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02 Aug 07 Dealer payments on revenue account - Tyco

The Federal Court (Allsop J) has held that payments (totalling $132,284,530 in the three relevant years of income) made by a taxpayer to its Authorised Dealers were on revenue, rather than capital, account and therefore deductible under s 8-1 ITAA 1997.

The taxpayer carried on a business of electronic security monitoring in Australia. The taxpayer acquired from independent contractors called "Authorised Dealers" service agreements that the Authorised Dealers had entered into with customers who had installed electronic security systems. The service agreements had an agreed monitoring term of at least 36 months and provided that the agreements could be assigned to the taxpayer. The taxpayer paid a fee to the Authorised Dealers for each service agreement that it acquired. It sought a deduction for the fees so paid. The Commissioner denied the claim for a deduction on the basis that the purchase of the contracts was the establishment of a profit yielding structure, for the business of providing monitoring services. The taxpayer appealed to the Federal Court.

In upholding the taxpayer's claim for a deduction, the Court said, at para 76:

"The asset or the so-called accretion to structure was, in practical and business terms (and in legal terms), the winning of a customer. That a very attractive (to the Authorised Dealer) Assignment Fee was set reflected the anticipation not of the value of the contract rights themselves that were assigned, but rather the future value of the connection with the customer and the future revenue stream once the customer was won. The advantage sought by each payment was the winning of a customer, so that he, she or it might be retained and exploited (using that word in a neutral sense) for future revenue for services to be provided."

The Court also said, at paras 79 and 81:

"When one steps back from each individual assignment and places the AD [Authorised Dealer] Program in its context, it amounts to one business method of seeking out, contracting and profiting from additional customers. It could have been done by many methods, including employees, commission agents or, as here, independent contractors, going out to obtain customers. The instrument used (whether employee, agent or independent contractor) would need to be remunerated. The method of remuneration does not affect the character of the advantage sought: the incremental addition to the customer base of [the taxpayer] and the future obtaining of revenue therefrom...This was not the purchasing or creation of a business structure. It was, to paraphrase and elaborate upon the words of Dixon J in Sun Newspapers 61 CLR at 360, the building of the extent of the profit-yielding subject (being the customer base of [the taxpayer]) as the product of the course of operations, by the incremental winning of customers by the chosen method of organising and remunerating an independent, but controlled, sales force."

The Commissioner's decision to disallow the taxpayer's objections was set aside: Tyco Australia Pty Limited v Commissioner of Taxation [2007] FCA 1055 (Federal Court, Allsop J, 20 July 2007).

For a copy of the decision, go here

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