Goldsbrough Mort & Co. Limited v. Federal Commissioner of TaxationJudges:
Supreme Court of South Australia
Walters J.: This is a reference to this Court of questions of law by a Taxation Board of Review under sec. 196(2) of the Income Tax Assessment Act, 1936-1975.
In its return of income for the year ended 30th June 1972, the appellant (hereinafter called ``the taxpayer'') sought to claim as an allowable deduction, for exempt income, the sum of $23,473 received by it as an adjustment of rates and taxes in circumstances that I shall presently examine. In issuing his notice of assessment, the Commissioner disallowed the deduction. The taxpayer objected to the assessment on the ground of such disallowance. Upon the Commissioner giving a decision on the objection adverse to the taxpayer, the taxpayer, pursuant to sec. 187(a) of the Act, requested the Commissioner to refer his decision to a Board of Review, and this was done.
Before the Board, the taxpayer, pursuant to sec. 196(2) of the Act, requested that certain questions of law be referred to this Court. The Board accordingly made a reference on an agreed statement of facts.
It appears from the statement of facts that at all material times, the taxpayer, which was incorporated in Victoria as a public company in 1893, was a wholly-owned subsidiary of Elder Smith Goldsbrough Mort Limited. The latter company was incorporated in Adelaide in 1962 to merge the separate businesses of a wool and produce broker formerly carried on by each of the taxpayer and Elder Smith & Co. Ltd., a company incorporated in 1882. The merger duly took place after the
ATC 4345incorporation of the holding company. Although most of the trading activities formerly carried on by the taxpayer were taken over by the holding company, the taxpayer retained the ownership of certain office buildings in Adelaide and Sydney, accommodation in which it leased to numerous tenants. The taxpayer also leased to the holding company some three hundred miscellaneous properties which, prior to the merger, it had used in conducting its own business of a wool and produce broker. In respect of the properties so leased, the holding company paid to the taxpayer a rental equivalent to approximately 10% of the capital value of the properties and also all rates, taxes and outgoings on them. Several pastoral properties were also retained and operated by the taxpayer, and, of these, there were two known as ``Eremeran Station'' and ``Mulgawarrina Station''.
On 30th June 1970, the taxpayer contracted to sell its office building in Sydney, known as ``Goldsbrough House'', for the sum of $3,539,250, subject to existing tenancies. The date fixed by the contract for completion of the sale and purchase was 30th June 1972. The contract provided that as between the taxpayer and the purchaser, an adjustment of the rates, taxes and outgoings on the property should be made as at the date of completion. Settlement took place as provided by the contract and, in accordance with its terms, there was an adjustment in favour of the taxpayer of $22,348 in respect of municipal and water rates. In 1972 (by what appears to be an undated agreement), the taxpayer contracted to sell Eremeran Station for the sum of $25,000. The date for completion fixed by the contract was 1st April 1972, and this contract included a term providing for an adjustment, as between the taxpayer and the purchaser, of rates, taxes and outgoings as at the date of completion. Settlement took place at the time fixed by the contract and, in accordance with its terms, there was an adjustment in favour of the taxpayer of $731 in respect of Crown rent and various rates. On 5th July 1971, the taxpayer contracted to sell Mulgawarrina Station for $80,000. The date for completion fixed by the contract was 20th September 1971, and this contract likewise included a term which provided for an adjustment, as between the taxpayer and the purchaser, of rates, taxes and outgoings as at the date of settlement. Settlement took place on the date specified and there was an adjustment in favour of the taxpayer of $394 in respect of Crown rent and various rates. The sum of the three adjustments received by the taxpayer and added by it to the total purchase price of the three properties was $23,473. The taxpayer included this sum in its profit and loss account for the year of income ended 30th June 1972 ``in accordance with generally accepted accounting principles and practice, [since] the omission of the adjustments in the calculation of the taxpayer's net profit for the year ended 30th June 1972 would not have given a correct reflection of the taxpayer's profit for the year for accounting purposes''.
