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: Starke J)

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

Court:

Judges: Latham CJ
Rich J

Starke JDixon J
McTiernan J

Subject References:
Income Tax (Cth)

Hearing date:
Judgment date: 18 March 1940

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Judgment by:
Starke J

A series of questions have arisen in appeals to this court in connection with the assessment of the Texas Co. (Australasia) Ltd. to income tax in respect of the income years 1929, 1930, 1931, 1932 and 1933. My brother Rich has directed that they be argued before the Full Court upon facts admitted between the parties. (at p448)

The main topics raised by the questions may be examined without a minute statement of the facts, and a foundation laid for categorical answers to the questions.

1. Exchange

The taxpayer was a company incorporated in the State of New South Wales. Its main business was the purchase and sale of petroleum products in Australia and New Zealand. It purchased those products from a company or a group of companies in America, which may be referred to as "the supplier". The goods were shipped in America to the taxpayer and invoices delivered covering the price f.o.b. and also freight and insurance which was payable by the taxpayer in American dollars. The supplier also provided the taxpayer with plant, equipment, and other capital items and also made advances to it, all on a dollar basis. The products were sold in Australia and New Zealand. (at p448)

Until the end of 1930, there was comparatively little fluctuation in the rate of exchange between America and Australia, but then it moved against Australia, especially so in the years 1931, 1932 and 1933. It was quite obvious, as the taxpayer's American office stated, that with the Australian pound depreciated so heavily the taxpayer could not pay its current liabilities in United-States dollars without suffering tremendous exchange losses. The American creditors deferred some payments, but still considerable adjustments had to be made for exchange differences which the taxpayer claimed as deductions in its return for the purpose of assessment to income tax. Nothing, I think, really turns upon the method of accountancy whereby these adjustments were made. The commissioner does not challenge the accuracy of the method. But it is desirable that the question which is set this court should be clearly understood and disentangled from the complicated method of accountancy which was necessarily adopted to make adjustments in the accounts of the taxpayer. It incurred an obligation in American dollars for goods supplied and during the periods material to these appeals entered the amount of that obligation in its books in dollars and also the corresponding liability in Australian currency at the rate of exchange then current. But when the taxpayer came to pay for the goods, intervening exchange movements required it to provide more in Australian currency to pay or provide for the goods and discharge the dollar obligation than the sum originally calculated as the equivalent in Australian currency of the dollar obligation. The taxpayer had also to provide the cost of remittances to its supplier. (at p449)

The taxpayer claims these additional sums, paid or provided in any of the years in question here, as deductions from its income assessable to income tax. It claims them as losses or outgoings actually incurred in gaining or producing its assessable income (Income Tax Assessment Act 1922-1934, sec. 23(1)(a)). The commissioner did not, as I understand the argument, dispute the general proposition that such losses or outgoings might, in circumstances other than exist in the present case, be legitimately claimed as deductions under and by virtue of the Income Tax Assessment Act 1922-1934. (at p449)

But the commissioner contends that the deductions claimed in these appeals should not be allowed for several reasons. (at p449)

A. Because they were losses or outgoings of a capital nature (Act, sec. 23(1)(a)). It appears that the supplier allowed payment of the sums due to it to stand over for considerable periods of time. And moneys realized from the sale of goods were used, during those periods, in the business of the taxpayer or, as the commissioner suggests, in providing working capital for the business. Certainly the share capital of the company was insufficient to cover the capital expenditure of the taxpayer in Australia. But the delay in payment of the moneys owing to the supplier was not wholly because working capital was required in the taxpayer's business, for about August 1932 the supplier apparently permitted the taxpayer to defer payments of the indebtedness incurred prior to September 1931 until business conditions improved, which it was considered would be accompanied by a rise in the exchange rate and relieve the difficulties of the situation. (at p449)

