Texas Co (Australia) Ltd v Federal Commissioner of Taxation; Federal Commissioner of Taxation v Texas Co (Australia) Ltd
(1940) 63 CLR 38214 ALJ 32
(Judgment by: Dixon J)
Between: Texas Co (Australia) Ltd
And: Federal Commissioner of Taxation
Between: Federal Commissioner of Taxation
And: Texas Co (Australia) Ltd
Judges:
Latham CJ
Rich J
Starke J
Dixon JMcTiernan J
Subject References:
Income Tax (Cth)
Judgment date: 18 March 1940
Judgment by:
Dixon J
The taxpayer is a company incorporated in New South Wales and throughout Australia it carries on a business of supplying petrol and petroleum products. It was formed in 1918 by a body or bodies incorporated in the United States of America, whose business it is to produce and distribute gasolene and other products of petroleum. The taxpayer remains under the control of this group of corporations or one of them and its business is therefore "controlled principally by persons resident outside Australia" within the meaning of sec. 28 of the Income Tax Assessment Act 1922-1934. That section provides that when a business carried on in Australia is so controlled and it appears to the Commissioner of Taxation that the business produces no taxable income or less than the ordinary taxable income which might be expected to arise from the 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 p460)
For the five financial years beginning 1st July 1930 and ending 30th June 1935 the commissioner assessed the taxpayer company under this provision. The accounting period of the taxpayer is the calendar year and the assessments therefore took a percentage of the gross receipts for each of the years of income 1929, 1930, 1931, 1932 and 1933. The taxpayer carried in objections to the application of sec. 28 to its business and requested the commissioner to refer his decisions to the board of review. That tribunal reached the conclusion that in one year only should the taxpayer company be assessed under sec. 28, viz., the income year 1932. The board, having announced this conclusion, proceeded at a later date to ascertain upon ordinary principles the company's taxable income for the three preceding years. In the fifth year, 1933, it was not disputed that the company's trading had resulted in a heavy loss. (at p460)
In all five years both the commissioner and the taxpayer appealed to this court from the decisions of the board of review on one ground or another. The appeals are of course to the original jurisdiction of this court. They came before Rich J., who at the request of the parties made an order which, as amended at the hearing, directed that some thirteen questions, formulated by them as arising in the appeals, should be argued before the Full Court. It is these questions that we are now called upon to decide. (at p460)
The appeals themselves involve many complications and difficulties which our answers to the questions will not necessarily remove. The attempt on the part of the parties to isolate specific questions and extract them from the matters in general controversy is to be commended as an effort to lighten the burden of a heavy case, but it means that the Full Court cannot determine the appeals finally and must confine itself to giving in general terms answers to questions, some of which are of rather an abstract nature, leaving the application of the answers to the agreement of the parties or, failing their agreement, to a justice. The nature of the questions makes it unnecessary to discuss the facts of the case. Each question depends upon a particular set of facts or phase of the case and it is better to deal with the questions in order, stating under each of them such of the facts as are material to the answer.
1. Question 1 relates to deductions which the taxpayer claims to make because remittances to the United States of dollars cost more in Australian pounds than the amount in Australian currency at which its dollar liabilities were expressed in its books of accounts. The claim assumes, of course, that the income of the taxpayer will be assessed, as in the three earliest years the board has assessed it, upon ordinary principles, and has no direct concern with the company's assessment in any year to which sec. 28 is ultimately applied. (at p461)
From 1929 the Australian pound fell heavily in terms of dollars. At the end of that year it stood at $4.78 and by a fall steadily gaining in acceleration it reached by November 1932 a level of about $2.50. From that it rose in a fluctuating manner but at the end of the period with which we are concerned it was under four dollars. During this time the taxpayer carried a very large dollar liability to the New-York house, notwithstanding the remittances which are the foundation of its present claim to deductions on account of increased expenditure for exchange. The reason for carrying so large a dollar indebtedness lies in the company's relationship with the group of corporations in the United States which included alike the source of its finances and the source of its supplies of trading stock and plant. (at p461)
The share capital with which the taxpayer was constituted proved by no means sufficient to meet its requirements for working capital. In order therefore to provide it with funds large enough for its needs, the company was allowed to delay payments for the trading stock and plant supplied from the United States. Thus a dollar liability grew while a working capital accumulated. Further large amounts were written off the liability in each successive year to represent a reduction in the price of gasolene and petroleum products allowed by the supplier. As from the end of September 1931, the time approximately when Britain left the gold standard, the company's account with the American Texas Co. or group whence it obtained its supplies was divided into two. The debt up to that date was, so to speak, funded for the time being and all remittances going forward after a period fixed somewhat arbitrarily as three months from that time, that is after 31st December 1931, were to be regarded as payments for new supplies. But the taxpayer company had by this time accumulated a fund much in excess of its requirements because, owing to the adverse exchange, it had accumulated and invested moneys which otherwise it would have remitted. When this fact was understood in New York, fresh directions were given and in the end remittances were made out of such surplus accumulations. They were appropriated in the Australian books as payments on account of the old indebtedness. (at p462)
Subject to the two special matters to which I have referred, viz., the reductions in price and the directions as to the division of the accounts as from 30th September 1931, the taxpayer company kept the account of its dealings with the New-York house responsible for its supplies without appropriating payments or other debits to the account against any items on the credit side. (at p462)
On the credit side of the account were entered the invoice price, including freight and insurance, of supplies of stock-in-trade and of items of plant and of certain cash advances made in 1929 and the early part of 1930. On the debit side were entered disbursements of a casual nature made to the use of the American house and the remittances. The price of the goods was expressed in dollars and the liability was one to be discharged in United States currency by payments in New York. Accordingly, the remittances were made by purchasing American exchange. The account was kept in dual currency, but until 1932 it seems to have been regarded as unnecessary to keep the merchandise and trading accounts of the taxpayer company in dollars as well as in Australian currency. In 1929 and in 1930 the changes in the value of the Australian pound in terms of dollars were not such as to bring into the company's return for taxation any important item under the head of exchange. Indeed, it appears that the expenditure took its place in the trading account and represented cost of transfer as much as increase in the cost of procuring dollars. But in 1931 it is a different story and large amounts are claimed as deductions on account of the very much greater cost of remittances in dollars. The movement of exchange against Australia was reflected in the company's accounts in more ways than one, at all events after the adoption of bi-monetary accounting for its internal accounts as well as for the purpose of its account with the New-York house. (at p463)
