Texas Co (Australia) Ltd v Federal Commissioner of Taxation; Federal Commissioner of Taxation v Texas Co (Australia) Ltd

(1940) 63 CLR 382
14 ALJ 32

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(Judgment by: Latham CJ)

Between: Texas Co (Australia) Ltd
And: Federal Commissioner of Taxation
Between: Federal Commissioner of Taxation
And: Texas Co (Australia) Ltd

Court:

Judges:
Latham CJRich J
Starke J
Dixon J
McTiernan J

Subject References:
Income Tax (Cth)

Hearing date:
Judgment date: 18 March 1940

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Judgment by:
Latham CJ

LATHAM C.J. The Texas Co. (Australasia) Ltd. carried on business from the year 1918 by importing from the United States of America and selling in Australia gasolene, kerosene and other petroleum products. All the shares in the Australian company were held by the Texas Corporation of New York. The Texas Corporation held ninety-nine per cent of the shares in another company - the Texas Co., incorporated in Delaware. The Texas Co., Delaware, supplied the petroleum products to the Australian company either from its own stocks or from those of the Texas company incorporated in California. Questions arise as to the assessment of the Australian company under the Commonwealth Income Tax Assessment Act 1922, as amended from time to time, in respect of income received by the Australian company during the calendar years 1929, 1930, 1931, 1932 and 1933, which were accepted by the Commissioner of Taxation as accounting periods in lieu of periods ending on 30th June in each year - See Income Tax Assessment Act, sec. 32 (3). (at p423)

The commissioner assessed the company under sec. 28 of the Act and the company appealed to a board of review. Sec. 28 is as follows: -

"When any business which is carried on in Australia is controlled principally by persons resident outside Australia, and it appears to the commissioner that the business produces either no taxable income or less than the ordinary taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall be assessable and chargeable with income tax on such percentage of the total receipts (whether cash or credit) of the business, as the commissioner in his judgment thinks proper."

From the decisions of the board of review in relation to the several years both the company and the commissioner have appealed to this court. Rich J., acting under the Judiciary Act 1903-1939, sec. 18, directed that certain questions arising in the appeals be argued before the Full Court on admissions made by the parties.

Question 1

This question asks whether it is proper to allow deductions claimed by the company in respect of payments of Australian money made in remitting money to New York in order to satisfy debts owed in the United States of America in dollars. In the years in question rates of exchange moved against Australia and they varied from time to time, as is shown by the following table of variations in the dollar-equivalent to the Australian pound:

The company incurred debts for oil, & c., supplied at times when the exchange was near to what was regarded as normal, so that the number of Australian pounds required for the purchase of American dollars was close to par rate of exchange. The company subsequently discharged these liabilities when the rate of exchange had moved against Australia, so that a considerably larger number of Australian pounds was required to settle the American debt in dollars. The commissioner is prepared to allow as a deduction the increased amount in Australian pounds required to discharge the dollar debts if that increase is calculated by a comparison of the amount required at the time when the debt became due with the amount required when the goods in respect of which the debt was due were sold - the latter time being the time when in the ordinary course the purchase price should have been remitted to America. The company, however, did not make regular remittances as it sold the goods, but withheld payment, with the consent of the supplier company, for a period which on the average produced a two years lag between the invoicing of the oil, etc., and the payment therefor. The company claims as a deduction the whole amount of the differences so involved. (at p425)

For the calendar years 1929, 1930, and 1931 the company kept its accounts in Australian pounds and in American dollars, but without any special adjustment on account of variations in exchange. The company valued its stocks in both pounds and dollars and credited itself and debited the supplier company with remittances in both pounds and dollars. After Great Britain went off the gold standard in September 1931 the company altered its system of accounting, and from 1st January 1932 a new and somewhat complicated system was introduced. The result was that balances to the credit of the trading account, so far as they represented debts due for stock-intrade consisting of oil, etc., took into account so much of that stock as had been sold at the original f.o.b. dollar cost of that stock, but at an Australian pounds figure, not at the date of the invoice but at the date of the sale in Australia. If the stock was still unsold, the Australian pounds figure was calculated for the purpose of the trading account as at the date of the balance.

The dollar debts in respect of particular consignments remained unchanged in dollar figures throughout. Remittances to America were taken into account at the actual amount of Australian pounds expended and in dollars at the dollar equivalent of the Australian pounds remitted at the date of the remittance. But (admission no. 17)

"at the end of every month an adjustment of the Australian pounds so debited for remittance was made by ascertaining the difference between the total debits in Australian pounds for remittances for the month converted as aforesaid and the total of such debits in Australian pounds converted at the rate ascertained by dividing the number of dollars standing to the credit of the said account at the beginning of the month by the number of Australian pounds standing to the credit of the said account at the beginning of such month and debiting or crediting as the case might be this difference in Australian pounds to the said account. If in applying the above procedure there was for any year an excess of credits over debits for these differences then such excess of credits was claimed by the company in its income tax returns as deductions, but if there was an excess of debits then such excess of debits was returned as assessable income. These differences are hereinafter referred to as 'exchange'."