The reasons given by the Commissioner for disallowance of the objection against the assessment were twofold, namely:
``(1) That a net adjustment sum of $23,473, being part of the amount of $23,646 treated by the taxpayer as an adjustment of rates and taxes and so described in its return and notice of objection, was received by the taxpayer by way of adjustments of rates and Crown rent on the sale of three properties in New South Wales, namely an office building in Sydney known as Goldsbrough House and two pastoral properties known as Eremeran Station and Mulgawarrina Station, and was correctly included in the assessable income of the taxpayer for the year ended 30th June 1972 pursuant to sec. 25(1) of the Income Tax Assessment Act 1936-1972 in that it was a receipt of a revenue nature.
(2) That the said net adjustment sum of $23,473 was correctly included in the assessable income of the taxpayer for the said year pursuant to the provisions of sec. 26(j) of the Income Tax Assessment Act 1936-1972 as an amount received by way of indemnity for or in respect of any loss or outgoing which is an allowable deduction.''
When the matter came on for hearing before the Board, three questions were reserved, at the instance of the taxpayer, for the consideration of this Court. But upon the reference being brought before me, counsel for the parties intimated that for reasons about which I need not concern myself, one question did not call for answer, namely, that which related to a deduction of $173 that the taxpayer had purported to make from its
ATC 4346assessable income in respect of an adjustment of an electricity extension fee pertaining to Mulgawarrina Station. It was agreed that I should refer this question back to the Board for further consideration. There are therefore two questions which fall for my decision:
``(1) Whether a net adjustment sum of $23,473, being part of the amount of $23,646 treated by the taxpayer as an adjustment of rates and taxes, and so described in its return and notice of objection, and which was received by the taxpayer by way of adjustments of rates and Crown rent on the sale of three properties in New South Wales, namely an office building in Sydney known as Goldsbrough House and two pastoral properties known as Eremeran Station and Mulgawarrina Station, was correctly included in the assessable income of the taxpayer for the year ended 30th June 1972 pursuant to sec. 25(1) of the Income Tax Assessment Act 1936-1972 in that it was a receipt of a revenue nature; and/or
(2) Whether the said net adjustment sum of $23,473 was correctly included in the assessable income of the taxpayer for the said year pursuant to the provisions of sec. 26(j) of the Income Tax Assessment Act 1936-1972 as an amount received by way of indemnity for or in respect of any loss or outgoing is an allowable deduction;''
Although the arguments of counsel upon these questions were addressed to me in reverse order, I propose to answer each question in the order in which it is raised in the reference.
Before proceeding to consider the questions, I must say that the problems raised by the reference involve matters of some complexity. The questions are not of easy solution, and they touch upon matters on which different minds might take different views. My task has not been made easier by conflicting decisions of the Boards of Review. Of course, I am not bound by those decisions though naturally enough I must give, as indeed I have done, careful consideration to them. Certain members of Boards of Review have arrived at widely and persistently differing views on the proper interpretation to be given to sec. 25(1) and 26(j) of the Act in their application to facts not unlike those existing in the present case. It must be borne in mind, however, that some of the decisions so given depend largely upon issues involving mixed questions of law and fact. At all events, my duty is to endeavour to interpret the words of each particular section in order to discern what was the legislative intent expressed in the section and to arrive at a conclusion which accords with the intent discovered.
Whether or not a receipt is of an income nature or a capital nature has received the attention of the courts on numerous occasions. But on the authorities, I do not think it possible to formulate any fixed rule which would provide a solution to the problem that would be capable of being applied to every case. ``Each case must largely depend on its own facts, and the decisions show that the margin is sometimes a narrow one between what in one case has been treated as a [receipt on account of revenue] and what in another case has been attributed to capital'' (
Burmah Steam Ship Co. v. I.R. Commrs. (1931) S.C. 156, per Lord Blackburn at p. 163). Though the interpretation of the language of sec. 25(1) has given rise to difficulties and differences of opinion, I think I may take as my guide the criterion adopted by Stephen J. in
A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T. 74 ATC 4001, where his Honour said (at p. 4009):
``For the purposes of sec. 25(1) of the Act, the character of a receipt in the hands of the taxpayer is to be determined having regard to all the circumstances of the case.''