In the merchandise account the invoice cost of goods was debited in dollars and converted into Australian pounds at the rate of exchange prevailing at the date of the invoice. But this rate of conversion was adjusted every month. The adjustment or revaluation was effected by a process which it is unnecessary to describe in detail; it is enough to say that it had the effect of converting the dollar value of the goods on hand at the end of the month into pounds at the rate prevailing on that day and of providing for the variation in the exchange when applied to the dollar value of goods sold during the month. Thus the Australian currency equivalent of the dollar value of goods on hand was brought up to date month by month and in the case of goods sold the difference between the Australian equivalent at the old and at the new rate of conversion was brought into the merchandise account. The adjusted values in pounds were reflected in the trading account, whence they found a place in the income tax returns. So far the commissioner, apart from his resort to sec. 28, does not challenge the company's method of taking into account, in relation to its assessment of its income, the effect upon its trading of the variation in the rate of exchange. Nor does he contest the company's next step, which indeed operates, during a movement against Australia, to reduce, not to increase, the claim of the taxpayer which he does contest. That step concerns the difference between the Australian currency equivalent of the dollar value of the goods on hand at the end of the month as appearing from the balance of pounds and dollars shown in the account and the equivalent of those dollars at the rate of exchange prevailing at the end of the month. This difference, being for the period in question an excess of the latter over the former, is carried to the credit of the account with the New-York supplying house, an account which, generally speaking, does not affect the income-tax return. This account also is balanced monthly. Goods recei ved during the month are credited at the invoice dollar value converted into pounds at the rate prevailing at the date of the invoice. Remittances are debited in dollars and in pounds converted at the rate at the date of the remittance, that is to say, the pounds equivalent of the company's actual outlay in effecting the remittance. At the end of the month the balance in dollars represents the balance due to the American house, but the balance in pounds is, during a decline of the pound, less by the increase in the cost of purchasing the exchange for the remittances than the Australian currency equivalent of the same goods as contained in the opening figure for the month, that is, the balance from the previous month. This deficiency is made up to some extent by the credit from the merchandise account of the exchange adjustment therein, already mentioned. But the rest of it forms a balancing figure representing what is described variously as a loss on exchange or an increase in the outlay to remit dollars. It is this item that the taxpayer company claims to bring into its assessment as a deduction, a claim which the commissioner has successfully resisted before the board of review. (at p464)
It is important to see what such an item represents. It forms in the first instance portion of the excess in pounds required to remit a given number of dollars at the time of the remittance over the number of pounds standing in the account as equivalent to the same number of dollars at the credit side of the account, that is, on the side of the account which stated the dollar liability of the taxpayer to the New-York house and its equivalent in Australian currency as at the end of the previous month. The remaining portion, having gone into the trading account, cannot be taken into consideration a second time. The total excess pounds required for actual remittances over the previous equivalent in pounds of the same sum in dollars as was remitted on each occasion during a year of income represents a cash outlay during that year, unexpectedly found necessary to discharge liabilities which, for the purpose of profit and loss and of assessment of taxable income, have been taken into account at lower amounts in pounds. In the present case the liabilities which the taxpayer says are discharged by the remittances are found always to be more than a year old and therefore they must have been taken into account in a previous accounting period or year of income. Commercial accounts are not kept on a receipts and disbursements basis but on a valuation and credit basis. Purchases of stock-in-trade go into the account quite independently of actual payment. The cost of the purchase is taken in as at the time when the purchases are made, not when the cost is paid, and the disbursement involved in payment does not form an item of the account of the year when the purchase is made, still less of the subsequent year. We are therefore concerned with the difference between, on the one hand, the pounds in which a dollar liability taken into a prior accounting period is expressed or valued for the purpose of accounting or assessment, and, on the other, the actual amount in pounds found in the subsequent accounting period to be required to discharge it. (at p465)
In considering the validity of a claim to deduct such an item from assessable income in the year of actual expenditure, the first question to be answered is whether any part of the actual expenditure made in discharging liabilities which have already gone into account as and when incurred should find any place in the estimate of income. The fact that to discharge the liability more is required than the sum at which it was expressed or valued might perhaps be regarded as no more than a falsification of a prior estimate, justifying a revision of the estimate, if that course be still open, but not warranting a deduction from current profit. (at p465)
But this, I think, is not the true way to look at the matter. During any given accounting period the profit or loss made by the taxpayer's operations must be ascertained by a comparison between its position at the beginning and at the end, based upon estimates of value and upon the accrual of debits and credits. But discrepancies between the liabilities carried into the period and the cost of defraying them must come into the comparison as an actual reduction or increase of the profit or loss otherwise produced by the comparison, provided always that the liability is one belonging to an income account and that the loss ought not for other reasons to be referred to capital. For where liabilities are not fixed in their monetary expression, whether because of contingencies or because they are payable in foreign currency, a difference between the estimate and the actual payment must be borne as a business expense, and where the continuous course of a business is divided for accounting purposes into closed periods it is a reduction of the net profit, which otherwise would be calculated for the period. (at p466)
But in the present case the commissioner denies that any liability of an income nature is discharged by the remittances in making which the excess expenditure was incurred. The remittances were made without specific appropriation and in respect of a running account which included items for plant and other things of a capital nature. Reliance is placed upon sec. 25(e) of the Income Tax Assessment Act 1922-1934, which forbids the deduction of money not wholly and exclusively laid out or expended for the production of assessable income. It is, however, a mistake, I think, to treat this provision as concerned with the distinction between expenditure of a capital and of a revenue nature. Expenditure on plant looks to the production of assessable income, whether the expenditure be upon recurrent repairs and therefore of an income nature or upon new plant and therefore of a capital nature. (at p466)
The operation of sec. 25(e) is to disallow claims to deduct expenditure made in order to effect some purpose other than the production of assessable income, and to do so even if the latter purpose was also to some extent present as a secondary object. It is not this provision but the excepting words in sec. 23(1)(a), "not being in the nature of losses and outgoings of capital," that exclude the deduction of items referable to capital. They are excluded though, as the form of the section recognizes, they may be actually incurred in gaining or producing the assessable income. No less may they be money wholly and exclusively expended for the production of assessable income. There is I think nothing which prevents the division or apportionment between capital and income of an outgoing which is in part of a capital nature and in part of a revenue nature. But the outgoing must be of such a kind that it is capable of distribution. The point arises in reference to the nature of the liabilities which the remittances discharged. As I have stated, they were made without specific appropriation, and debited to a running account which included items for the supply of plant, some comparatively small items for advances, and some other items of a capital nature. Is it possible to trace the liabilities which the remittances during a year have operated to discharge, and, by apportionment or otherwise, to attribute a proper part to liabilities incurred on account of revenue, that is, of an income nature? The question is I think almost entirely one of fact. Before the board of review an attempt was made by the taxpayer to show that it could be done, indeed actually to do it. But in the view taken by the board it was not necessary for that tribunal to express any opinion as to the success of the attempt. The mode in which the accounts have been kept makes the task difficult, but it does not appear to me to be impossible. I see no reason why the remittances to the debit of the account should not be taken as discharging the items on the credit side of the account in the order in which they are entered, that is to say, why the rule or presumption should not be applied that payments satisfy the earlier liabilities. Further than this I do not think we are in a position to go upon this reference to the Full Court. (at p467)
