American Thread Co v Federal Commissioner of Taxation
73 CLR 643(Judgment by: DIXON J)
American Thread Co.
v Federal Commissioner of Taxation
Judges:
Latham CJ
Starke J
Dixon JMcTiernan 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:
DIXON J
This case stated raises the question whether a loss sustained by a taxpayer in a business of selling in Australia goods which he has manufactured or bought abroad can be deducted by him, pursuant to the provisions of s. 80 of the Income Tax Assessment Act , in his assessment for a subsequent year.
Sub-section (1) of s. 80 provides that for the purposes of the section a loss shall be deemed to be incurred in any year when the allowable deductions from the assessable income of that year exceed the sum of that income and the net exempt income (an expression defined) and the amount of the loss shall be deemed to be the amount of such excess. The remaining sub-sections proceed to lay down the conditions in which a loss is deductible and how the amount to be deducted is fixed and for that purpose define "net exempt income." But it is not upon these provisions that the difficulty arises and it is needless to state their effect. Sub-section (1), however, appears to me to be an exhaustive statement of the kind of loss to which they refer and it contains an expression which does contribute to the difficulty. It is the expression "allowable deductions." Section 6, rather unnecessarily, defines "allowable deduction" to mean a deduction allowable under the Act. Division 3 of Part III. is headed "deductions" and contains a number of directions, both general and particular, authorizing the allowance of deductions. As they apply to a selling business the general result is to enable the taxpayer to deduct from his assessable income his expenses and outgoings as a trader, including, of course, such items as purchases, freight, insurance, selling expenses and bad debts.
If no more appeared, therefore, a taxpayer selling goods in Australia which he obtained by manufacture or purchase abroad could, if his transactions for an accounting period resulted in a loss, claim that he had incurred a loss of the nature described by sub-s. (1) of s. 80. But more does appear. Subdivision C of Division 2 of Part III., containing ss. 38 to 43, is headed "Business Carried on Partly in and Partly out of Australia" and includes specific directions for the ascertainment of the profit derived from the sale of goods in Australia by a manufacturer abroad or an importer. The profit ascertained according to the directions is to be carried into the assessable income of the taxpayer. It is an exceptional way for the Act to treat profit. For the plan adopted by the legislation for ascertaining taxable income is to aggregate all gross revenue on one side under the description of assessable income and all outgoings and allowances on the other side under the description of deductions. To isolate, as Subdivision C does, the proceeds of a certain kind of transaction, to direct the computation specially of the net profit therefrom and to provide that the net profit, when so found, is to be taken in as an item of assessable income is to proceed according to a different conception foreign to the general plan. To fit it into the plan at all, it is apparent that some provision is necessary against a double use of items of revenue or of expenditure. Items which are taken into account in ascertaining the profit of the isolated transactions cannot be permitted to appear again and to enter the aggregate of assessable income or of deductions as, in the absence of some express provision to the contrary, they must under the general plan of the enactment. To meet this difficulty a special provision is included in Subdivision C. It is sub-s. (2) of s. 43 and it is expressed as follows:
"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 expression "such sale" refers back to an antecedent in sub-s. (1), namely " any sale to which this subdivision applies." It is sub-s. (2) that combines with the expression quoted from s. 80 "allowable deduction" to complete the legislative direction forming the source of the difficulty which confronts a trader in goods he brings from abroad when he claims to deduct a loss sustained in a prior year. For obviously the loss of the prior year must consist in a large measure of the excess expenditure incurred in relation to sales to which Subdivision C applies. Yet sub-s. (2) of s. 43 says that no such expenditure shall be an allowable deduction and sub-s. (1) of s. 80 says that the loss must consist of the excess of allowable deductions over revenue.
Thus a text is made from the two provisions which upon the surface appears to be a complete enough statement upon which to exclude any deduction of a prior loss sustained in a business of making sales of the kind to which Subdivision C applies. The result is a strange one and it is hard to imagine any policy that it might reflect. If such a trader is excluded from the general provisions authorizing the deduction of losses of specified prior years, it would seem to be the fortuitous consequence of bringing into juxtaposition two directions each penned alio intuitu .
