AM Donovan Ch
RK Todd M
No. 2 Board of Review
A.M. Donovan (Chairman) and R.K. Todd (Member) (constituting a quorum): In these references the only matter to be determined is whether the taxpayer company can, in relation to its assessments for the years ended 30th June, 1972, and 30th June, 1973 respectively, be found to have satisfied the requirements of the continuing business test laid down by sec. 80E of the Income Tax Assessment Act, 1936. A complication is that in respect of the second year sec. 80E stood in an amended form, but for present purposes the amendments are of no moment. It will be appropriate to consider the matter as if the former sec. 80E applied in both years, as only subsec. (c) and (d), which are to the same effect as the new subsec. (b) and (c), need concern us. That section provided as follows:
``Sec. 80E(1). Subject to the next succeeding sub-section, where -
- (a) the whole or a part of a loss incurred by a taxpayer, being a company, in a year before the year of income would not, but for this section, by reason of section eighty A of this Act (including that section as affected by the last preceding section) or section eighty C of this Act, be taken into account for the purposes of section eighty or section eighty AA of this Act;
- (b) the whole of the loss would, but for a change that has taken place in the beneficial ownership of shares in the company or in a company that had a controlling interest in the company, have been so taken into account;
- (c) the first-mentioned company carried on at all times during the year of income the same business as it carried on immediately before the change took place; and
- (d) the first-mentioned company did not, at any time during the year of income, derive income from a business of a kind that it did not carry on, or from a transaction of a kind that it had not entered into in the course of its business operations, before the change took place,
section eighty A or section C of this Act, as the case may be, does not operate to prevent the whole of the loss being so taken into account.''
2. The limited nature of the enquiry arises from the undisputed fact that changes in the beneficial ownership of shares in the taxpayer company had occurred which had the effect of denying to the taxpayer a deduction in respect of losses of previous years unless subsec. (c) and (d) of sec. 80E set out above can be found to apply so as to maintain the deductibility of those losses. The questions are, in the proved circumstances, whether the taxpayer carried on at all times during the year of income the same business as it carried on immediately before the disqualifying change in beneficial ownership took place (in this case 3rd March, 1971), and whether the company did not at any time during the year of income derive income from a transaction of a kind that it had not entered into in the course of its business operations before the change in shareholdings took place.
3. The following findings of fact will suffice. The details of changes in shareholdings need not be set out in view of the findings which we are prepared to make:
- (i) Prior to 3rd March, 1971, the taxpayer was engaged in the manufacture, sale and installation of fibreglass swimming pools and other fibreglass products. It was also involved in the production of laundry trolleys, small cold water sterilisers for hospital use, and other small items such as fishponds. Sales were made to the general public and in the case of the sterilisers sales were sometimes to the Government. The company had occasionally bought in, for installation, an above-ground type of swimming pool but such occasions were not of any consequence. Finally, as well as manufacture and sale, the company installed the pools which it had so manufactured and sold. It did all of the selling of the fibreglass manufactured products, and all of the selling and installation of swimming pools.
- (ii) From 1st July, 1971, manufacturing operations were taken over by another company in the group of companies that now owned and operated the enterprise described above and some other enterprises associated primarily with the manufacture and sale of products for the building industry. After this date the taxpayer was selling and installing the same goods as it had previously manufactured, but it bought them from the associated company. It may be mentioned that at a later date, later that is than the years with which we are concerned, the taxpayer resumed manufacturing operations, but this is of no relevance to the problem before us.
- (iii) In the year ended 30th June, 1973, an amount of interest was derived, and returned in the taxpayer's assessment. This was said probably to have arisen because during a Christmas period there had been an ``enormously good cash flow'' and ``some of it was put into one of the building societies - or something like that - for a couple of months''.
- (iv) The income of the taxpayer since its incorporation in December 1969 has been derived in the main from the sale and installation of swimming pools, the sale of other items having been of a minor nature.
- (v) The changes in beneficial ownership of the shares in the taxpayer that had occurred were not part of any attempt to ``traffic in loss companies''.
- (vi) The disposal of the manufacturing business to an associated company took place in the normal course of commercial operations.
4. The argument for the taxpayer was that the taxpayer had at all times derived its income substantially from the sale and installation of its chief product, namely swimming pools, and that this being so the source of that product was really irrelevant to the determination of the nature of the business being carried on. Further, it was said that the purpose of sec. 80E of the Act was to prevent trafficking in loss companies and that what had here occurred did not constitute the mischief that the statutory provision was designed to combat.
5. We deal with this second submission first, and have to say that in our opinion we are compelled to construe sec. 80E as we find it and that there is no room for the avoidance of the application of the section upon grounds related to what we might conceive as the intention of the legislature in enacting it.
6. As to the prime submission put on behalf of the taxpayer, we were referred to
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; and to
J. Hammond Investments Pty. Ltd. v. F.C. of T. 77 ATC 4311. None of these authorities offer us any direct guidance. But in
Gordon & Blair Ltd. v. I.R.C. (1962) 40 T.C. 358, the Court of Session, comprising Lord President Clyde, Lord Carmont and Lord Guthrie, had to consider a very similar problem. There a company carried on business as brewers. In October 1953, it ceased brewing but continued to bottle and sell beer supplied to its specifications by another brewing company. The company claimed that it carried on the same trade both before and after October 1953, so that losses sustained prior to that date could be set off against subsequent profits under sec. 342(1) of the Income Tax Act, 1952 (U.K.). On appeal the Special Commissioners upheld the Crown's contention that as from 1953 the company ceased trading as brewers and commenced a fresh trade of selling beer. The Court of Session confirmed that the Special Commissioners were entitled to find as they did. It is true that the question there was related to carrying on the ``same trade'' and not the ``same business''. But witness the words of Lord Guthrie at p. 363:
ATC 187Motors (Parts) Pty. Ltd. v. F.C. of T. 71 ATC 4101;
``Now it is true in a sense that a company's earnings are made by the disposal of its product and that the process of manufacture per se yields no financial return. That does not mean, however, that in considering what is the trade of a company one should have regard only to the distribution of the product sold. If it is of the essence of the business of a company that it is the disposal of a product manufactured by the company, then the discontinuance of manufacture and the disposal instead of a product made by another manufacturer is a change in the nature of the business of the company which can properly be held to be the cessation of the trade and the commencement of a new one.''
We are conscious that this authority is of persuasive force only in Australia, but we think that there is no doubt that it should be followed by a Board of Review, and while we are conscious that this means that in a sense the taxpayer was unlucky to be caught in a net that was put out to catch other types of fish, that consideration cannot affect our conclusion.
7. It should also be mentioned that we can take no account of the fact, if it be a fact, that the overall business had remained the same in so far as it was being carried on within a ``group'' of companies.
8. In view of our conclusion reached above, it is unnecessary to go further, though it is noted that the receipt of interest, referred to above, should probably be seen to have constituted, as the Commissioner's representative submitted, a derivation of income from a transaction of a kind that it had not entered into in the course of its business operations before the change in ownership took place.
9. In the result, it is our conclusion that the decisions of the Commissioner upon the objections were correct, and that the assessment should be confirmed.