a payment made to a trader in return for a covenant to refrain from doing particular acts may have the character of a trade receipt (see, for example, Thompson (HM Inspector of Taxes) v Magnesium Elektron Ltd (1943) 26 TC 1). Referring to the background material which has already been mentioned, Mr White submitted that the trade ties were simply a normal incident of the carrying on of business for such retailers. The payments, he said, did not involve them in making any significant adjustments to the profit-making structure of their businesses. This argument for the Commissioner has, with respect, more cogency. Anticipating it, Mr Harrison referred the Court to three cases in particular where lump sum payments received by petrol retailers in exchange for a trade tie had been characterised as capital, namely The CIR v Coia 1959 SC 89, Dickenson v Federal Commissioner of Taxation (1958) 98 CLR 460 and CIR v Dunlopís (Wanganui) Ltd.
In Coia the retailer gave up being a multi-brand outlet and accepted an exclusive tie for a period of ten years with Esso Petroleum in return for payment of £1,550 which was based on previous annual gallonage and an estimate of future sales from the garage. As stipulated in the agreement, the money paid by Esso was used to buy additional land and build a lubrication bay and an extension to Mr Coiaís workshop. It was agreed that if the retailer broke his undertaking or became insolvent or ceased business within ten years the sum of £1,000 would be apportioned to the date of that event and an appropriate refund made to Esso.
In the leading judgment the Lord President (Clyde) observed that the retailer had expended the moneys on capital outlays. And, he said, they were also made to Mr Coia in return for the trade tie, acceptance of which required him to give up his unrestricted freedom to trade as he wished, to buy petrol from any of the various suppliers and to sell other brands of petrol to his customers. He ceased being a multi-brand retailer ó something which it appears he could have elected to continue with ó and became "in effect an agency for the sale of the Esso Petroleum Companyís fuels". (p.95)
Lord Patrick, concurring, commented that the taxpayer had (p 95)
.... parted with what I regard as a valuable asset of a capital nature, the right to obtain the supplies of fuel oils which were his stock in trade from such sources as he might consider most suited to the varying nature of the demands made by his customers, and the right to obtain these fuels in the cheapest market. For ten years he must buy his supplies of motor fuels from the Esso Company, and he must buy them at such prices as the Esso Company choose to exact.
The taxpayer in Dickenson accepted payments totalling £4,000 from Shell in return for agreeing for a period of about ten years to sell only Shell products. Until that time Mr Dickensonís business had been multi-brand. Shellís rights were secured by a ten year lease and sub-lease ó the same type of arrangement as is found in Kenlock 2. The majority of the High Court of Australia found that the payments were of a capital nature. Dixon CJ said that (p 474):
The appellantís business constituted a profit-yielding organisation of a definite structure under his control and he received the money as part of an inducement to change a feature in it. The feature to be changed was the use of a plurality of petrols and oils, and this was replaced by a restriction to the purchase and sale of the products of one company.
The Chief Justice added that there was nothing recurrent in the nature of the payment. It was not a normal or natural incident of carrying on such a business and it did not represent a purpose for which such a business was carried on.
Kitto J said (p 492):
But a lump sum payment for a restriction of a garage and its proprietor to one brand of petroleum products for a period of ten years, effectuated by means of a lease and sub-lease of the premises as well as by personal covenants, seems in the nature of a sale price for a substantial and enduring detraction from pre-existing rights. The restriction does not strike my mind as an obligation undertaken incidentally to the carrying on of the business. Rather does it take a substantial piece out of the ordinary scope of the business activities to which otherwise the appellant might apply himself and for which he might use his premises ....
The third of the authorities referred to by Mr Harrison was Dunlopís, a decision of this Court. Until 1961 the taxpayer, a motor spirits retailer, had sold all available brands of petrol. In that year Mobil offered £3,000 if the company would sell Mobil petrol only. No legal tie was effected but payment was made by means of Mobil returning four of the companyís cheques for monthly supplies of fuel. North P concluded that the £3,000 had been paid in consideration of the retailer giving up a part of its business and confining itself to a more limited field. The other members of the Court agreed. Turner J commented that there was no tie legally binding for a definite period but there was a promise by persons whom the oil company trusted to restrict themselves for an indefinite and lengthy period. He did not think that the absence of legal obligation on their part was crucial.
