Federal Commissioner of Taxation v. Westraders Pty. Limited.

Judges:
Barwick CJ
Mason J
Murphy J
Aickin J
Wilson J

Court:
Full High Court

Judgment date: Judgment handed down 5 August 1980.

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Barwick C.J.

The facts of this case disclose an ingenious use of the provisions of sec. 36 and 36A of the Income Tax Assessment Act, 1936 as amended (Cth.) (the Act) to produce what is claimed to be an allowable deduction from a taxpayer's assessable income. The facts were found by the Supreme Court of New South Wales ( Rath J.). They were found on available evidence and have not been challenged at any time in the course of the proceedings in the case. Further, they were confirmed as correct by the majority of the Federal Court ( Deane and Toohey JJ.) and, as I think, also by Brennan J. although he found himself able to reach a different ultimate conclusion of fact, which his Honour thought not inconsistent with the primary judge's findings.

Because of the employment of the provisions of the Act to produce a very large diminution of tax, the case affords an occasion to point out the respective functions of the Parliament and of the courts in relation to the imposition of taxation. It is for the Parliament to specify, and to do so, in my opinion, as far as language will permit, with unambiguous clarity, the circumstances which will attract an obligation on the part of the citizen to pay tax. The function of the Court is to interpret and apply the language in which the Parliament has specified those circumstances. The Court is to do so by determining the meaning of the words employed by the Parliament according to the intention of the Parliament which is discoverable from the language used by the Parliament. It is not for the Court to mould or to attempt to mould the language of the statute so as to produce some result which it might be thought the Parliament may have intended to achieve, though not expressed in the actual language employed. In this connection, I would endorse what was said by Deane J. in his reasons for judgment in this case, and which, in my opinion, are worthy of repetition. Speaking of the result of this case in upholding the taxpayer's claim to deduction, his Honour said:

``That result may seem both contrary to the general policy of the Act (if it be possible to discern any general policy other than that people pay income tax) and unfair to the ordinary taxpayer who willingly or reluctantly contributes, without resort to tax avoidance, the share of his net income which the Parliament

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has determined is required by the nation for the common good. If there be, in truth, such contrariety or unfairness, the fault lies with the form of the legislation at the relevant time and not with the courts whose duty it is to apply the words which the Parliament has enacted. For a court to arrogate to itself, without legislative warrant, the function of overriding the plain words of the Act in any case where it considers that overall considerations of fairness or some general policy of the Act would be best served by a decision against the taxpayer would be to substitute arbitrary taxation for taxation under the rule of law and, indeed, to subvert the rule of law itself (see
Ransom v. Higgs (1974) 1 W.L.R. 1594 at p. 1617 ;
I.R.C. v. Duke of Westminster (1936) A.C. 1 at p. 19 ).''

The principle to which his Honour calls attention is basic to the maintenance of a free society.

Parliament having prescribed the circumstances which will attract tax, or provide occasion for its reduction or elimination, the citizen has every right to mould the transaction into which he is about to enter into a form which satisfies the requirements of the statute. It is nothing to the point that he might have attained the same or a similar result as that achieved by the transaction into which he in fact entered by some other transaction, which, if he had entered into it, would or might have involved him in a liability to tax, or to more tax than that attracted by the transaction into which he in fact entered. Nor can it matter that his choice of transaction was influenced wholly or in part by its effect upon his obligation to pay tax. Of course, the transaction must not be a pretence obscuring or attempting to supplant some other transaction into which in fact the taxpayer had earlier entered. Again, the freedom to choose the form of transaction into which he shall enter is basic to the maintenance of a free society.

Section 36(1) of the Act provides:

``36(1) Subject to this section, where -

• (a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock, standing or growing crops, crop-stools, or trees which have been planted and tended for the purpose of sale;
• (b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and
• (c) the disposal was not in the ordinary course of carrying on that business,

the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value.''

In 1951 this Court decided that sec. 36(1) was only applicable to the disposal of the entirety of the ownership in an article of trading stock and inapplicable to the disposal of an undivided fractional interest in such an article (
Rose v. F.C. of T. (1951) 84 C.L.R. 118 ).

The facts of that case were that a father, the owner of a pastoral business, with livestock as part of its stock in trade, entered into partnership with his two sons. It was agreed between the three that the lands and stock owned by the father should constitute the capital of the partnership, the father making a gift to each of the sons of a one-third interest therein. The Court held that sec. 36(1) did not apply to these facts.

In 1952 the Parliament inserted sec. 36A into the Act, evidently to reverse the consequence of sec. 36(1) perceived by this Court in Rose's case. Section 36A(1) provides:

``36A(1) Where, for any reason, including -

• (a) the formation or dissolution of a partnership; or
• (b) a variation in the constitution of a partnership, or in the interests of the partners,

a change has occurred in the ownership of, or in the interests of persons in, property constituting the whole or part of the assets of a business and being trading stock, standing or growing crops, crop-stools, or trees which have been planted and tended for the purpose of sale, and

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the person, or one or more of the persons, who owned the property before the change has or have an interest in the property after the change, section thirty-six of this Act applies as if the person or persons who owned the property before the change had, on the day on which the change occurred, disposed of the whole of the property to the person, or all the persons, by whom the property is owned after the change.''

