A.G.C. (Advances) Ltd. v. Federal Commissioner of Taxation.

Judges: Barwick CJ

Gibbs J
Mason J

Court:
Full High Court

Judgment date: Judgment handed down 26 February 1975.

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Gibbs J.: I have had the advantage of reading the reasons for judgment prepared by the Chief Justice and need not repeat his statement of the facts of this case. Two main questions arise for consideration. The first is whether by entering into the scheme of compromise and arrangement the appellant parted with its interest in the debts at that time owed to it. If so it could not, by purporting to write off those debts, obtain a deduction under sec. 63(1) of the Income Tax Assessment Act 1936 (Cth), as amended (``the Act''):
G.E. Crane Sales Pty. Ltd. v. F.C. of T. , 71 ATC 4268 ; (1971) 126 C.L.R. 177 .

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ATC 4067

No particular form of words is necessary to create an equitable assignment, and express words of assignment need not be used for that purpose. The question whether the scheme operated as an immediate assignment of the debts owed to the appellant depends upon its proper construction. There can be no doubt that the scheme operated as an assignment of those debts that were in fact collected by the special manager. Once the amount of a debt had been received by the special manager it was his duty to pay it into the bank account out of which the dividends and other payments referred to in the scheme were required to be made. The provisions having this effect revealed an intention to divest the appellant of its beneficial interest in any debt once it was collected. However, there is nothing in the scheme to reveal any intention to deprive the appellant of the beneficial interest in any debt which the special manager did not collect. The fact that the collections were to be made by the special manager as agent for the appellant suggests that at the moment of collection the appellant was still the owner of the debts. Although the scheme speaks of the ``powers and duties'' of the special manager, it is apparent that it was not intended that the special manager should be obliged to exercise all the powers given to him by the scheme. Indeed, some of those powers could not be exercised consistently with others; for example, there was a power to engage or dismiss persons as employees. In particular it could not have been intended that the special manager should be bound to enter into possession of and recover all of the assets of the group companies, although he had power to do so; it was contemplated that the group companies might continue to trade and this would have been impossible if they were to have no assets. It was provided that the appellant should cease to be a party to or affected by the scheme if its structure was sold by the special manager and in any case the scheme was to determine automatically at the expiration of five years. It was possible that assets of the appellant would remain unrealized when the scheme ceased to affect the appellant or determined automatically and in the absence of any express provision to the contrary it must have been contemplated that those assets should remain in the same ownership as before - namely, in the ownership of the appellant. Moreover, the scheme did not provide for the consequences of a realization sufficient to pay all the scheme creditors in full - an event that was perhaps unlikely, and did not in fact occur, but that was not impossible, for example if Master Butchers Limited had made unexpectedly large trading profits. It must have been contemplated that in that event also the property in the unrealized assets should remain in the appellant. These considerations support the view that the intention of the framers of the scheme was that the appellant should remain the owner of the debts owed to it unless and until those debts were collected by the special manager and there is nothing in the scheme that points to a different conclusion.

The scheme in the present case presents points of similarity to that considered in G.E. Crane Sales Pty. Ltd. v. F.C. of T. In that case the taxpayer had never owned the debts in law and it was held that after the scheme took effect the taxpayer had lost its beneficial interest in the debts. It would not serve any useful purpose to compare in minute detail the provisions of the schemes in the two cases but the broad point of distinction between them may be seen from the following statement made by Walsh J. in G.E. Crane Sales Pty. Ltd. v. F.C. of T., 71 ATC 4268 at p. 4273; (1971) 126 C.L.R. 177 at p. 189 as to the effect of the scheme in that case -

``It was not merely that the control and possession of the property of the appellant, including the debts, were vested in the scheme receiver and manager or in the scheme administrator. But, as the case stated asserts, as from 21st June 1966 the appellant `was not entitled to receive or to retain amounts paid in respect of such debts'.''

There was no similar concession as to the effect of the scheme in the present case and it is not right to say, upon the proper construction of the scheme, that upon its commencement the appellant ceased to have any right to receive or retain moneys paid in respect of the debts owing to it. Moreover, the provisions of cl. 21A of the scheme which are referred to in G.E. Crane Sales Pty. Ltd. v. F.C. of T., 71 ATC

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ATC 4068

4268 at pp. 4274 and 4276; (1971) 126 C.L.R. 177 at pp. 190 and 194 had no counterpart in the scheme in the present case.

It follows that the debts which were not realized by the special manager remained owing to the appellant and were therefore debts that could be written off as bad debts within the meaning of sec. 63.

Of the debts due to the appellant, those due by borrowers of money lent by the appellant in the ordinary course of its money-lending business clearly fell within sec. 63(1)(b). Part of the debts due by hirers of chattels from the appellant as owner under hire-purchase contracts - namely, the amount representing terms charges - had been brought to account by the appellant as assessable income and answered the description contained in sec. 63(1)(a). The balance of the latter debts, however, had not been brought to account as assessable income and was not deductible under sec. 63.