The result of the system adopted was that the accounts of the company showed over the period of years involved the actual payments made in Australian pounds from time to time for the purpose of discharging the dollar indebtedness of the company. (at p426)

The commissioner assessed the company under sec. 28 of the Income Tax Assessment Act 1922 for all the years in question upon a percentage of the cash and credit receipts of the company. He therefore did not make assessments under the ordinary provisions of the Act. But now, in consequence of the decisions of the board of review, assessments are to be made under those provisions for at least the years 1929, 1930 and 1931. If assessments for each year in which there is net income are made under the ordinary provisions of the Act, it may be supposed that the return upon which the assessments will be based will show stocks at the beginning of the year, stocks purchased during the year at cost whether paid for or not, on the one hand, and, on the other hand, sales made during the year, and value of stock on hand at the end of the year, the difference between the two sides of the account being the net income on trading account for the year. If an assessment for each year is made upon this basis, namely, a credit basis as distinct from a cash account of actual receipts and actual disbursements in the year, there are difficulties in finding room for a deduction in a subsequent year of an unexpectedly increased amount which was paid in cash in that year in respect of the price of goods received in a prior year, the price for which, though not paid, had been deducted in the accounts for that prior year. If, owing to the movement of exchange, goods which in earlier years could have been paid for in dollars by an expenditure of say 1,000 pounds Australian were in fact paid for in a subsequent year by a necessarily increased amount of 1,100 pounds Australian, it is urged that it would be difficult to regard the additional sum of 100 pounds as deductible in the later year if it is regarded as the price of the goods bought in the earlier year because, ex hypothesi, the full deduction of what was in the earlier year taken to be the price, namely, 1,000 pounds, had already been made. It has been suggested that a claim for the deduction of increased expenditure resulting from adverse exchange movements where the payment is made in respect of goods acquired in an earlier year cannot be deducted in a later year, because such a deduction would involve a substitution of a cash basis for a credit basis in assessing the company. In my opinion, however, the suggested difficulty disappears if the increased outlay required in a subsequent year to discharge the constant (in this case, dollar) debt is regarded not necessarily as payment of the price of the goods, but as a necessary outgoing made in the normal course of the continuance and maintenance of the business as an enterprise conducted for the purpose of profit.

The Income Tax Assessment Act, sec. 23(1)(a), permits the deduction of outgoings (subject to exceptions) actually incurred in gaining or producing the assessable income. Although assessments to income tax are made for separate years, it is established that an expenditure made in one year which does not produce its incomegaining effect till a subsequent year may nevertheless be deducted in the year in which it is made, and so also an outgoing which arises out of income-gaining activities of a prior year may be deducted in a subsequent year when it is actually made (Ward & Co. Ltd. v. Commissioner of Taxes (1923) AC, at p 148 ; Herald and Weekly Times Ltd. v. Federal Commissioner of Taxation (1932) 48 CLR, at p 118 ; Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 CLR 295 ). Thus the mere fact that the deductions claimed relate to the discharge of liabilities incurred in previous years does not in itself prevent a deduction. The cases to which I have referred show that in relation to this matter the law does not insist that when a credit system of accounts has been adopted so that an expenditure is deducted when it is incurred (whether or not the liability which it represents has actually been discharged by payment) it is thereafter impossible to make a further deduction on the same account in a subsequent year when it turns out that a larger expenditure than that anticipated must actually be made in order to discharge the liability. (at p427)

Income is assessed under the Income Tax Assessment Act in terms of Australian pounds, and taxpayers are taxed in terms of Australian pounds. If a taxpayer carrying on business in Australia is to discharge a debt incurred in dollars in the United States of America he must spend a number of Australian pounds dependent upon the current rate of exchange in order to obtain control of the necessary amount of dollars in America. Such expenditure of Australian pounds is an ordinary business expenditure, and the taxpayer is entitled to claim as a deduction the actual outgoing which he makes in order to discharge his normal business debts for stock-in-trade and the like: Cf. Moreau v. Federal Commissioner of Taxation (1926) 39 CLR, at p 70. As I have already said, the fact that he has made a preliminary estimate of the amount required to discharge his foreign debts does not, in my opinion, preclude him from claiming later a deduction of any increased amount which in fact he has to pay. This deduction is claimable simply as an outgoing incurred in gaining or producing assessable income. In one sense it is true that it is not incurred in gaining or producing the assessable income of the later year in which the money is actually paid, but a business is properly regarded as a continuing enterprise, and if a business man in one year were to decline to pay his debts incurred in previous years it is obvious that his business would soon come to an end. Accordingly, the payment made in subsequent years has a real relation to the assessable income of the later year, although it is also related to, for example, the price of goods purchased in an earlier year, an estimate of which price has already appeared in his accounts and been allowed in the assessment for that year. (at p428)

What has been said applies, however, only to outgoings in Australian pounds which are not outgoings of capital (sec. 23(1)(a)). Accordingly, remittances sent by the company to America in repayment of moneys lent or in payment for plant which became part of the capital assets of the company fall outside the principles stated and no exchange in respect of such remittances should be allowed as a deduction. (at p428)

