AM Donovan Ch
LC Voumard M
G Thompson M
No. 2 Board of Review
A.M. Donovan (Chairman); L.C. Voumard and G. Thompson (Members)
The company involved in this reference was incorporated as a private company on 23 April 1972. For the period from incorporation until 30 June 1972, and for each of the three years ended 30 June 1975, it incurred losses, and in its return for the year ended 30 June 1976, it claimed to deduct those losses in determining the taxable income of that year. But on 4 April 1973, changes had occurred in the beneficial ownership of shares in the taxpayer company such as admittedly denied the deduction claimed, so far as it related to losses incurred prior to that date, unless the taxpayer could be shown to have satisfied the ``same business'' test imposed by sec. 80E(1) of the Income Tax Assessment Act.
2. That provision reads:
``80E. (1) Subject to sub-section (2), 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 a change that has taken place in the beneficial ownership of shares in the company or in any other company, be taken into account for
ATC 106the purposes of section 80 or section 80AA;
- (b) 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 referred to in paragraph (a) took place; and
- (c) 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,
sections 80A and 80DA do not prevent the whole of the loss being so taken into account.''
In the circumstances of this case, subsec. (2) is not material.
3. The two questions that sec. 80E(1) raises are -
- (a) whether, at all times during the year ended 30 June 1976, the taxpayer carried on the same business as it carried on immediately before the date (4 April 1973) the disqualifying change in beneficial ownership took place, and (if that question is answered favourably to the taxpayer)
- (b) whether, at any time during the year ended 30 June 1976, the taxpayer derived 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 disqualifying change in beneficial ownership took place.
4. We find the relevant facts to be as follows:
- (a) The taxpayer company was formed to sell and market marine craft of many types, including houseboats. The company's memorandum of association was not before us, but we accept the evidence of Mr. G., a director of the taxpayer and of several related corporations (in the Companies Act sense of that term), as to the nature of the company's business. The formation of the company resulted from a meeting between Mr. G and persons who were looking for someone to manufacture houseboats; another company in the G group of companies (S.M.) manufactured fibreglass products, and the parties therefore ``got together and formed'' the taxpayer company. The sale of houseboats may be taken as an important object for which the taxpayer was incorporated.
- (b) Between incorporation and 4 April 1973, the taxpayer sold three houseboats, one ferry and 17 assorted yachts and runabouts. All these boats were supplied by S.M. but the houseboats, and to a lesser degree the ferry, were supplied in a partly unfinished state and were completed by the taxpayer. Until 2 March 1973, the taxpayer employed two persons who, while they did not carry out any assembly work ``as such'', were involved in what Mr. G described as ``screwing on some of the final bits and pieces such as instruments and things that generally were outside (S.M.'s) manufacture''. The work of these employees related predominantly to the houseboats for they required more ``finishing off'' than the other boats.
- (c) From 2 March 1973, the employment of the two employees mentioned above was terminated. That of a paid manager was also terminated about the same time. No sales took place in the two years ended 30 June 1975, but in the succeeding year the taxpayer sold 38 assorted boats, all supplied by S.M. No houseboats were sold during this year nor, as far as the evidence and the accounts for that year showed, was any labour engaged by the taxpayer. In other words, the goods supplied to the taxpayer during the year ended 30 June 1976, were supplied in a finished and saleable state, required no finishing off, and included no houseboats. In fact, environmental problems prevented the marketing of houseboats.
- (d) The last sale made by the taxpayer before the change of beneficial ownership occurred was made on 16 March 1973. There was a further sale on 11 May 1973, of attachments for a ferry sold earlier, but thereafter no further sales were made until 14 August 1975. There was some
ATC 107evidence of an advertising campaign conducted over a three month period around August 1973, but there was nothing in the taxpayer's accounts to suggest that the costs of the campaign had been borne by the taxpayer. There was also a suggestion, but no precise evidence, that some negotiations and some activity had preceded the August 1975 sales, but even making allowances for this there was a period of inactivity extending at least from late 1973 to early 1975, a period of well over 12 months. This inactivity is reflected in the fact that the accounts for the years ended 30 June 1974 and 1975, show no income and little in the way of expenses. In 1974 there were accounting fees, bank charges and sundry expenses aggregating $243 which, after adjusting the claim for depreciation in respect of the sale of a houseboat mould, left a net loss of $146. In 1975 there was an unexplained expense of $216, which was the loss assessed for that year.
