Emu Bay Railway Co Ltd v Federal Commissioner of Taxation
71 CLR 596(Judgment by: Starke J)
Emu Bay Railway Co Ltd v Federal Commissioner of Taxation
Court:
Judges:
Latham CJ
Rich J
Starke JMcTiernan 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:
Starke J
STARKE J. The appellant, the taxpayer, issued PD267,064 5 per cent irredeemable debenture stock secured by a trust deed. Stock certificates were issued which certified the registered holders of the stock and the amount of stock held, which stock, it was added, was "constituted and secured" by the trust deed. On their face, these certificates set forth that the interest was to be "a charge upon and payable only out of the net annual income" or, to use another phrase found in the certificates, "out of the net income of" the taxpayer "of each year" as "defined" and "provided" in the trust deed, but the interest was not to be cumulative until after 31st December 1933. The interest as "defined" or "provided" in the trust deed refers back, I take it, to the provision in the trust deed that during the period of ten years ending on 31st December 1933 the interest shall be payable only out of the net income of the taxpayer from time to time available after payment of the interest upon certain 4 per cent stock and after making all other provisions properly chargeable against revenue. Further, these certificates also set forth on their face that the stock was to be charged upon and rank pari passu with the 4 per cent stock as a first charge upon all the property and assets of the taxpayer subject to a prior charge for securing the 4 per cent stock upon certain specified property. The trust deed was made between the taxpayer and certain named trustees. It recited that it was part of the scheme referred to in the deed, that the 5 per cent stock should bear interest and be secured in manner and have the rights described in the stock certificates. And by the deed the taxpayer acknowledged that it was 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. And it was agreed that, until stock was redeemed or paid off, the taxpayer should pay the stock holders whose stock remained outstanding 5 per cent per annum as mentioned and provided in the stock certificates. Further, it was agreed that, during the period of ten years ending on 31st December 1933, the interest on the 5 per cent stock should be payable only out of the net income of the taxpayer from time to time available after payment of interest on the 4 per cent stock and making proper provision for certain other outgoings and that after the expiration of such period the interest on the 5 per cent stock should be cumulative. And the trust deed also contained a covenant on the part of the taxpayer to pay to the trustees the amount of the 5 per cent stock and interest thereon in accordance with the terms set out in the third schedule (that is, in accordance with the terms and conditions set forth in the stock certificates on which the 5 per cent stock was issued) until repayment thereof but so that the trustees should receive the same as the trustees for the persons named in the stock certificates, who should be deemed to be the beneficial owners thereof. Further, the taxpayer by the trust deed charged in favour of the trustees by way of floating charge all the business, undertaking, property and assets of the taxpayer including its uncalled capital for securing payment of the 4 per cent stock and 5 per cent stock respectively "and the interest thereon as aforesaid," subject only to the prior charge in favour of the 4 per cent stock already mentioned. The trust deed also contained a trust for sale upon the happening of various events, and the trustees were to hold the proceeds of realization, subject to certain preceding trusts, in and towards payment to the holders of the 4 per cent stock and the 5 per cent stock equally in proportion to the respective amounts thereof due to them respectively and all arrears of interest thereon. And, upon the trustees being satisfied that the 4 per cent and the 5 per cent stock and all interest thereon respectively had been paid, they were to re-convey the premises or so much thereof as remained vested in them. Further, the trust deed provides for the creation of a fund for redeeming the 4 per cent and 5 per cent stock after paying or providing for the interest on the 4 per cent stock and the 5 per cent stock. And, finally, there is a general covenant in the trust deed on the part of the taxpayer duly to perform and observe the obligations imposed upon it by the trust deed.
Interest on the 5 per cent stock calculated at 5 per cent for the twelve months ending on 31st December 1939 amounted in round figures to PD13,333, but no part of that sum was during the period of twelve months nor since paid or credited to the trustees or any holders of the stock.
The taxpayer claims that this sum should be allowed as a deduction in its assessment to income tax for the financial year 1940-1941 based upon the income year 1939. The claim is based upon s. 51 of the Income Tax Assessment Act 1936-1940, which, so far as material, is as follows:"(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions." But the Commissioner of Taxation rejected the claim and disallowed the deduction. And he contends that the sum claimed was not an outgoing expended in the income year or at all. But the words of the section are not losses or outgoings expended or paid, but incurred, which is an appropriate enough word to cover liabilities to which taxpayers become liable or subject.
The section, however, requires that the liability shall be incurred in gaining or producing the assessable income or in carrying on a business for that purpose. And the Commissioner contends that the sum claimed by the taxpayer was not so incurred, in other words, that the taxpayer incurred no liability in the relevant year-1939-for the interest because it was payable only out of the net income of the company for that year. Net income of the taxpayer is not, I may observe, the same sum as its taxable income, which is the amount remaining after deductions from the assessable income of all allowable deductions. Admittedly there was no income available in the relevant year for payment of the interest but a loss, as appears by the balance sheet and profit and loss account of the taxpayer. Consequently, it is said that the taxpayer incurred no liability and came under no obligation in the relevant year to pay the interest claimed as a deduction. The Commissioner is, I think, right in this contention. The terms and conditions of the stock certificates explicitly provide that the interest is to be payable only out of the net income of the taxpayer of each year as defined or provided in the trust deed. And the trust deed itself provides, as already mentioned, that the 5 per cent stock should have the rights described in the third schedule, that is, in the stock certificates; that interest should be paid to stock holders as mentioned and provided in the schedule; that the taxpayer will pay to the trustees the amount of 5 per cent stock and interest thereon in accordance with the terms set out in the schedule. It is said, however, that the taxpayer acknowledged its indebtedness to the trustees on behalf of the holders of the 5 per cent stock in the sum of PD267,064 bearing interest at the rate of 5 per cent per annum. But that is consistent with the terms and conditions of the stock certificates that the interest shall be paid out of net annual income. Again, it is said that the clause providing that, during the period of ten years ending on 31st December 1933, interest shall be payable only out of net income after certain obligations have been provided for and thereafter shall be cumulative necessarily imports an obligation on the part of the taxpayer after the ten-year period to pay interest on the 5 per cent stock. But the real purpose of the provision is to provide when and when not the interest should be cumulative. Clearly this clause contains no express provision to pay interest after the ten-year period, and the implication contended for is by no means necessary having regard to the explicit term of the stock certificates and other clauses of the stock certificates. Finally, it is said that the 5 per cent stock and interest thereon, subject to a certain prior charge, is charged upon the capital assets of the appellant by way of floating charge, that is, upon the business, undertaking, property and assets of the taxpayer, including uncalled capital. This argument is, I think, correct; the charge is to secure both the principal and interest on the 5 per cent stock and it is a charge upon capital assets. But a charge upon the capital assets of the taxpayer does not result in an outgoing incurred in gaining or producing assessable income or in carrying on business for that purpose. The charge is a security but only a security in case of non-payment of the principal or in case interest is not provided in the manner contemplated and agreed upon by the parties to the trust deed.
The question stated should be answered in the negative.