Remittances were not appropriated to particular items, except that from August 1932 remittances forwarded after 1st January 1932 were appropriated for a period to liabilities accruing after 1st October 1931. This arrangement was varied in October 1933. The particulars are set out in admission no. 23 and the letters therein mentioned. Subject to these facts, the ordinary rule should be applied and payments should be appropriated towards the discharge of the debts in the order in which the latter became payable. (at p429)

In the present case remittances to satisfy debts owed for stock-in-trade supplied were delayed beyond a normal period because the company was short of capital in Australia. The commissioner is prepared to allow exchange costs calculated as at the date when, it is said, apart from the necessity of the company for more capital, the remittances would have been made, that is, the commissioner says, at the time when the goods were sold. It is argued that any increased cost due to any further delay in payment must be regarded as an outgoing of capital, and therefore not allowable as a deduction, because it was really incurred by reason of the necessity of obtaining more capital for the company. (at p429)

The principle involved in the proposition submitted for the commissioner is very far-reaching. If it were adopted it would mean that whenever a trader postponed the payment of ordinary trade debts and therefore lost a discount and so was called upon to pay a larger amount than would otherwise have been the case, he would be allowed as a deduction in his assessment only the smaller amount which he would have paid if he had paid more promptly. Similarly, if a trader in the same position obtained credit and became liable to pay interest, the interest would not be allowed as a deduction. In each case the trader would have the benefit during the period of postponement of the use of a sum of money equivalent to the amount of the debt. The application of the principle in such cases would involve an inquiry as to whether the postponement of payment of debts was really due to a desire to have the use of a larger amount of money or was to be explained by some other reason. In nearly every case it would be possible to take the view that postponement was due to the former reason. Such a principle has not, so far as I am aware, ever yet been applied. (at p429)

I construe the admissions of the parties as showing that payment of debts in the present case was postponed in order to provide the company with more capital in Australia and that the consequence of such postponement was that when the American dollar debts were ultimately paid more Australian pounds were required to pay them than would otherwise have been the case. But in my opinion these facts do not prevent the deduction of the exchange costs so incurred. The Income Tax Assessment Act does not include any provision which prevents the deduction of amounts paid in order to obtain the use of capital. Sec. 23(1)(a) expressly permits the deduction of interest if an outgoing of interest is actually incurred in gaining or producing assessable income. If a liability for interest is incurred in order to introduce capital into an income-gaining business enterprise the amount of interest paid is allowable as a deduction: See Federal Commissioner of Taxation v. Munro (1926) 38 CLR, at pp 171, 197, 217, 218. (at p430)

It was further objected on behalf of the commissioner that the exchange in question was not an allowable deduction because it did not constitute a payment or any part of a payment for goods. I have already incidentally dealt with this objection. In my opinion, the payment may be described as a payment of the price of goods, but it may also be described as an ordinary outgoing not in the nature of capital, because it was an outgoing for the purpose of carrying on a business as a going concern and a necessary outgoing for that purpose. Accordingly, the amount can be deducted under sec. 23(1)(a). Therefore, even if the view be taken that the expenditure of the moneys paid to obtain the American dollars cannot be regarded as being simply and only a payment of the price of goods, still the payment can be deducted as an outgoing under sec. 23(1)(a). (at p430)

Finally, it was objected that sec. 25(e) of the Income Tax Assessment Act prevented the exchange in question being allowed as a deduction because the money was not wholly and exclusively laid out or expended for the production of assessable income. In so far as the money was expended in the repayment of loans and in payment for plant it was money not expended for the production of assessable income - it was simply a capital expenditure. But in so far as the money was expended to pay the dollar debts for stock-in-trade (oil, & c.) it was money wholly and exclusively expended for the production of assessable income in the ordinary trading activities of the company. Accordingly, in my opinion, question 1 should be answered.

"Yes, so far as the amount was expended on remittances in payment of debts not being capital liabilities - except in the case of any year to the income of which sec. 28 of the Act is applied."

Question 2

Question 2 is as follows: -

"In ascertaining the taxable income of the company for the income year 1930 should the gross income derived by the company from carrying on its business in New Zealand be included in its assessable income and should the expenditure and other deductions referable to that income be allowed as deductions to the extent that the same are allowable deductions under the Income Tax Act 1932 as amended?"

(The reference to Income Tax Act 1932 should be a reference to the Income Tax Assessment Act 1922 and I so read the question.) (at p431)

In each of the years in question the company carried on business in New Zealand as well as in Australia. The company was resident in Australia and, accordingly, was bound to pay tax upon any non-exempt income derived from New Zealand as well as upon income derived from Australia (sec. 4 - definition of assessable income - and sec. 13). In the year 1930 the company made a loss upon the New-Zealand business and was not charged with income tax in New Zealand. The company claims that it should be allowed to deduct that loss in its Australian assessment. If the New-Zealand income was chargeable with income tax in New Zealand it was exempt in Australia (sec. 14(1)(q)). If it was so exempt it was not assessable in Australia and no New-Zealand outgoings or losses were deductible in Australia. Thus, in the present case, the customary attitudes of commissioner and taxpayer are reversed. The commissioner seeks to show that the New-Zealand income is exempt in Australia by showing that it is chargeable in New Zealand. If he succeeds, the New-Zealand losses cannot be deducted in Australia. The taxpayer, on the other hand, strives to show that the New-Zealand income is assessable in Australia in order to get the benefit of including New-Zealand outgoings (which exceeded New-Zealand revenue for 1930) in its Australian return. (at p431)