WHAT THE PAYMENTS EFFECTED
The question of whether the payment for an asset is received as capital or income turns in our view upon the nature of the asset in the hands of the seller. Is it sold as a capital asset or is the seller disposing of it in the carrying on of the operations of a business or in pursuance of a particular venture? Are the retailers in their particular circumstances to be seen as having disposed of a part of their businesses, as the retailers did in Coia, Dickenson and Dunlopís, or did they accept the sums of compensation as an incident of the carrying on of their businesses without any change of a structural nature having occurred? In other words, the question is what the retailersí acceptance of Mobilís payments effected from a practical and business point of view, to adapt Dixon Jís words in Hallstroms.
In our view, the following three factors are relevant to determining what the trade tie payments effected from a practical and business point of view.
[a] The proper accounting treatment
The evidence showed that proper accounting treatment required the payments to be taken into the revenue account of the retailer. Such a requirement is not determinative but in this case provides a minor degree of support for the view that the payments were revenue in nature.
[b] Little was surrendered by the retailers
In this case, the appellantsí apparent freedom to contract as they wished for purchases of motor spirits was illusory. In reality each had no choice, if it wished to remain in business, other than to accept a tie to one of the four oil companies. It was merely a matter of choosing for which one of them the retailer would become an "agent" and negotiating the period of the tie, the amount of the payment to be received upfront and the applicable conditions. The details of the arrangements were not likely to vary much at all as between the oil companies, for the reasons already stated. There is no doubt that Mobil imposed quite severe restrictions and controls, including the right of first refusal. But the effect of these on the pre-existing business structure has to be measured against the situation in which the retailers found themselves upon deregulation of the industry.
This readily distinguishes the present case from the three cited to us by the appellant, Coia, Dickenson and Dunlopís. All of those cases involved a retailer which enjoyed both legal and practical ability to continue as a multi-brand seller. None of them appears to have faced a compelling need to tie themselves to one supplier. Each accepted a payment or payments in exchange for surrendering their freedom to continue as a multi-brand seller and becoming, as the Lord President put it, in effect an agency for the sale of the oil companyís products for a lengthy period. That involved in each case a substantial alteration to the profit making structure of the business ó from independent operator to "agency".
There was no such freedom involved here. Leaving aside Kenlock 2 which had unique features, all that the retailers subtracted from their contractual freedom in this case when signing up to the trade ties was the ability to make much the same deal, varying for each location only in length and therefore amount. There was no conversion of the type of business from multi-brand to trading exclusively with the products of one wholesaler. They were already trading only in that restricted fashion.
It was submitted for the retailers that they gave up the opportunity of waiting until another wholesaler entered the market, perhaps offering more favourable terms. But in the period during which the compensation agreements were entered into there was no other wholesaler and no evidence has been given as to the prospects at that time of one appearing. Challenge and Gull have been mentioned but they did not arrive on the scene for some years afterwards. The reference to Challenge in the evidence of Mr Gale, an economist called by the Commissioner, appears to be to the present day position. Plainly these retailers could not at the time when they entered into their ties have waited in the hope of some such development at an indefinite time in the future. The evidence was overwhelmingly that they had an immediate need to tie themselves to a wholesaler in order to survive. It may be said that those with ongoing ties lost the opportunity to deal with Challenge when eventually it came into the market, but the nature of the transaction is to be judged by the circumstances and prospects at the time the tie was entered into. The prospects then were that at the expiry of each contracted period of exclusivity there might be an opportunity to negotiate a further tie with Mobil, or possibly with one of the other three wholesalers and of obtaining a further lump sum payment. Perhaps the length of a tie might have been influenced by the retailerís prediction about the arrival of a new wholesaler, but we were not referred to any evidence that that was so and the prospect seems to have been of little, if any, influence on the arrangements.
Therefore, in accepting the trade tie payments, the appellants were not giving up a significant freedom. In addition, the other features of the structure of the business had hardly changed. There was no alteration in the ownership of the land or chattels employed in the conduct of the business, nor in their nature. (In one case ó Birkdale 1 ó there was a change of wholesaler, presumably necessitating a change in the ownership of tanks and pumps, but from one wholesaler to another, not from Birkdale to Mobil.)
The manner of conducting the business of the retailer may have changed because of the contractual requirements imposed by Mobil on service station operations. But that involved the way in which the revenues were to be derived rather than an alteration in the structure from which they were derived.