But it is not enough that liabilities of an income nature may have been discharged by the remittances involving the increased outlay of pounds in purchasing dollars. Consistently with that fact, the increased outlay may still be of a capital nature. And the commissioner maintains that it is of a capital nature because it was brought about by the company's using as its working capital the moneys out of which the liabilities should have been discharged before the fall of the pound. His contention fastens upon the cause of the delay in remitting moneys to discharge the earlier liabilities of the taxpayer company for stock-in-trade and supplies. Because remittances were withheld in order to provide the company with the equivalent of a working capital the commissioner says that the increase in the cost of the dollar ultimately purchased to discharge the earlier liabilities should be borne by the capital account. In other words, the need for capital accounts for the additional expenditure incurred in purchasing the dollars at the higher cost prevailing at the later date. It might at first sight appear that as remitting in dollars is a regular part of the taxpayer company's outlay in the ordinary routine of its business, it could not be of any importance how the expenditure for that purpose in any given year was appropriated to satisfy liabilities. That is to say, it is a recurrent expenditure, and why should it not be charged against current receipts? But it must be remembered that the accounting is not upon a cash but upon a credit basis, not upon a basis of actual receipts or disbursements, but by valuation and taking and giving credit: See Executor, Trustee and Agency Co. of S.A. Ltd. v. Deputy Federal Commissioner of Taxes (S.A.) (1939) 62 CLR 545 . Current purchases, in other words, are taken into the account against current sales independently of payment by or to the taxpayer. Thus the true nature of the deduction claimed is for the increase in the cost of discharging a past liability for which provision in the accounts was made at a lower figure. (at p468)
But notwithstanding that so much must be conceded to the contention of the commissioner, I think that the outgoing is not wholly of a capital nature and to the extent to which it is attributable to the discharge of liabilities incurred on revenue account ought to be allowed. From the fact that the increase in the expenditure arose from a delay in payment designed to create a fund for working capital, it by no means follows that it is a capital outgoing. The variations in the cost of exchange for discharging liabilities in foreign currency are continual sources of credits and debits in accounts into which the liabilities have already been taken. It is true that the credits and debits do not, or at all events may not, record actual losses and gains incurred or obtained independently of the previous expression of the liability in the accounts. But they are continually recurring variations in the position of the business in its course of profit earning. Whether the variations are on account of capital or revenue cannot depend on the purpose of the business policy or measures to which as a matter of causation the size or direction of the variation may be traceable. Some kinds of recurrent expenditure made to secure capital or working capital are clearly deductible. Under the Australian system interest on money borrowed for the purpose forms a deduction. So does the rent of premises and the hire of plant. No doubt the difficulty of assigning an outgoing to capital or income is often very great. This court has dealt with aspects of the problem in Egerton-Warburton v. Deputy Federal Commissioner of Taxation (1934) 51 CLR: Cf. at pp 575, 576 , Ash v. Federal Commissioner of Taxation (1938) 61 CLR 263 . and Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 . Here I think that there are factors which place the expenditure in the category of an outgoing on account of revenue, so far as it is not referable to capital liabilities. First among these factors is that the circumstances that the liability discharged is ex hypothesi of an income nature. Next the chance of loss or gain in the expenditure required to discharge it, owing to variations in exchange, is a matter attendant upon the use of funds transferable from one country to another, which is continual, recurrent and not independent of judgment and policy on the part of those managing a business of which such funds form a part. It is a loss or gain ordinarily regarded in business as detachable from the fund, and susceptible of treatment as a trading profit or loss. (at p469)
The delay increased the chances of a loss expressed in pounds, but the fact that the reason for the delay related to capital does not make the outgoing a capital loss. It is rather a standing contingency representing the recurrent expenditure which must be incurred to obtain the use of the money and is much more like annual outgoings to obtain the use of capital assets, such as rent, hire or interest. (at p469)
There remains a further point. The commissioner challenged the reality of the expenditure claimed as a deduction. He challenged it on two independent grounds. He said in the first place that it represented a mere book-keeping expense, the reality of which could never be determined until the account was closed off; that exchange continually varied, that the fact that in a given period the amount at which the liabilities stood was found to be exceeded by the outlay in discharging them told you nothing of the true result of the whole account. This contention, I think, leaves out of view the fact that it is necessary to find profit and loss over yearly accounting periods and that to do so comparisons must be instituted between credits, debits and values over the period. To arrive at a conclusion as to the profits of a period, casual recurrent expenditure on account of outgoings allowed for in anticipation must in appropriate cases be compared with the provision made. Otherwise the true result of the trading would not appear. (at p469)
The second ground of the challenge depends on the facts of the case as appearing from the admissions between the parties. The identity of the corporation or group to which I have so far referred as the New-York house is not stated or at all events clearly established. The commissioner says that it may be that it is only a branch of the taxpayer company itself and therefore that a remittance at a particular date throws no light on the actual discharge of the liability. There is I think good ground for excluding the hypothesis suggested. For the form and contents of the documents as well as the account of the organization of the corporations raises a presumption that the remittances went to the supplier. But as will appear from a consideration of what I have said above I do not attach so much importance to the date at which the liability was actually discharged as to the fact that the remittance was for the purpose of providing for the liabilities, and of the latter I think there can be no doubt. (at p470)
For the reasons given I think that it cannot be said that the deductions claimed for "exchange" should be disallowed. (at p470)
The first question should in my opinion be answered as follows: - So much of the amount of the exchange referred to in par. 17 of the mutual admissions as is found to be referable to expenditure incurred in or for the purpose of discharging or providing for liabilities on revenue or income account is allowable as a deduction in ascertaining (otherwise than under sec. 28 of the Income Tax Assessment Act) the taxable income of the company in the year in which payments were made as set forth in the mutual admissions.
