Federal Commissioner of Taxation v. Australian Gas Light Co.Judges:
Federal Court of Australia
Bowen C.J., Fisher and Lockhart JJ.
The question which arises in these appeals from the Supreme Court of New South Wales (Lusher J.) [reported at 83 ATC 4220] is whether the taxpayers derived assessable income within the meaning of subsec. 25(1) of the Income Tax Assessment Act 1936 (``the Assessment Act'') during the years of income in question in respect of the supply of gas to their respective customers.
Six appeals were brought by The Australian Gas Light Company (``AGL'') to the Supreme Court against amended assessments of income tax relating to the years ended 30 June 1972 to 30 June 1977 inclusive. Two appeals were brought by Newcastle Gas Company Limited (``NGC'') to the Supreme Court against amended assessments of income tax relating to the years of income ended 30 June 1974 and 30 June 1975.
The same question was in issue in all appeals before both the Supreme Court and this Court. All appeals have been heard together by consent throughout. The Supreme Court allowed five of the six appeals of AGL and both appeals of NGC, but did not in its orders allow AGL's appeal in relation to the 1977 year (this matter was Federal Court Appeal No. G311 of 1983). We drew the attention of counsel to this, but they could offer no explanation for it. Counsel for all parties agreed, however, that the result of the other appeals would determine the result in AGL's appeal relating to the 1977 year notwithstanding that technically there is no appeal to this Court in that matter.
It is necessary to refer to the facts and the statutory framework in which the taxpayers carry on their activities to comprehend the questions which arise in these appeals.
AGL is an unincorporated company established in 1837 by Act 8 Wm. IV 1837. NGC is an incorporated company established by the City of Newcastle Gas and Coke Company's Incorporation Act 1866. The activities of gas companies in New South Wales including the taxpayers are regulated by the Gas and Electricity Act, 1935 (N.S.W.) (``the G. & E. Act'') which permits them to produce gas and supply it to customers and gives them a virtual monopoly in the supply of gas in the gas company's designated area subject to controls imposed by the G. & E. Act and the Regulations made under it. The controls are broadly of three kinds: first, limitations on the amount of dividends and restrictions on the accumulation of profits; second, control of the price at which gas may be sold; and third, certain requirements relating to the accounts of gas companies.
The G. & E. Act limits the profits of a gas company available for distribution among its shareholders by fixing a maximum rate of dividend which it may declare on its capital (called ``the standard rate of dividend'') (para. 6(1)(a)). It restricts the profits which gas companies may accumulate (sec. 6 to 11 inclusive). If a gas company fails in any year to pay dividends to its shareholders, the profits available for distribution in any subsequent year may exceed the standard rate payable in that subsequent year but not by more than a further statutory limit (subsec. 6(1A)). The directors are authorised in any year to transfer out of the company's revenue, as part of the expenditure on revenue account, to an account called ``the special purposes account'', a sum not exceeding an amount calculated by reference to a statutory formula; and the use of that special purposes account is prohibited other than for certain specified purposes (sec. 7). The depreciation of plant, buildings and equipment which may be charged against the company's revenue is limited (sec. 8). The directors are authorised to set apart out of profits, amounts by way of a general reserve where the average price per megajoule charged by the company for all gas sold by it during any year did not exceed a sum fixed by a statutory formula (sec. 10). Except as authorised by the G. & E. Act no sum shall be transferred from revenue to any reserve, fund or account; and the profits of the company shall not be applied otherwise than to pay dividends and to provide a general reserve and a suspense or reserve account to inaugurate a superannuation fund in accordance with the Act (subsec. 11(1) and (2)). If the ``clear'' profits of a company in any year, after providing for all expenses properly chargeable to revenue, interest on loans, and any transfers to any reserve, fund or account authorised by Pt. III of the G. & E. Act, amount to a larger sum than is sufficient to pay the standard rate of
ATC 4802dividend, the excess may be carried forward in the company's profit and loss account; but the balance remaining in that account, after allowing for payment of accrued dividends, shall not exceed the amount required to pay one year's dividend at the standard rate (subsec. 11(3)). A penalty is imposed upon a gas company which contravenes sec. 11 (subsec. 11(4)).