A right of first refusal was given, but not for any stipulated price: the obligation was simply to give Mobil the right to match any offer. It did not confer upon Mobil any ability to acquire the business if the retailer were unwilling to sell, nor did it give Mobil the right to fix the price.
There was apparently no alteration to the way in which prices for motor spirits were to be set. They were to be acquired by the retailer at Mobilís posted prices. It is not suggested this was different from the position before the ties. The retailer could set its resale prices as the market would permit, although where the quota related to gallonage there was an incentive to sell at prices which would maximise sales while still producing an acceptable retail profit.
The guarantee from the shareholders was simply a guarantee of performance extending to all obligations incurred by the retailer. It did not effect any structural change.
[c] The length of the trade ties
The length of the trade ties also distinguishes the present case from the three cited to us by counsel for the appellants. In the present case, in no instance was the initial tie for a period of more than five years and in two cases it was as short as three years. Although, in theory, at the end of that period the retailer could switch to another wholesaler, the best that could actually be hoped for was the renegotiation of a further package either with Mobil or possibly with one of the other oil companies. Mr Faesen Kloet of Kenlock spoke of negotiations which he conducted with Mobil and Caltex prior to entering into the transaction known as Kenlock 2 with Mobil, by means of which he succeeded in extracting better terms from Mobil. The recurrent nature of each transaction is obvious and there is much force in the Commissionerís argument that the receipt of payments in return for a trade tie ought therefore to be seen as an incident of the motor spirits retailing business. Commenting on Dixon CJís observations in Dickenson (para  above) R W Parsons, Income Taxation in Australia (1985) para [2.417] says that the possibility cannot be excluded that in modern conditions, when entering into a tie agreement is a "universal experience" in the business of a garage proprietor, receiving an amount for a tie is incidental to carrying on that business. "The capacity to accept a restriction is, in effect, a revenue asset." It may not be going too far, on the evidence, to say that by the time the second ties were entered into by the retailers in this case ties to wholesalers were a universal experience in New Zealand. Certainly they were common. And it is worth noting that repetition of a tie involved no change at all to the business structure, other than in relation to length of term in instances where that was different from the retailerís first tie with Mobil. In short, the further tie and any longer period have to be considered in that context.
Some guidance is obtainable from the judgments of the House of Lords in Regent Oil Co Ltd v Strick (Inspector of Taxes)  AC 295. That case concerned the deductibility of payments made by an oil company to obtain a large number of trade ties from retailers who had previously sold multiple brands of motor spirits. It should be said at the outset, however, that statements made about the position of such a wholesaler are not necessarily applicable to the position of an individual retailer.
The case also involved lease / sublease securities for the ties, but while some of their Lordships found that aspect to be determinative, the judgments also contained comment on the position which would have applied if there had been no such securities.
Lord Reid said that recurrence of payments, as against a payment made once and for all, has been accepted as one of the criteria in the question of capital or income. He regarded a payment which had to be made every three years to retain an advantage as a recurrent payment, whereas if the period of the tie were 20 years, the fact that another payment would have to be made after 20 years if the situation did not change in that time would not prevent the first payment from being regarded as being once and for all. He commented that if a further payment to retain the advantage is necessary "in the near future" he would hold that the first payment was not once and for all. He said (p 324) that making arrangements for the next five or six years could generally be regarded as an ordinary incident of marketing (for the wholesaler), and that a payment which would have to be repeated after five years to obtain a tie could be regarded as a recurring payment.
One of the ties in Regent Oil was for 10 years and another for five years. It seems in these instances to have been only the lease / sublease factor which led Lord Reid to conclude that the payments were capital in nature.
Lord Pearce said nothing about the 10 year tie but observed that "the considerations pointing towards a revenue expenditure would, in my opinion, have prevailed on balance in the transaction where only a five year period is involved" (p336). He regarded the 21 year tie as capital. So did Lord Upjohn. But, as for the five year tie, Lord Upjohn thought that its length plainly put it into the character of a merely long term trading contract. It would have been an ordinary trading expense, he said, and deductible for tax had it not been for the fact of the lease / sublease.
