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COAL DEVELOPMENTS (GERMAN CREEK) PTY LTD v FC of T

Members:
Dowsett J

Tribunal:
Federal Court, Brisbane

MEDIA NEUTRAL CITATION: [2007] FCA 1324

Decision date: 28 August 2007

Dowsett J

1. The applicant appeals pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) (the "Administration Act") against the respondent's objection decision dated 25 July 2006. By that decision the respondent disallowed the applicant's objection against its assessment of income tax pursuant to the Income Tax Assessment Act 1997 (Cth) (the "Assessment Act 1997") for the income tax year ended 31 December 2001 (in lieu of the year ended 30 June 2002) (the "2002 year").

The assessment

2. The applicant lodged its income tax return for the 2002 year on 25 March 2003. It disclosed a taxable income of $16,650,244. In arriving at this figure it claimed to deduct carried-forward losses totalling $13,372,139. By notice of amended assessment dated 26 November 2004 the respondent notified the applicant that it had assessed its taxable income for the 2002 year in the sum of $30,022,383 and that in so doing, it had disallowed those carried-forward losses. On 28 February 2006 the applicant objected to the assessment. The objection was disallowed on 25 July 2006.

The legislation

3. Broadly speaking, pursuant to s 165-5 of the Assessment Act 1997, a company's accumulated tax losses are deductible in subsequent years of income if its ownership and control remain unchanged or if it satisfies the same business test. The ownership and control of the applicant changed relevantly on 25 March 1998, and so deductions of relevant accumulated losses were only permissible in the 2002 year if it satisfied the same business test. At the relevant time section 165-210 of the Assessment Act 1997 provided:

  • "1. The company satisfies the same business test if throughout the same business test period it carries on the same business as it carried on immediately before the test time.

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    2. However, the company does not satisfy the same business test if, at any time during the same business test period, it derives assessable income from:
    • (a) a business of a kind that it did not carry on before the test time; or
    • (b) a transaction of a kind that it had not entered into in the course of its business operations before the test time.
  • 3. The company also does not satisfy the same business test if, before the test time, it:
    • (a) started to carry on a business it had not previously carried on; or
    • (b) in the course of its business operations, entered into a transaction of a kind that it had not previously entered into;

    and did so for the purpose, or for purposes including the purpose, of being taken to have carried on throughout the same business test period the same business as it carried on immediately before the test time.

  • 4. So far as the same business test is applied for the purpose of Subdivision 165-B (which is about working out the taxable income and tax loss for the income year of change of ownership or control), the company also does not satisfy the test if, at any time during the same business test period, it incurs expenditure:
    • (a) in carrying on a business of a kind that it did not carry on before the test time; or
    • (b) as a result of a transaction of a kind that it had not entered into in the course of its business operations before the test time."

4. The relevant question is whether or not the applicant, during the same business test period (1 January 2001 to 31 December 2001) carried on the same business as it was carrying on immediately before the test time (namely 25 March 1998).

The facts

5. The parties have agreed substantially upon the facts. I set them out below, using the paragraph numbers which are used in a document prepared by the applicant:

  • "6. The applicant:
    • (a) is and was at all material times a company incorporated in Queensland;
    • (b) was formerly called Capricorn Coal Developments Pty Ltd.
  • 7. At all material times:
    • (a) Overseas Coal Developments (Queensland) Limited ( OCDQ ) was a company incorporated in the United Kingdom, later known as Coal Developments (Queensland) Limited.
    • (b) Ruhrkohle AG ( RAG ) was a company incorporated in Germany.
    • (c) RAG Australia Coal Pty Limited ( RAGAC ) was a company incorporated in Australia. RAGAC was a wholly owned subsidiary of RAG.
    • (d) Austen & Butta Limited ( A&B ) was a company incorporated in the United Kingdom.
    • (e) Austen & Butta Collieries Pty Limited ( A&BC ) was a company incorporated in Australia. A&BC was a wholly owned subsidiary of A&B.
    • (f) Shell Company of Australia Limited ( Shell ) was a company incorporated in Australia.
    • (g) Commercial Union Assurance Company ( CU ) was a company incorporated in the United Kingdom.
    • (h) National Coal Board was a United Kingdom statutory corporation.
    • (i) Capricorn Coal Management Pty Limited ( CCM ) was a company incorporated in Australia.
    • (j) German Creek Coal Pty Ltd ( GCC ) was a company incorporated in Australia.
    • (k) Jena (SIFT) Pty Limited ( Jena ), formerly known as Jena Pty Limited, was a company incorporated in Australia.
    • (l) Shell Australia Limited ( SAL ) was a company incorporated in Australia.
    • (m) ACI Resources Limited ( ACIR ) was a company incorporated in Australia.
    • (n) National Mutual Life Association of Australasia Limited (NML ) was a company incorporated in Australia.
    • (o) Minproc Holdings Pty Limited ( ME ), later Ticor Energy Pty Ltd, was a company incorporated in Australia.