But a closer examination of Subdivision C discloses what in my opinion are cogent reasons for concluding that what I have called the surface appearance of the provision does not accord with either the true interpretation of the whole subdivision or the exact meaning of the precise expressions on which the exclusion of prior losses depends. The evident purpose of Subdivision C is to provide some ready means of solving the otherwise intractable problem of attributing to a territorial source the whole or portion of a profit realized in this country at the termination of a connected series of business operations beginning abroad with the production or purchase of vendible commodities. It is for that reason that it departs from the plan otherwise pursued by the Assessment Act of computing separately gross revenue and gross outgoings or other deductions and enters at once upon the ascertainment of the net gain from distinct transactions. It is for the same reason that it confines itself to profit and does not concern itself with transactions resulting in loss. Its task is territorial attribution, allocation or apportionment, and the only subject of that task is profit. The direction contained in sub-s. (2) of s. 43, the concluding provision of the subdivision, is consequential and arises out of the necessity which ensues only from the taking of such a profit into the general assessable income.
It is necessary to throw out of the computation of assessable income items of expenditure only when they belong to the ascertainment of the actual profit which in fact is independently taken into assessable income under the direction contained in sub-s. (1) of s. 43. It is true that the exclusion required by sub-s. (2) is not limited to the amounts actually taken into account in ascertaining the profit but extends to expenditure incurred directly or indirectly in or in relation to sales to which the subdivision applies. But that is only because both s. 38 and s. 39 are rigid in confining the deductions allowed from the selling price to the value of the goods in the country of manufacture or their purchase price, as the case might be, together with the expenses of transporting them to and selling them in Australia. Other expenses which belong to the transaction ending in the marketing of the goods here must not be included, and consequentially must be excluded, too, from the assessable income lest they are let in under the general provision and the principle of limiting the deductible expenses under ss. 38 and 39 is thereby indirectly defeated.
It is therefore evident that s. 43 (2) was introduced with but one purpose, namely, as consequential upon the ascertainment, under the earlier provisions of the subdivision, of the profit of sales within its ambit and upon the inclusion of the profit in the assessable income. As this is its function there are strong a priori grounds for treating the sub-section as applicable only in cases where there is a profit. As soon as it is found that there is no profit the subdivision has no application; there is no subject matter upon which it can operate to produce any effect. In this view it would be remarkable if the final sub-section nevertheless had a further operation, one foreign to the purpose of the anterior provisions, and worked a general denial of the character of an allowable deduction for any purpose to all forms of expenditure in relation to sales of goods brought in from abroad for sale here by a manufacturer or purchaser.
From these general considerations it is now necessary to turn to the precise language of the provision and examine it. The critical words are "any such sale" and these words, as already stated, refer back to and are equivalent to "any sale to which this subdivision applies." This expression is not the same as "any sale of the foregoing description." The word "applies" means "operates upon" and the whole expression refers to the legal application and operation of the provisions of the subdivision. It predicates of the case to which it refers that it has undergone the operation of those provisions so that the result has been produced which they are designed to effect. That occurs only when there is profit. Resort to the provisions for the purpose of ascertaining whether there is a profit or not is only an examination of the facts in relation to the criteria they supply to discover whether the case, that is the sale, is one to which they do apply. When there is no profit the subdivision does not apply to the sale.
The precise meaning of the material words contained in s. 43 (1) and (2) therefore accords with the general scope and purpose of the subdivision and shows that the surface appearance produced by bringing together the words "allowable deductions" from s. 80 (1) and the last phrase in s. 43 (2) is fallacious.
I am, therefore, of opinion that Subdivision C does not exclude from the general provisions contained in s. 80 losses incurred in a prior year by a trader who, if he had made profits in that year, would have been liable to have them ascertained under that subdivision.
So far I have dealt with the question in abstract form. The facts disclosed by the case stated before us call for no special discussion. But curiously enough in the ascertainment of the profit of the accounting period under assessment for the financial year of tax, the directions of s. 38 were not followed precisely. An account was used in which stock on hand at the beginning and end of the period and purchases and sales during the period were compared. Commonsense and convenience, though not the exact terms of s. 38 or s. 39, justify the process, which doubtless will suffice, when both the Commissioner and the taxpayer are content to use it. The loss of the prior year, which happens to be the preceding year, was ascertained by the same form of account which of course is more of the kind needed for the application of s. 80 (1) in combination with, for example, s. 51.
For the year under assessment the taxable income ascertained in the manner mentioned, but in disregard of the claim to deduct the prior loss, amounts to PD2,392 (Australian) and for the preceding year the loss amounted to a considerably greater sum. We need not be concerned with the calculation of the loss, about which no question was raised. The question in the case stated asks in substance whether the prior loss up to the amount of the income of the year under assessment is deductible.
For the reasons given, my opinion is that the question should be answered: Yes, the whole.