Lord Upjohn described the 10 year tie as an "interesting case". He said that it was a borderline case and that it was very wise of the retailer to have driven a hard bargain with Regent Oil (apparently a reference to the lease / sublease) which quite plainly made the sum a capital sum. It is to be noted that here his Lordship was looking at the matter from the retailerís perspective and yet saw a 10 year tie, in exchange for giving up complete freedom to trade as a multi-brand dealer, as a borderline case.
Against this, Lord Morris of Borth-y-Gest, saying that he understood his reason did not commend itself to the majority, considered that a payment for five years was of a capital nature. Lord Wilberforce took the same view, regarding the length of the life of a tie as an irrelevant circumstance. He said he could see no logical basis for saying that 21 years or 10 years was good enough to create a capital asset of the tie but five or three years was too short. He also thought that the position should not differ because there might be a lease security.
Strict logic may suggest, as it did to Lord Wilberforce, that the length of a tie cannot determine whether the payment made and received for it is capital or revenue in nature, but we do not think that this question is capable of being answered simply by an application of logic. What a payment effects in practical and business terms depends upon the particular circumstances, foremost amongst which is the nature and extent of the alteration to the business structure (if any) which it brings about. In assessing that alteration the length of the tie must be a relevant factor; as Lord Pearce said in delivering the advice of the Judicial Committee in BP Australia, it is a question of degree. Adapting his words to the position of a recipient rather than a payer (p 267):
Length of time, though theoretically not a deciding factor, does in practice shed a light on the nature of the advantage [granted]. The longer the duration of the agreements, the greater the indication that a structural solution was being sought.
At the extremes it would be peculiar to treat a payment for a three month tie as capital, even if it were not actually renewed, or to treat a one-off payment for a 50 year tie as revenue, even if in practical terms the retailer appeared to give up comparatively little by way of trading freedom as matters stood at that time. The point at which the duration of the retailerís commitment along with the other particular circumstances leads the observer to conclude that the inducement for it, in the form of an advance payment, is an affair of capital in the hands of the recipient is difficult to determine, as the varying judgments in Regent Oil amply demonstrate.
In the end, the decision in this case comes down to the impression created by the combination of circumstances, including the length, and thus potential for recurrence in the short and medium term, of each tie, and the insignificant nature of the supposed freedom given up by the appellants.
Having reviewed these matters, we reach the conclusion that in all cases except Kenlock 2 the payments were incidents of the conduct in the deregulated environment of one brand motor spirits retailing businesses and, as such, revenue in nature. The receipt of compensation payments, with the anticipation of more to come upon expiry of the current tie, was a modus operandi of this type of business. No essential change was made in the nature or structure of the business. None of the ties was of a term sufficiently long to impart a capital character. The longest term was 10 years, which it appears Lord Reid and Lord Upjohn in Regent Oil would respectively have regarded, in the absence of a lease and sublease, as not "once and for all" or as having the character of a long term trading contract. And it is to be noted that in Regent Oil these views were expressed even where there had been a surrendering by the retailers of a real freedom to operate on a multi-brand basis. Where no such freedom has been surrendered, and no changes have been made in practice to the way the business is run, even a 10 year trade-tie is not in itself sufficient to suggest a structural change.
It is not necessary to determine whether the length of the term in Kenlock 2 (15 years) would in itself have been enough to constitute that transaction an affair of capital. Two factors, both singly and even more powerfully in combination, convince us that Kenlock 2 is different from the other arrangements. They are, first, that Mobil obtained security for its tie by means of a 15 year lease with a sublease to Kenlock on a back-to-back basis and, secondly, that the term for which Kenlock became committed to Mobil was potentially very substantially longer than 15 years. At any time during the 15 year term Mobil had the right to call upon Kenlock to enter into a redevelopment of the site, and if Kenlock did not within a short time negotiate satisfactory terms with Mobil, then Mobil could pay Kenlock the value of its site improvements and take a 20 year lease at a ground rent, again with a corresponding sublease back to Kenlock. There was also a restrictive covenant preventing Kenlock and its shareholders from trading in competition with the outlet from other premises within a 10 kilometre radius of the premises during the lease term.
Even though the choices realistically open to Kenlock Motors were no greater than for the other retailers, or for itself when it entered into Kenlock 1, on accepting such terms of Kenlock 2, particularly by the granting of a long term interest in its land and buildings, we consider that Kenlock Motors was altering its business structure in such a material way that the payment it received in exchange has to be regarded as of a capital nature. As Lord Pearce said in Regent Oil (p 336), a lease/sublease transaction is "materially different both in form and in substance. By it the wholesalers obtain for a premium an interest in the land from which their goods are retailed to the public".