The answer to this question depends upon the interpretation of sec. 14(1)(q) of the Act. This section provides, so far as relevant, that:

"The following incomes, revenues and funds shall be exempt from income tax: -

(q)

income derived from sources outside Australia -

(i)

by a resident of Australia to the extent to which that income is proved to the satisfaction of the commissioner -

(1)

to be chargeable with income tax in any country outside Australia."

(at p432)

In the year 1930 no income tax was in fact charged upon the New-Zealand income. The company contends that therefore such income was not "chargeable with income tax" in New Zealand and accordingly, was not exempt from Australian taxation. If this be so, the gross income would have to be brought into account and the appropriate deductions would be allowable, and as such deductions exceeded the gross income in the year in question the result would be that the company would gain an advantage in its Australian assessment. (at p432)

In my opinion the contention of the company is not well founded. If it had been intended to exempt only income which was actually charged with income tax, so that some amount of tax became due and payable, it would have been very easy to say so. It may be that in a particular year no charge is actually made because the income is insufficient in amount to reach the taxing limit or because losses exceed receipts. But if the income is of such a nature that it is liable to be taxed then, in my opinion, it is income which is chargeable with income tax though not actually so charged. (at p432)

The result of this view of the section is that if income is exempt from tax in a country outside Australia (under, for example, a provision such as sec. 14 in the Australian Act) then it is taxed in Australia. If, on the other hand, it is not so exempt from tax but, if sufficient in amount, is taxed, then the income is not subject to tax in Australia. The result in the present case is that as the income is ordinary business income and is liable to tax in New Zealand it is exempt in Australia and should therefore not be brought into account. Therefore, the losses connected with it should not be brought into account. (at p432)

The second question should therefore be answered in the negative.

Question 3

This question inquires whether the board of review had power to do more than uphold the objections to the assessment for the years 1929, 1930 and 1931. For these years the commissioner had assessed the company under sec. 28. The company objected that sec. 28 was not applicable. The board not only upheld this objection, but also made its own assessments. (at p433)

The board gave two decisions, or, at least, made two statements on this matter. In July 1937 the board upheld the objection to the application of sec. 28 to the years mentioned and reserved for future consideration a question as to what has been called special property tax. In October, however, after hearing further argument, the board assessed the company in respect of ordinary income tax and also in respect of special property tax in respect of these years. (at p433)

Sec. 44 of the Act provides that a board of review shall for the purpose of reviewing decisions of the commissioner have all the powers and functions of the commissioner in making assessments under the Act and that such assessments shall for all purposes (except for the purpose of objection and appeal to the High Court) be deemed to be assessments of the commissioner. Sec. 51(4) provides that the board, on review, shall give a decision, and may either confirm the assessment or reduce, increase, or vary the assessment. (at p433)

It is therefore plain that the general question asked must be answered in the affirmative. The board had power, inter alia, to make assessments as well as to uphold objections.

Question 4

This question asks whether the board, having given the decision which it gave in July 1937 as to the years 1929, 1930, 1931 and 1933, had power to give the decision which it gave in October 1937 except as to special property tax, the latter being the only question specifically reserved in July for future consideration. (at p433)

The objection is based upon the facts just mentioned in relation to question 3 except that in respect of the year 1933 (when there was a heavy loss) what happened was that in July the board in its decision stated that "the claim made in ground 5 of the objection is upheld." Ground 5 was an objection that sec. 28 of the Act was not applicable. In October the board "re-stated" its decision in the following terms:-

"Notwithstanding that the business produced no taxable income, the board, in its judgment, does not think it proper to assess and charge tax on any percentage of the total receipts of the business - sec. 28."

(at p433)

As to the first three years mentioned the board, as already stated, had power to make assessments in respect of these three years. In July it did not exercise that power but said -

"An assessment under the ordinary provisions of the Act to issue for each of these years in lieu of the assessment under sec. 28."