A gas company is prohibited from charging for gas supplied by meter prices which exceed ``the appropriate standard price'' (subsec. 12(1)). A price fixing machinery is established by the G. & E. Act. In summary, the Minister may constitute a Board to enquire what prices of gas would, having regard to the gas company's revenue, enable it to pay the standard rate of dividend, after making provision for various kinds of expenses of the company (subsec. 12(2)). The Board shall determine those prices and certify them to the Minister. The Governor may then, by order published in the New South Wales Gazette, notify that those certified prices shall be the standard prices in respect of the company, and authorise the company to make those certified charges (subsec. 12(2) and (3)).
The issue of shares in gas companies is subject to various restrictions, including a requirement that they be sold by public auction or tender (sec. 13).
Gas companies are required to forward to the Minister each year an annual statement of accounts duly audited; and the Minister is empowered to request the Auditor-General to audit those accounts (sec. 17 and 18).
A gas company is required to charge for gas supplied by it on the basis of the number of megajoules so supplied (sec. 26). The giving by a gas company and the taking by a person of a supply of gas otherwise than through a meter supplied by the company giving the supply, is prohibited (subsec. 27(1)). A gas company is prohibited from supplying a meter unless it has been tested and stamped in the prescribed manner (subsec. 27(2)). A penalty is imposed on a gas company or a person offending against sec. 27 (subsec. 27(3)). The registration of a meter supplied in accordance with the G. & E. Act shall be prima facie evidence of the quantity of gas which has passed through the meter (subsec. 27(4)).
Persons desiring a supply of gas to premises shall serve a written notice on the gas company which is authorised to supply gas within the locality in which the premises are situated, setting out certain specified particulars. Those persons if required by the gas company shall give a written undertaking to it to take and pay for a supply of gas and, if required, give security to the company for the payment of the price of the gas (subsec. 28(1)). The company is required to give those persons a supply of gas and to continue such supply provided that the company is not so bound where persons are indebted to the company for gas supplied or where the apparatus used for the supply of gas to particular premises is, in the opinion of the company, unsafe. A gas company which refuses or wilfully neglects to supply or continue to supply gas which it is required to give or continue is liable to a penalty (subsec. 28(2)).
Officers or servants of gas companies duly authorised in that behalf may at reasonable hours enter any premises to which gas is supplied or in which any apparatus has been installed for the supply of gas, and may inspect and test the apparatus, affix seals to it and remove it. Persons who obstruct such officers or servants in the exercise of this authority are liable to a penalty (sec. 29).
Penalties are imposed upon persons who injure apparatus belonging to a gas company for the supply of gas or who alter the index of meters or prevent meters from duly registering the quantity of gas supplied or otherwise interfere with meters or seals affixed to them (subsec. 30(1)). Gas companies are authorised to discontinue the supply of gas to persons who have committed offences under sec. 29 or 30 until the matter complained of has been remedied (sec. 31).
Gas companies are authorised to discontinue the supply of gas to persons who neglect to pay sums due by them to gas companies for gas supplied (sec. 32).
Regulations have been made pursuant to the power conferred under sec. 85 of the G. & E. Act. They provide, inter alia, for the testing of meters, the computation of accounts for gas sold and for payment thereof.
There are detailed Regulations which provide for a wide range of matters including
ATC 4803the checking of meters, correcting faulty meters, making estimates of gas supplied by faulty meters and so on. Regulation 34 makes the reading on the gas meter determinative of the quantity of gas which has been supplied and determinative of the quantitative basis on which the customer is obliged to pay for gas supplied. The Regulations contain provisions enabling customers to challenge the accuracy of readings on meters.
Regulation 42 is important and should be set out in full. At the relevant time it provided as follows:
``42(1) A demand for payment for gas supplied shall not be made by a gas company or an officer of a gas company until an account therefor has been rendered.
(2) An account rendered by a gas company shall bear the actual readings of the meter upon the first and last days of the period for which the account is rendered.
(3) A gas company shall not, except as provided in these Regulations, render an account for any quantity of gas supplied by meter, other than the quantity registered by the meter as having been supplied to the consumer.