    • ATC 4994

      (p) Superannuation Fund Investment Trust (SFIT) was an Australian investment trust.
  • 8. On 12 October 1976, the applicant was incorporated with 10,000 ordinary shares issued and allotted to OCDQ.
  • 9. On 4 May 1977, the applicant acquired ATP 206C, an authority to prospect in the German Creek region of the Bowen Basin in Queensland ( the German Creek Development ).
  • 10. On 29 October 1977, RAG acquired 1,000 ordinary shares in the applicant from OCDQ.
  • 11. On 18 April 1978 a further 422 ordinary shares in the applicant were allotted to RAG, and a further 6 ordinary shares in the applicant were allotted to OCDQ.
  • 12. On 18 April 1978, the applicant entered into an unincorporated joint venture with A&BC for the German Creek Development by executing a joint venture agreement. The applicant held a 73.34% interest in the joint venture, A&BC held a 26.66% interest. At the same time, CCM was incorporated to manage project operations for the German Creek Development on behalf of the applicant and A&BC.
  • 13. On 21 March 1989, RAGAC became a party to the unincorporated joint venture referred to at paragraph 12 above and acquired a 10% interest in it, with the applicant then holding a 63 1/3% and A&BC a 26 1/3% interest. Shortly after it acquired an interest in the joint venture, RAGAC acquired RAG's 1422 shares in the applicant. Those shares were converted to "B class" deferred shares on 1 October 1979, while OCDQ's shares in the applicant were converted to "A class".
  • 14. On 18 January 1980, Shell acquired a 43 1/3% interest in the unincorporated joint venture referred to at paragraph 12 above (the applicant then holding a 20% interest with A&BC continuing to hold a 26 2/3% interest and RAGAC continuing to hold a 10% interest). The applicant, RAGAC, A&BC and Shell ( Original Participants ) entered into new documents to govern the unincorporated joint venture for the German Creek Development, now called the Capricorn Coal Developments Joint Venture ( CCDJV ). A joint venture agreement was executed ( the CCDJV Agreement ), the express purpose of which was to fix and regulate the exploration, instigation, evaluation, development and exploitation of the German Creek region. Under the CCDJV Agreement:
    • (a) ownership of the CCDJV property was as tenants in common;
    • (b) expenditure was to be borne severally by the Original Participants;
    • (c) coal was to be divided and owned separately by the Original Participants, and each Original Participant was both entitled and obliged to take its proportion of coal and sell it separately; and
    • (d) a manager was to be appointed.
  • 15. At the same time the Original Participants, their parent companies, and the shareholders of OCDQ also entered into the New Participants Agreement and the Management Agreement with CCM.
  • 16. Pursuant to the Management Agreement between the Original Participants and CCM:
    • (a) CCM acted as manager of the CCDJV;
    • (b) CCM held CCDJV property on trust for the Original Participants;
    • (c) CCM acted as agent for the Original participants as undisclosed principals; and
    • (d) the Original Participants were severally responsible for expenditure incurred by CCM in performance of its obligations under the Management Agreement.
  • 17. Each of the Original participants also entered into sales agreements with GCC for the selling and marketing of coal from the German Creek region.
  • 18. On 24 October 1980, the applicant issued and allotted 6,524,000 million A Class shares to OCDQ.
  • 19. In the period from 1980 to 1990 there were various changes to the participation and ownership in the CCDJV, including:
    • (a) the acquisition by ACIR of a 13.03% interest in the CCDJV on or about 24 December 1981;

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      (b) the acquisition by NML of a 13.03% interest in the CCDJV on or about 24 December 1981;
    • (c) the acquisition by Jena of a 13.03% interest in the CCDJV on or about 7 July 1983 (where Jena was trustee of the Jena Unit Trust, and the shares in Jena and units in the Jena Unit Trust were held by SFIT);
    • (d) the acquisition by PLM of ACIR's 13.03% interest in the CCDJV on or about 26 June 1985;
    • (e) the acquisition by Shell of A&BC's then 25 5/6% interest in the CCDJV on 14 December 1988;
    • (f) the acquisition by ME of NML's 13.03% interest in the CCDJV and PLM's 13.03% interest in the CCDJV on 1 October 1990; and
    • (g) the (indirect) acquisition by Shell, RAGAC and the applicant of Jena's 13.03% interest in the CCDJV by their acquisition of all issued shares in Jena and units in the Jena Unit Trust from SFIT on 3 December 1990. The shares and units were held in proportion to the purchasers' interests in the CCDJV, with Shell acquiring (through Jena) an additional 8.67% interest in the CCDJV, the applicant an additional 2.75% interest in the CCDJV and RAGAC an additional 1.61% interest in the CCDJV.
  • 20. In October 1990, SAL acquired all shares in CCM.
  • 21. At all material times in the period from 3 December 1990 to 25 June 2001, the applicant held:
    • (a) a 12.06% direct interest in the CCDJV; and
    • (b) a 2.75% indirect interest in the CCDJV through the applicant's acquisition of shares in Jena and units in the Jena Unit Trust, described above in paragraph 19.
  • 22. During the years ending 31 December 1996 and 1997, the applicant incurred tax losses in the amounts of $7,149,055 (of which $5,750,160 was available to be carried forward as at 31 December 2001) and $7,621,979 respectively.
  • 23. Immediately before 25 March 1998 the shares in the applicant were held by OCDQ (holding all 6,533,006 A Class shares) and RAGAC (holding all 1,422 B Class deferred shares). On 25 March 1998, RAGAC acquired all 6,533,006 ordinary A Class shares in CDGC held by OCDQ.
  • 24. In the period from 25 March 1998 to 25 June 2001, the applicant was a wholly owned subsidiary of RAGAC.
  • 25. As at 25 March 1998 the applicant's participation in the CCDJV included:
    • (a) providing, jointly with the other participants in the CCDJV, executive management in the overall conduct of the CCDJV on the terms of the CCDJV Agreement and the Management Agreement (while actual management was carried out by CCM as manager of the CCDJV);
    • (b) meeting the applicant's ongoing obligations as a participant in the CCDJV, including the payment of regular calls (payable in AUD) made by CCM as manager of the CCDJV to fund the costs of production and mine infrastructure development; and
    • (c) managing its cash flow requirements, arising out of the calls made by CCM being due in AUD and receipts of the proceeds of the sale of coal being in USD.
  • 26. On 25 June 2001, RAGAC and the applicant sold their direct and indirect interests in the CCDJV to Anglo Coal. …"

6. In summary the above facts disclose that prior to 25 March 1998 shares in the applicant were held by two companies, OCDQ and RAGAC. On 25 March 1998 RAGAC became its sole shareholder. Until 25 June 2001, the applicant remained a wholly owned subsidiary of RAGAC. From 3 December 1990 until 25 June 2001 the applicant and RAGAC held interests in a coal mining joint venture (the "joint venture"). From January 1980 the joint venture was regulated by an agreement which provided that the joint venturers held their interests as tenants-in-common. They met their respective shares of outgoings in the same proportions as they held interests in the joint venture. The coal produced in the operation was

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divided amongst them on the same basis and sold by them individually. The joint venture was managed by CCN, acting as agent for the venturers. Each venturer entered into an agreement with CCN for the sale and marketing of its coal.

