Bert Needham Automotive Company Pty. Limited v. Federal Commissioner of Taxation.

Judges:
Rath J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 26 August 1976.

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Rath J.: This is an appeal by the taxpayer against the decision of a Board of Review upholding the decision of the Commissioner on the objection of the appellant to assessments of primary tax for the years ended 30th June, 1968, 1970, 1971 and 1972.

The question is whether the taxpayer is entitled to deductions for depreciation on a Ford Mustang motor car under sec. 54 of the Income Tax Assessment Act 1936 (as amended) and to deductions on disposal or loss of the motor vehicle under sec. 59.

The taxpayer at the material times carried on a business related to automatic transmission and power steering. Its managing director was in the United States of America in October, 1966, and on 24th October, 1966 he purchased there on behalf of the taxpayer the vehicle in question. The managing director, in evidence before the Board of Review, said that he purchased the car for the taxpayer for several reasons, one of them being for advertising purposes associated with drag racing. What the other reasons were does not appear, but it was agreed at the hearing that business use was 70%. After purchasing the car, the managing director drove it from Hollywood Ford to San Pedro, a distance of about 200 miles, and it was then shipped to Sydney. It was landed in Sydney on 10th November, 1966, and after completion of Customs requirements, it was delivered to the taxpayer on that day or shortly thereafter. It was a left hand drive vehicle, and as it was the taxpayer's intention to drive it on the road it had to be converted to right hand drive. The conversion was carried out in December, 1966.

The vehicle was thereafter used in the taxpayer's business until it was seized by the Customs authorities on 15th November, 1967. Thereupon the managing director was charged on three counts in respect of the vehicle, two of making an entry in a particular in breach of sec. 234(e) of the Customs Act 1901 (as amended) and one of evading payment of duty in breach of sec. 234(a) of that Act. All the offences were alleged to have occurred on 11th November, 1966, and the managing director was convicted on 11th August, 1971. The vehicle has not been returned to the taxpayer, and was presumably deemed to be condemned under the provisions of the Customs Act 1901.

Section 54(1) of the Income Tax Assessment Act reads as follows:

``(1) Depreciation during the year of income of any property being plant, or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction.''

Section 59(1) reads as follows:

``Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction.''

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The taxpayer's claim is for a deduction for depreciation under sec. 54(1) in the accounting years in which the vehicle was used in its business, and for the depreciated value (less the amount of any consideration) in the year in which the vehicle was seized by the Customs authorities. As to sec. 54(1), it was argued that the vehicle was property owned by the taxpayer and used by it during the year for the purpose of producing assessable income, or alternatively was property owned by the taxpayer which had been installed ready for use for that purpose and was during that year held in reserve by the taxpayer. It is a condition of the operation of both limbs of sec. 54(1) that the taxpayer must own the property in respect of which the deduction is claimed. As a result of the provisions of the Customs Act 1901 it was common ground that the taxpayer was deprived of its title to the motor vehicle, and the only question was whether that deprivation occurred when the offences were committed (that is, on 10th November, 1966) or when the car was seized by the Customs authorities (that is, on 15th November, 1967). The resolution of that question depends of course upon the effect of the relevant provisions of the Customs Act. If the taxpayer was divested of title on 10th November, then only the events prior to that time are relevant in relation to the application of sec. 54(1). These consist only of the purchase of the vehicle, its being driven 200 miles in America, and being shipped to Australia. If on the other hand seizure is the relevant date, then by that time the vehicle had been modified to right hand drive, and used in the taxpayer's advertising by drag racing and otherwise.

Section 59(1) operates only where depreciation has been allowed, or is allowable, so that no question will arise under it unless the taxpayer is to be allowed a deduction for depreciation under sec. 54. Counsel for the taxpayer submitted that where the taxpayer was deprived of property by the operation of the Customs Act, that property had, within the words of the subsection, been ``disposed of, lost or destroyed''. Reliance was placed on the following passage in the joint judgment of Williams A.C.J., Webb, Kitto and Taylor JJ. in
Henty House Pty. Ltd. v. F.C. of T. (1953) 88 C.L.R. 141 at 151: ``The entire expression `disposed of, lost or destroyed' is apt to embrace every event by which property ceases to be available to the taxpayer for use for the purpose of producing assessable income, either because it ceases to be his, or because it ceases to be physically accessible to him, or because it ceases to exist.''

