American Thread Co v Federal Commissioner of Taxation
73 CLR 643(Judgment by: LATHAM CJ)
American Thread Co.
v Federal Commissioner of Taxation
Judges:
Latham CJStarke J
Dixon J
McTiernan J
Subject References:
Taxation and revenue
Income Tax
Assessment
Assessable Income
Deduction
Losses of previous years
Legislative References:
Income Tax Assessment Act 1936 - ss 38-43,; 80
Judgment date: 20 December 1946
Melbourne
Judgment by:
LATHAM CJ
The following written judgments were delivered:
Case stated under the Income Tax Assessment Act 1936-1943 and s. 18 of the Judiciary Act 1903-1946.
Section 80 (2) of the Act provides that so much of the losses incurred by a taxpayer in any of the four years next preceding the year of income as has not been allowed as a deduction from his income of any of those years shall be allowable as a deduction in accordance with the provisions of the section. The company claims that in the income year ending 31st December 1941 (which was the accounting period for the company under s. 18 of the Act) it incurred a loss and that that loss is allowable as a deduction from the income of the subsequent year 1942. The Commissioner, on the other hand, contends that s. 80 is not applicable because the company was in each of the years mentioned subject to the provisions of Sub-division C of Division 2 of Part III. of the Act, and under those provisions there were no allowable deductions which exceeded the sum of the income of the company during the year 1941 within the meaning of s. 80 (1), so that there was no loss within the meaning of that sub-section which could be deducted under s. 80 (2).
The company is a company incorporated in Scotland and is a non-resident within the meaning of the Act (see s. 6, definitions of "non-resident" and "person") and therefore its assessable income prima facie includes the gross income derived directly or indirectly from all sources in Australia which is not exempt income (s. 25 (1) (b) ). The company, however, manufactures goods in Scotland which it sends to Australia and sells in Australia. Accordingly the provisions of Sub-division C of Division 2, Part III., of the Act are applicable for the purpose of ascertaining what profit is deemed to be derived by the company in Australia. This sub-division applies to businesses carried on partly in and partly out of Australia. Section 38 is as follows:
"Where goods manufactured out of Australia are imported into Australia and the goods are, either before or after importation, sold in Australia by the manufacturer of the goods, the profit deemed to be derived in Australia from the sale shall be ascertained by deducting from the sale price of the goods the amount for which, at the date the goods were shipped to Australia, goods of the same nature and quality could be purchased by a wholesale buyer in the country of manufacture, and the expenses incurred in transporting them to and selling them in Australia."
Section 43 is as follows:
"(1) The assessable income of a taxpayer shall include any profit derived by him in the year of income which, under the provisions of this sub-division, is derived or deemed to be derived in Australia and the proceeds of any sale to which this sub-division applies shall not otherwise be included in his assessable income.
(2) No amount taken into account in ascertaining any such profit, and no expenditure incurred directly or indirectly in or in relation to any such sale, shall be an allowable deduction."
The result of the application of these sections is that a profit ascertained in accordance with their terms is included in the assessable income of the company.
For the year 1941 calculations which the parties have accepted as being made in accordance with the provisions of these sections brought out the result that there was a loss in Australian currency of PD2,752. This loss was the result of taking into account on the one hand the gross sales of goods during the year, stock on hand and goods in transit at the end of the year, together with a small sum (PD9) of interest. From this total amount deductions were made of the value of stock on hand and goods in transit at the beginning of the year, the value of the goods invoiced for the year, freight, insurance and duty applicable to sales, discounts to customers, bad debts, difference in exchange and that proportion of expenses which was referable to transporting the goods to and selling them in Australia. When adjustments were made by excluding taxes which were not deductible for income tax purposes the result was, as stated, a loss for 1941 of PD2,752.
In the following year upon an account taken in the same manner the result was a profit of PD1,906. The company claims to deduct from this 1942 profit an amount of PD1,906, representing so much of the 1941 loss as had not been allowed as a deduction in any preceding year.
This claim is based upon s. 80, the precise terms of which require careful attention. Section 80 is as follows:
"(1) For the purposes of this section, a loss shall be deemed to be incurred in any year when the allowable deductions (other than the concessional deductions and the deduction allowable under this section) from the assessable income of that year exceed the sum of that income and the net exempt income of that year, and the amount of the loss shall be deemed to be the amount of such excess.
