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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Mason J.: I am in agreement with the reasons which have been given by the Chief Justice and Gibbs J. for the conclusion that the compromise or arrangement did not operate as an immediate equitable assignment of the debts owing to the appellant when the compromise or arrangement was entered into. It then follows that the debts uncollected by the special manager were debts of the appellant capable of being written off as bad debts so as to become allowable deductions in accordance with the provisions of sec. 63 of the Income Tax Assessment Act (Cth), as amended.

Debts constituting money lent by the appellant in the ordinary course of its money-lending business are allowable deductions under sec. 63(1)(b). So much of the debts due by hirers under hire-purchase agreements as represent terms charges which have been brought to account as assessable income are allowable deductions under sec. 63(1)(a).

The appellant conceded that so much of the debts owing by hirers as have not been brought to account as assessable income cannot fall within sec. 63. However, the appellant claimed that these debts, viz. outstanding terms charges not brought to account as assessable income, fall within sec. 51(1) as 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''.

That the relevant amounts were losses incurred at the time when they were written off is not in question. What is in issue is whether they were losses which answered either one of the two statutory descriptions contained in sec. 51(1). That the losses related to the earning of income in antecedent years, and not to the earning of income in the year in which the losses were incurred, is not a disqualifying circumstance, as previous decisions of this Court have established - see
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 , and the cases there referred to.

The words ``losses and outgoings actually incurred in gaining or producing the assessable income'', as they appear in the first alternative in sec. 51(1), were taken from sec. 23(1)(a) of the Income Tax Assessment Act 1922-1934 (Cth). The presence of the definite article before the words ``assessable income'' has presented a problem of interpretation in the existing section and in its progenitor. The question is whether the expression ``the assessable income'' refers to the assessable income of the taxpayer in the particular year in which the expenditure is incurred or the assessable income of the taxpayer generally without regard to division into accounting periods. In
Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 , the Court considered that the expression should be read as referring to assessable income of the year in which the expenditure was incurred, though the Court qualified the narrow effect of this interpretation by observing that the words ``incurred in gaining or producing'' should be understood as ``in the course of gaining or producing''. On this view Latham C.J. said that an expenditure designed to produce income in a past or future year was deductible where it was ``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'' (at pp. 303-304). See also Dixon J. (at p. 309). This approach derived, not from the language of the subsection, but from what was said in
Ward & Co. Ltd. v. C. of T. (N.Z.) (1923) A.C. 145 , at p. 148 , in connection with a differently worded provision in the New Zealand Land and Income Tax Act, 1916 and its application to an expenditure incurred so as to enable the taxpayer to continue to carry on business, not so as to enable it to earn income in a particular year.

When the Court was subsequently called upon to consider the similar question of interpretation which arises under the

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provisions of sec. 51(1) in the Ronpibon case it indicated that a different view might be taken of the provisions in their new setting. Latham C.J., Rich, Dixon, McTiernan and Webb JJ. there said of the second alternative under sec. 51(1) (at p. 56) -

``The word `business' is defined by sec. 6(1) to include profession, trade, employment, vocation or calling, but not occupation as an employee. The alternative in sec. 51(1) therefore covers a wide description of activities. But in actual working it can add but little to the operation of the leading words, `losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income'. No doubt the expression `in carrying on a business for the purpose of gaining or producing' lays down a test that is different from that implied by the words `in gaining or producing'. But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative. The words `such income' mean `income of that description or kind' and perhaps they should be understood to refer not to the assessable income of the accounting period but to assessable income generally. If they were so interpreted, they would cover a case where the business had not yet produced or had failed to produce assessable income and the alternative would then itself suffice to authorize the deduction of a loss made in a distinct business.''

The passage indicates that the question of construction is not foreclosed by de Bavay's case and that this Court is at liberty to reach its own conclusion unfettered by what was said in de Bavay's case . Support for this view is in my opinion supplied by the observations of Dixon C.J. in
F.C. of T. v. Finn (1961) 106 C.L.R. 60 , where his Honour said (at p. 68) - ``The better view, however, is that sec. 51 as now drawn does not in either limb require a rigid restriction to the gaining or production of assessable income of the current year.''

Looking at the question de novo the case for saying that ``the assessable income'' in sec. 51(1) means assessable income of the taxpayer generally without regard to division into accounting period is to my mind irresistible. There is every reason for thinking that the definite article was used so as to designate the income of the taxpayer generally rather than the income of the taxpayer in the year in question. It is inconceivable that Parliament intended to confine deductions to losses and outgoings incurred in connection with the production of income in the year in question and to exclude losses and outgoings incurred in connection with the production of income in preceding or succeeding years. True it is that the expression ``in gaining or producing'' as it applies to assessable income may allow some expansion in the relationship which it would otherwise prescribe between the loss or outgoing and the production of income in the year in which the loss or outgoing was incurred, but the expanded relationship thereby suggested is hinged upon the notion that the taxpayer is conducting a continuing business, a concept which finds no expression in the first limb of sec. 51(1) for the ascertainment of the allowance of a deduction. The preferable course, so it seems to me, is to read the reference to assessable income in the first limb of sec. 51(1) as a reference to the assessable income of the taxpayer generally.