In sec. 59(3) a definition is given of ``consideration receivable in respect of the disposal, loss or destruction''. The material part of the definition is as follows:

``(3) The consideration receivable in respect of the disposal, loss or destruction means -

• .....
• (b) in the case of loss or destruction of the property - the amount or value received or receivable under a policy of insurance or otherwise in respect of the loss or destruction;
• .....
• (d) in the case where property is disposed of otherwise than by sale - the value, if any, of the property at the date of disposal.''

Evidence was given of the value of the vehicle. It was as I understand common ground that nothing was received under a policy of insurance. The amount of any deduction under sec. 59(1) would vary considerably according to whether para. (b) or para. (d) applied. It may be noted in passing that ``loss'' would appear to be an appropriate word to use to describe the effect of seizure and condemnation in relation to marine insurance (
British and Foreign Insurance Co. Ltd. v. Wilson Shipping Co. Ltd. (1921) A.C. 188 at 193-4).

I do not think that the vehicle was at any time ``installed ready for use'' the purpose of producing assessable income and ``held in reserve by'' the taxpayer within the meaning of sec. 54(1). I have doubt whether it can be properly said of a motor car that it is ``installed''; but whether this is so or not, the vehicle was not on the evidence ready for use for the purpose of producing assessable income until the conversion to right hand drive took place in December, and when that did take place it is not disputed that the vehicle was used for the purpose of producing assessable income.

The next question is whether the vehicle was used by the taxpayer for the purpose of producing assessable income before the commission of the Customs offences. The contemplated business use for the purpose of producing assessable income was use in relation to advertising. It was a special vehicle, unique in Australia at the time, and suitable for

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promoting the business interests of the taxpayer by participation in drag racing. The only use of the vehicle from the time of its purchase to the time of its release from the Customs bond was its shipment to Australia. There was no evidence that its journey of 200 miles in America was related in itself to any business of the taxpayer. Indeed the only business of the taxpayer was in Australia. The 200 miles journey was presumably only part of the process of bringing the vehicle from America to Australia. That process was not the taxpayer's business, but was directed towards making the vehicle available for the contemplated use in the business. The vehicle was not being used for the purpose of producing assessable income, but was being put in readiness for that purpose. The process is analogous to installation of plant. The structure of sec. 54(1) indicates that the process of installation would not fall within the first limb, for if it did there would be no need for the second limb, since the conditions of the second limb would be more than sufficient to satisfy the first limb. In this context it may be noted that the requisite purpose is not confined to the production of assessable income in the year of use or installation (
Thomas v. F.C. of T. 72 ATC 4094 at 4098; 46 A.L.J.R. 397 at 400;
cp. A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at 4064, 4068; 49 A.L.J.R. 105 at 110, 113, 114). It seems to me that to put property in readiness for use for a purpose is not itself to use the property for that purpose (cp.
Southern Estates Pty. Ltd. v. F.C. of T. (1966) 117 C.L.R. 481).

If this reasoning is correct then the taxpayer can succeed, under either sec. 54 or sec. 59, only if it can show that it owned the motor car at the time of its use in Australia. It did so own it, if title was retained until seizure; it did not so own it, if it was deprived of title on the commission of the Customs offences. It is not necessary to determine what, in a particular case, may constitute ownership, for the effect of a Customs forfeiture is complete deprivation of title.

Section 229 of the Customs Act 1901 provides, in part, as follows: -

``229. The following goods shall be forfeited to the Crown -

• .....
• (i) All goods in respect of which any entry invoice declaration answer statement or representation which is false or wilfully misleading in any particular has been delivered made or produced.''

Section 234(e) provides: -

``234. No person shall -

• .....
• (e) Make in any declaration or document produced to any officer any statement which is untrue in any particular or produce or deliver to any officer any declaration or document containing any such statement.''