The issue

7. On 25 June 2001 RAGAC and the applicant sold their interests in the joint venture to Anglo Coal. The relevant question is whether, from 25 June 2001 until 31 December 2001, the applicant continued to carry on the same business as it had carried on immediately before 25 March 1998. It is accepted that it did so between that date and 25 June 2001. The applicant claims that after 25 June 2001 it 'continued to carry out activities arising out of its participation in the joint venture', and that those activities continued until after 31 December 2001.

Applicant's submissions

8. The applicant submits that:

  • "(a) a business does not cease to be carried on, or to be the "same" business, while it is being wound down and obligations arising out of the prior conduct of the business remain unfulfilled;
  • (b) notwithstanding the sale of its interest in the [joint venture], throughout the 2002 year [the applicant] carried on the same business as it carried on immediately before 25 March 1998, being essentially its participation in the [joint venture], because throughout the balance of the 2002 year it engaged in activities relating to the discharge of obligations arising out of its participation in the [joint venture] prior to the sale."

9. In support of its submissions the applicant relies upon the history of the relevant legislation. Since 1964 there has been legislation which seeks to prevent the transfer of the tax benefit of accumulated losses through trafficking in companies having such losses. The first statutory approach was to make the availability of accumulated losses dependent upon continuity of ownership of the relevant company. It is said that to ameliorate possible harshness in that approach, the relevant legislation was amended in 1965 to introduce the continuity of business test which now appears in s 165-210 of the Assessment Act 1997. The applicant submits that the test should be applied in a way which reflects this ameliorative intent, particularly as there is no suggestion that in this case, there has been any trafficking in tax loss companies. I find it difficult to give effect to this submission. If I were construing the legislative provisions, I would keep in mind any relevant history, but no real question of construction arises in this case.

10. The applicant submits that it is not generally possible to stop carrying on business at a particular point in time, that it is generally necessary to "wind down" the business over a period of time. Such winding down should be seen as a continuation of the original business. To test the accuracy and relevance of these propositions for present purposes, it is necessary to consider the evidence concerning the applicant's activities after 25 June 2001.

Activities after 25 June 2001

11. The activities of the taxpayer after 25 June 2001 appear at paras 20-26 of the affidavit by Mr Purkiss. In para 20, he asserts that:

"Following the settlement of the APA on 25 June 2001, the activities of CDGC, and consequently the activities I undertook for CDGC, included the following:

  • (a) The finalisation of the allocation statement pursuant to the APA. Pursuant to clause 3.10 of the APA, the parties were also required to allocate the purchase price between the sale assets. Behind Tab 15 are copies of the following correspondence regarding the finalisation of the allocation statement:
    • (i) a letter from Anthony Portas of Anglo Coal Australia Pty to me dated 27 August 2001;
    • (ii) a letter from Anthony Portas of Anglo Coal to me dated 20 November 2001; and
    • (iii) a letter from KMPG (sic) to me dated 13 December 2001;
    • (iv) a letter I sent to Anthony Portas on 13 December 2001. That copy has been obtained from Mr Portas of Anglo Coal Australia Pty Ltd, and bears his handwritten annotation. On 21 March 2007, I had a conversation with Mr Portas to the following effect:

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      I said:      		 "Anthony, do you recall when we finalised the allocation statement for CDGC?"
      He said: "From my handwritten annotation on your letter of 13 December 2001. I believe it occurred sometime in January 2002. I usually take December off."

      I believe the allocation statement was finalised in January 2002 or shortly thereafter, as indicated by the handwritten annotations I refer to in paragraph 20(iv) above.

  • (b) The finalisation of the tax adjustment pursuant to the APA. Pursuant to clause 16.9 of the APA, Anglo Coal was required to pay a tax adjustment for the amount of tax paid by CDGC in the period referable to 1 January 2001 to 25 June 2001. Behind Tab 16 is a copy of a letter from me to Anthony Portas of Anglo Coal dated 25 July 2001. The amount of adjustment payable to CDGC (being $207,456) was received by CDGC sometime prior to 30 September 2001 (I infer to the fourth last page of CDGS's General Journal bearing the heading date 1/07/2001 to 30/09/2001 which is behind Tab 17 ).
  • (c) The transfer of CDGC's rights and obligations under the material contracts (clause 3.3 and 16.1 of the APA), as I refer to in paragraphs 21 to 24 below;
  • (d) The finalisation of CDGC's obligations in respect of the mining tenements (being the mining leases set out in clause 1.1 of the APA under the definition of "mining tenements"). Under the mining leases, CDGC as a participant in the CCDJV had to provide a banker's guarantee to the Queensland Minister of Mines and Energy. The amount payable by CDGC in respect of the mining leases was determined by the Department of Mines and Energy on an annual basis. Behind Tabs 18 to 20 are documents relevant to the provision of an undertaking to the Queensland Minister of Mines by CDGC in 1998, 1999 and 2000 respectively. As a result of the APA, Anglo Coal provided a replacement undertaking to the Queensland Minister of Mines and Energy (as contemplated by clause 3.6 of the APA). Documents relevant to the provision of this replacement undertaking are behind Tab 21 , namely:
    • (i) a letter dated 15 May 2001 from Queensland Government (Department of Mines and Energy) to Ms Michelle Pham of Antanaskovic Hartnell (solicitors then acting for CDGC) regarding the assignments of the mining leases; and
    • (ii) a letter from Anglo Coal to the Department of Natural Resources and Mines dated 17 August 2001 which attached a replacement undertaking by Anglo Coal in respect of the undertaking previously provided by CDGC for $1,754,689. The letter also requested that the Department of Natural Resources return CDGC's undertaking.

