Guinea Airways Ltd v Federal Commissioner of Taxation
(1950) 83 CLR 584 (Dixon J - 22 December 1949 - (decision appealed))[1950] HCA 60 (Dixon J - 22 December 1949 - (decision appealed))
(1950) 83 CLR 584 at 588 (Full Court - 13 November 1950)
[1950] ALR 913 (Full Court - 13 November 1950)
(Judgment by: Latham CJ)
Between: Guinea Airways Ltd
And: Federal Commissioner of Taxation
Judges:
Dixon J (decision appealed)
Latham CJMcTiernan J
Webb J
Fullagar J
Kitto J
Judgment date: 22 December 1949 (Dixon J); 13 November 1950 (Full Court)
Judgment by:
Latham CJ
This is an appeal from an order of Dixon J. dismissing an appeal from an assessment of Guinea Airways Limited to income tax. The question which arises relates to a deduction claimed by the company under s. 51 (1) of the Income Tax Assessment Act 1936-1942. Section 51 (1) is in the following terms:-
"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation ..."
The taxpayer is an air transport company operating in New Guinea. It necessarily maintained a stock of spare parts for the maintenance and repair of its aeroplanes and a stock of general stores which were required in order to carry on its business. The remoteness of the territory in which it operated necessitated the carrying of substantial stocks. When Japan invaded New Guinea the physical assets of the company were destroyed. A claim was made under the National Security (War Damage to Property) Regulations, but the full amount claimed was not awarded. The result is that the company claims that there was a loss in respect of the spare parts and stores of an amount which was finally stated at 5,983 pounds. It was not disputed that this loss had been suffered, but it was contended for the commissioner that the loss was a loss of a capital nature and so was not deductible under s. 51(1).
The value of the spare parts destroyed was stated by the company to be 25,361 pounds and of the general stores 7,702 pounds. In the objection to the assessment lodged by the company it was claimed that the general stores were stores held not only for the use of the company, but also for sale to other airline operators, and if this had been the case it would have been necessary to consider how far the general stores represented stock in trade acquired and held for purposes of resale. There was, however, no evidence of this suggested fact and I read the accounts of the company for the relevant year as showing that the stores, so far as they were used, were used for the purposes of the company itself.
The claim of the company is not a claim for deduction of the amount expended in purchasing the spare parts and stores or of the value of those actually used. It is a claim in respect of their loss. When spare parts and consumable stores were used for the purpose of maintaining and repairing (as distinct from renewing or replacing) the aircraft and other material assets which constituted the plant of the company a deduction could properly be claimed for purposes of assessment to income tax because the utilisation in the manner stated of such spare parts or general stores would constitute part of the working expenses of the year in which they were so used. The statement of facts agreed between the parties includes a statement that during the relevant accounting period aircraft spare parts costing 4,212 pounds were taken into account and during that period issues (for actual use) of aircraft spare parts out of stores on hand totalled 2,525 pounds. The balance shown in the account of the company as remaining at 21st January 1942, when the Japanese aircraft bombed Lae, was 25,361 pounds. There is a corresponding statement with respect to stores. The claim of the company relates, therefore, to a large quantity of spare parts and stores which were not in fact used in the maintenance and repair of the company's plant, but which were intended to be so used. In its statement of objection to the assessment the company stated:-
"The assets comprising the items of objection were assets used for the repair, maintenance and reconditioning of our aircraft as distinct from fixed plant."
It is, however, clear that the assets in question had not in fact been so used. What was destroyed was a large stock of assets, much greater than, according to the facts before the court, any annual quantity which was intended to be used in the maintenance and repair of the aircraft of the company.
The provision of these stocks of goods does not represent incidents in the carrying on of the enterprise of the company from day to day whereby it earned its income. As I have already said, so far as the spare parts & c. were actually used in repairing & c. aeroplanes, their cost would be deductible. But the cost of maintaining a large stock which, though it probably represents a wise policy, is beyond any requirements for prospectively immediate use cannot, in my opinion, be regarded as an expenditure properly chargeable to income account. It represents, in my opinion, an expenditure of the capital of the company in procuring an asset to be used in the future in carrying on the income-earning enterprise of the company. Accordingly I agree with Dixon J. that the claim for the deductions was properly disallowed by the commissioner.
It was alternatively argued for the appellant that under ss. 59 and 54 of the Act a deduction should have been allowed. Depreciation, it was claimed, was allowable in respect of the property of the taxpayer which was destroyed (s. 59) and it was urged that the articles which were destroyed were articles owned by the taxpayer which had been installed ready for use for the purpose of reducing assessable income (s. 54). But, in my opinion, it cannot be said that the articles in question were in any sense installed ready for use.
In my opinion the appeal should be dismissed.