It is said that this was a decision that the commissioner should issue an assessment. In my opinion it does not necessarily bear this meaning and it was still open to the board to make an assessment. There is only one assessment in respect of one year and it was impossible to make an assessment until the matter of special property tax had been dealt with. This was not done until October, and then the board gave its decision in relation to these years by actually making assessments. In my opinion these assessments were not rendered invalid by reason of the fact that the board did not make them in July, when it was really impossible to make them. (at p434)

As to the year 1933, the July decision was that the claim made in ground 5 of the objection was upheld, that is, the application of sec. 28 was excluded. In October "the decision" was "re-stated" in the terms already set out. The October decision was therefore to the effect that sec. 28 was applicable to the year 1933 because the business produced no taxable income, but that the board exercised a discretion and refused to apply the section by fixing an infinitesmal percentage of cash and credit receipts under the section. The first matter for inquiry is whether the board, having given the July decision, was entitled to do anything further in October. The July decision only upheld the objection, namely, that sec. 28 was not applicable. The board was still able to exercise any of its powers in relation to that year provided that the exercise of such powers was consistent with its decision that sec. 28 did not apply. In October the board really reversed its July decision as to the applicability of sec. 28, holding that sec. 28 was applicable, but that the board had a discretion whether or not to apply the section and decided not to apply the section by fixing a percentage of receipts as the taxable income of the company. (at p434)

The importance of this question depends upon the fact that in 1933 the company made a very large loss (it is said amounting to 600,000 pounds). It is the view of the company that if the company were liable to be assessed in respect of 1933 only under the ordinary provisions of the Act, that loss could be carried forward in the four succeeding years (sec. 26 (2)) until it was exhausted. If, on the other hand, the assessment is technically made under sec. 28 by fixing a very small percentage of the cash and credit receipts of the company, then the company had an income of say 1 pound for that year and therefore had no losses to be carried forward. The matter is therefore of importance to the parties. (at p435)

The board dealt with the appeals in respect of the five years together, but strictly each appeal should have been separately heard. The parties were entitled to a separate decision in the case of each appeal. When the board has given - see sec. 51 (4) - a decision it cannot, in my opinion, alter that decision at a later date. The decision of the board determines the rights of the parties under secs. 44 and 51. There can then be an appeal to the High Court from a decision of the board which in the opinion of the High Court involves a question of law (sec. 51 (6)). These provisions assume that a definite ascertainable decision is given at a particular time from which an appeal can be brought within the time which is allowed by the Rules of Court: See Order LIA, rule 11. In the present case the board gave a clear decision in July that sec. 28 did not apply. In my opinion the board was not at liberty upon the same material, or even upon further material, and independently of consent, to give a different decision upon the same matter in October and to determine that sec. 28 did apply and either to fix a percentage under that section or to "apply" the section but to abstain from fixing a percentage thereunder. (at p435)

In my opinion, therefore, question 4 should be answered as to the years 1929, 1930 and 1931 - "Yes," and as to the year 1933 - "No." (at p435)

In connection with this question it was argued for the commissioner thatswhenever the following conditions were satisfied sec. 28 necessarily applied:-

(a)

a business carried on in Australia,

(b)

controlled principally by persons resident outside Australia, and

(c)

it appeared to the commissioner that the business produced no taxable income or that it produced less than the ordinary taxable income which might be expected to arise from the business.

The result would be that the person carrying on the business in Australia would necessarily be assessed for income tax upon a percentage of total receipts. (at p435)

It is not disputed that the object of sec. 28 was to reach and to make amenable to taxation businesses which on account of foreign control had not produced income where normally such income would reasonably be expected to arise. Upon the contention of the commissioner the section would apply to every foreign-controlled business in Australia in every year in which a loss was made, because in such a year there would be "no taxable income". In my opinion, this is not the true view of the section. The section provides that when the specified conditions are satisfied, a person carrying on business in Australia shall be "assessable and chargeable" on a percentage of total receipts. These words, I think, mean that he may be so assessed and that he may be so charged. They do not compel the commissioner so to assess and so to charge. For these reasons, if it were necessary to decide the point, I should be of opinion that the board took a wrong view in holding that the section was necessarily applicable and in going on to hold also that, though the section was necessarily applicable, the fixing of a percentage was optional.

Question 5

Question 5 is as follows:-

"The board of review having determined that the percentage under sec. 28 of the Income Tax Assessment Act 1922 as amended fixed by the commissioner for the year 1932 was excessive did the board of review have power to do other than set aside the assessment for the said year?"

(at p436)

The board of review agreed with the commissioner that in respect of the year 1932 an assessment should be made under sec. 28. But, after consideration of the evidence, the board fixed the percentage of receipts upon which the company should be assessed and charged with income tax at 9.5 per cent and substituted that percentage for the percentage of 20 per cent fixed by the commissioner. In July the board fixed the total receipts of the business at 2,446,671 pounds and said that the percentage on which the company should be taxed should be 9.5 per cent. In October the board made a calculation of the 9.5 percentage and declared that the company was assessed under sec. 28 on 232,434 pounds, being 9.5 per cent of the said total receipts. At the same time the board declared that the company should be assessed to further tax (special property tax) upon an amount of 19,906 pounds. (at p436)

The reasons which I have given in relation to question 3 lead me to reply to question 5 in the affirmative, that is, the board of review did have power to do more than set aside the assessment of the commissioner for that year. The board had power to make an assessment itself and that assessment could only be made in October when an assessment to further tax as well as to ordinary income tax or to tax under sec. 28 could be made.

Question 6

Question 6 is as follows:-

"Were the assessments of the board of review dated 18th October 1937 of taxable income for the income years 1929, 1930, 1931 and 1932 valid assessments?"

