Ravenshoe Tin Dredging Ltd v Federal Commissioner of Taxation
(1966) 116 CLR 8140 ALJR 76
(Decision by: Owen JJ.)
RAVENSHOE TIN DREDGING LTD.
v FEDERAL COMMISSIONER OF TAXATION
Judge:
Taylor J.
Judgment date: 28 April 1965
Decision by:
Owen JJ.
OWEN J. This is an appeal from an order made by Taylor J. dismissing an appeal by the company against its assessment to income tax for the year ending 30th June 1961. During that year the whole of the company's revenue was derived from tin-mining operations carried on by it in Queensland. This was its sole activity and at all material times tin was a prescribed metal or mineral within the meaning of s. 23A (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1961 (Cth). That sub-section, so far as material to the present case, provides that (at p93)
"Where a person carries on mining operations in Australia . . . for the purpose of . . . the production of a prescribed metal or mineral, an amount equal to one-fifth of the amount remaining after deducting from so much of the assessable income of that person as is attributable to the production . . . of the prescribed metal or mineral . . . -
- (a)
- all allowable deductions which relate to that income; and
- (b)
- so much of any other allowable deduction as, in the opinion of the Commissioner, may appropriately be related to that income, shall be exempt from income tax."
In earlier years the company, a "resident" within the definition of s. 6 of the Act, had incurred losses in carrying on its mining operations and, by s. 80 (2) and (3), (at p93)
"(2) So much of the losses incurred by a taxpayer in any of the seven years next preceding the year of income as has not been allowed as a deduction from his income of any of those years shall be allowable as a deduction in accordance with the following provisions: -
- (a)
- where he has not in the year of income derived exempt income, the deduction shall be made from the assessable income;
- (b)
- where he has in that year derived exempt income, the deduction shall be made successively from the net exempt income and from the assessable income;
- (c)
- . . . (at p94)
(3) In this section 'net exempt income' means - (a) where the taxpayer is a resident - the amount by which his exempt income derived from all sources exceeds the sum of the expenses (not being expenses of a capital nature) incurred in deriving that income . . . ".
In the year in question in this appeal an amount of 142,034 pounds of the company's earlier losses remained unapplied under s. 80 and was available to it for the purposes of that section and during that year the company made what it described as a "net profit" amounting to 245,622 pounds. This sum - as I understand it - represented the difference between its gross income from tin mining and the deductions which it was entitled to make under s. 51 (1). From that figure of 245,622 pounds it made further deductions, one of them for instance being under s. 122, amounting in all to 72,015 pounds. It is not disputed that these deductions were properly made and it is unnecessary to detail them. The amount then remaining was 174,873 pounds. The company, however, was entitled to the benefit of s. 23A and the difference between it and the Commissioner on this appeal is as to the way in which that section and s. 80 are to be applied. The interpretation of the sections presents some difficulties. For example, the "assessable income" in s. 23A which is made the starting point for the calculation which that section requires to be made obviously includes an amount which, when the calculation is finished, is declared to be exempt from tax, and the words cannot be given the same meaning as the "assessable income" to which s. 80 refers and from which losses may be deducted by virtue of that section. This is no doubt explained by the fact that the sections were introduced into the Act at different times. (at p94)
The rival contentions can perhaps best be illustrated by stating the method of calculation adopted by the company on the one hand and that adopted by the Commissioner on the other. Each began with the figure of 174,873 pounds, representing the difference between the gross income from the production of tin and what, for the sake of brevity, I will call the sum of the s. 51 deductions and the other deductions of 72,015 pounds. The company took one-fifth of 174,873 pounds, namely 34,974 pounds, as being income exempt from tax under s. 23A. This left 139,899 pounds and from that amount it deducted what I will call its available s. 80 losses of 142,034 pounds by applying par. (b) of s. 80 (2). It set 34,974 pounds against its exempt income of 34,974 pounds and the balance of the losses, amounting to 107,060 pounds, against its "assessable income" of 139,899 pounds. This left the figure of 32,839 pounds and this it claimed to be the amount upon which its tax should be assessed. The method of calculation thus adopted by it was based upon the submissions that a s. 80 loss is not within the words "all allowable deductions which relate to that income" in s. 23A (1) (a), "that income" being "so much of the assessable income . . . as is attributable to the production or is derived from the sale of the prescribed metal or mineral produced by "the mining operations referred to in the section, and that, under s. 80 (2) (b) the amount of "exempt income" and the amount of "assessable income" to which s. 80 refers must be ascertained before it is possible to make the allocation for which s. 80 (2) (b) provides. (at p95)