Thus an offence under sec. 234(e) is a cause of forfeiture under sec. 229(i). In that event sec. 262 makes the following provision: -

``262. Where the committal of any offence causes a forfeiture of any goods the conviction of any person for such offence shall have effect as a condemnation of the goods in respect of which the offence is committed.''

Power is given to an officer of Customs (and others) to ``seize any forfeited ship aircraft or goods upon land or water or any ship aircraft or goods which he has reasonable cause to believe are forfeited'' (sec. 203). By sec. 205 when any ship aircraft boat or goods have been seized as forfeited the seizing officer shall give notice in writing of such seizure and the cause thereof to a certain designated person; and ships aircraft boats or goods seized shall be deemed to be condemned and may be sold by the Collector unless the person from whom such ship aircraft boat or goods shall have been seized or the owner shall give notice that he claims them. By sec. 206 seized goods, etc. may be delivered to the claimant on his giving security to pay their value in the case of their condemnation. Whenever any goods have been seized and a claim to such goods has been served on the Collector by the owner, the Collector may retain possession of the goods without taking any proceedings for their condemnation, and may by notice require the claimant to enter an action against him for recovery of the goods, and if the claimant shall not within four months enter such action the goods shall be deemed to be condemned (sec. 207). All forfeited ships, aircraft and goods shall be disposed of or destroyed in such manner as may be prescribed or the Comptroller may direct (sec. 208).

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The Customs Act does not provide for the time of passing of title from the owner to the Crown where there is a forfeiture. It may be that there is no single answer to the question raised. Section 206, providing for return of seized goods to the claimant upon security, appears to contemplate that the Collector may, in some circumstances at all events, be left to realise his security if the goods are condemned. In cases under sec. 206 it would seem to be anomalous, even in Customs law, to construe the Collector's powers as enabling him to overreach the title of a purchaser from the owner. It may be (though I express no opinion on the point) that where goods are returned to the owner under sec. 206, the title, if it was initially divested, is revested in the owner. But so to interpret the operation of sec. 206 would be consistent with a strict construction of the forfeiture provisions whereby title passes to the Crown immediately upon a cause of forfeiture arising, without either seizure or condemnation. Such a strict construction is consistent with decisions on Customs legislation both in England and Australia (The Annandale (1877) 2 P.D. 218 at 220;
Burton v. Honan 86 C.L.R. 169 at 178-9).

The terms ``forfeiture'', ``seizure'' and ``condemnation'' are not defined in the Act. They are well known terms in Customs legislation. The term ``condemnation'' refers not to a proceeding which has the effect of vesting title in the Crown, but to a proceeding which determines that upon some cause previously arising title had vested in the Crown (Burton v. Honan, above, at p. 176;
Willey v. Synan 54 C.L.R. 175 at 185-6). It was argued for the taxpayer that the term ``forfeiture'' in sec. 229 should be construed as ``liable to forfeiture'', and reliance was placed upon some observations of Kitto J. in
Powers v. Maher (103 C.L.R. 478) as indicative that such a construction would be consistent with authority. In that case Kitto J. says (p. 483) that ``forfeited'' is an ambiguous word, and may mean either taken from a man or liable to be taken from him, and he proceeds to say that in order to decide which meaning it has in sec. 229, that is to say ``whether it is on the occurrence of the stated facts or on seizure that the change of ownership occurs'', it would be necessary to consider certain judgments and cases. I do not think that Kitto J. was necessarily saying that the question was an open one; he was in my view merely raising a query as to the state of the authorities. In my view I am bound by The Annandale and Burton v. Honan (above) to hold that it is on the occurrence of the stated facts that the change of ownership occurs.