If, however, the main purpose of the delay in the payment was to provide working capital for the taxpayer, how does that delay make the payments outgoings of a capital nature? They were, nevertheless, though deferred, outgoings incurred in connection with the trading operations of the taxpayer: the purchase of the stock in which it traded. They may be placed, I think, in much the same category as the interest payments in respect of borrowed money, which were allowed in Farmer v. Scottish North American Trust Ltd. (1912) AC 118. The amounts fluctuated from time to time and payments were delayed temporarily and for uncertain periods (1912) AC, at p 127. They were outgoings by means of which the taxpayer procured funds by which it made a profit "and, like any similar outgoing, should be deducted from the receipts to ascertain" the taxable income of the taxpayer (1912) AC, at p 127. (at p450)

B. Because the payments were not losses or outgoings actually incurred in gaining or producing the assessable income (Act, sec. 23) (1)(a). The Act in sec. 25(e) also provides that a deduction shall not be made in respect of money not wholly and exclusively laid out or expended for the production of assessable income. The supplier, as already stated, provided the taxpayer not only with petroleum products but also with plant and other capital items and also made advances to it. The account of the supplier with the taxpayer was a running account and a balance was struck monthly. Remittances, when made, were entered in such account as at the date of remittance and were generally for lump sums in Australian currency. But they were not appropriated against any particular item that had been entered on the credit side of the account nor were any of them allocated so as to satisfy particular items for goods or stock, capital items, or advances. The question whether these remittances were losses or outgoings incurred in gaining or producing the assessable income and were wholly or exclusively so laid out or expended is mainly a question of fact (Usher's Wiltshire Brewery Ltd. v. Bruce (1915) AC, at p 466 ; New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR, at p 198. It has been recognized, however, almost as a business necessity, that taxpayers with continuing businesses must be allowed to deduct expenditure in the year of assessment (which is not a capital outlay) incidental to or connected with the operations or activities regularly carried on for the production of income. It is not necessary that each item of expenditure should be traced to definite items of income (Ward & Co. Ltd. v. Commissioner of Taxes (1923) AC, at p 148.) ; Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 CLR, at p 307 ; W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation (1932) 56 CLR, at p 305. The commissioner, whilst accepting these decisions, submits:

(a)

That it does not appear on the admitted facts that remittances were made to the supplier and that it is consistent with the facts stated that the remittances were to the taxpayer's own office in New York;

(b)

That it does not appear on the admitted facts that the deductions claimed were appropriate to the years in which they were claimed;

(c)

That the remittances were not wholly or exclusively laid out or expended for the production of the assessable income.

In my opinion the submissions numbered a and b are questions of fact for the justice who hears these appeals. They involve a detailed examination of the facts and the taxpayer's accounts and cannot be satisfactorily dealt with on the materials before this court. Submission c is based on the undoubted fact that the remittances covered expenditure both of a revenue and a capital nature. The remittances were not only for goods or stock supplied but also for plant and other capital items and advances. But whether these outgoings can be disentangled and treated in part as of a revenue nature and in part as of a capital nature is essentially a question of fact for the justice who hears these appeals. It may be that the application of the rule in Clayton's Case (1816) 1 Mer, at p 608 (35 E.R. at pp 792, 793). will solve the problem, though I should doubt it on the form of such of the accounts as have been submitted to this court; or some percentage allowance or some other method or evidence. But if it be true, as the taxpayer asserts, that it can demonstrate beyond all doubt that the deductions claimed by it were wholly and exclusively laid out or expended in the sense already indicated, for the production of the assessable income for the years in question in these appeals, then it would be entitled to the deductions claimed.

2. New Zealand losses

In 1930 the taxpayer derived income from its business carried on in New Zealand, but the deductions and exemptions from that income allowed by the New-Zealand law were greater than the amount of the income, so that no income tax was payable in New Zealand in respect of the income of that year. The taxpayer nevertheless claims to deduct this loss in assessing its taxable income under the Income Tax Assessment Act 1922-1934. Income tax is payable under the Acts for each financial year upon the taxable income derived directly or indirectly by every resident, which includes the taxpayer, from all sources whether in Australia or elsewhere, and in calculating the taxable income the total assessable income derived by the taxpayer is taken as a basis and from it various deductions are allowed: See Act, secs. 13, 4, and 23. But the commissioner points out that assessable income means the gross income which is not exempt from income tax under the provisions of the Act. And sec. 14(1)(q) of the Act 1922-1934 (Act 1930 No. 50, sec. 5) exempts from income tax income derived from sources outside Australia by a resident of Australia to the extent to which that income is proved to the satisfaction of the commissioner to be chargeable with income tax in any country outside Australia. (at p452)