(2) So much of the losses incurred by a taxpayer in any of the four years next preceding the year of income as has not been allowed as a deduction from his income of any of those years shall be allowable as a deduction in accordance with the following provisions:
- (a)
- where he has not in the year of income derived exempt income, the deduction shall be made from the assessable income;
- (b)
- where he has in that year derived exempt income, the deduction shall be made successively from the net exempt income and from the assessable income;
- (c)
- where a deduction is allowable under this section in respect of two or more losses, the losses shall be taken into account in the order in which they were incurred."
Sub-section (3) of s. 80 contains a definition of "net exempt income" which in the case of a non-resident means "the amount by which his exempt income derived from sources in Australia exceeds the sum of the expenses (not being expenses of a capital nature) incurred in deriving that income." In the case of the appellant company there was no "net exempt income" in the year 1941.
It was argued for the respondent that the provision in s. 80 (1) with respect to the allowable deductions exceeding the sum of the assessable income and the net exempt income of the year can apply only where there are both assessable income and net exempt income. In my opinion there is no substance in this contention. If there is no net exempt income the result merely is that the sum of the assessable income and the net exempt income (i.e. nil) is the amount of the assessable income. Accordingly, in my opinion, the application of s. 80 (1) is not excluded by the fact that the company had no net exempt income in the year in which it is claimed that a loss was incurred.
The first contention of the company is that the provisions of Subdivision C are as applicable for the purpose of ascertaining a loss as for the purpose of ascertaining a profit, and that as the application of these provisions in respect of the year 1941 showed a loss, that loss is an allowable deduction under s. 80. The difficulty in the way of this contention is said by the Commissioner to be that the effect of s. 43 (2) is to prohibit the allowance as a deduction of any amount taken into account in making up an account under Subdivision C, and also of any expenditure incurred directly or indirectly in relation to sales of goods in Australia to which the subdivision applies. The loss in 1941 is the result of taking into account amounts such as cost of goods in Scotland, cost of transport to Australia, and sundry expenses in Australia the allowance of which as deductions is prohibited by s. 43. Therefore there are in the case of this company no "allowable deductions from the assessable income" of 1941 which can be used for the purpose of ascertaining a loss under s. 80 [F1] .
Alternatively, the company contends that Subdivision C is not applicable because it is directed only to ascertaining profit, and not to ascertaining loss, and that therefore the company is entitled under s. 80 to deduct any loss incurred in 1941 which it can establish by applying the ordinary provisions of the Act independently of Sub-division C.
Section 43 (1) provides that the assessable income of a taxpayer shall include any profit as ascertained under the subdivision and s. 43 (2) provides that no amount taken into account in ascertaining any such profit, and no expenditure incurred directly or indirectly in or in relation to any such sale (that is a sale to which the subdivision applies-see s. 43 (1)) shall be an allowable deduction. "Assessable income" in this section is not used in the sense in which it is ordinarily used in the Act. "Assessable income" is defined in s. 6 as meaning all the amounts which under the provisions of the Act are included in the assessable income, and "taxable income" is defined as meaning the amount remaining after deducting from the assessable income all allowable deductions. Section 48 provides that in calculating the taxable income of a taxpayer the total assessable income derived by him during the year of income shall be taken as a basis, and from it there shall be deducted all allowable deductions. Thus ordinarily "assessable income" is a gross amount from which allowable deductions are made. Under Subdivision C, however, the profit which is declared to be included in "assessable income" is an amount which is calculated as the result of making the deductions specified in s. 38 (or s. 39 which deals with the case of a merchant who imports goods and sells them in Australia). Thus that which is declared to be assessable income under s. 43 is a net amount and not a gross amount. It has been calculated by making the deductions permitted under preceding sections and s. 43 prevents any further deduction of amounts already so taken into account, and also of any expenditure in relation to the sales the profit from which has been ascertained by making only the deductions which are permitted by those preceding sections. Section 43 does not prohibit other deductions, for example, those which may be made under s. 78 (certain gifts and other payments) which have no relation to the ascertainment of profit on the sale of goods in Australia or to expenditure incurred in or in relation to any such sale.
The contention of the Commissioner is that s. 43 brings about the result, not only that a profit ascertained under Subdivision C is included in assessable income, but also by virtue of sub-s. (2) that the amounts and expenses referred to in that sub-section are not allowable deductions for any of the purposes of the Act. If this view be right then there was, in the case of this company, no loss in 1941, because the outgoings upon which the company relies for the purpose of showing that there was a loss in that year are prohibited as deductions under s. 43 (2), and therefore there is not an excess of allowable deductions over the assessable income (plus net exempt income, if any-but there was none in fact) of that year.