And his Honour went on to propound a test to be applied, namely, whether in the circumstances established, the receipt bears ``the nature of proceeds of a trade or business and hence [is] assessable income''. In the instant case, I am, of course, foreclosed, in the interpretation of sec. 25(1), from accepting the proposition that because a refund of rates and taxes in one income year happens to be a refund of outgoings on revenue account of a type which has been allowed in earlier years, the adjustment necessarily becomes assessable income within the meaning of sec. 25(1) (
Allsop v. F.C. of T. (1965) 113 C.L.R. 341, at 350-351;
H.R. Sinclair & Son Pty. Ltd. v. F.C. of T. (1966) 114 C.L.R. 537, 542-543).
I am not unmindful of the strictures that have been placed on the use of metaphors in the law, but I nevertheless think that a metaphor used by the Lord President (Lord Clyde) in Burmah Steam Ship Co. v. I.R. Commrs. (supra) is apt for present purposes.
ATC 4347Bringing that metaphor into play in the circumstances of this case, I think the most useful way of testing the character of the adjustments received by the taxpayer is to have regard to the character of the ``hole'' that was filled by the payments made. The ``hole'' made in the taxpayer's profits for the year of income was one involving an expenditure in respect of rates and taxes upon income account - an expenditure related to its ``enjoyment of the land or the rents and profits'' derived therefrom. As it seems to me, the rates and taxes so paid are to be treated ``as part of the `flow' of outgoings characteristic of expenditure on revenue account'', and as such are inexorably connected with the profit derived from the business carried on by the taxpayer. Rates and taxes paid out were necessarily thrown against the rents accruing during the year of income and were outgoings in gaining income, for that year, from the rents received from the properties in question. The taxpayer was reimbursed because it had paid those rates, and as a matter of ``reason and logic'', it was ``reimbursed those rates simply because it happened to have paid them'' (
F.C. of T. v. Morgan (1961) 106 C.L.R. 517, 520). Payment of the rates and taxes made a ``hole'' in the taxpayer's profits, and in my view, therefore, it is in accordance with sound accounting principles that the refund should accounting principles that the refund should be treated, pro tanto, as filling that ``hole''.
It is true that in F.C. of T. v. Morgan (supra), the Court was concerned with the right of a purchaser to deduct from his assessable income the amount paid by him to the vendor on an apportionment of the rates, levied on a rent-producing property, that had actually been paid by the vendor prior to possession being given and taken. The Court held that the purchaser was entitled to claim a deduction of the amount paid on account of the adjustment. Admittedly, the present case has converse features. Even so, it appears to me that the reasoning of the Court in Morgan's case has equal application in deciding whether a payment received by a vendor on adjustment of rates and taxes may properly be treated as a receipt of a revenue nature, or whether it should be regarded as a payment of a capital nature made in fulfilment of a condition attaching to the sale of the subject property. The purchase price is clearly not increased by reason of the apportioned rates being paid to the vendor; the adjustment received cannot be regarded as a component of the purchase price. Unless the receipt of the sum apportioned in the vendor's favour takes the character of a consideration for the acquisition of the capital asset, it seems to me that it cannot be said to be a receipt of a capital nature. I think so much appears from the joint judgment of Dixon C.J., Kitto and Windeyer JJ. in Morgan's case (at p. 521):
``Not only as a matter of reason and business sense is it [the apportioned part of the rates] an outgoing on account of revenue, but an examination of the grounds on which it is said to be capital and not incurred in gaining the assessable income discloses their inadequacy. In the first place neither under the contract nor under the statutory provisions does the apportioned part of the rates really represent a payment for the land as a profit or income earning subject, that is as a capital asset. The price remains fixed. The payment of the apportioned part is separate and represents nothing but the reimbursement of a charge for an ensuing period of enjoyment, one of a very limited duration. It is not in form or substance part of the consideration for the property considered as a `corpus'. In the next place it is entirely variable with the time of settlement or giving of possession and with the amount paid in respect of a period thereafter by the vendors. It is, in other words, treated as between them as part of the `flow' of outgoings so characteristic of expenditure on revenue account.''