2. The second question relates to a loss sustained by the taxpayer company in the year 1930 in its trading operations in New Zealand. It claims to deduct this New-Zealand loss in the ascertainment of its taxable income. As the taxpayer is incorporated in Australia it falls within the statutory definition of "resident" (sec. 4 of the Income Tax Assessment Act 1922-1930). A resident is liable to taxation upon his income derived from all sources whether in Australia or elsewhere. The claim for deduction is based alternatively upon the provisions of sec. 23(1)(a) and upon those of sec. 26. The material part of sec. 23(1)(a) provides that in calculating the taxable income the total assessable income derived by the taxpayer shall be taken as a basis and from it there shall be deducted all losses and outgoings actually incurred in gaining or producing the assessable income. (at p470)
The contention on the part of the taxpayer is that its assessable income from all sources including New Zealand should be aggregated and from it there should be deducted the outgoings everywhere that were incurred in its production. Thus the New-Zealand outgoings, which exceeded the New-Zealand assessable income, would be thrown against the mass, so that the New-Zealand deficiency would operate to reduce the Australian income. (at p471)
To qualify for this inclusion among the deductions, the New-Zealand expenditure or outgoings must have been incurred in the gaining or producing the assessable income and sec. 25(e) goes further and forbids deductions in respect of money not wholly and exclusively laid out or expended for the production of assessable income. If it were true that New-Zealand revenue formed part of the taxpayer's assessable income, it would be hard to deny that the New-Zealand expenditure fulfilled the required condition. But "assessable income" is defined to mean, in the case of a resident, the gross income derived from all sources which is not exempt from income tax under the provisions of the Income Tax Assessment Act 1922-1930: See sec. 4. And the commissioner contends that the New-Zealand income is exempt from taxation. The exemption, it is said, is given by sec. 14(1)(q)(i)(1), which provides that there shall be exempt 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 p471)
In New Zealand the net income of the taxpayer company derived from that country would be liable to income tax. In 1930 there was of course no net income; outgoings overtopped revenue. But if the balance had been the other way and there had been an excess of receipts in New Zealand over expenditure and outgoings, the excess would have been taxable income liable to New-Zealand income tax. In these circumstances the question is whether it can be said that the New-Zealand outgoings were incurred in gaining assessable income, inasmuch as if any net income had arisen in New Zealand it would have been exempt from Australian tax under sec. 14(1) (q)(i)(1). In my opinion it cannot properly be said that the New-Zealand outgoings were incurred in producing assessable income as defined. The reason is that the New-Zealand receipts are exempt under sec. 14(1)(q)(i)(1) and therefore fall outside the definition in sec. 4 of assessable income. They are exempt from tax in Australia, that is from inclusion in an assessment, because they are liable to be charged with tax in New Zealand, if there is a balance remaining after the deductions allowed by New Zealand law have been made. (at p472)
I think that sec. 14(1)(q)(i) exempts gross receipts or what would otherwise form an item or items of assessable income. The word "chargeable" is a wide one and I think it includes the case of New-Zealand or foreign assessable income which is liable to taxation only after deductions of outgoings and other allowances and includes that case whether the deductions exceed the assessable income so that no New Zealand or foreign tax is in fact payable. It does not mean to bring into the Australian assessment foreign gross income where there is a foreign tax payable on the net amount, simply because the deductions wipe out the whole and leave no net figure. Accordingly I am of opinion that the taxpayer is not entitled under sec. 23(1)(a) to deduct New-Zealand losses in his Australian assessment. (at p472)
The taxpayer's reliance upon sec. 26 is also answered by the interpretation I have placed upon sec. 14(1)(q)(i)(1). The material part of sec. 26 is sub-sec. (1)(b), which provides that where a loss is made in any year by any person, if he is a resident, in carrying on a business the proceeds of which (if any) derived from sources outside Australia would not be wholly exempt from income tax under the provisions of sec. 14(1)(q)(i), that person shall be entitled to a deduction of that loss from the net assessable income (if any) derived by him in that year. (at p472)
Sec. 26 contains many difficulties but it is sufficient to say in the present case that it cannot apply because according to the construction I have put upon sec. 14(1)(q)(i)(1), the proceeds of the New-Zealand business would under those provisions be wholly exempt from Australian income tax.
