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: Walsh J)
Investment and Merchant Finance Corporation Ltd
v FCT
Judges:
Barwick CJ
McTiernan J
Menzies J
Walsh J
Judgment date: 18 August 1971
Judgment by:
Walsh J
In its income tax return for the year which ended on 30 June 1965 the appellant included a statement of profit which showed its net profit for the year as £55,021. It attached another statement, by which additions and deductions were made to and from that figure, in order to arrive at what the statement described as taxable income. One of the items of deduction was, "Loss on Sale of Macgrenor Shares £82,931". The facts relating to the acquisition and to the sale of those shares are stated in the judgment of Windeyer J (1970) 120 CLR 177 from whose decision this appeal is brought. The above figure shown as the loss on the sale represents the difference between the cost price of the shares and the value which was placed upon the shares in the commercial accounts of the company as at 30 June 1964, following upon a writing down of their value for the purposes of those accounts after a large dividend had been received by the appellant from the Macgrenor company. The amount of £82,931 had already appeared in the accounts submitted with the appellant's return for the year which ended 30 June 1964, as an amount written off on revaluation. In that return that amount was added back to the income for that year.
In assessing tax for the year which ended 30 June 1965, the respondent did not proceed on the basis that any loss sustained upon the sale of the shares was a loss of capital or a loss of a capital nature which should be wholly disallowed. The loss was allowed but it was "adjusted" to £4583. It is clear that in arriving at that sum the respondent ignored the actual amount (£82,931), stated in the return as being the loss. The loss to be allowed was calculated by the respondent on the footing that in measuring it the amount of the dividend received had to be deducted from the figure obtained by subtracting from the purchase price of the shares the price at which the appellant resold them. It seems plain that the case was treated by the respondent as one to which s 52 of the Income Tax Assessment Act 1936, as amended, (the Act) applied.
In its notice of objection the appellant contended that the whole amount claimed by it was allowable as a deduction pursuant to s 52. But it did not limit its grounds of objection to a reliance upon that section. It included a ground which is obviously based upon s 51 and a ground which referred to "the accepted treatment of trading stock" and to the provisions of the Act which deal particularly with trading stock.
The reasons for judgment of Windeyer J, who confirmed the respondent's assessment, do not refer specifically to the question whether the shares were "trading stock" of the appellant within the meaning of the Act. His Honour stated that the notice of objection put the appellant's claim on several grounds, that these were not all pressed by counsel for the taxpayer and that his main argument was upon s 52. His Honour referred also to an alternative argument founded upon s 51. It seems plain from the way in which his Honour dealt with that argument that he did not reject it upon the grounds which formed part of the argument put on behalf of the respondent to this Court, namely, that the purchase and the resale of the Macgrenor shares were transactions of a capital nature and that the shares were not trading stock within the meaning of the Act. His Honour said that he did not doubt that the amount which the appellant paid for the shares was an outgoing in the year in which it was paid incurred in gaining assessable income and was an allowable deduction under s 51. It is plain from his Honour's reasons that in saying that he was not applying subs (2) of that section, but was referring to the provisions of subs (1) thereof. That means that he did not regard the outgoing as being an outgoing of a capital nature. Elsewhere in his reasons, Windeyer J made findings that the appellant had dealt extensively in buying and selling shares with a view to profit and that its share dealings had been, throughout, a substantial part of its activities. He referred to the transaction under review as "an unusual transaction" but he said of it that it "is properly to be regarded as an incident in the business of the taxpayer".
I have mentioned those features of the reasons for judgment because the acceptance or rejection of the contention of the learned Solicitor-General that this transaction was entirely of a capital nature must depend upon the view that is taken of the facts and it is, therefore, important to consider whether that argument gains support from the findings of fact made by his Honour. In my opinion, the view of his Honour as to the facts was not inconsistent with and, indeed, was the same as the conclusion to which my own examination of the evidence brings me, namely, that this transaction was a part of the appellant's business of dealing in shares and was a transaction of a trading character. Furthermore, I am of opinion that the shares formed part of the "trading stock" of the appellant. It is true that the appellant did not treat these shares as trading stock in its income tax returns for the years ending 30 June 1964 and 30 June 1965. No doubt that is a factor which may be taken into account in deciding whether they were part of its trading stock. But it has not been suggested and, in my opinion, it could not be maintained that it precludes the appellant from putting forward now, as one of the grounds upon which it disputes the assessment under review, the contention that the facts disclosed by the evidence are facts to which the provisions of the Act relating to trading stock are applicable.