(4) A gas company shall keep at its head office, or if its works be situated more than 20 miles from the General Post Office, Sydney, at the office of such works, a list of all accounts which have been computed under Regulation 28 showing the particulars specified in Schedule 1 to these Regulations. The list shall be available for inspection by the Senior Gas Examiner or his authorised officer at all reasonable times, and a copy thereof or an extract therefrom shall be supplied to him upon request.
(5) An account for gas supplied by meter shall have printed thereon the following words: -
- `On application to supply authority, meters tested for accuracy by Government Gas Examiner. Testing fees refunded if meter favours supply authority by more than 2 percent.'''
Customers of the taxpayers fall into three categories: domestic, commercial and industrial. These appeals are concerned with domestic customers.
The tariff or price of gas supplied by the taxpayers has been determined from time to time by a Board of Inquiry constituted by the Minister under the G. & E. Act. In fixing the tariff the Board took into account the accounts of the taxpayers and other material furnished by them. Between 1972 and 1975 the tariff was adjusted four times. The tariff was calculated in terms of the price per unit of gas used in quarterly periods during each calendar year. The learned primary Judge described the calculation of the tariff in these terms [at pp. 4223-4224]:
``The tariff is struck in terms of price per unit used in the period of a quarter. It is a differential tariff scaled at a different price in accordance with blocks or specified amounts of units used. Large numbers of consumers are involved so that meter readings and accounts sent out based thereon are cyclical or staggered over different days throughout the year and this is an important feature of the case. Although procedures and systems have been devised for the reading of meters and billing of accounts it has not during the relevant period, and both before and since, been possible to ensure that meters are read at the end of every quarter or month as the case may be. Many factors over which there is no control can cause billing periods to vary such as weather, staff absences, leave granted at short notice, industrial disturbances, leap years, need to get ahead of schedule for special purposes, data processing failures, loss or delay of documents in transit, inability to gain access to premises to read meters, reading errors, meter failure or behaviour, customer and meter movements, and the need to make the optimum use of reading personnel and strength. From this it follows that there is `routine billing' and `special billing', the latter comprising billings to close off accounts where premises are vacated and other special readings requested and those accounts which could not be billed at routine billing dates for various reasons, including some of those mentioned above. Special billing runs and bill printing processes occur daily and are subject to errors and
ATC 4804corrections which are investigated, as they are in routine billing procedures, before release of the bills. Some accounts are delivered, some mailed and all special bills are mailed.
The consequences are that as at 30th June in any year there will be a large number of domestic consumers whose quarter will not have expired, whose meters accordingly will not have been read and who will not receive accounts until after the close of the quarter, sometime in the ensuing period up to a quarter less a few days in the next financial year, whereupon payment normally follows after some 14 days.''
As at 30 June in the relevant years there was what was described in the evidence and by the primary Judge as ``unbilled or unpaid revenue'' or, expressed in terms of supply, ``unbilled gas'' which had not been paid for by the customer and in respect of which no moneys had been received by the taxpayers up to 30 June of the relevant year.
The primary Judge said [at p. 4224]:
``The tariff setting mechanism under the Act required that income be estimated and tariffs calculated so that costs were made and certain statutory requirements including provision of dividend are satisfied. The projection related to the income of the previous year as recorded in the A.G.L. books, which was compared with anticipated costs in the forecast year, and to the extent that there was any shortfall in income to meet costs and to satisfy dividend and other requirements the tariff was adjusted. The basis of the submission to the Boards of Inquiry for 1971, 1973 and 1974(2) was as to the actual income which did not take into account gas supplied to customers but in respect of which meters had not been read (i.e. unread gas) and the submission for price adjustments did not take into account any amount in respect of unread or unbilled gas as at 30th June. Following the expiration of the quarterly period the account is rendered in the usual course and this will include an amount for gas used prior to 30th June and when paid the whole of the account [sic] referred to in the account is treated as income or revenue for the year next following that particular 30th June, even though it will include revenue for gas consumed in the preceding year and it is in this way available as income for tax purposes in the subsequent year. With expanding demand for gas and increase in consumers, the volume of unbilled gas is likely to increase each year as will its value so far as it is capable of estimation, a result which is further increased by rises in prices of gas consumed.''