    To the best of my recollection, CDGC's undertaking was returned shortly after 17 August 2001.

  • (e) The preparation and lodgement of CDGC's application for a tax concession for research and development with AusIndustry for the years ended 31 December 2000 and 2001. Behind Tab 22 is a copy of the application for the year ended 31 December 2000 that was lodged on 31 October 2001. Also behind Tab 22 is a copy of a letter from KPMG to me dated 23 November 2001 which attached confirmation of AustIndustry's registration of CDGC's application for research and development tax concession. I was also involved in the research and development application lodged in respect of CDGC's interest in the CCDJV for the financial year ended 31 December 2001. Behind Tab 23 are documents relevant to that research and development application, including:
    • (i) the research and development application for 1 January 2001 to 31 December 2001;
    • (ii) two emails from Todd Fielding of KPMG to me dated 29 October 2002;
    • (iii) an email from me to Mr Fielding dated 29 October 2002;
    • (iv) a letter from Mr Fielding to AusIndustry dated 31 October 2002; and

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      (v) a letter from AusIndustry to KPMG dated 6 November 2002;
    • (vi) a letter from KPMG to me dated 12 November 2002 which confirmed that the application had been lodged with AusIndustry.
  • (f) The preparation of audited special purpose financial reports. Behind Tab 4 is a copy of CDGC's audited special purpose financial reports for the year ended 31 December 2001, which were finalised and signed on 20 May 2002, and behind Tab 3 is a copy of CDGC's audited special purpose financial reports for the year ended 31 December 2000, which were finalised and signed on 7 June 2001.
  • (g) Preparation and lodgement of income tax returns for CDGC for the year ended 31 December 2001. The return was lodged with the ATO on or about 12 March 2003, a copy of which is behind Tab 24 . Also Behind Tab 24 is a copy of CDGC's income tax return for the year ended 31 December 2000, which was dated 8 February 2002 and lodged on or about 14 February 2002.
  • (h) The maintenance of books and records. For example, behind Tab 17 is a copy of the general journal for CDGC for the period from 1 May 2000 to 28 February 2002.
  • 21. I was also involved, as outlined in paragraph 22 below, in the finalisation of CDGC's obligations pursuant to the APA in relation to two of the "Material Contracts" set out in schedule 1, item 3 of the APA ( Material Contracts ), being:
    • (a) the Port Corporation User Agreement; and
    • (b) the German Creek East Agreement.
  • 22. I took steps to finalise CDGC's interest and obligations under the two Material Contracts referred to in the previous paragraph post completion of the APA, as follows:
    • (a) CDGC and RAG Australia were required to effect the transfer of their rights and obligations under the Port Corporation User Agreement. Behind Tab 25 is correspondence between May 2001 and January 2002 which records negotiations between Anglo Coal, CDGC, RAG Australia and Ticor regarding the assignment, as follows:
      • (i) a letter from Ports Corporation Queensland to Anglo Coal Australia Pty Ltd dated 22 May 2001, attaching a draft deed of covenant, assignment and assumption;
      • (ii) a letter from Anglo Coal Australia Pty Ltd to me dated 12 October 2001;
      • (iii) a letter from Anglo Coal Australia Pty Ltd to me dated 10 January 2002, which in turn attached:
        • (A) a letter from Anglo Coal Australia Pty Ltd to CL-NQ Management Pty Ltd dated 14 December 2001;
        • (B) a letter from Anglo Coal Australia Pty Ltd to CL-NQ dated 28 September 2001; and
        • (C) a letter from Freehills to Anglo Coal Australia Pty Ltd dated 20 December 2001.

        These letters record that as at January 2002, the transfer had not been effected. To the best of my recollection, the transfer did not occur until sometime after January 2002.

    • (b) The rights and obligations under the German Creek East Agreement had to be assigned to Anglo Coal. Behind Tab 26 is correspondence which relates to the negotiations between RAG Australia, CDGC, Ticor and Anglo Coal regarding the Deeds of Novation between 11 July 2001 and 21 January 2002, as follows:
      • (i) an email dated 11 July 2001 from Ms Anne Moubarak of Freehills (acting for Anglo Coal) to "MDP", being Ms Pham;
      • (ii) an email from Ms Pham to Ms Moubarak dated 17 July 2001;
      • (iii) an email from Ms Pham to Ms Moubarak dated 2 August 2001;
      • (iv) an email from Ms Moubarak to Ms Pham dated 20 September 2001;
      • (v) an email from Ms Pham to Ms Moubarak dated 24 September 2001;
      • (vi) a letter from Ms Moubarak to Ms Pham dated 21 January 2002;

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        (vii) a letter from Ms Pham to Ms Moubarak dated 22 January 2002; and
      • (viii) a letter from Ms Pham to Ms Moubarak dated 31 January 2002;

      The correspondence shows that the Deeds of Novation were executed on 19 March 2002. Copies of the executed counterparts of the Deeds of Novation of the German Creek East Agreement are behind Tab 27 , together with the covering correspondence dated 4 April 2002 and 5 April 2002.

  • 23. The NAB Lease was also one of the Material Contracts referred to in the APA. To the best of my knowledge, no steps were taken to transfer the obligations of CDGC under the NAB Lease to Anglo Coal. Accordingly, CDGC remained liable to the National Australia Bank Limited under the NAB Lease until its term expired on 30 November 2003 (see clause 2.2 of the NAB Lease at Tab 9 ). For the reasons given in paragraph 18 above, the NAB Lease was not referred to in the financial accounts for the year ended 31 December 2001.
  • 24. I note that the Rail Haulage Agreement is also referred to as a Material Contract under Schedule 1, item 3 of the APA. The APA also recorded that Anglo Holdings Australia Limited, on behalf of Anglo Coal delivered an undertaking to Queensland Rail which replaced the undertaking dated 26 June 1997 that RAG Australia provided to Queensland Rail as the parent company of CDGC, as required by the Rail Haulage Agreement (clause 3.15(a)).

