Cecil Bros Pty Ltd v. Federal Commissioner of Taxation
(1964) 111 CLR 43037 ALJR 445
(Judgment by: Menzies J.)
CECIL BROS. PTY. LTD. v FEDERAL COMMISSIONER OF TAXATION
Court:
Judges:
Owen J.
Dixon C.J.
Kitto J.
Taylor J.
Menzies J.
Windeyer J.
Subject References:
Income Tax
Judgment date: 25 February 1964
Judgment by:
Menzies J.
Here we are concerned, not with the usual application of s. 260 of the Income Tax and Social Services Contribution Assessment Act (Cth) to increase a taxpayer's assessable income by bringing into that income what the arrangement, unless avoided, would exclude, but to increase a taxpaying company's taxable income by denying to it an outgoing from assessable income to which it is entitled unless the tax-avoiding arrangement is avoided. In the course of the judgment under appeal, Owen J. said: "Section 260 is being called in aid to reduce the amount of the taxpayer's outgoings and thus increase its taxable income, but I can see no reason why it should not be invoked for that purpose" (1962) 111 CLR, at p 436 With this general statement I agree - vide Jaques v. Federal Commissioner of Taxation (1924) 34 CLR 328 The point of this case, however, as it seems to me, is whether the application of s. 260 does show that in truth the taxpayer's actual outgoings were smaller than any arrangement which was avoided had made them to appear.
The appellant company is a retailer of boots and shoes, so that what it pays for its stock is an outgoing which s. 51 makes an allowable deduction. Normally, in the sort of business carried on by the taxpayer company, the retailer buys at the best price available, but the taxpayer here chose not to do so. It preferred to buy some of its stock from Breckler Pty. Ltd. interposed between it and its usual suppliers at prices higher than those that would have been charged to it by those suppliers. The shareholders in Breckler Pty. Ltd. were the children, grandchildren and other relatives of the shareholders in the taxpayer company and what happened was that Breckler Pty. Ltd. made profits by buying the taxpayer company's requirements as ordered at the prices the taxpayer would itself have had to pay the suppliers and reselling what it bought to the taxpayer company at higher prices. When I say that Breckler Pty. Ltd. was "interposed" in this way, I am not suggesting that it was formed to be the intermediary between the taxpayer company and its suppliers. In fact, it was formed before the taxpayer company and at a time when that company's business was carried on by a partnership for which it had bought and to which it had sold in the same fashion. I use the term, however, to emphasize that it was at all material times open to the taxpayer company to buy directly from its usual suppliers at lower prices or to order its requirements from Breckler Pty. Ltd. at higher prices so that the latter could make profits. When it bought from Breckler Pty. Ltd., therefore, it chose to pay more than was necessary for the purpose of allowing that company to make a profit.
The Commissioner applied s. 260 of the Act in the assessment of the taxpayer's taxable income and tax for the year ended 30th June 1960, disallowing 19,777 pounds of its deductions and increasing its taxable income to 72,148 pounds. The 19,777 pounds disallowed was the difference between what the taxpayer company paid Breckler Pty. Ltd. for boots and shoes and what Breckler Pty. Ltd. paid for those boots and shoes. From that assessment the taxpayer company appealed to this Court and Owen J. dismissed its appeal and confirmed the assessment. The appeal to the Full Court from that decision was upon the grounds that the learned trial judge was wrong in holding (a) that the appellant was party to an arrangement within the meaning of s. 260 of the above Act and (b) that the application of the said s. 260 to that arrangement justified the assessment.
I propose to decide this appeal upon the second ground of appeal for, assuming without deciding that the arrangement which did exist between the taxpayer and Breckler Pty. Ltd. fell within s. 260, I have come to the conclusion that application of the section in the circumstances stated does not show that the taxpayer company's real outgoings for stock were 19,777 pounds less than it had paid to its suppliers, including Breckler Pty. Ltd. The application of s. 260 here could not be regarded as invalidating the contracts between Breckler Pty. Ltd. and the taxpayer or as substituting the taxpayer for Breckler Pty. Ltd. in the contracts which that company made with the suppliers. The contracts, as made, stand, as his Honour recognized. His critical findings were expressed as follows: "What he" (i.e. the Commissioner) "has done is to treat as having no legal efficacy so much of the arrangement between the two companies as required the taxpayer to pay Breckler Pty. Ltd. amounts in excess of the price which it would have paid if it had made the purchases direct from the manufacturer or wholesaler and to regard those excess payments as though they had not been made. In my opinion he was entitled to do so in the circumstances of this case. The effect of the transactions was to relieve the taxpayer from a liability to tax which it would otherwise have incurred and the Commissioner was entitled to proceed upon the footing that the steps taken to produce this result had not been taken" (1962) 111 CLR, at p 436 This means that s. 260 has been regarded as a warrant for disregarding part of the price actually paid for goods pursuant to contracts, the validity of which remains unaffected. I do not think that section authorizes the Commissioner to substitute a different price for that actually paid in accordance with those contracts. Indeed, s. 260 does not authorize the Commissioner to do anything; it avoids as against the Commissioner arrangements, etc. as specified and so leaves him to assess taxable income and tax on the fact s as they appear when the avoided arrangements, etc. are disregarded. Here, it is not revealed that the taxpayer company's real outgoings for its supplies were 19,777 pounds less than the price it paid or that the additional 19,777 pounds was not paid or was a gift to Breckler Pty. Ltd. To arrive at any such conclusion would, I think, be an unauthorized reconstruction of what occurred and, moreover, would not be in accordance with the true facts. All that does appear is that the taxpayer company could have bought its requirements for 19,777 pounds less than it did, but the disregard of what his Honour regarded as the tax-avoiding arrangement does not seem to me to warrant reducing whatever deduction is permitted by s. 51. The Commissioner did argue unsuccessfully before Owen J. that, independently of s. 260, the amount of 19,777 pounds should not be regarded as an outgoing necessarily incurred in gaining or producing the taxpayer's assessable income. His Honour rejected this submission, relying upon Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47 . With this I agree. Moreover, if the application of s. 260 could have any effect in this case, it is at this point that one would expect to find that effect in revealing that what had been made to appear as a necessary outgoing was really something different. As I have said, however, I have not found any basis for such a conclusion. Accordingly, it seems to me that his Honour's decision that the purchase money paid by the taxpayer to Breckler Pty. Ltd. could not be apportioned really disposed of this appeal because any possible application of s. 260 did not expose any new situation affecting that conclusion. Although not so expressed, his Honour's decision really amounted, as between the Commissioner and the taxpayer, to avoiding the contracts between the taxpayer and Breckler Pty. Ltd. and to substituting the taxpayer for Breckler Pty. Ltd. in the contracts made by that company with the taxpayer's suppliers. If the result is looked at in this way, it again illustrates that s. 260 has been treated as giving the Commissioner some power to modify when its sole function is to destroy.
His Honour also rejected the Commissioner's contention that the dealings between the taxpayer and Breckler Pty. Ltd. were sham transactions. Again I agree with his Honour.
For the foregoing reasons I consider this appeal should be allowed and that the assessment should be amended by allowing as a deduction from assessable income an additional sum of 19,777 pounds.