Moreover, it is plain that the refund of rates and taxes in the instant case was a receipt brought into the taxpayer's revenue account, so that it might enter into the calculation necessary to determine the result of the taxpayer's trading operations. The refund was produced by a previous outgoing made out of revenue and, therefore, out of potential profits. In its accounts, the taxpayer treated the total adjustments as a revenue receipt - as something to be taken into account as an item of revenue in determining its trading expenses for the year of income, in arriving at its profit and loss account for the year, and in calculating the surplus available for distribution and the dividend to be paid. In that way, the refunds were brought into account, pro tanto, in and towards payment of the dividend. If I may adopt the words of
ATC 4348Ferguson J. in
F.C. of T. v. Manufacturers' Mutual Insurance Limited (1931) 31 S.R. (N.S.W.) 575, at p. 585:
``Any statement of the affairs of the company professing to show the result of the year's operations, which neglected to take into account this [receipt], would be grossly inaccurate and misleading.''
In this context, I would also apply the observations of Gibbs J. in
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152; (1971) 124 C.L.R. 343, where his Honour said (at ATC p. 4156; C.L.R. p. 351):
``In the absence of some definite direction in the Act, the Commissioner should, in an assessment of income, adopt the method of accounting which is in fact appropriate to the circumstances of the case, or which in other words `is calculated to give a substantially correct reflex of the taxpayer's true income,''
It seems to me, therefore, that in the course which the appellant took in appropriating the apportioned rates and taxes to its profit and loss account and, thus, in calculating, pro tanto, its profits, the surplus available for distribution, and the dividend to be paid, the taxpayer ``did accurately recognize the character of the receipt'' (
Automatic Totalisators Limited v. F.C. of T. (1968) 119 C.L.R. 666, per curiam at p. 670; H.R. Sinclair & Son Pty. Ltd. v. F.C. of T. (supra), per Menzies J. at p. 544, and per Owen J. at p. 547). In my view, it is consistent with the reasoning applied in the cases cited and with considerations of reason and logic to treat the adjustments as receipts of a revenue nature and not as receipts of a capital nature; they possess ``those attributes ordinarily regarded as those of a transaction of a revenue nature giving rise to income as commonly understood'' (Hamblin's case (supra), per Stephen J., at p. 4009). I think the adjustments were received by the taxpayer on a revenue account sufficiently connected with the business which it conducted and that they must be brought into the category of assessable income. I am of opinion, therefore, that the Commissioner was entitled to say that the adjustments were items of revenue falling within sec. 25(1) and to include them in the taxpayer's assessable income.
Next, I turn to the question whether each adjustment received by the taxpayer may be brought within the compass of sec. 26(j) of the Act as an ``amount received by way of... indemnity... for or in respect of any loss or outgoing which is an allowable deduction'', or whether sec. 26(j) operates to exclude its application to the amount received. In the first place, it seems to me that the question for decision depends upon the construction to be given to the technical language of sec. 26(j). With all respect to the formidable arguments addressed to me on behalf of the taxpayer, I am disposed to think that those submissions laid too much stress on the general meaning of the word ``indemnity'' and tended to put out of view the general context in which the word is found in sec. 26(j). Cases were cited for the purpose of showing various meanings that courts have placed upon the word ``indemnity''. But some of these cases were dealing with ``indemnity'' as a disparate subject matter and in a differing context. It is not that the word has a different meaning from that which it usually bears, but it is a question of what meaning is to be attributed to it as it is used in the section. The significance of a word, so apparently general in its use, as ``indemnity'', must be governed by the context in which it appears. ``There is no general word the primary meaning of which may not be modified by its context'' (
Nicol v. Chant (1909) 7 C.L.R. 569, per Griffith C.J. at p. 581(.