(at p437)

The objection to these assessments is that they were made in October after the July decision. As to the years 1929, 1930 and 1931 I have really answered this question under question 4, and as to 1932, under question 5. (at p437)

In my opinion, the answer should be in the affirmative in the case of each year. This answer does not mean more than that they were valid as assessments under the Act. It does not mean that they were justifiable in all respects. They may be altered upon appeal.

Question 7

This question relates to the year 1932 in respect of which sec. 28 was applied by the board as well as by the commissioner. It inquires whether the board when considering whether to apply sec. 28 for that year or in ascertaining a percentage of gross receipts, should have taken into account losses in previous years. (at p437)

Sec. 28 contains no guidance as to the principles which are to be applied in determining a percentage in a case where a taxpayer is taxed upon an assumed income for the reason that a business has not produced such an income as would normally be expected. In considering whether the section should be applied the commissioner (or the board upon review) is, in my opinion, at liberty to take into account losses in previous years, though not bound to do so. It is, in my opinion, quite impossible to lay down any rule as to the weight to be given to the circumstance that such losses have been incurred. But the fact that losses have actually and bona fide occurred in previous years may lead to the view that sec. 28 should not be applied in relation to a subsequent year. Similarly, real losses in previous years might help the commissioner in fixing a percentage of receipts as a fair assessed income of the company. (at p438)

In question 7 the court is also asked to declare whether, if such losses are to be taken into account, they are to be arrived at by applying the ordinary provisions of the Act or by applying some formula which the commissioner may have used for the purpose of fixing a percentage under sec. 28. No question can actually arise as to this matter unless the result of allowing deductions for exchange losses before 1932 brings about the result that there are losses in those years. As the question is therefore entirely hypothetical it should strictly not be answered. If it were answered I should express my opinion that there can be no ground whatever for utilizing any such formula in relation to any estimate of either income or losses in relation to any year in respect of which sec. 28 has not been applied.

Question 8

Question 8 is as follows: -

"Was any business carried on by the company in Australia during the relevant period within the meaning of sec. 28 of the said Act?"

(at p438)

The point sought to be raised by this question depends upon the fact that the company carried on business both in Australia and New Zealand during the relevant period. It is urged that sec. 28 applies only to a case where a business is carried on solely in Australia and not where one and the same business, that is, a business under the same control, is carried on in Australia and in another country. Sec. 28 is introduced by the words -

"When any business which is carried on in Australia is controlled principally by persons outside Australia ..."

It is contended that these words relate only to a business the whole of which is carried on in Australia. In my opinion the section should not be so construed. If a business is carried on in Australia then it is none the less carried on in Australia because it is also carried on outside Australia or because the persons who control the business have another business outside Australia. (at p438)

In my opinion question 8 should be answered in the affirmative.

Question 9

Question 9 is as follows: -

"Was the company assessable or chargeable with tax on a percentage of the total receipts of the business in respect to the year 1932?"

(at p438)

It is suggested that, for some reason not very clearly stated, sec. 28 cannot be applied after a series of years to which the ordinary provisions of the Act have been applied. In my opinion there is no substance in this contention. (at p439)

The company carried on a business in Australia. That business was controlled principally by persons resident outside Australia. It appeared first to the commissioner and then to the board that the business in respect of the year 1932 produced less income than the ordinary taxable income which might be expected to arise from that business. Accordingly, the company was assessable and chargeable with tax under sec. 28 on the percentage of the total receipts of the business. The question should therefore be answered in the affirmative.

Question 9A

This question was added upon the argument before the Full Court. It is as follows: -

"Upon the facts admitted and upon the proper construction of sec. 28, had the board of review authority to refuse to fix any percentage of the total receipts of the business?"

This question is limited to the year 1933. (at p439)

In my opinion, for reasons which I have stated in dealing with question 4, the board of review was entitled to decline to apply sec. 28, that is, the board was not bound to apply sec. 28. It followed that the board was not bound to fix under sec. 28 any percentage of the total receipts of the business as the taxable income of the company. Further, for reasons which I have already stated, I am of opinion that, in view of the decision given in July that sec. 28 was not applicable at all, the board had no authority to reverse its decision in October so as to hold that the section was applicable but then to elect to refuse to fix the percentage. Accordingly, in my opinion, the question should be answered by declaring that as the board decided in July that sec. 28 was not applicable to the company in respect of the year 1932 the question of fixing the percentage of the total receipts of the business did not arise for any purposes of the Act in relation to that year.