    Subsequent investment activities by CDGC in 2002/2003

  • 25. In 2001, all CDGC's activities were focussed on the CCDJV. It did not have any other investments in mining during 2001.
  • 26. In late 2002, CDGC acquired an interest in Thiess NG Pty Limited (which subsequently changed its name to Mitterb Pty Ltd), being an entity which had an interest in the North Goonyella Joint Venture."

12. As to the matter raised in para 20(a) the correspondence concerning allocation of parts of the purchase price to individual assets suggests that the process took some time. It was no doubt an involved process and of some financial importance. However it may be more accurately described as incidental to the sale of the applicant's interest in the joint venture than as carrying on the business in which these assets had previously been utilized. As to the finalization of the tax adjustments referred to in para 20(b) this is also better described as an incident of the sale of the applicant's interest in the joint venture. The matters raised in para 20(c) are further discussed in paras 20-24. I will consider them separately.

13. Paragraph 20(d) concerns the assignment of mining leases pursuant to the sale agreement with Anglo Coal. Conditional governmental approval of those transfers was given by letter dated 15 May 2001, prior to the date of sale. The applicant had given security for performance of its obligations under the mining leases. The security was to be released upon Anglo Coal providing replacement security. This was not done until 17 August 2001. Again, this was an incident of sale of the applicant's interest rather than of the continuing conduct of the business.

14. In par 20(e) Mr Purkiss asserts that after 25 June 2001, he was active in the preparation and lodgement of applications for tax concessions for research and development activities relating to the years ended 31 December 2000 and 2001. It seems to have been accepted that these applications were connected with the business carried on by the applicant prior to 25 June 2001. A similar application was made for the year ended 31 December 2001. It appears to have been made in late 2002. Such applications may have been incidental to carrying on the business previously conducted by the applicant. Alternatively, they may have related to the winding up of the business.

15. In para 20(f) Mr Purkiss asserts that after 25 June 2001, he finalized special purpose financial reports for the years ended 31 December 2000 and 31 December 2001. The preparation of such reports may have indicated that the company carried on business in the relevant years, but not necessarily that it carried on such business throughout the whole of each year. Such preparation may occur in the course

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of conducting a business or in the course of winding up a business.

16. In para 20(g) Mr Purkiss asserts that income tax returns for the years ended 31 December 2000 and 31 December 2001 were prepared and filed after 25 June 2001. This is no doubt true. Such preparation and filing may indicate that the company had previously carried on business, or at least received income. That these matters may have been attended to after 25 June 2001 says little about the company's other activities after that date.

17. In para 20(h), Mr Purkiss says that books and records were maintained after 25 June 2001. The general journal is exhibited. As I understand it, the point is that the journal and other records were maintained, not that anything flows from their contents. A corporation which has substantial cash assets arising from the sale of assets would probably continue to keep books of account. That would not necessarily imply that it was carrying on the business which it had carried on prior to such sale.

18. Paragraphs 21-24 of Mr Purkiss's affidavit deal with what are described in the sale agreement as "material contracts". The first such contract is described as the "Port Corporation User Agreement". It seems that the applicant had an agreement with Ports Corporation Queensland with respect to the export of its coal. Under the sale agreement it was obliged to transfer its rights and obligations pursuant to that agreement to Anglo Coal. Anglo Coal sought to negotiate the transfer with Ports Corporation Queensland. On 12 October 2001 it asked the applicant to take over the negotiations. It seems that the matter had not been resolved by 20 December 2001. Mr Purkiss understands that it may have been resolved at some time after January 2002. In any event such negotiations were incidents of the sale of the applicant's interest in the joint venture rather than of its continuing to carry on the previous business.

19. The second material contract was described as the "German Creek East Agreement". Pursuant to the sale agreement, the applicant assigned to Anglo Coal its interest pursuant to that agreement in another joint venture, the German Creek joint venture. Transfer of that interest was to be effected by "novating" the applicant's interest under the German Creek East Agreement. Correspondence concerning this matter was exchanged between 11 July 2001 and 31 January 2002. Deeds of novation were executed on 19 March 2002. Again, this appears to have been an incident of the sale rather than of carrying on the previous business.

20. Paragraph 23 of the affidavit deals with another material contract, namely a lease from the National Australia Bank of certain equipment, including earthworks. Pursuant to cl 3.3 of the sale agreement, Anglo Coal was to assume the applicant's obligations pursuant to this lease. It seems that nothing was ever done to effect the release of those obligations and the substitution of Anglo Coal as lessee. Whilst this may have been somewhat sloppy conveyancing, it is not evidence that the applicant continued to carry on its previous business after 25 June 2001.

21. Finally, in para 24 Mr Purkiss refers to a "Rail Haulage Agreement" which was also a material contract, the obligations pursuant to which Anglo Coal was to assume. At some unidentified time Anglo Coal provided an undertaking to Queensland Rail which was to replace the undertaking given by the applicant. Again, this appears to be an example of action taken pursuant to the sale agreement rather than in carrying on the previous business.

22. In para 25 Mr Purkiss says that all of the applicant's activities in 2001 were focussed on the joint venture, and that it did not undertake any other investment in mining. That proposition says nothing about whether it was carrying on its previous business after 25 June 2001. In para 26 he says that in late 2002 the applicant acquired an interest in another company which had an interest in another coal joint venture. This is irrelevant for present purposes.

