Investment and Merchant Finance Corporation Ltd v FCT
(1971) 125 CLR 249(1971) 45 ALJR 432
(1971) 71 ATC 4140
(1971) 2 ATR 361
BC7100340
(Judgment by: McTiernan J)
Investment and Merchant Finance Corporation Ltd
v FCT
Judges:
Barwick CJ
McTiernan JMenzies J
Walsh J
Judgment date: 18 August 1971
Judgment by:
McTiernan J
This is an appeal from a decision of Windeyer J dismissing an appeal by Investment & Merchant Finance Corporation Ltd ("the taxpayer") against its assessment in respect of the year of income ended 30 June 1965.
The taxpayer (which prior to 1967 bore the name of Devon Credits Ltd) described itself at the relevant time as a "financier". This term encompassed the business of money-lending, underwriting and share-dealing, the latter both for investment purposes and for the purpose of profit from purchases and sales. The transaction in question involved shares purchased in the year of income ended 30 June 1964 in Macgrenor Investments Pty Ltd ("Macgrenor") (a private company) for £86,180 17s 0d. The shares purchased comprised twenty-one of the thirty ordinary shares issued in Macgrenor. The remaining nine shares were purchased by another company, the Investment Company of South Australia Ltd In the same year Macgrenor declared a dividend which represented its accumulated profits available for distribution in this way to ordinary shareholders. The taxpayer thereby received £81,900. This sum was liable to tax under s 44(1) of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth) ("the Act") but that tax was in fact rebatable pursuant to s 46(2) of the Act. Events followed this course. As regards the shares themselves the question of tax did not arise for the year of income ended 30 June 1964 because the shares had come into the taxpayer's trading account at their cost price and stood there, for the purposes of tax liability, at that price on 30 June 1964, even though it was clear that they no longer retained anything like their original value at purchase.
During the course of the year of income ending 30 June 1965 the taxpayer sold its twenty-one shares in Macgrenor to a company called Happy Venture Pty Ltd for the sum of £21, a difference, vis-a-vis the purchase price, of £86,482 17s Od, if the stamp duty on the purchase is added. The result of this transaction was that the taxpayer's account showed an opening entry, with respect to the year of income ending 30 June 1965, for those shares of £86,503 17s 0d. and a closing entry of £21. The taxpayer claims that the difference of £86,482 17s 0d. is an allowable deduction. The Commissioner has refused to assess the taxpayer's tax on this basis.
The primary submission for the taxpayer was that the shares in question were "trading stock" within the meaning of s 6(1) of the Act and that therefore it was entitled to claim a deduction of £86,482 17s 0d. pursuant to s 28(3) of the Act. S 28(3) reads as follows: "Where the value of all trading stock on hand at the beginning of the year of income exceeds the value of all trading stock on hand at the end of that year, the amount of the excess shall be an allowable deduction." S 29 and s 31(1) deal with the computation of the value of trading stock and it was argued that these sections make it clear that if the shares in question be considered trading stock the taxpayer must be entitled to an allowable deduction under s 28(3).
It was submitted in the alternative by counsel for the taxpayer that the shares in question were not trading stock but an asset purchased for the purposes of a venture in the nature of trade and that the difference between the purchase and sale prices of the shares should therefore be an allowable deduction under s 51(1) of the Act. S 51(1) provides that: "All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income." It was argued that this was a loss incurred by the taxpayer in carrying on one of its businesses, in this case its business as a share dealer.
Counsel for the taxpayer contended that this was a case in which s 26(a) of the Act had no operation for the reason that it is not permissible for the Commissioner to take a taxpayer's course of business and extract from that course of business a single item which is then treated as falling under s 26(a) rather than under s 25, which will of course govern the rest of the taxpayer's transactions in his business.
It was submitted for the Commissioner that, whatever might be the position with regard to shares as trading stock in other circumstances, these particular shares were not trading stock. It was argued that although the taxpayer was carrying on a business as a share trader the purchase of these shares was neither a part nor an incident of its ordinary share-trading business but an expenditure of capital with a view to obtaining a capital asset, with a result that their disposal at a loss involved no allowable deduction of the nature claimed by the taxpayer. The reason put forward for so classifying this expenditure was that the sole benefit of the transaction to the taxpayer lay in its production of a taxation advantage and this fact rendered the dealing one without a real commercial aspect and therefore either not a trading activity, or, at least, so far removed from the company's ordinary course of business, that it could not be considered part of that business.