3, 4, 5 and 6. Questions 3, 4, 5 and 6 relate to the mode in which the board of review exercised or purported to exercise its powers. (at p472)
Sec. 50 (4) of the Income Tax Assessment Act 1922-1935 enables a taxpayer to require the commissioner to refer his decision upon an objection to the board of review. Under sec. 51 the taxpayer is limited on the review to the grounds stated in his objection and the board on review must give a decision in writing and may either confirm the assessments or reduce, increase or vary the assessment. Under sec. 44 the board for the purpose of reviewing decisions so referred to it has the powers and functions of the commissioner in making assessments, determinations and revisions under the Act. (at p473)
By reg. 45 (1) of the Income Tax Regulations (S.R. No. 64 of 1927) the board is to give a written decision on each review and shall forward copies of the decision to the commissioner and to the taxpayer and the commissioner is required, unless the decision has been appealed from, to give effect to the decision within thirty days after the receipt thereof. Within thirty days the commissioner or the taxpayer may appeal to this court from any decision of the board of review which in the opinion of the court involves a question of law (sec. 51 (6) and Rules of the High Court of Australia, Order LIA., rule 11). (at p473)
The five assessments which were the subject of the reference to the board made at the taxpayer's request were each made under the provisions of sec. 28 and not under the ordinary provisions of the Act. The objections covered not only income tax but also the further income tax imposed by sec. 7A (1) of the Income Tax Act 1930 (sec. 5 (1) of the later taxing Acts), a tax sometimes referred to by the not very accurate description, special property tax. The board dealt first with so much of the assessments as related to income tax, deferring the consideration of the further income tax. It stated its conclusions in writing in the form of a decision. As to the first three years, 1929, 1930 and 1931, the board upheld the taxpayer's objection that sec. 28 was not applicable and added -
"an assessment under the ordinary provisions of the Act to issue for each of these years in lieu of the assessments under sec. 28."
As to the fourth year, 1932, the board stated that an amended assessment was to be issued under sec. 28 on the basis of a specified amount of receipts and of a named percentage fixed by the board. As to the fifth year, 1933, the board simply upheld the objection that sec. 28 was not applicable. In that year the taxpayer company's accounts disclosed a very large loss. These determinations were expressed in the form of a written decision duly signed by its members, such as would comply with the requirements of the Act and the rules that a decision should be given in writing. The document concluded by saying that the case would be re-opened for the purpose of hearing evidence and argument on the ground only relating to the special or further income tax. (at p474)
But when for this purpose the case came again before the board it made some addition to or perhaps variation of its prior decision upon the other matters. For the first three years the board assessed the amount of the taxable income, that is, under the ordinary provisions. For 1932 the board expressed an actual assessment under sec. 28, at the percentage it had fixed upon the sum for gross receipts that it had specified. As to 1933 the board said that in lieu of the terms in which its decision was expressed upholding the ground that sec. 28 was not applicable, the board considered it desirable to restate the decision in the following terms, viz., 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. The purpose of this declaration was to enable the commissioner to argue in subsequent years that the loss incurred in 1933 could not be carried into later assessments because sec. 28 had been put into operation for the year 1933. (at p474)
The taxpayer considered that, if, as the first decision of the board appeared to require, the commissioner proceeded to assess it upon ordinary principles for the first three years, it would be open to the taxpayer company to object to the assessment on any grounds it thought fit and either appeal to the court or request another reference to the board of review. With this possibility in view the taxpayer objects that when the board gave its second decision it was beyond its authority to go back and vary or add to the board's first decision by itself assessing the taxable income for the three earliest years. The taxpayer applies the objection to the fourth year also. These are other matters to which the third, fourth, fifth and sixth questions are directed. The declaration, as it may be called, made in the fifth year, 1933, that the board had proceeded under sec. 28 to its conclusion, is made the subject of separate questions. (at p475)
When in its first decision in relation to 1929, 1930, and 1931 the board of review said that an assessment under the ordinary provisions of the Act was to issue I take it to mean that the commissioner would make and issue such assessments. It appears that the board itself has not in the past made assessments as sec. 44 (1) authorizes it to do, and during the discussion before the board the chairman made it clear that assessment by the commissioner was what was in contemplation. But the statement cannot I think, amount to an order or a direction given to the commissioner operating to impose an independent duty upon him. The board is an administrative tribunal with authority to review the commissioner's assessments and decisions, but I do not think that it is authorized to direct him what he shall do. What the statement amounts to is, I think, a declaration that the objection to the former assessments under sec. 28 having been upheld it will devolve upon the commissioner to make assessments upon ordinary principles. In the same way, for the year 1932, the board, having fixed a new percentage under sec. 28 and determined the amount of the total receipts, says that the work of assessing upon that basis falls to the commissioner. The board might have proceeded, I think, to make all four assessments under sec. 44 (1), or it might have gone on, not to make complete assessments, but, nevertheless, to ascertain the taxable income. It is to be noticed that the board's power to assess is limited to the purpose of reviewing the decisions of the commissioner: See sec. 44 (1). That means that in so far as it is incidental to giving effect to the decisions of the board, which must be confined to the grounds of objection, the board may assess. (at p475)
In the circumstances of the present case it had in the first instance authority to go as far as it afterwards did on the occasion of its second decision. The only question therefore is whether by its first decision it was precluded from taking up the matter where it had left it and going on to assess the taxable income. (at p475)
Clearly enough the board at the time of giving its first decision regarded it as final except for further income or special property tax. I should doubt very much whether the board could vary a decision once given or give a further decision inconsistent with it. I do not think that sec. 37 which enables the commissioner to alter his assessments is incorporated by sec. 44 among the powers the board is to have. (at p476)
But upon the view I have expressed as to the nature and legal effect of the statement appended to the first decision, that assessments were to issue, it was not incompatible with the legal operation of the board's first decision for it afterwards to go on and assess the taxable income. To do so was not to depart from but to fulfil or complete its decision or order. No doubt its intention to stop short of assessing and to leave the task to the commissioner was changed. But I do not think that the change of intention meant that any operative part of the board's decision was either set at nought or rescinded. (at p476)
The question arises however whether the board, having elected to stop short of carrying its decision further into effect than a mere declaration, can afterwards change its mind and complete or carry nearer to completion the consequences of its decision. On the whole I think it is at liberty to do so at any time before the closing of the process of review. It is exercising an administrative authority and I do not think that until it has completed the exercise of the function of reviewing the assessments referred to it, its administrative authority is exhausted. I see no reason to doubt that it may give definitive decisions, which it cannot afterwards set aside, upon separate decisions of the commissioner referred for review although those decisions do not clear up the whole assessment. But while the assessment remains before it, I think that it may go on to exercise a power so as to carry out what it has already decided, though at an early stage it chose to refrain from doing so. (at p476)
In answer to question 3 I think it should be declared that the power of the board of review was not limited to upholding the objection to the assessments for the years 1929, 1930 and 1931. (at p476)
To question 4 I think the answer should be that notwithstanding its decision in July 1937 as to the years 1929, 1930 and 1931 the board of review did have power to give the decision of October 1937 with respect to those years. The question inquires also about the year 1933, but as that year is dealt with by other questions and it depends on somewhat different considerations I think the answer to question 4 as asked should not include it. (at p477)
In answer to question 5 I think it should be declared that the board's power in respect of the year 1932 to which sec. 28 has been applied was not limited to setting aside the assessments. (at p477)
In answer to question 6 it should be declared that the assessments by the board of the taxpayer's taxable income for the years 1929, 1930, 1931 and 1932 made on 18th October 1937 are not void, but, subject to any order made upon the appeals therefrom to this court, are binding upon the taxpayer.