The taxpayer argues however that its income in New Zealand was not chargeable with income tax in New Zealand because the deductions and exemptions there allowed exceeded the amount of the income. This contention cannot be sustained. The commissioner must be satisfied that the income is chargeable; that is that the income is of such a nature that it is liable to and may be brought to charge under the New-Zealand law, whether it is actually charged or not. If it be so chargeable, then it is exempt from income tax under the Commonwealth Acts and both that income and deductions from it disappear from assessments under the Income Tax Assessment Act 1922-1934. The commissioner was satisfied, and indeed it is clear, that the New-Zealand law brought to charge income derived by the taxpayer from sources in New Zealand.

3. Assessments under sec. 28 of the Act

The commissioner assessed the taxpayer to income tax under sec. 28 of the Income Tax Assessment Act 1922-1934 for the income years 1929, 1930, 1931, 1932 and 1933, but the board of review disallowed this assessment as to the years 1929, 1930 and 1931 and directed assessments under the ordinary provisions of the Act. (at p452)

The provisions of sec. 28 were adopted by the board as to the year 1932 and it purported to adopt these provisions as to the year 1933 and thus expressed its decision: -

"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."

(at p453)

Sec. 28 enacts, so far as material:

"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."

(at p453)

The board of review, for the purpose of reviewing the decisions of the commissioner, has under sec. 44 all the powers and functions of the commissioner in making assessments. The taxpayer contends that the section applies only to the case of a business carried on wholly within Australia. The contention is untenable: a business is carried on in Australia although it is also carried on elsewhere. All the Act requires is that business is carried on in Australia: it is explicit in its terms and effect must be given to it. It is not disputed that the taxpayer's business was controlled principally by persons resident outside Australia. (at p453)

But both parties complained of the decision that the board of review gave as to the year 1933. The power conferred by sec. 28 is discretionary in its nature: that is to say that neither the commissioner nor the board is bound to exercise it though the conditions mentioned in the section actually exist. But the form of the board's decision suggests that though the business produced no taxable income of any sort still the powers conferred by sec. 28 must be exercised. Such an application of the section would not accord with its language. It must, as I think, appear to the commissioner or the board that there is no taxable income, measured by the ordinary standards of the Act, or less than the ordinary taxable income which might be expected to arise from that business (British Imperial Oil Co. Ltd. v. Federal Commissioner of Taxation (1926) 38 CLR, at p 214. ). But in my opinion the decision of these matters of fact is entirely within the authority of the commissioner or the board if they are approached from a right understanding of the meaning of the Act.

4. Further tax on income from property or special property tax, as it is commonly called

The tax was originally imposed in 1930 by the Act 1930, No. 61, sec. 7A, and may be found substantially re-enacted in the Act 1934 No. 31, sec. 5 -

"In addition to any income 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 income tax of" a certain percentage "of that taxable income."

(at p454)

The taxpayer contended that in respect of the income years in which the powers given by sec. 28 of the Act were exercised then the further tax on income from property was superseded. This contention cannot be sustained in the face of the explicit terms of the tax Act. It is a tax additional to any other income tax and upon a special class of income. The provisions of sec. 28 relate to taxation of a business carried on in Australia but controlled abroad and are wholly inapplicable to the further tax. (at p454)

Other questions also arise in connection with this further tax. One the manner of its assessment. The main consideration is that the tax is a further tax on income derived from particular sources. Prima facie, therefore, the general method of assessment under the Income Tax Assessment Act 1922-1934 should be followed. The total assessable income derived from the sources mentioned in the section should be taken as the basis and from it should be deducted all deductions that are allowed under the Act for that class of income. The taxable income mentioned in the section will then be ascertained. (at p454)