- (e) At the same time as the disqualifying share transfers took effect - that is, 4 April 1973 - the taxpayer disposed of certain assets - cash, a motor vehicle and a boat mould - to an unrelated company, which also took over certain liabilities, including a hire purchase debt, a bank liability and trade creditors.
- (f) The money value of purchases made by the taxpayer from vendors outside the G group of companies ranged from about 30 per cent in the total period of 14 months between incorporation and 30 June 1973, including not much less than 50 per cent during the year ended 30 June 1973, to virtually nil during the year ended 30 June 1976.
- (g) Some time in 1973 or 1974 the taxpayer followed S.M. to new premises.
5. Given these facts, it seems to us that the taxpayer's claim must fail. In argument we were invited by the representative of the Commissioner to follow the view expressed by Gibbs J. in
Avondale Motors (Parts) Pty. Ltd. v. F.C. of T. 71 ATC 4101 at pp. 4105-6, namely, that the expression ``same business'' in the then sec. 80E(1)(c) imports more than a business of a similar kind, and requires that the business carried on during the year of income should be indentical with that carried on immediately before the disqualifying change in beneficial ownership. In the case before us the necessary identity is lacking. The original business included the buying of partly finished houseboats, putting them into a finished condition, using for that purpose the taxpayer's own labour, and selling them. After 4 April 1973, there was a gap of several months before the company began a business of buying boats (not including houseboats) that were completely finished and in a saleable condition, and selling them. And this, in our view, was not an identical business. This view is further supported to some extent by the matters referred to in para. 4(e) and (f).
6. The taxpayer's argument to the contrary was based largely on the finding of the majority of the Full High Court in
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 that there had been no change in the nature of that taxpayer's business. At 75 ATC at p. 4066, Barwick C.J. said: ``The nature of the company's business, both before and at the conclusion of the scheme when the company resumed activities, was that of a financier, lending directly to borrowers and also servicing hire purchase arrangements. There was no change in the nature of the business at all. I conclude that in point of fact it was the same business which was carried on after a break, a break which it might be noted was not for the purpose of abandoning the business but rather to enable its continuance.'' And Mason J., who agreed with the Chief Justice, said (ibid, at p. 4072) that on the facts there was ``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.''
7. Of course, the A.G.C. (Advances) case is readily distinguishable from the one with which we have to deal, both on the facts and as regards the statutory provision involved (in the context from which the two quotations cited above are taken, sec. 51). And it might also be observed that in none of the judgments was there any reference, nor, with respect, was it necessary to make any reference, to the Avondale Motors case or to
ATC 108sec. 80E. But even if it be said that for the purposes of that section a business can remain the same business, despite some interruption, provided its nature and character remain unchanged, the change in the business of this taxpayer was, in our opinion, a change in its nature and character. On any test, therefore, the company has failed to bring its claim within the ``same business'' test prescribed by sec. 80E, and it is not necessary to consider the second question set out in para. 3 of these reasons.
8. It follows that for the reasons given we would uphold the Commissioner's decision on the objection and confirm the assessment. By that assessment the Commissioner disallowed as deductions the losses incurred by the company between its incorporation and 4 April 1973, apparently on some time basis treating part of the losses shown in the return for the year ended 30 June 1973, as incurred after the disqualifying change of beneficial ownership, and therefore deductible. Such an apportionment may, on the facts, have produced a generous result for the taxpayer, but the Commissioner's representative very properly disclaimed any wish to adjust the deduction allowed, and the Board expressly refrains from doing so.