The taxpayers did not bring into their accounts for any of the relevant years ended 30 June any amount in respect of unbilled gas consumed before 30 June during an incomplete quarterly period. Nor did the Boards have any regard to unbilled gas as such in fixing the tariff. It is this unbilled gas with which these appeals are concerned.
The primary Judge found that the taxpayers did not derive assessable income within the meaning of subsec. 25(1) in respect of the supply of unbilled gas to their customers during the years of income in question. The Commissioner challenges that finding.
There is no doubt that what the transactions with consumers produce is income, but the question for decision is when is that income derived? The practice or method of accounting adopted by the taxpayers was not to bring to account in respect of years of income expiring on 30 June the revenue which ultimately would be received on account of unbilled gas. Thus what each taxpayer returned as assessable income did not include the revenue which it anticipated it would receive, and was contingently entitled to receive, for gas supplied after the last billing before 30 June and before that date. The Commissioner submitted that, as the taxpayers had done all that was required of them under their obligation to supply gas during this period, they should bring to account as additional sales the value or estimated value of the unbilled gas. The Commissioner placed particular emphasis on the fact that the property in the gas supplied through meters during this time had passed, and passed beyond recall, to the customers.
Many tests have been propounded and many expressions adopted by the Courts in
ATC 4805attempting to state when income is derived. Those tests have inevitably been conceived in different circumstances and to determine different facts and issues. The following examples may be cited. The fees of accountants are derived when they have matured into recoverable debts:
Henderson v. F.C. of T. 70 ATC 4016; (1970) 119 C.L.R. 621. Fees paid in advance for provision of dancing lessons are not derived until they are earned:
Arthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T. (1965) 114 C.L.R. 314; (1965) 14 A.T.D. 98. The income of a trading business is derived when its stock is sold and a debt is created:
Rowe J. & Son Pty. Ltd. v. F.C. of T. 71 ATC 4157; (1971) 124 C.L.R. 421. Conversely, fees for the price of goods sold are not earned, and thus not derived, if a further step is required before the taxpayer is entitled to payment: Rowe's case. The passing of property in stock in trade does not necessarily signify the derivation of income if the consequence is merely the creation of a right to an account rather than entitlement to a debt:
Farnsworth v. F.C. of T. (1949) 78 C.L.R. 504; (1949) 9 A.T.D. 33. If a taxpayer accounts on the basis of cash receipts, the income is derived when the ``gains have during the period of account come home to the taxpayer in a realized or immediately realizable form'':
C. of T. (S.A.) v. Executor, Trustee & Agency Co. of South Australia Ltd. (Carden's case) (1938) 63 C.L.R. 108 at p. 155; (1938) 5 A.T.D. 98 at p. 132 per Dixon J. These are some examples of the tests which the Courts have used in determining the time when revenue transactions are brought to account or income is derived.
Helpful as these tests may be as signposts, each of them has been conceived in and applied to varied and contrasting circumstances. As signposts they indicate that invariably something more than provision of goods or services by the taxpayer is required. It is necessary to determine whether the consequence is that a debt has been created or whether the taxpayer is obliged to take further steps before becoming entitled to payment. It may often be possible to reach the proper conclusion by the application of these tests if the circumstances of the taxpayer are unexceptional. However, the taxpayers in this case operate under exceptional circumstances. They contend that these circumstances dictate the manner in which they bring their revenue to account.