Another, the deductions that may be allowed to the taxpayer in respect of income assessable to tax under the section. The taxpayer received "pump rents," as they are called, or in other words amounts received by way of rent or hire for petrol pumps owned by the taxpayer and let to retailers under hiring agreements and used by the retailers for distributing petrol to consumers. Such rents are comparatively small in amount, but the taxpayer claimed very considerable deductions in respect of repairs to and depreciation of such petrol pumps, municipal taxes and licences on such petrol pumps, losses on sale or retirement of such petrol pumps and administration expenses in connection with such petrol pumps. In my opinion the "pump rents" are income derived by the taxpayer in the course of carrying on its business and are of a nature that if derived otherwise than in the course of carrying on a business would be income from property. They are received by the taxpayer in the course of its business. But if the rents had been derived otherwise than in the course of carrying on the business they could not have been described as income from personal exertion and must have fallen within the definitions of income from property which means all income not derived from personal exertion (Income Tax Assessment Act 1922-1934, sec. 4). The assertion that the "pump rents" are not income within the meaning of the Act appears to me untenable. They come in and increase the revenue of the taxpayer, though in a small degree. But the deductions claimed by the sense already indicated - Cf. Act, sec. 23(1)(a) - and I would go further and apply the prohibition of sec. 25(e) and say that no deduction should be allowed in respect of any money not wholly and exclusively laid out or expended for the production of that income. In my opinion, the question whether the deductions claimed were so incurred and expended is mainly a question of fact. The board of review allowed a deduction in respect of administration expenses but otherwise rejected the deductions. The company admittedly did not instal the pumps for the purpose of earning the pump rent of ten shillings per pump per year. They were installed and maintained to enable retailers to sell the taxpayer's products to the public. As the board said, the "pump rents" constitute only a small fraction of the total receipts of the taxpayer and even if the taxpayer found it impossible to obtain pump rents still the nature of its business requires that it should instal and maintain petrol pumps. These reasons impress me, but the final determination of the question and how far it is open in these appeals is for the justice who hears these appeals.

5. The functions and powers of the board of review

The board of review is an administrative and not a judicial body, though it must of course exercise its powers and authorities according to the provisions of the law and not arbitrarily and capriciously (Shell Co. of Australia Ltd. v. Federal Commissioner of Taxation (1931) AC 275; 44 CLR 530 ; (1926) 38 CLR 153 . ) - and cf. British Imperial Oil Co. Ltd. v. Federal Commissioner of Taxation (1925) 35 CLR 422 . A taxpayer who is dissatisfied with an assessment made by the commissioner under the Act may lodge an objection in writing against the assessment stating the grounds upon which he relies. The commissioner must consider the objection and may either disallow or allow it wholly or in part and give notice of his decision to the taxpayer. A taxpayer who is dissatisfied with the decision of the commissioner may in writing request the commissioner to refer the decision to a board of review for review or to treat his objection as appeal and forward it either to this court or to the Supreme Court of a State (Act, sec. 50). The board of review, if a decision be referred to it, is required to give a decision in writing and it may either confirm the assessment or reduce, increase, or vary the assessment (sec. 51). And for the purpose of reviewing a decision of the commissioner, the board of review has all the powers or functions of the commissioner in making assessments, determinations and decisions under the Act and such assessments, determinations and decisions are deemed to be assessments, determinations, or decisions of the commissioner (Act, sec. 44). (at p456)

The taxpayer had been assessed by the commissioner to income tax for the years already mentioned, but it was dissatisfied with the assessments and lodged objections which were disallowed by the commissioner. The taxpayer then requested the commissioner to refer his decision in each of the years mentioned to the board of review, which he did. And the board thus became seised of each of those decisions for the purpose of review. (at p456)

The commissioner had assessed the taxpayer to income tax for each of the years 1929, 1930 and 1931 under and in pursuance of the provisions of sec. 28 of the Act, but the board upheld an objection to these assessments and determined that assessments should be made under the ordinary provisions of the Act and that such assessments should issue in respect of each of those years in lieu of an assessment under the provisions of sec. 28. But this was subject to a reopening of the case in connection with the assessment of the taxpayer to further tax on income from property. The board re-opened the case and in October 1937 assessed the taxable income of the taxpayer in each of the years mentioned and also the further tax on income from property. (at p457)