The solution of the difficulty is to be found, in my opinion, in recognizing that s. 43 applies only when a profit has been ascertained by the application of the provisions of Subdivision C. The subdivision begins by enacting in ss. 38 and 39 that a profit ascertained in the manner therein stated is deemed to be derived in Australia. Both of these sections relate to the sale of goods in Australia. Section 43 (1) then provides, in its first part, that the assessable income of a taxpayer shall include any profit derived by him in the year of income which under the provisions of the subdivision is derived or deemed to be derived in Australia. Where this provision applies it takes effect by bringing about the inclusion in "assessable income" of the profit ascertained under the subdivision. Where no such profit is so ascertained it is clear that this part of the section has no operation. The second part of s. 43 (1) provides that "the proceeds of any sale to which this subdivision applies" shall not otherwise be included in the assessable income. The sales to which the subdivision applies are certain sales of goods in Australia in cases where the application of the subdivision results in the ascertainment of a profit. If the application of the subdivision does not result in the ascertainment of a profit arising from any sales, then those sales are not sales to which the subdivision applies. If, therefore, the subdivision is not applied to any particular sales, the result is that the proceeds of those sales are not excluded from the assessable income of the taxpayer by reason of the latter part of s. 43 (1).
Section 43 (2) is also limited to cases in which the application of the provisions of Subdivision C results in ascertaining a profit. This is quite clear in relation to the first part of sub-s. (2)-"No amount taken into account in ascertaining any such profit...shall be an allowable deduction." The prohibition of the deduction of any such amount applies only where such amount has been taken into account in ascertaining "any such profit"; that is, where the result of the application of the subdivision is that a profit is ascertained. If the result of the application of those provisions is that there is no profit, but a loss, then it cannot be said that the amounts which would have been taken into account under (in this case) s. 38, in ascertaining a profit if there had been a profit are amounts the deduction of which is prohibited under s. 43 (2).
Similar considerations apply to the second part of sub-s. (2) of s. 43-"no expenditure incurred directly or indirectly in or in relation to any such sale shall be an allowable deduction." This provision is limited to expenditure incurred in relation to "any such sale." The words "any such sale" refer back to the words in s. 43(1)-"any sale to which this subdivision applies." For reasons already stated such a sale is a sale in respect of which the subdivision has been applied so as to result in ascertaining a profit which is deemed to be derived in Australia under preceding sections.
Accordingly, in my opinion, Subdivision C, including s. 43, applies only where the result of applying it is to show that there is a profit in the relevant year. If the application of the provisions of the subdivision shows that no profit ascertained in accordance with those provisions was made, then s. 43 is not relevant for any of the purposes of the Act.
In 1941 the application of Subdivision Cdid not show any profit, and therefore that subdivision should not be considered for any purpose in relation to that year. The endeavour to apply it has demonstrated that it is not applicable for the only purpose for which it can be used. Thus the company is in the position that it can claim a deduction under s. 80 if it can show that the conditions of s. 80 have been satisfied. In order to show that this is the case the company must establish that allowable deductions from the assessable income of 1941 exceeded the amount of that income. In order to ascertain whether this is the case, Subdivision C being inapplicable as irrelevant, the ordinary provisions of the Act must be applied; for example, s. 25 (1), which includes in the assessable income of a non-resident the gross income from all sources in Australia which is not exempt income, and s. 51, which provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in the carrying on of a business for the purpose of gaining or producing such income, shall be allowable deductions, with certain exceptions which are immaterial for the purposes of this case. In ascertaining the amount of such a loss, as the company carried on business both in Scotland and in Australia, it will be necessary to make some apportionment of receipts and expenses in order to ascertain the gross income derived from sources in Australia and the deductions from that income which are allowable.
It may be, as pointed out on behalf of the Commissioner, that the resulting figure of loss will be different from the amount which has been ascertained by the endeavour to apply the plan of Subdivision C to the dealings of the year 1941. This may result from the fact that the deductions permitted by Subdivision C do not include certain deductions which might be allowed in cases outside the subdivision; for example, any allowance for depreciation, which (it might be claimed) should be allowed in determining the amount of a loss in order to apply s. 51 of the Act. On the other hand, it may be that the provisions of Subdivision C in the circumstances of this case provide a reasonable means of ascertaining the actual relevant loss, and in that case the result would be the same as if it had been provided that Subdivision C should be applied for the purpose of ascertaining loss as well as profit in cases where businesses are carried on partly in Australia and partly out of Australia. But the determination of the method according to which the loss should be ascertained in this case upon the basis that Subdivision C is not applicable to the case as a matter of statutory enactment is not before the Court in this case.
Accordingly, in my opinion, the question submitted in the case stated should be answered by declaring that the taxpayer is entitled to a deduction of the whole amount of PDA2.392.