The alternative submission for the Commissioner was that the taxpayer's dealings amounted to a "profit-making undertaking or scheme" under s 26(a), with a result that the dividend received in the previous year of income must be taken into account in computing any profit or loss under the scheme. S 44(1), which makes the dividend assessable income in the year of income in which it is received, was said to be subject to s 26(a) on the grounds that in the case of a profit-making undertaking or scheme it is necessary, in calculating whether there has been any taxable profit under s 26(a) or any allowable deduction under s 52, to take into account everything that was gained or lost during the course of carrying out the scheme.
In my opinion it seems clear that the taxpayer would be entitled to a deduction under s 28(3) if the shares in question fall within the definition of "trading stock". S 6(1) of the Act defines "trading stock" thus: "'trading stock' includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock." In Australian Machinery and Investment co Ltd v Deputy Federal Commissioner of Taxation, Dixon J (as he then was), with whom I concurred, said (1946) 8 ATD 81, at p 107: "As at present advised I am not prepared to hold that the shares were 'trading stock' within the meaning of Div 2, SubDiv B, ss 28-31, though this does not necessarily mean that the principles of accounting embodied in those provisions are themselves altogether inapplicable." In my opinion, whatever may be the general position with regard to shares held by a company trading in shares, these particular shares could not be considered as trading stock. This transaction was certainly not part of the taxpayer's normal trading business. In fact it was the only dealing of this type engaged in by the taxpayer during the period 1961-1968. I think it appropriate to quote the words of Lord Morris of Borth-y-Gest in Bishop (Inspector of Taxes) v Finsbury Securities Ltd (1966) 1 WLR 1402; (1966) 3 All ER 105; (1966) 43 TC 591, where a dividend-stripping operation, similar in nature, if not in detail, to that in this case, had occurred. His Lordship said (1966) 1 WLR, at p 1417; (1966) 3 All ER, at p 112; (1966) 43 TC, at p 627: "A consideration of the transactions now under review leads me to the opinion that they were in no way characteristic of, nor did they possess, the ordinary features of the trade of share dealing. The various shares which were acquired ought not to be regarded as having become part of the stock-in-trade of the company. They were not acquired for the purpose of dealing with them. In no ordinary sense were they current assets." and later at the same page: "It was a wholly artificial device remote from trade to secure a tax advantage." (1966) 1 WLR, at p 1418; (1966) 3 All ER, at p 112; (1966) 43 TC, at p 627. It must also be remembered that the taxpayer did not treat the shares in question as trading stock in either of the returns lodged for the years of income ended 30 June 1964 and 30 June 1965.
In my judgment the taxpayer's reliance on s 51(1) of the Act does not avail it either. The section speaks of "losses and outgoings" which may be allowable deductions. Obviously the purchase price of these shares was not an outgoing in the relevant year of income. It would have of course been such an outgoing in the previous year of income: Rowdell Pty Ltd v Federal Commissioner of Taxation (1963) 111 CLR 106. The word "loss" raises, I think, notions of a want or a deficiency. As regards therefore the claim of a "loss" in the sum stated I consider that it is necessary in computing any such loss to take into account the dividends which the taxpayer received and which in this instance approximated to the "loss" claimed. In my opinion the Commissioner correctly thought that the only figure which reflected these concepts was that arrived at by taking the dividends received into account rather than that claimed by the taxpayer.
In my opinion this transaction of the taxpayer falls within those words of s 26(a) of the Act which make assessable income of a taxpayer "profit arising . . . from the carrying on or carrying out of any profit-making undertaking or scheme". S 52 of the Act is therefore the provision which determines whether the deduction claimed by the taxpayer is allowable. S 52 provides as follows: "Any loss incurred by the taxpayer in the year of income upon the sale of any property or from the carrying on or carrying out of any undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in his assessable income, shall be an allowable deduction: Provided that, in respect of property acquired by the taxpayer after the date of the commencement of this proviso, no deduction shall be allowable under this section (except where the Commissioner, being satisfied that the property was acquired by the taxpayer for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme, otherwise directs) unless the taxpayer, not later than the date upon which he lodges his first return under this Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme." Leaving aside for the present the question of whether, as the proviso to the section requires, the taxpayer notified the Commissioner that the shares had been acquired for a profit-making purpose or the Commissioner rendered such notification unnecessary by indicating his satisfaction on this point, the requirement that there be a "loss" again seems to me to defeat the taxpayer's claim. When the complete scheme (or operation, to use a less pejorative word) is examined in this case I do not consider that the taxpayer incurred a loss within the meaning of s 52 in the year of income ending 30 June 1965. The taxpayer's method of book-keeping did portray such a picture but it is possible to achieve this impression only by disregarding almost completely the real value of the shares in question at the start of that year of income.
In my opinion, therefore, the appeal should be dismissed.