The authorities

23. The applicant relies upon a line of cases in bankruptcy commencing with
In re Dagnall
Ex parte Soan & Morley [1896] 2 QB 407. Pursuant to the Married Women's Property Act 1982, "Every married woman carrying on a trade separately from her husband shall, in respect of her separate property, be subject to the bankruptcy laws in the same way as if she were a feme sole." Mrs Dagnall had been

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carrying on a trade separately from her husband. Having sold her business, she gave notice to creditors that she was about to suspend payment of their debts. As a result a bankruptcy petition was presented. The question was whether or not the bankruptcy laws continued to apply to her after she had ceased trading but whilst she still owed trading debts. The Divisional Court (Vaughan Williams J and Wright J) found that the bankruptcy legislation continued to apply. Vaughan Williams J said (at 410-11):

"But whether a person is carrying on a trade or not is a question of fact; and if it were not for the decision in Ex parte McGeorge…, I would have said without any hesitation that as long as a woman trading separately from her husband had not paid the trade debts which she had incurred, so long she was continuing to trade. It seems to me that trading is not completed until you have performed all the obligations that the fact of trading imposed upon you. And that was the view that was taken in the older cases. Then we have to consider whether there is anything in the decision in Ex parte McGeorge… which prevents us from holding that the non-payment of debts incurred by a married woman while trading separately is evidence that she is still continuing to trade."

24. His Lordship then referred to numerous "older" cases, noting that the decision in Ex parte McGeorge had departed from them on the basis of differences in the wording of the relevant bankruptcy legislation. Two alternative lines of reasoning emerge from his Lordship's brief judgment. The first is that a trader continues to trade until he or she has performed all obligations incurred as a result of such trading. The second is that non-payment of trading debts is evidence of continued trading, presumably to be considered in the light of other evidence. Wright J disposed of the matter on a different basis, holding (at 411) that:

"… this appeal must be allowed, upon the short ground that in my view the natural meaning of the section is that a married woman who trades separately is to be subject to the bankruptcy laws in respect of all debts incurred by her in the period during which she was carrying on the trade."

25. The reference by Vaughan Williams J to the "older cases" is explained in the summary of argument by counsel for the petitioning creditor. At 408-9, counsels' submissions are summarized as follows:

"The meaning of s.1, sub-s 5, of the Married Women's Property Act 1882 is that a woman who once carries on a trade and contracts debts as a trader becomes subject to the bankruptcy laws, and continues to be so until she has discharged her trade debts, even though she may have ceased to carry on her trade. Under the old law of bankruptcy, in force at a time when only traders could be made bankrupt, a man who had retired from business might be made a bankrupt in respect of debts contracted before he did retire: Meggot v Mills …. Similarly, in Ex parte Bamford …, a case decided on an Act of Parliament which provided that persons "using the trade of merchandise" might be made bankrupt, it was held that an act of bankruptcy committed after retiring from trade was sufficient."

26. Those "older cases" are of some assistance in understanding the decision in Dagnall. In
Meggot v Mills, 1 Ld Raym 286; 91 ER 1088, it was said that:

"… though a man quits his trade, yet he may be a bankrupt for the debts that he owed before."

27. In
Ex parte Bamford (1809) 15 Ves Jun 449; 33 ER 824, Lord Eldon said (at 827):

"Upon the point, which has been taken at the trial, whether a Commission can be sustained by an act of bankruptcy, committed after retiring from trade, the debts, contracted in the course of that trade, remaining unpaid, I shall say no more, than that my clear opinion, unqualified by any doubt, is, that the Commission may be sustained; and I should not have heard so much upon it, if I had not understood, that two of the Judges held different opinions upon that question at the Assizes."

28. Neither of these authorities supports the proposition that a trader, who ceases trading in the usual sense, continues to trade for so long as trade debts remain owing. They rather establish the proposition advanced by Wright J that a

ATC 5002

person who has traded may be bankrupted upon debts incurred during trading, notwithstanding the fact that he has ceased to trade.

29. In bankruptcy matters, Dagnall has been followed in
Theophile v The Solicitor-General [1950] AC 186 at 201-203;
In re Bird v Inland Revenue Commissioner [1962] 1 WLR 686 at 695-697 and
In re a Debtor [1992] Ch 554. However, in
Avondale Motors (Parts) Pty Ltd v Commissioner of Taxation 71 ATC 4101; (1971) 124 CLR 97 at 102-103, Gibbs J (as his Honour then was) doubted the applicability of the decision in Dagnall "beyond the field of bankruptcy and into that of taxation law", referring to the decision of
Tryka Ltd v Newall (1963) 41 TC 146 where Wilberforce J (as his Lordship then was) said:

"I do not think I can accept the application of the bankruptcy cases here. It seems to me that the two fields are quite different. When one is considering the question whether for purposes of bankruptcy laws a person is carrying on business, it may be necessary to hold that he does not cease to carry on business when trading activity has ceased, and for that reason, the Courts have been ready to extend the Section so as to cover a case where he has left debts unpaid. But to apply the same line of thought to Income Tax cases would lead to very great difficulties and, indeed, would mean that almost every case which one finds in the books on such questions as cessation of business would have been complicated by the introduction of this question and might, indeed, have been otherwise decided."

30. Similarly, in
Northern Engineering Pty Ltd v Federal Commissioner of Taxation 79 ATC 4238; (1979) 42 FLR 301, Deane J considered that the decision in Theophile could not be applied in considering whether a taxpayer was carrying on business for so long as any debt owing to him remained uncollected. In that case Brennan J (as his Honour then was) said (at 304):

"When a company's business is closing down there comes a time when the activity of a trading or profit-making nature comes to an end. The business of the company is not carried on merely by managing or disposing of the company's assets otherwise than in a business. There was, as it seems to me, no element of business in the circumstances of the case here appearing in the movement of funds between the appellant and the other companies in the group. It was not shown that the movement of those funds was for the purpose of deriving any commercial benefit for the appellant and the mere existence of a debt owing by the holding company during the income year had no element of a business about it, nor was it in an relevant sense an incident of the trading business in which the appellant had been engaged."

I infer that Brennan J also saw no reason to apply Theophile.