7. Question 7 is concerned with the bearing upon the application of sec. 28 to the year 1932 of losses by the taxpayer in previous years. The board of review adopted figures for its taxable income in the years 1929, 1930 and 1931 quite inconsistent with the hypothesis that the company incurred any loss. But it is said that if the increased expenditure on purchasing exchange is deductible it will or may be found that, in 1931 at all events, a loss was sustained. Under sec. 26 the taxpayer might be entitled in 1932 to deduct an unexhausted loss incurred in 1931 if the assessment were made not under sec. 28 but upon ordinary principles. (at p477)
I find some difficulty in understanding exactly what is the application of question 7 to the matters in controversy. It seems to be directed to some contention on the part of the taxpayer that, in exercising its discretions to apply sec. 28 to the year 1932 and to fix the particular percentage which the board in fact adopted, the board ought to have treated the existence of such a loss as a relevant consideration. Presumably if it turns out that there was in truth a loss in 1931 and that the board's assessment of the taxpayer company's taxable income for that year cannot be sustained, then it will be contended that the exercise of their discretion for the year 1932 is vitiated. The question proceeds to inquire upon what principles the existence and amount of such a loss should be ascertained. (at p477)
The discretions given by sec. 28 are not controlled by any express direction as to what matters must be taken into account or what must be excluded from consideration. It would be hard to say that the fact of a loss in a prior year, still unexhausted and capable of deduction under sec. 26 in a subsequent year, is a matter foreign to the exercise of the discretion to apply sec. 28 in assessing the income of the subsequent year. (at p478)
But it is another thing to say that neglect to consider or give weight to the fact that such a loss was incurred would invalidate the exercise of the discretion by the board or commissioner, still less a mistake as to the existence of such a loss. (at p478)
The question is stated in very abstract terms. The facts do not appear which would show the application and the legal consequence of the answer. In my opinion it is both unsafe and unwise to attempt to formulate an answer. An abstract answer is likely to give rise to more difficulties than it will remove. The matter of the question forms only a step in a contention which, though no doubt it seeks a concrete result, cannot be advanced except upon a solid basis of fact. I think that we should not answer the question at all. We should wait until the basis of fact is established and then insist that the concrete question should be considered as an entirety.
8. Question 8 is said to be pointed at a contention that inasmuch as part of the business of the company is carried on outside Australia, viz., in New Zealand, the business was not of a description to which sec. 28 applied. This contention appears to me to be entirely misconceived. So much of the business of the company as is carried on in Australia is, within the meaning of sec. 28, a business which is carried on in Australia. (at p478)
In answer to question 8 in my opinion it should be declared that the fact that part of the business of the company is carried on outside Australia is no objection to the application of sec. 28 to so much of the company's business as is carried on in Australia.
9. Question 9 is included in order that the taxpayer might contend that it is not open to the commissioner to assess a taxpayer under sec. 28 for a given year of income which is preceded and followed by years the income of which is assessed upon ordinary principles. There is no foundation for such a contention. (at p478)
The question should be answered that it is no objection to the application of sec. 28 to the year 1932 that in the years immediately preceding and following the taxable income of the taxpayer has been ascertained on ordinary principles and not by the application of sec. 28.