This conclusion is not an answer to all the problems of construction presented by the subsection. In the Ronpibon case the Court suggested in the passage to which I have already referred that the second limb may have a slightly wider operation than the first limb and that it may authorize the deduction of losses incurred in a distinct business. At first glance it may be thought that these observations overlook the possible limitations inherent in the words ``incurred in carrying on a business for the purpose of gaining or producing such income'', viz. assessable income generally. It may be argued that if the taxpayer has ceased to carry on a particular business, a loss subsequently sustained in relation to that business cannot be described accurately as a loss incurred in carrying on that business, or at any rate one incurred in carrying it on for the purpose of gaining or producing assessable income. But the soundness of the argument depends on what is meant by ``incurred''. A loss constituted by the writing off of a bad debt is no doubt incurred, in the sense that it is sustained, at the time when the debt is written off, and that may occur in a given case

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after the taxpayer has ceased to carry on as a going concern the business in which the debt was created. Yet even in such a case it may be correct to speak of the loss as having been incurred in the carrying on of the business. This is because the occasion for the loss is to be found in a transaction entered into in the carrying on of the business for the purpose of producing assessable income, that is, in the agreement by which the debt was created. Because the loss had its origin in such a transaction the loss may be said to be one which was incurred in the carrying on of the business for the purpose of producing assessable income, notwithstanding that its true character as a loss is not finally ascertained until the debt is written off.

What I have said is, I think, in accord with the observations made with respect to sec. 51(1) in the later cases. Thus in the Ronpibon case (at p. 57) the Court stated that ``to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income''. So also it may be said that it is enough to satisfy the second part of the sub-section that the occasion of the loss or outgoing is to be found in the carrying on of a business for the production of assessable income. In my opinion, therefore, the outstanding terms charges not brought to account as assessable income fall certainly within the second limb of sec. 51(1); it may be that they fall within the first limb but this is not a question which needs to be pursued.

If this conclusion involves a departure from the literal meaning of the words used it is to be justified by reference to the context and to the unlikely and arbitrary consequence which would flow from the adoption of a literal interpretation. That a loss having its origin in the course of carrying on a business for profit should only be deductible whilst the business is still in operation, though the loss may not be ascertained until a later date, seems to me to be a strange result; so strange indeed that an intention to bring it about should not be imputed to the Legislature when the statute is susceptible to a sensible alternative interpretation.

On the view which I have thus far expressed it is unnecessary to decide whether the business carried on when the debts were written off was the same as the business which was carried on when the relevant hire-purchase agreements were entered into. However, having considered the question, I should state as an additional ground of decision that on the facts recited in the stated case I am satisfied that the business carried on by the appellant after its share capital was acquired by Australian Guarantee Corporation Ltd. was the same business as that which the appellant formerly carried on. Or to put the matter more precisely, the facts recited are not such as in my opinion raise an issue whereby it may be said that the appellant has failed to discharge the onus placed upon it by sec. 190(b).

From all that appears the appellant later conducted the business of a money-lender and hire-purchase financier, that being the business which it had conducted before it entered into the compromise or arrangement. There is no indication that the character of the business changed in any respect. That there was a change in the personality of the shareholders and of the clients with whom the appellant did business is immaterial to the question whether a different business came into existence, so long as the character of the business remained unaltered.

Nor can it be said that on the facts one could conclude that a new and distinct business came into existence in place of the business initially carried on, though having the same character as the latter. It may be acknowledged that there was a cessation in the day-to-day business activities of the appellant when it encountered financial difficulties, but as I read the facts the cessation was intended to be temporary, not permanent. The compromise or arrangement was not designed to terminate the appellant's business but to enable it to continue on the footing of the moratorium thereby provided, for it contemplated that the appellant would continue to trade.

In the result I agree that the questions should be answered in the manner proposed by the Chief Justice.

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ORDER:

That the questions in the stated case be answered as follows -

• (a) Was the appellant entitled in the years of income ended 30 June 1970 and 30 June 1971 to deductions under section 51 or under section 63 of the Income Tax Assessment Act 1936 as amended in respect of any part of the amounts of $243,838.00 and $1,126,117.00 referred to in para. 50 and 58 above.
• Answer: Yes.
• (b) If the answer to (a) is yes, was the appellant entitled in the years of income ended 30 June 1970 and 30 June 1971 to deductions under section 51 or under section 63 of the Income Tax Assessment Act 1936 as amended in respect of debts in respect of money lent in the ordinary course of the business of the lending of money by the appellant.
• Answer: Yes to a deduction of $76,296 for the year ending 30 June 1970 under section 63 and to a deduction of $765,367 for the year ending 30 June 1971 under section 63.
• (c) If the answer to (a) is yes, was the appellant entitled in the years of income ended 30 June 1970 and 30 June 1971 to deductions in respect of such parts of the said amounts written off as represented -
  • (1) debts owing to the appellant by hirers of chattels from the appellant as owner under hire-purchase contracts; or
  • (2) alternatively debts owing to the appellant by hirers of chattels from the appellant as owner under hire-purchase contracts to the extent only to which the hirers could not successfully have pleaded in bar the statute of limitations in any action which on the date of writing off might have been instituted against the hirers by the appellant for the recovery of such debts; or
  • (3) alternatively debts owing to the appellant by hirers of chattels from the appellant as owner under hire-purchase contracts to the extent only to which the debts were in respect of hiring charges made by the appellant under such contracts and had been brought to account by the appellant as assessable income.
• Answer: The appellant is entitled to a deduction under sec. 63 -
  • (i) of $38,620 hiring charges written off in the year ending June 1970 and
  • (ii) of $90,861 hiring charges written off in the year ending June 1971;

  and to a deduction under sec. 51 in respect of principal sums due under hire purchase agreements of

  • (i) $100,000 written off in the year ending June 1970 and
  • (ii) $220,000 written off in the year ending June 1971.
• It is unnecessary to answer specifically the question as framed.

Respondent to pay costs of this appeal.