The submission on behalf of the appellant was that the amounts owing by hirers which had been written off as bad debts, to the extent to which they had not been brought to account as assessable income, were losses ``incurred in gaining or producing the assessable income, or... necessarily incurred in carrying on a business for the purpose of gaining or producing such income'' within sec. 51(1) of the Act. The amounts written off were of course losses. It may be assumed that the losses were incurred when the amounts were written off, that is, in the income tax years ending respectively on 30th June 1970 and 30th June 1971. The fact that the losses were incidental and relevant to the production of income in earlier years does not in itself prevent the losses from being deductible under sec. 51:
Herald and Weekly Times Ltd. v. F.C.of T. (1932) 48 C.L.R. 113 , at p. 118 ;
Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 ;
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 56 C.L.R. 290 , at p. 305 ;
The Texas Company (Australasia) Ltd. v. F.C. of T. (1940) 63 C.L.R. 383 , at p. 427 ;
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 , at pp. 56-57 ;
F.C. of T. v. Finn (1961) 106 C.L.R. 60 , at p. 68 . However, sec. 51 does not authorize the deduction of losses that relate to income derived in earlier years if there has been a complete cessation of the business in the course of which that income was produced. This is established by Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. In that case Latham C.J. said, at pp. 303-304 -

``In this case, however, the outgoings in question have no relation whatever to the assessable income of the years in question. It is true that, in cases of continuing businesses, it has been conceded (perhaps upon a not very strict construction of this or a similar legislative provision) that expenditure may be allowed as a deduction though it produces and is possibly designed to produce results in the way of income in a future year and not in the year in relation to which income is being assessed (
Ward & Co. v. Commissioner of Taxes , [1923] A.C. 145 ). So it has also been held that expenditure which has a direct relation to income of a past year can be deducted in a later assessment year where it is of such a character that, in a continuing business, it must be met from time to time as a part of the process of gaining assessable income ( Herald and Weekly Times Ltd. v. F.C. of T. (1932), 48 C.L.R. 113). But even this benevolent interpretation cannot assist the taxpayer in a case like this, where there has been a complete cessation of the income-producing operations out of which the necessity to make the outgoing arose.''

In the same case Dixon J. said, at pp. 309-310 -

``A very wide application should be given to the expression `incurred in gaining or producing the assessable income'. 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

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ATC 4069

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 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...

In the present case, the actual expenditure was met in the current year. But it was completely dissociated from the gaining or producing of the assessable income of that year... None of the assessable income arose out of the business in the course of which the taxpayer became liable to the charge. The sources from which the assessable income did arise included no operations in the course of which the payment was made. It was a payment independent of the production of the income, not an expenditure incurred in the course of its production.''

(See also per Rich and Evatt JJ., at p. 305, and per Starke J., at p. 307.)

These statements related to a provision which corresponded to the first limb of sec. 51(1). But in my opinion exactly the same considerations apply to the second limb of the subsection. If in the year in which the deduction is claimed the taxpayer is carrying on a business entirely different from that in the course of which he previously derived income it is not possible to say that a loss incurred in connection with the business that has completely ceased is necessarily incurred in carrying on the new business. This does not mean that a temporary cessation of profit-earning operations will necessarily have the effect that losses connected with income earned in those operations in previous years cannot be deducted - cf.
Queensland Meat Export Co. Ltd. v. D.F.C. of T. (Qld.). (1939) Q.S.R. 240 . In the present case, if the appellant, in the tax years in question, was carrying on the same business as that formerly carried on, although after an interruption, the losses will be deductible provided of course that they were not of a capital nature. If, on the other hand, the appellant completely ceased to carry on its previous business, and later commenced an entirely new business, it will not be right to say that losses incurred in connection with the earlier business are incurred in gaining or producing the assessable income of the later business or are necessarily incurred in carrying on that business.

The question whether the business carried on by the appellant since about 3rd June 1970 is the same as that which it carried on before 2nd December 1968 is one of fact. It is a question with which the case stated does not deal fully or directly. It does appear that after 3rd June 1970 the appellant entered into transactions of the same general nature - namely, hire-purchase and money-lending transactions - as those that had been carried on before its activities ceased on 2nd December 1968. However, the appellant was then trading under a different name and had a different place of business. There was a complete change in the shareholding so that the appellant was under completely different control. The case does not state that the later transactions had any connection with the earlier ones and in particular it does not reveal whether it was still true that the appellant made most of its hire-purchase agreements with customers of a particular group of companies which manufactured or dealt in small domestic appliances. The case does not state whether, in other respects, the appellant's manner of trading was the same as, or different from, that of the earlier period. The burden of proving the facts necessary to establish that the assessment was excessive lies on the appellant - sec. 190(b) of the Act. In my judgment that burden has not been discharged. The facts stated in the case do not satisfy me that the appellant, after 3rd June 1970, resumed its former business; on the contrary, the material so far as it goes suggests that it commenced a completely new business. The appellant has therefore not shown that the losses are deductible within sec. 51. I should add that the fact that during the income years in question collections of debts incurred in earlier years were made by the special manager as agent for the appellant is irrelevant to the question arising under sec. 51; once the debts were collected the appellant had no beneficial interest in them and the fact that the collections were made under the scheme did not mean that the appellant was still carrying on its former business.

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ATC 4070

In my opinion the question asked in the case stated should be answered as follows -

• (a) Yes, to deductions under sec. 63 of the Income Tax Assessment Act 1936, as amended.
• (b) Yes, to a deduction of $76,296 in the year ending 30th June 1970 and of $765,367 in the year ending 30th June 1971.
• (c) Yes, to a deduction of $38,620 in the year ending 30th June 1970 and of $90,861 in the year ending 30th June 1971.