The method of calculation applied by the Commissioner was based upon the view that a s. 80 loss is one of the "allowable deductions which relate to that income" within the meaning of s. 23 (1) (a). He took 174,873 pounds as his starting figure and from it deducted 142,034 pounds, the amount of the available s. 80 losses. This left a balance of 32,839 pounds. One-fifth of that amount, namely 6,568 pounds, was thus arrived at as being the amount exempt from tax under s. 23A. This left 26,271 pounds as the taxable income and on that he assessed the company. On the face of it, the result at which the Commissioner arrived was more favourable to the company than was the figure claimed by it to be its taxable income but no doubt s. 44 explains the somewhat unusual circumstance that a taxpayer should be complaining that his taxable income is larger than that on which he has been assessed. (at p95)
The first question to be determined is whether the deduction of losses incurred in earlier years which s. 80 allows to be made is a deduction which "relates" to the company's revenue from its tin-mining operations during the year ended 30th June 1961. I find it difficult to see how a loss made in a previous year or years can fairly be said to "relate" to the income of a later year. I can understand that, in an appropriate case, expenditure in an earlier year may properly be said to relate to the income of a later year as, for example, when that expenditure has been incurred in carrying out work which will bear fruit in later years. But what s. 80 allows to be deducted is not expenditure in earlier years but the loss resulting from the fact that the expenditure in that earlier accounting period has exceeded the revenue for that period. If s. 23A (1) (a) has the meaning for which the Commissioner contends, it is difficult to see why the draftsman would have said more than "all allowable deductions". But he went further and confined the "allowable deductions" to those which "relate" to the income earned from mining operations in the accounting period. A further objection to the method of calculation adopted by the Commissioner seems to me to arise from the terms of s. 80 (2) (a) and (b). Those provisions plainly contemplate that before any deductions for past losses are made, it must first be determined whether any part, and if so how much, of the taxpayer's income is "net exempt income" and how much represents his "assessable income", because it is first from his "net exempt income" and then from his "assessable income" that the deductions are to be made, yet the Commissioner's method is to deduct the available amount of s. 80 losses not first from the "net exempt income" and then from the "assessable income" but from the sum which contains both these components and before ascertaining how much of that sum represents "net exempt income" and how much "assessable income".
In other words, the Commissioner's method seems to me to disregard the directions laid down by s. 80 (2) (a) and (b). It was said that difficulties in the way of adopting the company's method arise from the use in s. 80 of the words "net exempt income" and the definition of those words in s. 80 (3). As I have said earlier, the two sections do not easily run together but the amount which s. 23A exempts from tax is arrived at after making all allowable deductions which relate to the income attributable to the mining operations with which the section deals. It is a net figure and should, I think, be treated for the purposes of s. 82 (2) (b) as being the "net exempt income" against which the losses of previous years are first to be set. (at p96)
For these reasons I am of opinion that the company's contention should prevail but I should, I think, say something about s. 23 (1) (b). That paragraph is, I think, designed to enable the Commissioner in an appropriate case to apportion an amount claimed as a deduction where part only of it is related to carrying out the operations to which s. 23 (1) refers. For example, where a taxpayer is carrying on mining operations and at the same time conducting a general store and incurs expenditure for a purpose which is common to both branches of his business. In such case s. 23A (1) (b) gives the Commissioner a discretion to determine how much of that total expenditure may appropriately be related to the revenue earned in carrying out the mining operations. (at p96)
I would allow the appeal. (at p96)