Caltex Ltd v Federal Commissioner of Taxation
106 CLR 205(Judgment by: Kitto J)
Between: Caltex Ltd
And: Federal Commissioner of Taxation
Judges:
Dixon CJ
Fullagar J
Kitto JTaylor J
Menzies J
Subject References:
Taxation and revenue
Income tax
Debt payable in foreign currency
Exchange loss
Allowable deduction
Legislative References:
Income Tax Assessment Act 1936 (Cth) - s 51(1); s 80; s 136
Judgment date: 5 April 1960
SYDNEY
Judgment by:
Kitto J
The case of Texas Co (Australasia) Ltd v Federal Commissioner of Taxation [F21] shows that where a trader in Australia buys stock-in-trade for a price payable in United States dollars:
- (1)
- the price, expressed in terms of Australian pounds at the rate of exchange ruling at the time of the purchase, is an outgoing incurred in gaining or producing the trader's assessable income, and accordingly is an allowable deduction by virtue of s. 51 (1) of the Income Tax Assessment Act 1936-1940 (Cth) in the year of the purchase; and
- (2)
- if the rate of exchange moves against Australia so that when the trader comes to pay the price in dollars he has to forego more Australian pounds than those which formed the allowable deduction under (1), the excess pounds constitute a loss or outgoing incurred in gaining or producing the trader's assessable income in the year of the payment (assuming that his business is still continuing), and accordingly are an allowable deduction under s. 51 (1) in that year.
In the statement of the second proposition I have used the word "forego" to cover both the case where the trader expends Australian pounds in purchasing the requisite number of dollars, and the case where he uses for the payment dollars which he has acquired otherwise than in exchange for pounds, for example by a sale of goods for dollars, by an issue of dollar debentures, or by a gift of dollars from a rich uncle. In the first case he incurs an outgoing of the excess number of pounds. In the second case he incurs a loss to the extent of the excess number of pounds, for that number of pounds, as well as the number originally treated as the allowable deduction, is wrapped up in his dollars when he parts with them.
In the present case, the appellant, a trader in petroleum and petroleum products, bought stock-in-trade from time to time over a long period prior to July 1936, from a company which has been called the "old supplier", for prices payable in United States dollars. In successive years, certain amounts in Australian pounds were treated by the appellant and the Commissioner as allowable deductions under s. 51 (1) in respect of the dollar indebtedness thus incurred, and they included provision for exchange at the then current rate; but the rate of exchange was moving generally against Australia, and the situation on 1st July 1936 was that the total number of Australian pounds which had been treated as allowable deductions in respect of the dollar indebtedness then outstanding was substantially less than the number of pounds that would have been needed to purchase at the then ruling rate of exchange enough dollars to discharge the indebtedness.
If, on that day, the appellant had discharged the indebtedness out of its own resources, either buying dollars with pounds or utilizing dollars of its own, the difference between the equivalent of the dollar indebtedness expressed in pounds at the then rate of exchange and the number of pounds previously allowed as deductions in respect of the indebtedness would have been an allowable deduction, being covered by the second of the propositions which I have taken from the Texas Case. [F22] In particular if the present case had been the simple one of a debtor first augmenting his resources of dollars by borrowing, e.g. from a bank on overdraft, and then meeting a dollar liability out of the borrowed fund, I should think that the principle of the Texas Case [F23] would apply.
But what occurred was altogether different. The old supplier was a company "owned or controlled" (as the case stated puts it) by another company called the Texas Corporation of New York. The latter joined with the Standard Oil Company of California to form a new company, which has been called in these proceedings the new supplier, and on 1st July 1936 the old supplier ceased to supply the appellant with petroleum and petroleum products. The new supplier took its place so far as future supplies were concerned. And it took its place so far as the outstanding indebtedness for past supplies was concerned, also. This it did by a procedure which the case stated describes in these words:
"On 1st July 1936 the new supplier lent to the company (the appellant) a sum of dollars to enable it to discharge part of its indebtedness to the old supplier. The loan was effected by means of a payment in dollars to the credit of the company's bank account in New York and on the same day the company drew a cheque on that account for the full amount in dollars borrowed and paid it into the New York account of the old supplier".
The procedure was repeated on 27th November 1936, with the result that the appellant no longer owed dollars to the old supplier, but owed the new supplier the amount in dollars which it formerly owed the old supplier.
This, of course, meant that one dollar liability was discharged, and another dollar liability, of the same amount but to a new creditor, was created. But the question is whether this involved the appellant in any actual ascertained loss or outgoing of Australian pounds in excess of the number which had previously been allowed for. So far as the discharge of the liability to the old supplier is concerned, the answer must depend upon whether the dollars that were used to satisfy that liability were the appellant's or the new supplier's. If the case told us nothing more about the transaction than that the new supplier lent sufficient dollars to the appellant and the appellant used them to pay its debt to the old supplier, the answer would no doubt be that the dollars paid to the old supplier were the appellant's, so that the second of the propositions I have taken from the Texas Case [F24] would apply. But the case stated does tell us more. It shows that the lending by the new supplier was a step in an agreed process. The description of the lending as having been made "to enable it (the appellant) to discharge part of its indebtedness to the old supplier" obviously means, in the context, that the new supplier paid the requisite number of dollars into the appellant's bank account in pursuance of an agreement between them that the appellant should pay those dollars to the old supplier in discharge of its debt. When the appellant performed its part of the agreement, as it did on the same day, what was it doing but completing the process by which the parties had agreed that dollars of the new supplier should be used for the purpose of getting the new supplier into the shoes of the old supplier so far as the appellant's outstanding indebtedness was concerned? The process must be regarded as an entirety, for it was devised as an entirety. To split it up, and allow no difference between this case and the case of a simple borrowing followed by a payment of a dollar debt out of the proceeds, would be to deal not with this case but with another. The object of the affair was one which might equally have been achieved by the new supplier's taking an assignment of the appellant's debt from the old supplier for a consideration equal to the amount owing. What was done differed from that in form and differed from it in legal effect; but it did not differ from it in one respect. The appellant had not to lay out any pounds or suffer any loss of pounds' worth. There was an outgoing on the part of the new supplier, an outgoing effected in two stages, and that was all.
So far as the incurring of liability to the new supplier is concerned, it is plain what answer must be given to the question whether the happenings on 1st July 1936 and 29th November 1936 brought upon the appellant any accrued and actual necessity to suffer a loss or make an outgoing of Australian pounds in excess of the number previously allowed for. The liability undertaken to the new supplier was to pay the same number of dollars as was previously owing to the old supplier. Whether the provision already made on account of exchange in the allowable deductions of previous years would prove sufficient to cover exchange when the time should arrive for paying the debt, remained after the 1936 transactions the same open question that it was before. Not until the appellant should come to discharge the liability could it ascertain whether any loss or outgoing beyond the provision made would fall upon it.
For these reasons, I would answer the first question in the case stated: No. Of the facts relating to the second question I need say no more than that I take the same view as the Chief Justice.