It is not our understanding that the Commissioner has in this case placed any reliance upon s 65(2)(g) of the Income Tax Act 1976 (which provided for lease premiums to be assessable income). No doubt this was because, in addition to the $225,000 compensation payment, Mobil paid Kenlock $25,000 expressed to be a lease premium and the case is not concerned with that payment. However, we consider that although the consideration was apportioned in this way, the Kenlock 2 transaction must be viewed as a whole, including the lease and sublease. The 15 year term of the retail supply agreement and the term of the interest in Kenlockís land granted to Mobil were identical and in our view they served the same commercial purpose. The sublease was expressed to be "collateral" with the other agreements, including the compensation agreement.
We consider that in Kenlock 2 the taxpayer was altering its business structure in a very material way and that the payment of $225,000 received in exchange for this alteration was therefore capital in its nature.
The final matter for determination is the Commissionerís appeal against the decision of Laurenson J not to award costs in relation to the High Court hearing, primarily on the basis that this was a test case. Generally, an award of costs is not made in test cases (Securities Commission v Kiwi Co-operative Dairies Ltd  3 NZLR 26, 36). On appeal, the Commissioner argued that the case was not a test case as it is understood in the context of costs awards. It raised standard tax issues and not any novel point or principle of law that the Commissioner sought to have tested.
The Commissioner had designated the six objections in this case as "test cases" under s 137(1) of the Tax Administration Act 1994. That section gives the Commissioner power to designate an objection as a test case where he considers that the determination of the objection is "likely to be determinative of all or a substantial number of the issues involved in one or more other objections". But, the Commissioner argued, the designation of a case as a test case under s 137 does not necessarily make it a test case for the purposes of an award of costs. In the High Court, Laurenson J disagreed with the Commissionerís argument.
The decision whether to award costs is within the discretion of the Court hearing the case. It will rarely be interfered with on appeal (Wilson & Horton Ltd v A-G  2 NZLR 513, 529). In order to succeed in overturning this exercise of discretion, the Commissioner must show that the Judge acted on a wrong principle, or failed to take into account some relevant matter or took into account some irrelevant matter, or that the Judge was plainly wrong (May v May (1982) 1 NZFLR 165, 170).
We agree with the submission of the Commissioner. The procedure under s 137 is administrative only, and is a mechanism that allows the Commissioner to save time and resources by litigating fewer cases. It would undermine the operation of that section if, every time the Commissioner wished to use its procedures, he had to bear the cost of the ensuing litigation, whatever the result.
The Commissioner is right in saying that this case has involved only an exercise of applying settled principles of law to a particular set of facts. The determination of the issues has turned to a large extent on the particular contractual setting. There is little to suggest that the decision will be of benefit to anyone beyond the 111 objectors.
The six appellants are all represented by solicitors instructed by the Motor Trade Association and counsel retained by those solicitors. The costs of the litigation are being shared by 72 of the objectors who are members of the Motor Trade Association. In such a situation, where the decision will be of benefit to comparatively few outside the quite large group who are bearing the costs of the litigation, that is a telling consideration against treating the case as a test case.
We are satisfied therefore that Laurenson J proceeded on a wrong principle in his costs ruling, and that costs should be awarded to the successful party in accordance with the principles stated in Auckland Gas Co Ltd v CIR  2 NZLR 409.
The appeal of the second appellant, Kenlock Motors Ltd, is allowed in respect of the transaction known as Kenlock 2, but otherwise the appeals of the six taxpayers are dismissed. The Commissionerís appeal relating to costs is allowed and that matter remitted to the High Court for the fixing of costs in that Court in accordance with this judgment, taking into account the result of the substantive appeals.
The appellants must pay the Commissionerís costs in this Court in the sum of $8,000 together with his reasonable disbursements to be fixed, in the absence of agreement, by the Registrar.
I support the judgment delivered by Blanchard J, and wish only to add three points.
First, I agree that the key issue is whether the payments in question were a normal incident of the business of running a service station and therefore a part of its current operations, or whether the payments were closely associated with the underlying structure of the business. (Paras  to ). I also agree that the service stations did not surrender a capital asset of significant or any real value. (Paras  to ). My perception, however, is even more emphatic.