Questions 10, 11 and 12

Questions 10, 11 and 12 relate to what is referred to in the proceedings as special property tax. This is a further income tax imposed first under sec. 7A of the Income Tax Act 1930 and subsequently under sec. 5 of subsequent relevant Income Tax Acts. All the sections are in the same terms, which are as follows: -

"7A(1)

In addition to any tax (including additional tax, super-tax and further tax) payable under the preceding provisions of this Act, there shall be payable upon the taxable income derived by any person -

(a)

from property;

(b)

by way of interest, dividends, rents or royalties, whether derived from personal exertion or from property; and

(c)

in the course of carrying on a business, where the income is of such a class that, if derived otherwise than in the course of carrying on a business, it would be income from property,

a further tax of seven and one-half per centum of the amount of that taxable income." (at p440)

It will be observed that the further tax imposed under these provisions is payable upon what is described as "the taxable income" derived by a person from certain sources mentioned. One question which arises is whether the taxable income is to be ascertained by taking the taxable income assessed under the ordinary provisions of the Act and imposing the further tax upon such part of that total income as, upon some proportional basis, can be attributed to the sources mentioned in the section, or whether, on the other hand, the taxable income is to be ascertained by taking the income actually derived from the three sources a, b and c and making appropriate deductions therefrom. (at p440)

A further question which arises is whether if the second method is adopted the deductions appropriate to items in a are to be made from the income of a and so in the case of b and c, or whether, on the other hand, the income is to be aggregated and all the deductions are then to be aggregated and are then to be made from the total aggregated income, thus reaching the total net taxable income derived from the three sources mentioned. (at p440)

Question 11 deals with another question which arises in relation to the further tax, namely, the possibility of applying in one and the same year the provisions of sec. 28 (which depend upon a disregard of the real income and an attribution to the company of an income on a basis of percentage of total receipts) together with the provisions of sec. 7A and sec. 5, which depend upon ascertaining the actual sources of income of the taxpayer. It is urged that where a percentage basis is taken it is simply impossible to allocate any proportion of the income so estimated to any one or more of the sources a, b and c specified in sec. 7A. (at p441)

Before considering these questions it is desirable to set out the facts in relation to which they arise. The income of the company in relation to which the question of the application of sec. 7A arises was derived from three sources - rent, interest and pump rents. Rent varied from 13 pounds to 35 pounds in the five years in question. Interest varied from 528 pounds to over 24,000 pounds, and pump rents varied from 543 pounds to 2,226 pounds. Except for administration expenses, which were allowed by the commissioner to the extent of two and one-half per cent on taxable interest, and five per cent on pump and other rents, all the deductions claimed related to petrol pumps. The deductions reached as high a figure as 37,000 pounds. When the deductions were made from the total income in question, there was a debit balance in each year, that is, the deductions exceeded the total revenue. The company therefore claims that no income was taxable in any of the years in question under the provisions of sec. 7A (or sec. 5 in later years). (at p441)

Before 1928 most petrol was sold in tins or drums, but from that time onwards it became customary and, indeed, necessary from a business point of view, to sell petrol through pumps placed at garages. Accordingly, the company in the years which are in question in this appeal sold most of its petrol through pumps. Some of these pumps were leased at an annual rental of ten shillings per year. Others were owned by customers of the company. The installation of a pump costs from 75 pounds to 80 pounds and the company maintained all the pumps from time to time and painted them in a manner designed to attract trade. The moneys received from persons who utilize pumps owned by the company were called pump rents, although the company did not own the ground upon which the pump stood - many, indeed, being placed upon the public highways. It is not pretended that the object of installing and maintaining the pumps was to earn ten shillings per annum in respect of each pump. One year may be taken as an example. In the year 1930 the income from pump rents was 867 pounds. The deductions claimed in respect of that year were: depreciation on petrol pumps 6,070 pounds, repairs to petrol pumps 8,207 pounds, licence fees paid in respect of petrol pumps 991 pounds, and further depreciation 1,436 pounds, and some relatively small administration expenses. Only the administration expenses were allowed as a deduction by the commissioner and by the board. (at p442)

As to the first question which I have mentioned, I am of opinion that sec. 7A (and sec. 5 of the later Acts) contemplates actual assessment of taxable income derived by the company from the three sources mentioned. It involves calculations quite separate from those which are made in the ordinary assessment. It does not involve a calculation of some proportion of taxable income as ascertained under an ordinary assessment. There is no reason why the latter construction should be given to the section and there is a very sound reason why it should not be given, namely, that the section is plainly intended to tax moneys which are in fact derived from the sources mentioned. In my opinion the object is not to impose tax upon a sum of money which is reached by taking into account considerations which have no relevance whatever to the provisions of the section, such as volume of income from all sources including sources other than those mentioned in the section together with and subject to deductions attributable to the whole of that income and allowing such deductions to produce an effect upon the amount taxable under the section. If a contrary view to that which I suggest were adopted, then it would be possible for a taxpayer to have a very large net income from the sources a, b and c mentioned in the section and yet to escape tax thereunder. He might be entitled to so many deductions applicable to income derived from other sources that his total taxable income under the general provisions of the Act would be very small. For example, his net income from the sources a, b and c might be 10,000 pounds, and yet his taxable income from all sources, including a, b and c, might be only 10 pounds. Upon the view contrary to that which I have suggested he would be taxed under sec. 7A only upon some proportion of the 10 pounds. In my opinion there is no reason for reading the words of the section so as to bring about this result. (at p442)