9A. Question 9A, which was added by amendment, relates to the last year, 1933. In the second decision of the board of review it is made quite clear that the board regarded the conditions expressed in sec. 28 as fulfilled so that it was called upon to consider whether any and what percentage should be fixed of total receipts as the income upon which the company should be taxable. The decision stated that the board did not think proper to assess and charge tax on any percentage of the total receipts. The question asks whether the board had authority to refuse to fix any percentage of the total receipts of the business. The commissioner is responsible for raising the matter. His purpose is not to obtain a substantial percentage of the receipts as taxable income, but something however small or even illusory which will establish an assessment for 1933 under sec. 28. His reason for seeking this is that in 1933 the company in fact made a very large loss upon its trading operations and it is expected that it will claim under sec. 26 to carry this loss into 1934 and perhaps subsequent years as a deduction, until it is exhausted. The commissioner hopes to establish as a proposition of law that sec. 26 does not enable a taxpayer who in a year of loss has been assessed under sec. 28, even at an illusory figure, to carry the loss into any subsequent year, whether his income for that year is assessed upon ordinary principles or under sec. 28. (at p479)
The conditions expressed in sec. 28 which the board regarded as fulfilled are the following: - (a) a business which is carried on in Australia, (b) is controlled principally by persons resident outside Australia, and (c) it appeared to the board that the business produced no taxable income or less than the ordinary taxable income which might be expected to arise from that business. (at p479)
As to the conditions mentioned in (a) and (b) no difficulty exists. They were fulfilled. The third condition is expressed in the section as something which need only appear to the commissioner or board, as distinguished from something which must be true in fact. But there is I think a question as to what it is that must so appear. The company in 1933 incurred a real loss of considerable dimensions. It did so from causes which those principally in control of the business could neither prevent nor affect. No one suggests that the failure of the business to produce in that year taxable income is a thing which might not be expected in the circumstances. Now sec. 28 in stating the condition under discussion says:
"when ... 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 board of review interpreted the provision as meaning that whenever a business in Australia controlled from abroad makes a loss, then the commissioner's discretion arises to fix a percentage of gross receipts as the taxable income of the business. This appears to me to be a too literal construction of the words. The alternative expression means, I think, to require a comparison between the ordinary taxable income which the business controlled from abroad might be expected to produce and what it does produce whether nothing or something. It is expressed elliptically, not to say illogically, but I do not think that the mere fact that the business produces no taxable income in a given year is enough to fulfil the condition independently of the question whether the business might have been expected to produce an ordinary taxable income of appreciable amount. The purpose of sec. 28 was stated in British Imperial Oil Co. Ltd. v. Federal Commissioner of Taxation (1926) 38 CLR, at p 209. by Higgins J.: -
"It is not correct to say that sec. 28 purports to allow income tax where there is no income; in effect, it says merely that the commissioner may assess for income tax a percentage of the total receipts from the business in Australia where the evidence before him is insufficient to show the true income or any income of that business - where 'it appears to the commissioner that the business produces either no taxable income or less than the ordinary taxable income'. A firm that carries on business in London as well as in Australia can easily hide the profits of its Australian business by increasing the invoiced prices of the goods sent to Australia."
Starke J. said: -
"The object of sec. 28 is to prescribe a standard for fixing or estimating income in a particular case. It takes the total receipts as the source of income and then prescribe a percentage on those receipts as the standard for assessing income; but it is said that the case in which that standard is prescribed is one in which there is no taxable income. That is true; but it means no taxable income in reference to other standards set up by the Act, and therefore requiring a standard of its own. It is no secret that income tax has been avoided by companies and traders resident outside Australia setting up local companies to trade in Australia, and supplying them with commodities at prices that cannot return a profit here, but returning handsome profits to the company or trader so setting up the local companies"
(1926) 38 CLR, at pp 214, 215. (at p481)
It would I think be opposed to the general conception of the provision to construe it as if the mere fact that no taxable income was earned by a foreign-controlled company was enough, without any consideration of the question whether it might in the given year have been expected to earn taxable income, to justify the commissioner in assessing upon a percentage of total receipts. It does not mean that every time such a company makes a loss it is to be so assessed, but if it makes the smallest profit or taxable income then it must be considered whether it is less than the ordinary income that might be expected. The question what might have been expected is present, I think, in both cases, according to the true meaning of the provision. I am therefore of the opinion that what appeared to the board was not enough to fulfil the condition in question. For it did not appear to the board that any taxable income might have been expected in 1933. (at p481)
But in any case I think that sec. 28 by the words "shall be assessable and chargeable" does not mean to impose upon the commissioner an imperative duty to assess upon a percentage of total receipts whenever the three preliminary conditions prescribed by the section are fulfilled. I construe those words as conferring a power and a discretion, not as imposing upon the commissioner an inexorable duty to fix some percentage, however small, and to proceed to assess thereon. (at p481)
I am therefore of the opinion that the board was mistaken in the form in which, in its second decision, it expressed its conclusion that the taxpayer ought not to be assessed for the year 1933 under sec. 28.
Question 9A covers, as will be seen, the ground to which, in relation to the year 1933, question 4 was partly directed, and it was for that reason that I preferred to deal with the whole question of the year 1933 under question 9A. (at p481)
In my opinion in answer to the question it should be declared that the board of review rightly refused to fix any percentage under sec. 28 and the facts did not warrant any assessment under that section. (at p482)
The remaining questions relate to the further tax, i.e., further income tax, imposed by sec. 7A (1) of the Income Tax Act 1930 and by sec. 5 (1) of the Income Tax Acts 1931, 1932 and 1933.
10. Question 10 is concerned with the refusal of the board of review to allow certain deductions in ascertaining the net income subject to the tax. The provision, which was considered by the court in Victoria Park Racing and Recreation Grounds Co. Ltd. v. Federal Commissioner of Taxation (1934) 52 CLR 9 . is as follows: - In addition to any income tax payable under the preceding provisions of this (taxing) 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 ten per centum of the amount of that taxable income. (at p482)
The effect of the last paragraph of the provision, par. c, is, I think, to include income derived by any person in the course of carrying on a business, if the income is of such a class that, when it is derived otherwise than in the course of carrying on a business, it is income from property: Cf. Victoria Park Racing and Recreation Ground Co. Ltd. v. Federal Commissioner of Taxation (1934) 52 CLR, at p 26 . (at p482)
During the years in question the taxpayer received interest on Commonwealth loans liable to income tax, and in three of the years, viz., 1930, 1931 and 1932, the amounts were large. The interest was liable to the special or further income tax under par. b of the provision. (at p482)