In my view, it is incontrovertible on the facts of this case that the business of the retailers was the business of vending Mobilís motor spirits. Until the retailers entered into their agreements with Mobil, they had no business. Although cl 18 of the standard retail supply contract expressly disavowed that a retailer was in any way an agent for Mobil, it is nevertheless clear that the agreements created a de facto agency relationship. This was conceded by the appellants. (See also para  of Blanchard Jís judgment). Alternatively, it might be said that the retailers were in effect "franchised" to sell a particular wholesalers motor spirits. In the circumstances which prevailed following deregulation, therefore, it is to fall into error to think that the retailers operated the independent business of vending motor spirits and that they added a trade tie to that business. In the absence of the tie they had no motor spirits vending business. I therefore consider that the Commissionerís argument that, unlike CIR v Coia 1959 SC 89; Dickenson v Federal Commissioner of Taxation (1958) 98 CLR 460; and CIR v Dunlops (Wanganui) Ltd  NZLR 1125, the service stations were not surrendering any structural freedoms is well-made.
Secondly, I am impressed by the argument advanced by Mr White for the Commissioner to the effect that the compensation payments, on the one hand, and the obligation to buy the stipulated quota (backed by a contingent liability which reduces in proportion to sales), on the other, irrevocably linked the payments to performance. The payments were not only paid to bind the service stations to Mobil, they were also paid to ensure a stipulated level of sales performance. Being essentially linked to performance the receipts have the character of income. This is because receipts connected with a businessí performance are a product of the businessí current operations. Such receipts are related to how well the business is run, not to its underlying structure. The more performance-based a receipt, therefore, the more difficult it is to regard the receipt as capital in character.
For this reason, also, I would not be dismissive of the purported connection between liquidated damages and the payments and the quota. To my mind, the relevant question is not so much how the damages are calculated but the fact that the payments were intended to provide for a guaranteed performance, thus indicating income.
Finally, I am not wholly comfortable about excluding the Kenlock 2 arrangement. For myself, I would not regard the length of the trade tie as a distinguishing feature. The agreements are highly restrictive and the distinction between them, or their effect, and the lease seems somewhat artificial. For the present, however, I would accept Blanchard Jís conclusion (paras  to ) on the basis that being a motor spirits retailer in New Zealand at the present day entails a trade tie and is a normal incident of a motor spirits retail business, whereas, in contrast, being a retailer does not entail accepting a lease-back arrangement relegating the retailerís status to that of a tenant. For the moment, therefore, a lease-back can be seen as a structural decision which cannot be characterised as a prerequisite to the operation of a service station. In the event, however, that lease-backs become part of the trade tie arrangement and so become a normal incident of running a service station, I would wish to reconsider this issue.
CIR v Wattie  1 NZLR 529; CIR v Renouf Corporation Ltd (1998) 18 NZTC 13,914; B.P. Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia  AC 224; Hallstroms Pty. Ltd. v Federal Commissioner of Taxation (1946) 72 CLR 634; CIR v City Motor Service Ltd  NZLR 1010; CIR v Dunlopís (Wanganui) Ltd  NZLR 1125; Strick (Inspector of Taxes) v Regent Oil Co Ltd  1 WLR 1166; Regent Oil Co Ltd v Strick (Inspector of Taxes) AC 295; The Glenboig Union Fireclay Co Ltd v The CIR (1922) 12 TC 427; Thompson (HM Inspector of Taxes) v Magnesium Elektron Ltd (1943) 26 TC 1; The CIR v Coia 1959 SC 89; Dickenson v Federal Commissioner of Taxation (1958) 98 CLR 460; Securities Commission v Kiwi Co-operative Dairies Ltd  3 NZLR 26; Wilson & Horton Ltd v A-G  2 NZLR 513; May v May (1982) 1 NZFLR 165; Auckland Gas Co Ltd v CIR  2 NZLR 409
Tax Administration Act 1994: s.137
Authors and other references
R W Parsons, Income Taxation in Australia (1985)
Harrison QC, D D Martin and L J Smith for Appellants / Respondents (instructed
by Denham Martin & Associates, Auckland).
D J White QC and S D Barker for Respondent / Appellant (instructed by Crown Law Office, Wellington).
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