Before passing to a detailed consideration of these cases, I venture the opinion that the better view is that in the context of sec. 229 ``forfeited'' has the meaning (to use Kitto J.'s phrase), ``taken from a man''. Whatever meaning is given to the word, it seems reasonable that it should be a single meaning applicable to all the eighteen paragraphs listing causes of forfeiture, and not a variable meaning depending on the character of the cause of forfeiture. It is implicit in the observations of Kitto J. on sec. 229 that he regarded the word as having a single meaning. In para. (b) of sec. 229 the class of forfeited goods is ``All prohibited imports''. It would appear to be in the public interest that such imports should be divested immediately upon entry into Australia, irrespective of whether they were seized or not. Here it is pertinent to recall the following dictum of Isaacs J. in
Lyons v. Smart (6 C.L.R. 143 at 166): ``Now, if there were no sec. 233 at all, it is obvious that prohibited goods, imported against the express command of the Statute, are illegally at large in Australia, and sec. 229 forfeits them ipso facto to the King... No subject has any right to hold them; they never are lawfully imported, and therefore are never lawfully here at all. Their very presence in Australia is in contravention of the law, and when here should be returned by a purchaser to his vendor, or should be delivered to Customs, the Crown having the right to the goods, though seizure and condemnation or its equivalent may be necessary to perfect the title'' (see also, per O'Connor J., at p. 161: ``The forfeiture effected by the operation of sec. 229 vests the property in the Crown immediately on importation''). In The Annandale (above) James L.J. contrasted the phrases ``liable to be forfeited'' and ``forfeited''. He said (p. 219): ``The 103rd section of 17 & 18 Vict.c. 104, does not say that the ship shall be liable on conviction of the offence to be forfeited, but that the ship itself shall by reason of the offence be forfeited''.

In The Annandale ((1876) 2 P.D. 179; on appeal 218) the statutory provision was so far as material essentially the same as the provision of sec. 229 now under consideration. It was: ``If the master or owner of any British ship does or permits to be done any matter or thing, or carries, or permits to be carried, any

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papers or documents, with intent to conceal the British character of such ship from any persons entitled by British law to inquire into the same, or to assume a foreign character, or with intent to deceive any such person lastly hereinbefore mentioned, such ship shall be forfeited to her Majesty'' (Merchant Shipping Act, 1854 sec. 103(2)). Sir Robert Phillimore, the judge at first instance, and the Court of Appeal held that the property was divested at the time the offence was committed.

In Burton v. Honan (above) Dixon C.J. said (p. 176): ``On authority it is clear that under the provisions of sec. 229, provided the facts exist which justify a forfeiture, the title to the goods vests in the Crown when the forfeiture takes place in consequence of the occurrence of the facts. No further proceedings are requisite to make title, although of course further proceedings may be necessary either to vindicate the title of the Crown or to exclude the claim of some person asserting a right to the goods''. The question in that case was the constitutional validity of sec. 203, 229(b), 229(i) and 262 of the Customs Act 1901. Dixon C.J., after considering the operation of these provisions, held that they were valid. The other judges (McTiernan, Webb and Kitto JJ.) agreed. The passage that I have quoted does not appear to me to be merely a dictum. What was held to be valid was sec. 229(b) and (i), with the operation as there stated. As appears later in the judgment, forfeited goods may be seized even though they have passed into the hands of a bona fide purchaser for value, and a declaration to that effect was made (pp. 181, 182).

In summary, I am of the opinion that the motor vehicle, the subject of the claims for deductions under sec. 54 and 59 of the Income Tax Assessment Act 1936 (as amended) was, as result of the operation of sec. 229 of the Customs Act 1901 (as amended), not owned by the taxpayer within the meaning of sec. 54(1) of the Income Tax Act at any time after its release from Customs bond; that it was not prior to that release used by the taxpayer, or installed ready for use, for the purpose of producing the assessable income; and that accordingly the claim for depreciation as an allowable deduction under sec. 54 fails. As the claim for depreciated value as an allowable deduction under sec. 59(1) depends upon depreciation being allowed or allowable upon the motor vehicle, that claim also fails. It therefore becomes unnecessary to decide whether, if sec. 59(1) had been applicable, para. (b) or para. (d) defined the relevant consideration to be deducted from the depreciated value. It is also unnecessary to determine what was the depreciated value of the vehicle.

The appeal by the taxpayer from the decision of the Board of Review is accordingly dismissed. The appellant taxpayer is to pay the respondent's costs.