31. In face of these views expressed by highly respected judges, the applicant cites the decision of the House of Lords in
South Behar Railway Company Ltd v Commissioners of Inland Revenue [1925] AC 476. That case concerned a taxpayer company incorporated in order to enter into a contract with the Secretary of State for India for the construction of a railway in that country. The company was to supply the Secretary of State with the necessary funds and materials. The Secretary of State was to provide, free of cost, the land required for the railway, of which the company was to retain possession during the continuance of the contract. The Secretary of State was also to construct the railway, using such agency as he should appoint, and according to his design and specifications, but at the entire risk and cost of the company. From the opening of the railway until the determination of the contract, the Secretary of State was to work and maintain it and keep it supplied with rolling stock, plant and machinery. In each half-year he was to retain 45% of the gross earnings of the railway and remit the remaining 55% to the company. The company could not, during the continuance of the contract, without the written approval of the Secretary of State, engage in, carry on, or apply capital to any other business. The Secretary of State might determine the contract on twelve months' notice, given either on 30 June 1919 or on 30 June in the last year of any subsequent period of ten years. Thereupon the company was to give up to the Secretary of State all land, buildings, stores and other things which were to become the absolute property of the Secretary of State. The Secretary of State

ATC 5003

was to pay to the company, out of the revenues of India, such sum as, when added to any unspent capital, should amount to the total paid-up capital of the company, so far as such capital had been expended on the undertaking with the authorization of the Secretary of State.

32. The railway was constructed and opened. Although the original agreement remained in place, a further agreement was made on 11 December 1906. By it the company agreed that until determination of the contract, the Secretary of State should be entitled to hold and deal with the railway for his own benefit, without any interference or control by the company, and that he should be under no obligation to work the railway. As and from that date, and until determination of the contract, the Secretary of State was to pay a lump sum to the company by half-yearly payments. Amounts otherwise payable pursuant to the original contract ceased to be payable. It was also agreed that upon determination of the contract by notice of purchase the sum of £684,580 should be the sum payable in respect of capital expended on the undertaking.

33. Following the 1906 agreement, the company ceased to maintain an office in India. It maintained an office in England, with three directors and a secretary in that country. They received the annuity of £30,000 payable half-yearly and, after paying interest on the company's debentures, held meetings and declared dividends in the ordinary way. The company, in 1925, had £6,000 in a war loan but no other investments (apart from the railway).

34. The question was whether or not the company continued to carry on a business pursuant to s 50(2) of the Finance Act 1920 (Imp) which taxed "the profits of a British company carrying on any trade or business or any undertaking of a similar character." At p 483-484, Viscount Cave LC said:

"Until the execution of the agreement of 1906 the yearly sum receivable by the company was dependent on the gross earnings of the railway; but except in that respect the company had no interest in the railway, and it had no right to interfere in its working. By the agreement of 1906 this fluctuating annuity was converted into a fixed annuity, and as the fixed annuity was made independent of the earnings of the railway, those provisions of the original agreement which compelled the Indian government to continue to work the line were cancelled; but in other respects the original agreement remained and still remains in operation. The company can no longer be called upon to fulfil its first purpose - namely, to make advances for the construction of the line - because all the necessary funds have been already advanced; but it is still fulfilling its second purpose, which was to receive an income for its shareholders while the line was running and to distribute it among them, and if and when the principal agreement comes to an end, it will have the further function of recovering and dividing the capital to be repaid. I think, therefore, that the company still carries on a business or similar undertaking within the meaning of s 52 of the Finance Act 1920."

35. Lord Dunedin said (at 484):

"The sole question, therefore, seems to be, did the agreement of 1906 have the effect of sending the company out of business? What was the agreement of 1906? It was simply this, that instead of taking its remuneration in the form of a percentage of profits, a sum which must necessarily fluctuate, it agreed to take a fixed sum. My Lords, I cannot think that that operated any change in what the company was doing."

36. Lord Sumner said (at 485-6):

"To ascertain the business of a limited liability company one must look first at its memorandum and see for what business that provides and whether its objects are still being pursued … . It is common ground that the company, when first incorporated and for some years afterwards, did carry on a business, or an undertaking of a similar character, for it embarked its very considerable capital in making a railway, and there, as a matter of fact, that capital still remains. That the actual construction and working of the line were by agreement entrusted by the company to third parties does not affect the matter, for this was merely the way in which the company's business was carried on. Under the contract with the Secretary of State for India, which the company was formed to enter into, the

ATC 5004

line may be sufficiently, if not exactly, described as a line built with the company's money on land provided by the Secretary of State, and worked for the company by the Secretary's nominee for 45% of the gross earnings. …"

37. At 487-488, his Lordship continued:

"The present is not the case of a company existing to one act only and once for all. Not only did the company make the agreement of 1896, but it plays its recurring part in every payment and receipt of gains, and there is here, therefore, that "repetition of acts" which Brett LJ says … is implied in "carrying on business". The important thing is that the old business still continues of getting some return for capital embarked in the line. There has not been such a termination of the business formerly carried on or such a complete transfer of it to a new trading company as has been held to be the criterion of ceasing to carry on business under the Bank Charter Act 1844 … If, as was held in In Re Dagnall …, a married woman continues to carry on business for the purpose of [the bankruptcy legislation] as long as her trade debts remain undischarged, there would seem to be a presumption that a company continues to carry on business as long as it is engaged in collecting debts periodically falling due to it in the course of its former business. Business is not confined to being busy; in many businesses long intervals of inactivity occur. In the present case, at any rate, I think that no change has occurred to enable your Lordships to say that the company's carrying on a business is a thing of the past, or that the Commissioners could properly find that it is so."

38. One might well say that the railway company was in a position similar to that of the applicant prior to 25 June 2001. It had an interest in an asset, which was being managed by another party, and derived income from such interest. However the change in the undertaking of the railway company effected by the 1906 agreement was quite different from that made to the applicant's position by the agreement of 25 June 2001. The railway company's capital continued to be tied up in the railway, and it continued to derive income from that source. In the present case the applicant terminated its investment in the joint venture and ceased to derive income from it. Although Lord Sumner's reference to Dagnall may suggest some support for the applicant's case, the reference hardly amounted to an endorsement of the decision, and his Lordship clearly decided the case on its own facts. The other Law Lords made no reference to Dagnall. The applicant also refers to decisions applying the Dagnall-Theophile line of authorities in the Australian Taxation Board of Review and in Canada where Bowman CJ said:

"It is, I believe, settled law that a business continues to be carried on so long as the obligations arising out of the business remain unfulfilled … ."