Be that as it may, it is my opinion that in the interpretation of sec. 26(j), the word ``indemnity'' takes its colour from the phrases ``by way of'' and ``in respect of'', and that in conjunction with the word ``indemnity'', those two phrases are merely ``descriptive of, or adjectival to'', the expression ``the amount received'' (Cliffs Robe River Iron Associates v. Seamen's Union of Australia (1974) Industrial Arbitration Service Current Review [V92] at p. 201). Moreover, the phrase ``by way of'' is significantly wider than the word ``as'', or even the phrase ``under a contract of''. The words ``in respect of'' also have a wider import than the word ``for'' (
Paull v. Munday (1976) 9 A.L.R. 245, per Gibbs J. at p. 251). It seems to me that the phrases ``by way of'' and ``in respect of'' were inserted in the section for the express purpose of giving the word ``indemnity'' a wide connotation; that those phrases bring within the scope of the section a broader field of receipts than those recovered primarily under
ATC 4349a policy of insurance or other contract of indemnity.
In my view, the word ``indemnity'' in sec. 26(j) is not so entirely a special word that there can be attributed to it any one particular meaning, or any one comprehensive definition. I think that the word is capable of being constructed so as to contrast a receipt, of the kind now under consideration, with a receipt under a ``contract of indemnity''; that the receipt here is no less a receipt ``by way of indemnity... in respect of any loss or outgoing'' because it has not been received under a contract of indemnity. I cannot accept the notion that ``the terms of sec. 26(j) suggest that it is concerned with a contract of insurance or indemnity giving security or protection against contingent hurt''. I think it would be wrong to give the words of the section such a narrow interpretation. And if I may respectfully adopt the words of Herron J. (as he then was) in
Williamson and Anor. v. Commr. for Railways (1959) 76 W.N. (N.S.W.) 648, at p. 664, ``the word `indemnity' in sec. 26(j) is not used as limited to merely contractual indemnity, that is, as limited to receipts which are of the same character as `insurance'''.
In the present case, each contract for sale and purchase resulted in the assumption by the purchaser of certain obligations which, but for the transaction, would have rested upon the taxpayer. In terms of the contract, the taxpayer was to be kept secured against, or compensated for, the expense of rates and taxes on the subject property, in so far as the taxpayer might become liable in future to discharge that expense, or in so far as it had already discharged it; the taxpayer was to be held indemnis. In my view, the language of sec. 26(j) may be treated as contemplating an indemnification in respect of loss already incurred (
Robert v. Collier's Bulk Liquid Transport Pty. Ltd. (1959) V.R. 280, 283;
Melbourne Saw Milling Manufacturing Co. Pty. Ltd. v. Melbourne and Metropolitan Board of Works (1970) V.R. 394, 399). Support for the view I take may be found, I think, in the judgment of Kitto J. in
F.C. of T. v. Wade (1951) 84 C.L.R. 105, where the learned judge, in construing sec. 26(j), held that compensation already paid to a taxpayer, for a loss sustained by the destruction under statutory authority of certain dairy cattle, fell within the ambit of sec. 26(j) and was to be treated as an item on account of revenue for the purposes of ascertaining assessable income. At pp. 115-116, his Honour said:
``The words `by way of... indemnity' describe the character of the receipt, and in my opinion they may be satisfied as well by a receipt pursuant to a statutory right as by a receipt under a contract. Section 25(c) of the Income Tax Assessment Act 1922-1934 (Cth.) allowed a deduction in respect of any loss or expense recoverable under any contract of insurance or indemnity. The language of sec. 26(j) of the present Act is significantly wider.