Utilities like the taxpayers in this case and electricity supply authorities whose activities are also regulated by the G. & E. Act enjoy a statutory monopoly in their authorised areas. They are vested with powers to do things that would otherwise be unlawful and would constitute a nuisance or trespass, such as the power to enter privately owned land for the performance of their activities: sec. 29. We mentioned earlier some of the activities of gas companies subject to control and regulation under the G. & E. Act. They illustrate that, although the taxpayers are in one sense profit making bodies in that the proprietors or shareholders may derive dividends, the G. & E. Act regulates the level of dividend which the taxpayers may return to them, the profits that may be accumulated, requires the submission of their accounts to the Minister upon request by him and subsequent auditing by the Auditor-General. The accounts and method of accounting are controlled by the G. & E. Act by regulating the extent to which gas companies may take moneys into reserve. The prices which the taxpayers may charge for gas supplied by them are fixed by an independent body, namely a Board of Enquiry, on which the Government of New South Wales is represented. Changes in prices can be made only after application to the Board which may approve or disapprove them. If the taxpayers derive more revenue in a given period than the Board allowed when it established the rate or tariff, the rate in some future period is liable to be diminished. They are not able to have or retain profits surplus to those permitted by the Board under the G. & E. Act. When they apply to the Board to fix their rates they must inform it of the following: the income which they need to derive to cover their estimates of expenses, the dividends which they are permitted to return to their proprietors or shareholders, the moneys which they are permitted to carry to reserves and their estimate of sales and revenue therefrom. The manner in which they prepare their accounts is inevitably closely interwoven with the manner in which the Board regulates their activities and finances to establish the appropriate rate.
The registration of a customer's gas meter is prima facie evidence of the quantity of gas supplied and determines the quantitative basis on which he is obliged to pay. The reading of the meter and the giving of notice to the customer of what is registered are more than mere procedure. They are conditions precedent to the making of demand for payment. A gas company is obliged to commence and continue the supply of gas subject to certain exceptions including the failure of a customer to pay his gas bill.
In the years in question the tariff was fixed by a Board by reference to supply over quarterly periods of each year and the taxpayers were required to make quarterly readings of meters. The Governor, by Order published in the Gazette, notified that the prices as certified by the Board were to be the standard prices in respect of each taxpayer and authorised each of them to make the charges as certified by the Board.
It is true that the taxpayers could physically read all meters within their respective districts on 30 June; but, apart from the obvious commercial impracticability of such a course, there are legal restraints imposed on them from demanding payment for gas consumed up to that date. First, the taxpayers are obliged to supply for a quarterly period. The relationship between each taxpayer and its domestic customers is governed by statute and regulation which, in the light of the tariff, obliges it to supply for a quarterly period. Second, the circumstances to which we have referred as exceptional in our opinion dictate the manner in which the taxpayers bring their revenue to account namely, by not including an estimate of anticipated revenue from unbilled gas supplied after the last bills were rendered in the particular year and before 30 June in that year.
The consequence of the exceptional manner in which the taxpayers operate is that as at 30 June in each year their claims against customers for current liabilities for gas supplied had not matured into recoverable debts. The method of accounting adopted by the taxpayers was in our opinion dictated by obligations imposed upon them, both in their dealings with customers and with the Board which fixed their tariff or rates for domestic consumers. The taxpayers are bound to deal with their customers on a quarterly basis. The obligation to supply is for a period of three months, rates for gas supplied are fixed on a quarterly basis and amounts consumed are calculated for that period. Furthermore, payment cannot be required of customers until their meters have been read and accounts rendered. Thus the taxpayers contend that they cannot regard the amounts for which customers are contingently liable on 30 June each year as recoverable debts. Their method of accounting is in accord with this conclusion.
There was much expert evidence before the primary Judge on the question of accounting and commercial practice. He was entitled to have regard to this evidence (see the Arthur Murray case at C.L.R. p. 318; A.T.D. p. 100) though was not bound by it in coming to his conclusions. Much of the evidence of the experts was equivocal and made apparent that it was open to the taxpayers to adopt the methods for accounting for unbilled gas which they in fact adopted. The primary Judge expressed a strong preference for the evidence of witnesses supporting the taxpayers. This evidence was challenged by counsel for the Commissioner, but no grounds were advanced which in our view justify a departure from the primary Judge's conclusion.
We would dismiss the appeals with costs.
THE COURT ORDERS THAT:
1. The appeals Nos. NSW G120 and 306-310 of 1983 inclusive be dismissed.
2. The Commissioner of Taxation of the Commonwealth of Australia pay to the Australian Gas Light Company and the Newcastle Gas Company Limited their costs of the appeal.