In the case of a company the business of which includes dealing in shares, it could scarcely be doubted that shares which it buys and which it intends to resell would generally be regarded as part of its trading stock according to the meaning in which, apart from any statutory definition, that expression would be understood. This was taken for granted in all the Courts, including the House of Lords, that considered the case of Craddock v Zevo Finance Co Ltd (1946) 27 TC 267; 174 LT 385. I cannot think that it ought to be denied that this is so in relation to particular shares, merely for the reason that the company expects or intends that the resale of those shares will be at a lower price than the cost price. In s 6 of the Act it is provided that "trading stock" includes "anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock". I need not decide whether in this provision the word "includes" should be read as "means". If it should not, it seems clear to me that the Macgrenor shares were trading stock of the appellant. But if it should be so read, I do not think that a different conclusion should be reached. In Modern Permanent Building and Investment Society (in liq) v Federal Commissioner of Taxation (1958) 98 CLR 187, at p 190, Williams J expressed the opinion that in ss 28, 29 and 31 of the Act "trading stock" did not include choses in action. But, with respect, the reasons which his Honour went on to give for that opinion, although they may have been valid reasons for holding that the particular choses in action with which the case was concerned were not trading stock, did not warrant in my opinion the generalization which his Honour made. I find no difficulty in thinking of shares as being "on hand" at a specified time (s 28) or in supposing that their value at a particular date may be ascertained for the purposes of ss 29 and 31. In Australian Machinery and Investment co Ltd v Deputy Federal Commissioner of Taxation (1946) 8 ATD 81, Rich J made a declaration, at first instance, that certain shares and options held by the taxpayer company formed trading stock within the meaning of ss 28 and 31. The case was a complicated one. There was an appeal and a cross-appeal and many questions were raised in them. According to Latham CJ (1946) 8 ATD, at pp 91, 92, the company did not appeal against that declaration and in the cross-appeal the ground that that declaration was in error was abandoned at the hearing. But Dixon J (with whom McTiernan J concurred) said (1946) 8 ATD, at p 107 that "as at present advised" he was not prepared to hold that the shares were trading stock within the meaning of ss 28-31. Starke J (1946) 8 ATD, at p 97 stated more positively the opinion that the shares and options did not form trading stock. Williams J (1946) 8 ATD, at p 114 expressed the contrary opinion. There is nothing in that case, in my opinion, which is authority for the proposition that shares can never be trading stock within the meaning of the Act; and nothing in the reasoning in the judgments in the case requires the conclusion that in the present case the Macgrenor shares were not trading stock of the appellant. In my opinion, the evidence shows that they were purchased "for purposes of. . .sale", although it is clear that the appellant wanted also to get the benefit of the dividend and to get the advantage of selling the shares at a loss, to be offset against profits made on other dealings. I do not assert, of course, that shares are always trading stock in the hands of their owner; and even where the owner is a dealer in shares the circumstances may show that particular shares are not trading stock. But when shares are bought by a dealer in shares and it is intended that they are to be resold and that this will probably occur in the not distant future, I do not think they are to be denied the description of trading stock, either because the trader expects or intends that they will be sold at less than their cost price or because he seeks to obtain a commercial advantage from the transaction otherwise than from a profit on the resale, that is, an advantage from an expected dividend and from an expected taxation benefit.
If the appellant had compiled its returns on the basis that the shares were trading stock, as in my opinion they were, it would have been entitled to take into account their value at 30 June 1964, either at their cost price or at their market selling value: see s 31(1). The appellant did not compile its returns in accordance with the provisions of ss 28 and 31. But what it did was not for practical purposes productive in that year of a result more favourable to the appellant than the result which would have been obtained if those provisions had been then applied. For taxation purposes, in that year it did not treat itself as having suffered any loss by reason of the fall in the value of the shares which was the consequence of the payment of the dividend. It treated itself as still having shares worth the amount which it had paid for them. The dividend it received came into its income for that year.
When the year which ended on 30 June 1965 is considered from the point of view of the application of ss 28 and 31, that year could be regarded as having opened with trading stock in which were included the Macgrenor shares valued at cost. It could be regarded as having closed with trading stock which did not include those shares, which had been sold in that year. So far as that component in the trading stock was concerned, the result would be that the cost-price value of the shares would be deducted from the taxable income. The small sum received upon their resale would be of course an income item for that year. The result which I have stated would be in no way affected by the fact that a large dividend had been received in the previous tax year upon the Macgrenor shares.
