Northern Engineering Pty. Ltd. v. Federal Commissioner of Taxation.Judges:
Supreme Court of Victoria
Jenkinson J.: Appeal pursuant to Div. 2 of Part V of the Income Tax Assessment Act 1936 and sec. 8(4) of the Income Tax Assessment (No. 3) Act 1973.
The appellant claimed to deduct from its assessable income of the year of income ended 30 June 1967, losses incurred by it in certain preceding years of income. That claim the Commissioner wholly disallowed in assessment and again upon consideration of the appellant's objection against the assessment, which objection the appellant requested the Commissioner in a writing dated 22 November 1972, to treat as an appeal and to forward to the High Court of Australia. In August 1973 the appellant communicated to the Commissioner a letter which the parties seem to have regarded as amounting to an amendment of the request which satisfied the requirements of sec. 8(4) of the Income Tax Assessment (No. 3) Act 1973. In September 1976 the Commissioner forwarded the objection to this Court in compliance with sec. 188(1) of the Income Tax Assessment Act 1936. Contested interlocutory proceedings in May 1977 and a request by the appellant's solicitor in December 1977 for deferment had the effect of delaying the hearing of the appeal until 25 October 1978. By an amendment of his assessment of which notice was dated 23 October 1978, the Commissioner allowed in deduction losses which had been incurred in two of the years of income preceding the year ended 30 June 1967, and to which the objection related; and the parties were then in agreement that the other losses to which the objection related were deductible if, but only if, the conditions specified in para. (c) and (d) of sec. 80E(1) of the Income Tax Assessment Act 1936-1972 were satisfied.
Before amendment by the Income Tax Assessment Act 1973, sec. 80E provided:
``(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,
ATC 4240by 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 eighty 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 last preceding sub-section does not apply in respect of a loss incurred by a taxpayer being a company in a year before the year of income if -
- (a) before the change took place, the company commenced to carry on a business that it had not previously carried on or entered into, in the course of its business operations, a transaction of a kind that it had not previously entered into; and
- (b) the company commenced to carry on that business or entered into that transaction for the purpose, or for purposes that included the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty AA of this Act a loss that the company had incurred in a year before the first-mentioned year or might incur in the first-mentioned year.''
The issue of the amended assessment on the eve of the hearing of the appeal appears to have been authorised by sec. 170(7) of the Income Tax Assessment Act 1936, and sec. 191 seems to authorise a determination of the appeal, notwithstanding the making of the amended assessment. And the parties desired that the correctness of the amended assessment should be determined in this appeal.
The taxpayer was at all material times a wholly owned subsidiary of Automotive and General Industries Ltd. On 21 April 1967, the acquisition by another company of legal and beneficial ownership of more than 90 per cent of the issued shares of Automotive and General Industries Ltd. made it necessary that sec. 80E(1) should be satisfied if the losses of the preceding years which the Commissioner has not allowed as deductions from the taxpayer's income of the year ended 30 June 1967, were to be taken into account for the purposes of sec. 80 of the Act.
For several years before the year ended 30 June 1967, the taxpayer had engaged in the business of purchasing vehicles used in handling materials, such as forklift trucks, and of purchasing other equipment in which the group of companies controlled by Automotive and General Industries Ltd. was trading and of selling by wholesale what was purchased to companies within the group and to others. At 1 July 1966, the value of stock on hand was $11,977.80. The parent company and the taxpayer and other companies in the group were then engaged in bringing their trading activities to an end. By April 1967 the taxpayer had disposed of all its trading stock and by the end of May 1967 payment for that stock had been received by the taxpayer. Before 30 June 1967, the taxpayer had divested itself of all its assets except a debt, owed to it by its parent company, of $827,829.
The only witness called on the hearing of the appeal was Arthur Percy Fuller, who had been the secretary of the taxpayer during the year ended 30 June 1967.
He had signed a ``detailed profit and loss statement'' for that year in these terms:
``$ Interest received from Automotive & General Industries Ltd. 28,105 Bad debts recovered 92 ------- Total: $28,197 Deduct $ Audit fees 40 Bank charge 4 Management fees 1,000 Sundry expenses 85 Directors superannuation 400 1,529 ----- ------- Net profit per accounts $26,668 ------- Note Stock at 30 June 1966 - $11,978 transferred to associated company at book value.''
I was invited to find upon a consideration of certain of the taxpayer's books of account that the note as to the transfer of stock was an error and that the taxpayer had been engaged during most of the year ended 30 June 1967 in selling the stock. I am not persuaded to make those findings, but I proceed to consider the evidence further on the assumption that those findings were made. The witness gave evidence that the taxpayer employed ``a couple of storemen'' at the beginning of the year of income, but he swore that there would have been no storemen employed by the taxpayer in June 1967. The witness was asked, ``When you became secretary in 1966 what was the staff?'' Answer: ``Nil, all the work was handled by the staff of the parent company, Auto Gen. It was paper entries, you might say. There could have been a couple of storemen... I'm sorry, there might have been a couple of storemen, handymen.'' The payment described in the profit and loss statement as ``management fees'' was made to Automotive & General Industries Ltd.
