Emu Bay Railway Co Ltd v Federal Commissioner of Taxation
71 CLR 596(Judgment by: Rich J)
Emu Bay Railway Co Ltd v Federal Commissioner of Taxation
Court:
Judges:
Latham CJ
Rich JStarke J
McTiernan J
Williams J
Subject References:
Taxation and revenue
Income tax
Assessment
Deductions
Outgoings incurred
Income insufficient to pay interest
Legislative References:
Income Tax Assessment Act 1936 No 27 - s 51
Judgment date: 6 November 1944
MELBOURNE
Judgment by:
Rich J
RICH J. In calculating the taxpayer's assessable income for the financial year 1940-1941, the parties agreed that the twelve months ending 31st December 1939 should be deemed to be the year of income for the purpose of determining whether the sum in question of PD13,333 13s. 6d. is to be allowed as an outgoing to the extent to which it was incurred in carrying on the taxpayer's business for the purpose of gaining or producing such income (Income Tax Assessment Act 1936-1940, s. 51). The debenture trust deed contains the relative rights and obligations of the parties to it and is framed in the form in Palmer's Company Precedents, with such variations as the particular case requires. The deed secures debenture stock called "irredeemable," as no date is fixed for repayment of the principal, but there are a trust for sale, and a power for the trustees under the deed to enter and take possession, and a trust to apply the proceeds of realization (inter alia) towards the payment of the principal moneys, interest "and all arrears of interest" (clause 17). For the period of the first ten years interest is made payable only out of net profits and is non-cumulative. Accordingly, if the profit of any one year during that period was insufficient to pay the interest, there would have been no claim on subsequent profits for the deficiency: Cf. Palmer's Company Precedents, Part III, 15th ed. (1938), p. 301. The meaning of net profits is to be found in the dictionary contained in clause 7. The subject, however, of this appeal is concerned with the period following the first ten years and the sum in question is the unpaid interest for the relevant period on the 5 per cent stock. During this period, the interest is cumulative and although it is payable only out of net profits as defined (third schedule) it is an existing debt or obligation and is ultimately payable out of the proceeds of sale (clause 17). The trust deed begins with the acknowledgment in clause 1 (B) that the company is indebted to the trustees on behalf of the holders of the 5 per cent stock in the sum of PD267,064 carrying interest at the rate of 5 per cent per annum payable half-yearly on 1st April and 1st October in each year. And the payment to the holders of such stock of interest for each half year or other period on such stock held by them respectively shall operate in satisfaction of the interest for such half year or other period payable to the parties under this clause. The deed provides in the usual way for a floating charge which attaches upon the happening of certain events. A borrowing involves the obligation to repay. The trust deed creates a debt both in respect of principal and of interest, in the case of interest on each date when it becomes due. The fact that the covenant "points out the fund out of which payment shall be made ... does not make the raising of that fund a condition precedent to the liability" of the company: Cf. Pilbrow v Pilbrow's Atmospheric Railway and Canal Propulsion Co [F3] , at p. 962]. It is not a case of solvendum nunquam, as ultimately all overdue interest is payable out of the proceeds of realization. It is a liability incurred: Cf. West Ham Corporation v Grant [F4] . "Outgoings," in my opinion, include payments made and liabilities incurred within the meaning of s. 51. In a case where a taxpayer keeps his accounts on a cash basis, different considerations might arise.
I therefore answer the question submitted in the affirmative on ground a.