39. The cases cited in Dagnall and the reasons of Wright J do not support that proposition, even in the bankruptcy context. The rule is rather that, under bankruptcy legislation then in force, trading debts were recoverable in bankruptcy after trading had ceased. In Australia two eminent judges have doubted the wisdom of applying that proposition in the tax context, and a third (Brennan J) appears to have had a similar view. In England another eminent judge has expressed similar reservations. The decision in South Behar Railway cannot be interpreted as an endorsement of the wider application of the decision in Dagnall. Only one member of the House of Lords referred to it, and in a qualified way. Decisions in the Australian Taxation Board of Review can hardly be set against the views of the judges to whom I have referred. The observation in the Canadian case is not persuasive. In the circumstances I decline to follow Dagnall for present purposes.

40. In
Fielder Downs (WA) Pty Ltd v The Commissioner of Taxation 79 ATC 4019; [1980] QdR 283 at 290, WB Campbell J (as his Honour then was) said, concerning legislation which was analogous to the present legislation:

"Although dictionary definitions may be of assistance in some cases, it seems to me that the determination of the issue whether the business carried on by the company in each of the three relevant years was the same business, or one of a similar kind, as was carried on by it before March 1969 depends upon an investigation of fact so as to

ATC 5005

characterize the kind of nature of the business which was undertaken during each respective period."

41. For present purposes the applicant must show that until 31 December 2001, it continued to carry on the same business as that carried on before 25 March 1998, as explained by Gibbs J in Avondale Motors. It claims that its interests pursuant to the joint venture agreement, at all relevant times prior to 25 June 2001 were:

  • "(a) … rights, duties, obligations and liabilities which were several to those of other participants …;
  • (b) a beneficial interest in the property and assets of the (joint venture) as a tenant in common with the other participants, proportionate to its interest in the (joint venture) …;
  • (c) (several responsibility) for the expenditure and operational expenses incurred by the (joint venture); and
  • (d) (ownership of) coal produced by the (joint venture) in proportion to its interests in the (joint venture) which was to be divided and sold separately. This was achieved by each participant appointing (the manager of the joint venture) to market and sell the coal produced by the (joint venture) on its behalf."

42. The applicant submits that prior to 25 March 1998 and thereafter, until 25 June 2001, it carried on a business properly characterized as that of developing and exploiting deposits of coal at German Creek in Queensland through participation in the joint venture, conducting such business through an agent who was responsible for day-to-day management. In the 2002 tax year (ie 1 January-31 December 2001) the applicant conducted such business until 25 June 2001. Thereafter, as it asserts:

"(It) was engaged in various activities arising out of its participation in (the joint venture), including the transfer of its rights and obligations under the Corporation User Agreement and the German Creek East Agreement which were both essential to the operation of the (joint venture)."

Respondent's submissions

43. The respondent submits that from early 1998 until 25 March 1998 the only business activity of the applicant was its participation in the joint venture. It submits that on 25 June 2001, "The applicant ceased to be a participant in the joint venture. It no longer conducted the activities" associated with that joint venture. The respondent submits that in so doing the applicant altered in a significant way the source of its earnings, divesting itself of its profit-making interest in the joint venture. To the extent that the activities identified by Mr Purkiss were performed after 25 June 2001, they:

"… comprised ad hoc attendance to matters involving:

  • (a) preparation of documents to finalize some remaining obligations of the parties under the Asset Purchase Agreement;
  • (b) the receipt prior to 30 September 2001 of the amount of a tax adjustment payable to the applicant under the Asset Purchase Agreement;
  • (c) taxation or accounting-related issues."

44. It is submitted that none of those matters involved participation in the joint venture. The respondent relies upon the observations made by Brennan J in Northern Engineering to which I have previously referred.

Decision

45. I adopt those observations by Brennan J. Managing or disposing of remaining assets after active business operations have ceased will not necessarily constitute the continued conduct of the original business. Assets are often sold in the course of conducting a business, and such conduct does not necessarily imply that the former business has ceased. However, where those assets are essential to the conduct of the business and are not replaced, it is difficult to infer that the same business continues to be conducted. The line between, on the one hand, managing and selling assets whilst continuing to conduct the same business and, on the other, selling assets after cessation of business may not always be clear. However, in the present case, there can be little doubt that continuation of the business conducted prior to 25 March 1998 was dependent upon retention of the applicant's interest in the joint venture. Once that was sold, there was no business.

46. The negotiations and correspondence concerning the material contracts were incidents of the sale of the applicant's interest

ATC 5006

in the joint venture and not incidents of a continuing business. The continuing liability to the National Australia Bank should be similarly characterized. Similar comments apply to the finalization of the allocation of the purchase price, the agreement as to tax adjustments and finalization of the applicant's obligations in connection with the mining tenements. The preparation and lodgement of applications for tax concessions associated with research and development might well occur in the course of conducting a business. However when such actions occur after sale of the principal asset of the business, it may be otherwise. The better view is that in this case, these transactions were also incidents of the management or disposal of assets following the discontinuance of business, rather than incidents of the continued conduct of the business. The maintenance of records and preparation of accounts and tax returns should be similarly treated.

47. Whether these matters are taken separately or together, it is impossible to resist the inference that the applicant's business ceased when its interest in the joint venture was sold. Thereafter it sought to finalise obligations arising under the sale agreement, get in some assets (the tax concessions) and dispose of others. It also maintained its records. Although those actions arose out of its previous business undertaking, they did not constitute the continuation of the business of developing and exporting coal deposits at German Creek or anywhere else.

Orders

48. The appeal should be dismissed with costs.


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