The board did not exceed its powers, authorities and functions in so doing. The board was seised of decisions of the commissioner for the purpose of review and until its functions were completely discharged the decision remained within its power and jurisdiction for the purpose of review. The board did not, as a matter of fact, alter its decision, but carried it to completion. Even if the board had reached the conclusion that its former pronouncement was wrong, I see no reason why it should not have corrected any mistake that it had made and promulgated a proper decision so long as it was seised of the matter for the purpose of review. A superior court of justice, it may be remarked, has full power to rehear or review a case until judgment is drawn up, passed, and entered: See In re Suffield & Watts; Ex parte Brown (1888) 20 QBD 693 ; In re the Lyric Syndicate (Ltd.) (1900) 17 TLR 162 ; The Turret Court (1901) 84 LT 331; 69 LJP 117. The authority of administrative bodies is not so confined and must necessarily be more flexible. (at p457)

In July 1937 the board, as to the year 1932, directed that an amended assessment be issued under sec. 28 of the Income Tax Assessment Act 1922-1930 and determined the total receipts and the percentage on which the taxpayer should be assessable and as to the year 1933 held that sec. 28 was inapplicable. But these decisions were also subject to reopening of the case in connection with the assessment of the taxpayer to further tax on income from property. In October of 1937 the board, as to the year 1932, assessed the taxpayer to income tax under and in pursuance of the provisions of sec. 28 of the Act and also to further tax on income from property and as to the year 1933 the board restated its decision in these 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 p458)

These determinations of the board may be erroneous either wholly or in part and subject to review by this court but they were not in my opinion beyond its authority and jurisdiction. The board was still seised of the decisions of the commissioner for the purpose of review. The question of the further tax was still open and so indeed was the question whether the taxpayer should be assessed for 1933 and how it should be assessed. The board had determined that the provisions of sec. 28 were inapplicable but that did not completely discharge its function. Even if the determination of the board of October 1937 as to the year 1933 reverses or departs from that of July 1937, the board in my opinion nevertheless acted within its authority and jurisdiction in the determination of October 1937 for it was still seised of the decision of the commissioner for the purpose of review and had not exhausted its function. So long as the board retained seisin of the decision of the commissioner for the purpose of review it had authority to review its determinations and give effect to its conclusions reached upon such review. Moreover, it must not be assumed that I assent to the proposition that sec. 44 of the Act, coupled with sec. 37, would not justify the board's determination of October 1937, but it is not necessary to express any concluded opinion on the effect of these sections. (at p458)

All that remains is to answer the specific questions directed to be argued before this court under the order of my brother Rich.

Question 1. So much of the amount of the exchange referred to in par. 17 of the mutual admissions of fact as is found to be referable to expenditure incurred in and for the purpose of discharging liabilities on revenue or income account is allowable as a deduction in ascertaining (otherwise than under sec. 28 of the Income Tax Assessment Act 1922-1934) the taxable income of the company in the year in which the payments were made as set forth in the mutual admissions.

Question 2. No.

Question 3. Yes.

Question 4. Yes.

Question 5. Yes.

Question 6. Yes, subject to any appeal duly brought to this court.

Question 7. The question should not be answered in its present form.

Question 8. Yes.

Question 9. Yes.

Question 9A. Yes, but subject to any appeal duly brought to this court.

Question 10. So much of the deductions as are found to be actually incurred in gaining or producing the income assessed to the further tax upon income from property is allowable as a deduction in ascertaining the taxable income of the taxpayer from that source. The question is substantially a question of fact for determination by the justice who hears the appeals.

Question 11. Yes.

Question 12. The amount of the taxable income should be ascertained according to the method prescribed for ascertaining taxable income under the general provisions of the Income Tax Assessment Act 1922-1934 having regard however to the limited class of income assessable pursuant to sec. 5 or its corresponding provision in other Acts. (at p459)