If the activities of the taxpayer during the year ended 30 June 1967 satisfied the requirement of sec. 80E(1)(c) that during that year the taxpayer should carry on business, as to which I need express no opinion, the requirement that the carrying on of a business should be ``at all times during the year of income'' was in my opinion not satisfied by buying or by selling, for all buying and selling and all payments by and to the taxpayer in respect of its buying and selling had been completed before 30 June 1967, and there was no evidence of any intention that the taxpayer should resume either activity.
The bad debt recovery was effected in April 1967. The crediting of interest from Automotive & General Industries Ltd. was effected, according to the taxpayer's books of account, in June 1967. Evidence was given by Mr. Fuller that the members of the group of companies had in previous years followed the practice of transferring to the parent company funds which the transferor did not then require for the conduct of its business, while Automotive & General Industries Ltd. lent money to all members of the group which had need of funds. The practice was to charge interest on funds thus lent within the group, according to the witness. However, the evidence disclosed that, although the indebtedness of Automotive & General Industries Ltd., as shown in the taxpayer's balance sheet for each of the years ended 30 June 1962, 1963, 1964, 1965 and 1966 had exceeded $200,000, no interest was received or credited by the taxpayer from its parent, or from any other member of the group, during those years. If participation in such a practice as the witness described could be characterized as part of the taxpayer's business, as to which I express no opinion, I am not persuaded that in the year which ended on 30 June 1967 the taxpayer was carrying on that business, because I am not persuaded that any person concerned in the management or the control or the service of the taxpayer had any expectation or hope, at any time during that year before late June 1967, that the taxpayer would derive income by way of interest on the funds owed to it by
ATC 4242Automotive & General Industries Ltd., nor that any such person made any effort of any kind on the taxpayer's behalf during that year to obtain income of that kind for the taxpayer. The evidence of Mr. Fuller, who was not engaged in the management of the taxpayer for several years before 1 July 1966, was not inconsistent with the hypothesis that the practice of allowing interest on the parent company's loan indebtedness to the taxpayer had been discontinued by an agreement made between the two companies at some time during those years. The failure to allow interest during those years, which the taxpayer's books of account and financial statements demonstrate, is consistent with such an hypothesis. It is also an hypothesis consistent with the evidence that the taxpayer's derivation of interest on its parent's indebtedness in respect of the year ended 30 June 1967 was a consequence merely of decisions taken by persons who first became concerned in the affairs of the taxpayer in or about April 1967, or by persons who owed no duty to the taxpayer at any time either as directors or officers or servants. It was submitted on the taxpayer's behalf that the interest credited in June 1967 had been earned ``at all times during the year of income''. That may be. But that is not enough to show that the taxpayer carried on a business at all times during that year, when there has been shown neither hope nor expectation, for most of the year, of any such a receipt, nor any activity at any time during the year directed to the derivation of such income.
I am not persuaded by the evidence that in June 1967 the taxpayer carried on any business and therefore I am not persuaded that the requirements of sec. 80E(1)(c) have been satisfied in relation to the year of income ended 30 June 1967.
The order of the court is that the appeal be dismissed.
Mr. Santospirito: I ask, your Honour, for costs.
His Honour: What do you say about costs, Mr. Sweeney?
Mr. Sweeney: Your Honour will recall that the sequence of events when the matter was first brought on before your Honour was such that it disclosed that in effect at 7 p.m. the previous night the taxpayer had received an amended assessment to which your Honour has referred in judgment which now the issues have indicated... in my submission, your Honour, in those circumstances, the question of costs... In context, that, in effect, the taxpayer has succeeded in relation to those points and of course your Honour has been put to the task of hearing this case and so in my submission it would be an appropriate order for each party to bear their own costs.
His Honour: I do not know whether you are familiar with the history of the matter?
Mr. Santospirito: Unfortunately I am not.
His Honour: I will give the Commissioner an opportunity if he wishes to, as it were, enlarge my very, very limited knowledge of the history. I know that an amended assessment was served just before the hearing commenced, but I know nothing about the circumstances which brought that about, or how it happened, or what communications may have passed between the parties at any time in the 6 or 7 years during which they seem to have been engaged in this litigation. If you wish, I will stand the matter over, but on the - as I say - very, very meagre information which I presently have, I would be disposed to make no order as to costs, but I will stand it over if you wish.
Mr. Santospirito: Perhaps in the circumstances it would be better if the matter was stood over.
His Honour: You could get instructions about it, yes. You cannot object to that, can you, Mr. Sweeney?
Mr. Sweeney: No, your Honour.
His Honour: The costs occasioned by having to stand it over... I should warn you that of course it is likely that the Commissioner, if you are not in a position at the moment to prove any facts that you think, are relevant to the question of costs, will probably have to bear the costs of the further hearing in any event, no matter what the outcome is.
Mr. Santospirito: Your Honour, I can tell you this much, that the amended assessment resulted in a minimal decrease of $2,049, the original amount being $27,068.
His Honour: Are you talking about tax or taxable income?
Mr. Santospirito: Income.
His Honour: So that the amendment took about $2,000 off the taxable income?
Mr. Santospirito: That is so.
His Honour: And that was bringing it from 27-odd down to 25, something like this.
Mr. Santospirito: Yes, that is so.
His Honour: Yes. Well, I will stand it over so that you can get instructions. If you decide not to take the matter any further, you can simply notify the appellant's solicitors to that effect, and it will not be necessary to incur any more costs because at the moment I will be making no order as to costs.
I will adjourn the question of costs to a date to be fixed.