The taxpayer company also received some items of revenue which have been brought under par. c without objection on its part. For the purpose of selling its petrol it establishes kerbside pumps. The cost of doing so is very large indeed. The cost of maintaining the pumps also is very heavy. There are outgoings for repairs, for municipal taxes and licence fees, losses on reselling pumps regularly withdrawn from use and an annual provision for depreciation. But many petrol pumps are hired to the proprietors of garages who pay hire, or, as it is called, rent for the pumps. The hire from the company's point of view is not considerable and in fact is but a small saving on the very large expenditure in connection with petrol pumps which the exigencies of the business of distributing petrol throw upon the taxpayer company. But the payments for hire form the items of revenue which have been brought under par. c as liable to the further income tax. The company is by no means opposed to the inclusion of the hire from petrol pumps in the income to be taxed; for it forms the first step in an argument for the allowance against all the items brought under the further tax, including interest, of deductions which would overtop the items in amount and leave no net balance to be taxed. The deductions claimed are for the expenditure in maintaining the pumps, i.e., for the items to which I have referred. The theory of the company is that all the gross income from the classes of property falling under the three pars. of sec. 7A (1) is to be lumped together for the purpose of ascertaining the taxable income and all the expenditure incurred in producing any of the items is also to be lumped together for the purpose of deducting the total from the total of gross income. It contends that all the items of expenditure incurred in maintaining the pumps were incurred in producing the hire or pump rents. The board met the contention by disallowing the items, with the exception of one called administration expenses. It did so on the groun d that the expense was referable to the business of selling petrol rather than to the obtaining of pump rents. (at p483)
I think that this ground is not altogether sound. The truth, in my opinion, is that there was no net or taxable income from the hire of petrol pumps and the item never should come into the computation at all. The fact is that the hire obtained represents no independent source of revenue. It is nothing but a recoupment of a very small part of a large expenditure upon the establishment and maintenance of a means of selling petrol. The circumstances are singular and in my opinion they do not admit of the method of treatment which the taxpayer seeks to apply. To treat the receipts from hire as an item of gross revenue and the expenses of maintaining the pumps, because incurred in producing the hire, as items of a total expenditure to be thrown against the total receipts from all sources liable to the special or further tax is to overlook the fact that the pump rents are mere incidents of the expenditure; the expenditure is not an incident of the pump rents. Sec. 7A (1) (or see sec. 5) of the taxing Acts does not make it clear how the net income to be further taxed is to be ascertained. The expression "taxable income" cannot have its full defined sense, that is, the full meaning given it by sec. 4 of the Income Tax Assessment Act, viz., "the amount of income remaining after all deductions allowed by this Act have been made." For instance, it can scarcely be supposed that any part of a premium paid by a taxpayer upon his wife's life insurance is allowable in ascertaining the net amount liable to further tax: Cf. sec. 23(1)(c). A conceivable interpretation of the provision is that it requires an apportionment of the net taxable income ascertained for the purpose of ordinary income tax, an apportionment with a view to finding so much of the net sum thus ascertained as is attributable to the inclusion in the assessable income of the items described in pars. a, b and c. But I do not think this is its meaning. It may be that what the provision intends is that a further assessment of taxable income shall be made on the assumption that no other assessable income was derived by the taxpayer but only assessable income filling the descriptions contained in pars. a, b and c. (at p484)
But before it can be found that a receipt constitutes income falling within par. c something more must be asked than whether, if the receipt had been obtained otherwise than in carrying on a business, it would have been income from property. The peculiarity that the thing which incidentally produces the receipt is maintained at a great cost for business purposes and that the receipt arises merely incidentally and accidentally makes it necessary to inquire whether the receipt can be at all regarded as income of a class which, if it is obtained otherwise than in carrying on a business, is income from property. The establishment and maintenance of petrol pumps has no relation to anything but the carrying on of the business of selling petrol. The receipt is impossible except as a saving or recoupment in connection with selling petrol. It is a complete distortion of the transaction to regard the receipt as capable of an independent existence as revenue. It is obtainable only from the retail seller of the company's petrol who is provided with a pump for the purpose of selling it. In truth there is no "income" from the petrol pumps considered as property; there is only a reduction or recoupment in part of the expenditure in establishing and maintaining an implement of trade. Before you can arrive at the conclusion that there is taxable income derived in the manner described by par. c it must appear possible that taxable income might arise from the source in question otherwise than in the course of carrying on the business. No taxable income does or could arise from maintaining the pumps apart from selling petrol. (at p485)
I think that question 10 should be answered that the deductions claimed are not allowable against interest, but, having regard to the expenditure they represent and the purpose of the pumps, there is no taxable income from pump rents.
11. Question 11 asks whether a taxpayer who is assessed for his ordinary tax under sec. 28 is also liable to assessment, in addition, for the further income tax or so-called special property tax. (at p485)
It is suggested that to apply sec. 28 to a given year is to exclude for that year the special property tax. This suggestion does not appear to me to be well founded. (at p485)
There are two taxes, income tax and further income tax. For the first an assessment must be made of income generally whether under the ordinary provisions of the Income Tax Assessment Act or under sec. 28. For the second, another ascertainment of a particular class of income or of classes of income must be made. It is an independent ascertainment of a different taxable income. For this sec. 28 is not available. The two taxes are independent; the subject matters taxed, although of the same general nature, viz., income, are of different classifications; and the subjects of tax must be separately ascertained. There is nothing in the use of sec. 28 for the ordinary income at all inconsistent with the imposition of the special property tax. (at p485)
In my opinion question 11 should be answered that notwithstanding the application of sec. 28 to the assessment of the taxpayer company for ordinary income tax in respect of the year of income 1932, it remained liable to the further income tax under sec. 5 of the Income Tax Act 1933 (No. 41 of 1933).
12. Question twelve enquires how, for the purpose of the further income tax or special property tax, the taxable income is to be ascertained in a year to which sec. 28 has been applied for the purpose of ordinary income tax. (at p486)
In my opinion, sec. 28 has no application to the ascertainment of the "taxable income" described in sec. 7A (1) or sec. 5, as the case may be of the taxing statutes relevant to the various years. It is essentially concerned with the income from a business and cannot be employed for such a purpose as the special property tax. There is nothing in sec. 28 to require that when it is applied to ordinary income it shall also supersede the general operation of the provision contained in sec. 7A (1) or sec. 5, as the case may be. That provision operates just as if sec. 28 had not been used for ordinary income tax. (at p486)
In answer to question twelve it should be declared that for the year 1933 the amount of the income upon which the further income tax imposed by sec. 5 of the Income Tax Act 1933 is levied should be ascertained or assessed independently of sec. 28 and in the same manner as if sec. 28 had not been applied in that year for the purpose of assessing the taxpayer company to ordinary income tax. (at p486)
The costs of this reference should be reserved to be dealt with at the hearing of the appeals. (at p486)