The words `any loss of trading stock' are wide enough to include loss by any means, and I see no reason for denying that a loss by compulsory destruction is within their meaning. By compulsory destruction under the provisions of the Milk Act 1946-1947 (W.A.), the taxpayer lost 110 dairy cattle which, under sec. 28 and 32 of the Income Tax Assessment Act, would have been taken into account in computing his taxable income if the loss had not occured. He received £2,016 under sec. 53 of the Milk Act as `compensation in respect of the loss sustained by him by the destruction of the said dairy cattle'. The only question is whether a receipt of this character is a receipt `by way of indemnity' in respect of the loss of the dairy cattle. I should have thought the description entirely apt. The purpose and effect of the receipt was, to the extent of its amount, to save the taxpayer harmless from the loss he sustained by the destruction of his cattle; in other words, to provide pro tanto indemnification in respect of the loss of the cattle.''
By application of the principles enunciated by Kitto J. in Wade's case (supra), it seems to me that the purpose of the amount received by the taxpayer on adjustment of the rates and taxes was to compensate it for the loss of the ``enjoyment of the fruits of the property'', in respect of which the rates and taxes were paid. The receipt had the effect of indemnifying the taxpayer and of replacing in its hands something that it had lost on revenue account. I am satisfied that if that was the ultimate purpose of the payment, it is proper to treat it as an indemnification of the taxpayer for an expense already incurred. Looking at the reason why the apportioned amounts were received by the taxpayer, it is my opinion that
ATC 4350the character of each receipt was a receipt ``by way of indemnity'' and that the words of sec. 26(j) are wide enough to cover that receipt.
I give effect to the foregoing views in answering the second question reserved to this Court, and, that being so, I find that there is no ground for upholding the objection to the Commissioner's decision and that the adjustment sums must be treated as items on account of revenue for the purpose of ascertaining the taxpayer's assessable income. I think that the given receipt may fall within the scope of sec. 26(j) as well as sec. 25(1).
In the course of argument, the taxpayer's counsel invited my attention to other sections of the statute, which - it was contended - by their evolution and the language used therein, threw light upon the intention of the legislature in enacting sec. 26(j). I have considered these provisions, and whilst I do not pretend that the construction of sec. 26(j) is free from difficulty, after looking at the provisions of the other sections and after examining the variations and the similarities in the language there employed, I confess that I derive no assistance from those sections in construing sec. 26(j). This section is a single enactment, and, as I think, it must be regarded by itself for the purpose of ascertaining the meaning of the words found in it. I cannot be persuaded that the terms of sec. 26(j) should not be given as broad a construction as that which I have placed upon them.
I recognize that a taxing statute should be construed strictly and that nothing should be implied from its language except what reasonably falls within the words in which the particular provision of the statute is expressed. But this statement becomes too wide where it can be seen from the actual words of the statutory provision that the interpretation adopted is one which does not strain the language used, and is consistent with the ``fair and full effect'' of the legislation. Too broad a construction ought not to be given to the maxim ``that in a taxing Act clear words are necessary in order to tax the subject... [It] does not mean that words are to be unduly restricted against the Crown''. (
Cape Brandy Syndicate v. I.R. Commrs. (1921) 1 K.B. 64, per Rowlatt J. at p. 71). It must also be kept in mind that the object sought to be effected by those framing a taxing statute is to raise revenue, and that ``where any enactments for the purpose can bear two interpretations, it is reasonable to put that construction upon them which will produce these effects'' (
Bowles v. F.C. of T. (1919) 26 C.L.R. 205, per Isaacs Gavan Duffy and Rich JJ. at p. 216, quoting with approval a statement in the speech of Lord Blackburn in
Coltness Iron Co. v. Black (1881) 6 A.C. 315, at p. 330).
For the foregoing reasons, it is my opinion that each of the questions recited earlier in this judgment should be answered - Yes. In the result, my conclusion is that the Commissioner correctly included in the appellant's assessable income the adjustment sum of $23,473.
By consent I refer back for the consideration of the Board of Review the third question referred for the consideration of this Court.
The Commissioner having succeeded on both questions calling for my decision, it is my opinion that he should be entitled to an order for costs of the reference.