In order to apply the section it is necessary first to ascertain all the income of the taxpayer derived from a, b and c. It is then necessary to ascertain how much of that gross income is taxable. (The section expressly applies only to "taxable income.") This can be done only by making appropriate deductions. These deductions can be ascertained by applying the ordinary provisions of the Act so far as they are applicable to income derived from the sources specified in the section. There is nothing to exclude, for example, the application of sec. 23 when an assessment is being made which includes the application of sec. 7A. Sec. 23 provides that in calculating the taxable income of a taxpayer the total assessable income derived by the taxpayer shall be taken as a basis and that from it certain deductions shall be made. The provisions of sec. 23, so far as applicable, should be applied in ascertaining taxable income for the purpose of sec. 7A. Thus, for example, there should be deducted all losses and outgoings (excluding capital losses and outgoings) which are actually incurred in gaining or producing the income which is being assessed (sec. 23(1)(a)). In determining what deductions should be allowed under the general provisions of the Act, the provisions of sec. 23(2) are applied and deductions are accordingly made from the class of income to which in the opinion of the commissioner the deduction relates. So in applying sec. 7A the gross income under a, b and c should be ascertained and then deductions should be allowed if in the opinion of the commissioner (or the board upon appeal) they represent outgoings actually wholly and exclusively incurred in gaining or producing that gross income. (at p443)

The next question is whether the income from a, b and c should be added together and all the deductions applicable to a, b and c deducted from the total or whether the deductions appropriate to a should be deducted from the gross income under a and so also severally for b and c. (at p443)

In my opinion the former is the correct procedure. Sec. 7A treats the sum to be ascertained for the purpose of levying the further tax of seven and one-half per cent as "the amount of that taxable income" (see the concluding words of sub-sec. (1)). The tax, in other words, is imposed upon one amount and not upon three amounts. I am therefore of opinion that all the deductions relevant to a, b and c should be deducted from the total of the gross income derived under heads a, b and c. (at p443)

The next question is whether the expenses associated with the pumps, which the company claims as deductions, were properly so allowable. The amount of pump rents received was relatively small and it is contended for the commissioner that the real object of the expenditure was not to obtain the pump rents but to promote the general business of the company. (at p444)

I am of opinion that the receipts from pump rents were income of the company. They represent moneys which were in fact received by the company from other persons. They were not capital receipts. They must, in my opinion, be regarded as income. (at p444)

But, in order to bring the income within par. c of the section, it must be of such a class that if derived otherwise than in the course of carrying on a business it would be income from property. Pump rents might be derived by a person who owned and let out pumps without selling petrol and without being engaged in a business of letting out pumps. In such a case the receipts would be income from property. Thus, in my opinion, the pump rents do come within par. c of the section. (at p444)

But any deductions claimed must be outgoings, etc., actually incurred in gaining or producing the assessable income (Income Tax Assessment Act, sec. 23 (a)). Whether they were so incurred is a question of fact for determination upon the appeals. Further, sec. 25 (e) prohibits the deduction of any amounts which were not wholly and exclusively laid out or expended for the production of assessable income, that is, in this connection, the income assessable under sec. 7A (or sec. 5). Whether the amounts claimed as deductions were or were not so laid out or expended is also a question of fact to be determined upon the appeals. The question should, in my opinion, be answered accordingly.

Question 11

This question asks whether, the board of review having decided to tax the company under sec. 28 for the year 1932 and having accordingly fixed a percentage of total business receipts as the income of the company for the purpose of applying that section, the company was liable for any further tax under sec. 5 of the Income Tax Act 1933. In other words, can sec. 28 of the principal Act and sec. 5 imposing further tax be applied in the case of the same taxpayer in the same year? The contention for the company is that the assessment under sec. 28 fixes the income of the company for all income tax purposes and that, the income being a percentage of business receipts, it is quite impossible to identify within that income any income that possesses the characteristics mentioned in pars. a, b and c of sec. 5. In my opinion this contention cannot be sustained. Sec. 28 results in the company being taxed at ordinary rates of ordinary income tax on a percentage of its total business receipts. Sec. 5 simply adds a further tax upon a different basis. If in any year the company in fact has income which falls within sec. 5, then sec. 5 operates by force of its own terms without being subject to any impediments created by sec. 28. Therefore, in my opinion, question 11 should be answered in the affirmative.

Question 12

Question 12 is as follows: -

"If yes to question 11, should the amount of taxable income of the company referred to in the said sec. 5 have been ascertained for the said year by applying the percentage determined as aforesaid to the gross amount of the income so referred to or should the amount of such taxable income have been ascertained under the general provisions of the Income Tax Assessment Act 1922 as amended?"

(at p445)

This question is based upon the suggestion that a percentage ascertained and applied under sec. 28 should be applied to income taxable under the "further tax" provisions. In my opinion there is no basis for this suggestion. Sec. 28 takes a percentage of business receipts as the taxable income of the company for ordinary purposes and, as already stated, sec. 5 simply imposes another tax upon certain income of the company which is described as taxable income and which, as I have already stated, is to be ascertained by identifying the gross income derived from sources a, b and c and then making the appropriate deductions. (at p445)

I am therefore of opinion that question 12 should be answered by saying that the amount of the taxable income should be ascertained under the general provisions of the Income Tax Assessment Act 1922 as amended. (at p445)