The appellant first submitted that a transaction would not fall within the operation of sec. 36A(1) unless it did not occur in the ordinary course of business within the meaning of sec. 36(1)(c): in other words, that it was not enough that the transaction satisfied the requirements of sec. 36A(1): it must also satisfy all the requirements, including that of para. (c), of sec. 36(1). In my opinion, this submission should be rejected. In the first place, sec. 36A(1) provides its own conditions on which sec. 36(1) is to apply to the transaction. In the next place, sec. 36A(1) erects a notional or fictional transaction in order that sec. 36(1) may apply. It is scarce to be thought that a notional or fictional transaction, one which has not taken place, should be required to have taken place in the ordinary course of business.

The appellant then relies on the reasons for judgment of Brennan J. to submit that the shares disposed of by Jensen Mining and Investment Limited (Jensen) to Jenspart Trading Company (Jenspart) were not at the time of their disposal stock in trade of Jensen.

To enable this submission to be understood, it is necessary to summarise the relevant facts as found by the primary judge. Jensen was at all material times a share trader. It had acquired some shares in order to gain access to the assets of the companies in which they were held and in order by declaration and payment of a dividend to reduce their value on disposal. Undoubtedly, whatever the motivation to acquire these shares, when acquired they formed part of Jensen's stock in trade as a share trader. They were bought to be sold, though not till value had been taken from them by the payment of a dividend.

Some months before these shares were disposed of and after their value had been diminished, Jensen decided to promote partnerships, in which it would be a participant. The plan devised by Jensen was to dispose of shares whose value had been so diminished to these partnerships so that each partnership could exercise the election given by subsec. (2) of sec. 36A, i.e. by nominating the cost of the shares to Jensen as the notional cost to the partnership. The disposal of such shares at market value would thus disclose a loss deductible under sec. 51 of the Act.

One such parcel of shares was disposed of to Jenspart of which Jensen was a member to the extent of a 25% interest. The value placed on the shares for the purpose of fixing the extent of Jensen's interest was their market value, the whole of which was treated as Jensen's contribution to the capital of the partnership. But the shares vested in the partnership as a whole. The partnership, including Jensen (who obtained a fee for joining in the election), having given a notice of election under sec. 36A(3), disposed of the shares on the day they were transferred to it at a price slightly in excess of the market value placed on them when received from Jensen. However, if sec. 36(1) and 36A(1) were applicable to the partnership in its dealing with the shares, the result of the election of the partnership under sec. 36(1) was a loss of some $6,463,484 being the difference between the cost of the shares to Jensen, i.e. before their value had been diminished, and the sum realised on their sale by the partnership.

One of the members of the partnership, Jenspart, was the respondent. It claimed against its assessable income a deduction of its proportion of this partnership loss. The appellant disallowed the deduction. This disallowance gave rise to the respondent's appeal to the Supreme Court, to the appellant's appeal to the Federal Court and to his appeal to this Court.

The appellant says that, although the shares disposed of to Jenspart were stock in trade of Jensen when acquired, they ceased to be so when Jensen formed the intention of disposing of them to a partnership which Jensen would form and of which it would be a member. It is said that such a method of

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disposal was not part of the business of a share trader but a departure from it and a distinct and disparate business, as it were, sui generis.

This submission is, in my opinion, in flat opposition to the express finding of fact of the primary judge. As appears from his judgment, Rath J. was well aware of the so-called new development of Jensen's business, i.e. the plan to form the partnerships, but, nonetheless, he expressly found the shares in question to have been trading stock of Jensen at the time of their disposal to the partnership Jenspart.

However, in any case, it is to my mind fallacious to conclude that the disposal to a partnership of which the disponer was to be a member was not a manner of disposal of the shares in a business of share trading. Such a method of disposal was to an extent novel. But it was, however unusual, a method of disposing of the shares bought and held for disposal. To decide upon such a method of disposal did not involve, in my opinion, an abandonment of the business of share trading or the doing of something outside the scope of that business.

The matter might be pointed up by attempting to apply the reasoning of Brennan J. to the facts of Rose's case. Consistently with that reasoning, sec. 36A(1) would not apply to those facts. If the reasoning is correct, it should be held that the father, in deciding to form the partnership with his sons and to dispose of his stock to the partnership, removed them from his stock in trade so that when disposed of to the partnership they were no longer part of his stock in trade. Thus would sec. 36A(1), which was designed to enable the effect of Rose's case to be reversed, fail entirely of its purpose.

In my opinion, the primary judge's finding should stand: and, if it matters, it was in my opinion a correct finding.

The appellant, as a variant of the primary submission that to satisfy sec. 36A(1) the disposal of the stock in trade must not be in the ordinary course of business, submits that sec. 36 and 36A are designed to deal only with transactions which do not arise in the ordinary course of business. Therefore, if the shares disposed of to Jenspart were part of Jensen's stock in trade at the time of that disposal, the transaction between Jensen and Jenspart in relation to the shares was in the ordinary course of Jensen's business and fell for that reason outside the scope of sec. 36 and 36A.

But sec. 36A(1) sets out particular conditions upon the fulfilment of which sec. 36(1) is attracted. It is unconcerned with the question whether or not the transaction which satisfies the conditions it specifies is a transaction in the ordinary course of business. I can see no warrant for holding that sec. 36(1) and 36A(1) are only concerned with transactions which are not in the ordinary course of business. It seems to me that this submission must be rejected.

The final submission of the appellant was that the shares received by Jenspart from Jensen did not form part of the trading stock of Jenspart. This submission is immediately answered, in my opinion, by the terms of the sections with which we are concerned. There is no requirement that the shares should become trading stock in the hands of the disponee. It suffices that they were part of the trading stock of the disponer at the time of their disposition.

In my opinion, the majority of the Federal Court reached a correct decision in holding that the respondent was entitled to the claimed deduction. Accordingly, the appeal should be dismissed.