Federal Commissioner of Taxation v Wade
(1951) 84 CLR 105(Judgment by: Kitto J)
Between: Federal Commissioner of Taxation
And: Wade
Judges:
Dixon J
Fullagar J
Kitto J
Judgment date: 5 November 1951
Judgment by:
Kitto J
I agree that the appeal should be allowed. (at p114)
I must confess to some difficulty in accepting the view that the fact that dairy cattle, which are not trading stock according to ordinary conceptions, are required by force of a definition to be taken into account under ss. 28 and 32 of the Income Tax Assessment Act 1936-1947 (Cth.) as trading stock, affords a sufficient reason for bringing compensation received in respect of their compulsory destruction into the computation of taxable income. Cases such as J. Gliksten & Son Ltd. v. Green (1929) AC 381 establish beyond dispute that when trading stock (in the ordinary sense) is replaced by money, the money must be acknowledged as possessing the character of a trading receipt, whether the replacement resulted from a sale or from any other event. But it is not clear to me that, where a taxing Act requires capital assets to be treated as trading stock for the purposes of provisions such as are found in ss. 28 and 32, it necessarily follows that money which replaces those capital assets is to be treated as having been received on revenue account. It may be thought that a provision producing that result would be a reasonable corollary; but I should hesitate to supply such a provision by implication. (at p115)
I think it of some importance to observe that the application of ss. 28 and 32 has nothing to do with the profit and loss account of the business. That account produces its own balance, which forms an item to be taken into the computation of taxable income. Under ss. 28 and 32 a separate account is required, the balance of which forms another item in the computation of taxable income. Where trading stock (in the ordinary sense) is sold or otherwise turned into money, the proceeds must be reflected in the profit and loss account. Where assets which, though of a capital nature, are included in trading stock by definition are turned into money, the proceeds, since they are not a revenue receipt according to ordinary principles, cannot be reflected in the profit and loss account. They must be brought into the calculation of taxable income, if at all, because the relevant legislation so requires. But I find no such requirement in the Income Tax Assessment Act, apart from s. 26 (j). I should mention that by virtue of s. 51 (2) expenditure in the purchase of stock which, though by nature capital assets, are "used . . . as trading stock" - which I understand to mean, are used in a business so as to be, by virtue of the definition, trading stock of that business for the purposes of ss. 28 and 32 - is deemed not to be an outgoing of capital or of a capital nature. This appears to me to tend against the view that by inference from s. 28 and its accompanying sections purchases and sales of such stock ought to be treated as revenue items. (at p115)
However this may be, I am of opinion that this appeal should be allowed on the ground that the compensation money which the taxpayer received in the year of income was, within the meaning of s. 26 (j), "received by way of . . . indemnity for or in respect of any loss - (i) of trading stock which would have been taken into account in computing taxable income; . . . if the loss had not occurred." (at p115)
The words "by way of . . . indemnity" describe the character of the receipt, and in my opinion they may be satisfied as well by a receipt pursuant to a statutory right as by a receipt under a contract. Section 25 (c) of the Income Tax Assessment Act 1922-1934 (Cth.) allowed a deduction in respect of any loss or expense recoverable under any contract of insurance or indemnity. The language of s. 26 (j) of the present Act is significantly wider. (at p115)
The words "any loss of trading stock" are wide enough to include loss by any means, and I see no reason for denying that a loss by compulsory destruction is within their meaning. By compulsory destruction under the provisions of the Milk Act 1946-1947 (W.A.), the taxpayer lost 110 dairy cattle which, under ss. 28 and 32 of the Income Tax Assessment Act, would have been taken into account in computing his taxable income if the loss had not occurred. He received 2,016 pounds under s. 53 of the Milk Act as "compensation in respect of the loss sustained by him by the destruction of the said dairy cattle". The only question is whether a receipt of this character is a receipt "by way of indemnity" in respect of the loss of the dairy cattle. I should have thought the description entirely apt. The purpose and effect of the receipt was, to the extent of its amount, to save the taxpayer harmless from the loss he sustained by the destruction of his cattle; in other words, to provide pro tanto indemnification in respect of the loss of the cattle: cf. Stebbing v. Metropolitan Board of Works (1870) LR 6 QB 37, per Lush J at p 46 ; Minister for Lands v. Ricketson (1898) 19 LR (NSW) 281 , at pp 286, 287; 15 WN 189 . (at p116)
The appeal relates only to the balance of 130 pounds remaining after subtracting from the 2,016 pounds an amount of 1,886 pounds which the taxpayer expended in the year of income in replacing the cattle destroyed. In making his assessment, the commissioner added the 2,016 pounds to the amount shown in the livestock schedule in the taxpayer's return under sales, and he added the 1,886 pounds to the amount shown under purchases. To describe the 2,016 pounds as proceeds of sale is, of course, inaccurate. In the notice of assessment and the explanatory documents attached to it there was nothing to suggest that the commissioner had relied upon s. 26 (j). For that reason, the Board of Review considered that the commissioner was not entitled to rely upon s. 26 (j) as justifying his action in treating the 2,016 pounds as assessable income; and they referred to certain observations made by Latham C.J. and Starke J. in Danmark Pty. Ltd. v. Federal Commissioner of Taxation (1944) 7 ATD 333 , at pp 344, 352 . I do not understand those observations to mean more than this, that where there are two provisions of an assessment Act, each giving the commissioner a power to make an assessment, and each creating a liability to tax in the event of the power it confers being exercised, an assessment made in exercise only of the power given by one of those sections cannot be supported as effective under the other. The situation in the present case is quite different. If the 2,016 pounds formed part of the taxpayer's assessable income by reason of s. 26 (j), as I think it did, its inclusion in his assessable income in the course of making the assessment was right, whether or not the commissioner referred to s. 26 (j), and even though he described the amount inaccurately. No conduct on the part of the commissioner could operate as an estoppel against the operation of the Act: cf. Commissioners of Inland Revenue v. Brooks (1915) AC 478 , at pp 491, 492 ; Maritime Electric Co., Ltd. v. General Dairies, Ltd. (1937) AC 610 . (at p117)
Appeal allowed. Decision of the Board of Review set aside. In lieu thereof order that the assessment be confirmed.
No order as to costs.