Emu Bay Railway Co Ltd v Federal Commissioner of Taxation
71 CLR 596(Judgment by: McTiernan J)
Emu Bay Railway Co Ltd v Federal Commissioner of Taxation
Court:
Judges:
Latham CJ
Rich J
Starke J
McTiernan JWilliams 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:
McTiernan J
McTIERNAN J. The question to be decided is whether a sum of PD13,333 13s. 6d. should be allowed as a deduction from the taxpayer's assessable income derived in the accounting period ended 31st December 1939. The deduction is claimed under s. 51 of the Income Tax Assessment Act 1936-1940 on the ground that the sum was an outgoing incurred in gaining or producing the assessable income. The sum of PD13,333 13s. 6d, is the interest for twelve months ending 31st December 1939 upon the capital of "the five per cent Stock" which is described in the debenture trust deed made on 7th April 1925. No part of the amount was paid or credited to the holders of the stock.
In Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation [F5] , Dixon J., speaking of the phrase "incurred in gaining or producing the assessable income" in s. 23 (1) (a) of the Income Tax Assessment Act 1922-1934, said that a very wide application should be given to it. His Honour said: "But the words refer to the assessable income from which the deduction is to be made. In a continuing business, items of expenditure are commonly treated as belonging to the accounting period in which they are met. It is not the practice to institute an inquiry into the exact time at which it is hoped that expenditure made within the accounting period will have an effect upon the production of assessable income and to refuse to allow it as a deduction if that time is found to lie beyond the period. And, in the case of expenditure for which the taxpayer contracted a liability during an earlier accounting period than that in which it has matured, it is not the practice to consider whether its effect upon the production of income of a still continuing undertaking has already been exhausted. The terms of s. 23 (1) (a) have never been understood as requiring such a thing (See Ward & Co Ltd v Commissioner of Taxes [F6] , at p. 148, and Herald and Weekly Times Ltd v Federal Commissioner of Taxation [F7] , at p. 118). The expression `in gaining or producing' has the force of `in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself" [F8] . See also W. Nevill & Co Ltd v Federal Commissioner of Taxation [F9] . It follows from these principles that it was not necessary for the allowance of the deduction that the taxpayer should have paid the sum of PD13,333 13s. 6d. in discharge of its liability for interest in the accounting period in which it received the income on which the assessment is based. But in the case of Jolly v Federal Commissioner of Taxation [F10] , Dixon J., in disallowing a claim for the allowance of a deduction for interest under the relevant section of an earlier Act, said: "Although he paid nothing for interest during the two years in question, the taxpayer claims that a deduction should be allowed under s. 18 (1) (a) of the Income Tax Assessment Act 1915-1921, and that it should be considered money wholly and exclusively laid out or expended for the production of income within s. 20 (e). Whatever arrangement was made by the taxpayer with the executors of Widdis, I am not satisfied that it imposed upon him a liability to pay interest within either of the two years ending 30th June 1920 or 1921. I am not prepared to find that the taxpayer incurred an obligation which in those two years resulted in a debt for interest then due and payable. I do not think a deduction can be obtained unless an immediate liability accrued within the accounting period, there being no actual expenditure. Upon that ground I disallow the claim" [F11] .
The question that arises is therefore whether the taxpayer incurred an obligation which in the accounting period ending 31st December 1939 resulted in a debt for interest which was then due and presently payable. In my opinion, it did not incur an obligation of that nature. The answer to the question is governed by the debenture trust deed made on 7th April 1925. The case stated shows that the taxpayer made a loss for the year ended 31st December 1939.
On the one hand, the taxpayer contends that the proper construction of the deed is that it imposes an absolute liability upon the taxpayer to pay the interest on the above-mentioned stock on 1st April and 1st October in each year and merely makes the net income the primary fund for the payment of such interest. On the other hand, the Commissioner contends that the proper construction of the deed is that the terms upon which the taxpayer in the year ended 31st December 1939 incurred any obligation under the deed to pay interest on such stock, limited the rights of the trustees or the holders to payment of the interest out of the net income and that the earning of net income and its sufficiency to meet the interest constitute a condition precedent to liability for such interest. The nature of the question which these contentions raise is stated in Halsbury's Laws of England, 2nd ed., vol. 7, p. 221 (p) in these terms: "In the case of contracts for payment out of a particular fund, it is a matter of construction whether it is a condition precedent that such fund should furnish the means of payment, or whether the fund is indicated merely as that out of which the money is primarily to come." The Commissioner's contention is in my opinion the correct one.
The liability to pay interest on the 5 per cent stock is at several places in the deed declared to be subject to the conditions mentioned in the third schedule. The provisions of the deed and the schedule are lengthy and I do not repeat them. Reading them together, the conclusion at which I arrive is that the company, the taxpayer, did not make an absolute promise to pay interest in the year ended 31st December 1939 on the stock; the promise which it made was to pay interest in that year only out of the net annual income of the company. As there was no such fund in the year ended 31st December 1939, the taxpayer was not under an obligation resulting in a debt due and payable in that year to pay interest on the 5 per cent stock.
In my opinion, the question in the case stated should be answered: No.