The foregoing conclusions appear to me to be justified by the evidence in the case and they have the result, in my opinion, that the appellant should succeed. I have already stated reasons for thinking that the course taken by the appellant in compiling its returns and in presenting its case at the hearing before Windeyer J does not preclude it from seeking to challenge the assessment on that basis. I think that the same result could be reached, even if the provisions of the Act relating to trading stock did not apply, by reference to s 51 of the Act. There are serious difficulties standing in the way of treating the amount which the appellant claims as a deduction as an "outgoing", within the meaning of that provision, incurred in the year which ended on 30 June 1965. But, in my opinion, despite arguments which have been advanced for the respondent as to the sense in which the word "losses" is used in s 51, there was a loss which was in the circumstances allowable as a deduction under that section. The circumstances to which I refer are that for taxation purposes the diminution of the value of the shares was left out of account in the year which ended on 30 June 1964 and the appellant began the following tax year with shares which had cost it and which were to be taken (for relevant purposes) as being still worth over £80,000, but in that tax year it had sold them for only £21. Unless this were to be taken as a loss of capital (and I have already explained why I think it should not be so taken) I think it must be regarded as a loss incurred in carrying on the appellant's business, which was deductible under s 51. But whether or not that opinion as to the operation in this case of s 51 is correct, I am of opinion that in any event the appellant is entitled to succeed, because the case can be treated as one in which s 28(3) operates upon the facts proved by the evidence to make allowable the deduction which the appellant claimed.
The learned Solicitor-General has contended that if the transaction of the purchase and sale of the Macgrenor shares ought not to be held to be of a capital nature but should be regarded as bearing a trading aspect, then the appropriate way of dealing with it is to treat it as a profit-making undertaking or scheme, within the meaning of s 26(a) and of s 52 of the Act, and in working out the profit or the loss made or incurred, the dividend received on the shares must be taken into account. According to the argument, it would have been proper to treat the dividend as not being as such an item in the assessable income in the year in which it was received, but as being simply a factor in the calculation to be made for the purposes of s 26(a) or of s 52. That was not what the respondent did, but it was submitted that in the light of the facts disclosed by the evidence it may now be seen that that was the appropriate way of dealing with the transaction. Thus would be avoided the consequence, which would otherwise be involved in taking into account the dividend in the computation of a profit or loss for the purposes of s 26(a) or of s 52, that the amount of the dividend would be included twice (in this case once in each of two tax years) as an addition to the amount which but for the receipt of the dividend would have been the amount of the appellant's assessable income. But, in my opinion, this argument cannot be accepted. The amount of the dividend had to be included in the assessable income in the year in which it was paid, in accordance with s 44. In my opinion the provisions of the Act do not permit the exclusion of the dividend from the assessable income of a taxpayer, who is assumed to be engaged in a profit-making undertaking or scheme, upon the ground that not until the undertaking or scheme has been brought to completion can the overall profit or loss be ascertained. S 44 required that the dividend be included as such in the assessable income and this is equally so whether tax will be payable upon so much of the income as represents the dividend or the taxpayer will be entitled to a rebate in accordance with s 46.
The learned Solicitor-General submitted that even if the dividend ought not to have been excluded from the assessable income in the first of the two tax years covered by the transaction, it is nevertheless right to treat the transaction as one to which s 26(a) or s 52 applies and to bring into account at the appropriate time any ultimate overall profit or loss from the undertaking or scheme, taking the dividend into account in calculating the profit or loss. If that is what the Act provides, effect must of course be given to it. But the consequences of that construction of the relevant provisions of the Act are such as to cast doubt upon its correctness. I do not doubt that the appellant may properly be regarded as not having really suffered a loss of more than £80,000 from the transaction concerning the Macgrenor shares. In calculating the commercial result achieved by the whole enterprise the dividend must be counted. But it is to be counted once only. The direct financial result of the whole transaction was, as the Commissioner concedes, a loss of some £4000. But according to the argument now under consideration, the result for income tax purposes was an increase of over £81,000 in the assessable income of the year ended 30 June 1964 and a decrease of about £4000 in the assessable income of the year which ended 30 June 1965. It should be added that it would not be consistent with this argument to say that the appellant could have claimed as a deductible outgoing in the former year the amount which it paid for the shares, because (except for the dividend which on this branch of the argument is treated as coming into income under s 44) it is only upon the ultimate profit or loss of the whole undertaking or scheme that the provisions of the Act operate. In my opinion the arguments on behalf of the respondent as to the application of s 52 and as to the manner in which for its purposes a loss should be computed ought not to be accepted in the circumstances of this case. In my opinion, the claim of the appellant to deduct a loss in the sale of the shares should not have been dealt with by applying s 52 but should have been dealt with in the manner which I have stated earlier.
In my opinion the appeal should be allowed.
Solicitor for the respondent: R B Hutchison, Crown Solicitor for the Commonwealth
Solicitors for the appellant: Mollison Litchfield