Cyclone Scaffolding Pty. Ltd. v. Federal Commissioner of Taxation.
Judges:David Hunt J
Court:
Supreme Court of New South Wales
David Hunt J.
The taxpayer, Cyclone Scaffolding Pty. Ltd. (formerly called Cyclone Double-Grip Scaffolding Pty. Ltd.), appeals against amended assessments issued by the Commissioner for the years of income ended 30 June 1975 to 1980 (inclusive) and against his assessment for the year ended 30 June 1981. The seven appeals were by consent heard together.
The taxpayer owns scaffolding equipment. The major part of its business in relation to that equipment is hiring it out, but it does sell some of the scaffolding. This is mainly to governmental and semi-governmental authorities; hardly anyone else finds it economic to purchase instead of hire. The taxpayer will usually make a special purchase of equipment specifically for the purposes of such a sale, but it may also sell some of the equipment from the general pile from which it hires it out.
There is also a third way in which the taxpayer receives payments in relation to what the Commissioner asserts is the sale of its scaffolding equipment. The hiring contracts contain an obligation - expressed in slightly different ways over the years - to the effect that the hirer will pay to the taxpayer the cost of replacement by new equipment (at the taxpayer's latest current list price) of any hired equipment which has been either lost or irreparably damaged.
These appeals concern the basis upon which those payments are to be treated for taxation purposes. The taxpayer says that the payments amount to consideration which it has received in respect of the disposal, loss or destruction of property in respect of which depreciation has been allowed (that is, plant), and is thus assessable only in accordance with sec. 59 of the Income Tax Assessment Act 1936. The Commissioner says that the payments are made in relation to the sale of trading stock and are assessable as income within the ordinary concept of that term (in accordance with sec. 25) or as an indemnity for loss of trading stock (in accordance with sec. 26(j)).
This is not the first time that this issue has been litigated between the taxpayer and the Commissioner. Notwithstanding an agreement reached between them in 1946 as to how such payments should be treated, the Commissioner sought to assess the taxpayer in accordance with sec. 25 and 26(j) for the year ended 30 June 1949. A Board of Review held in favour of the taxpayer: Case F63
(1955) 6 T.B.R.D. (N.S.) 370. The Commissioner has now tried again. Although no appeal had been taken from that decision, the Commissioner now says that the Board of Review was wrong. (The taxpayer concedes that no estoppel arises by reason of the Board's decision.)
Because of the sheer impracticability of tracing every piece of its scaffolding equipment, the taxpayer has adopted a number of arbitrary practices in its accounting procedures which, it argues, are calculated to give a substantially correct reflex of its true income for taxation purposes: cf.
Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (1938) 63 C.L.R. 108 at pp. 154-155. Over the years and until now, the Commissioner has always accepted those procedures. He now says that they were wrong.
One such accounting procedure adopted by the taxpayer is that - whatever may be the actual position - it treats the proceeds of any sales of scaffolding equipment as relating to equipment purchased in that year of income (the so-called "last in - first out" principle). When the taxpayer does make such a sale, it usually (but not invariably) sells new equipment, so that in practice this procedure appears to reflect the actual position correctly. The taxpayer also treats payments which it receives for the replacement of equipment (which it also calls "sales") in the same way. Where there is an excess of such sales (including payments received for the replacement of equipment) over purchases during a particular year of income, that excess is treated as the sale of any equipment recorded as still being on hand in the immediately preceding year of income.
For taxation purposes, the taxpayer treats equipment purchased as trading stock up to the end of the year of income in which it is purchased, and thereafter it treats that equipment as plant. It describes this process as one of capitalisation. The equipment is then depreciated by the taxpayer in accordance with sec. 54 et seq. of the Act. Where that equipment is sold (or treated as having been sold) during the year of income in which it was purchased, the profit on the sale is returned by
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the taxpayer as assessable income (as the sale of trading stock). If, however, the equipment is sold (or treated as having been sold) during any year succeeding the year of its purchase, the taxpayer returns as assessable income only that amount which is made assessable income by sec. 59 (in relation to depreciated plant). Section 59 makes assessable only the excess of the consideration received over the depreciated value to the extent of the total amount previously allowed in respect of depreciation. The appropriateness of this particular accounting practice is in issue in these appeals.Notwithstanding (a) the taxpayer's description of the payments which it received for the replacement of equipment as "sales" and (b) its treatment of new equipment as trading stock for tax purposes during the year of income in which it is purchased, it is the substance of the transactions - not the labels which the taxpayer puts upon them - which matters:
Facchini v. Bryson (1952) 1 T.L.R. 1386 at pp. 1389-1390;
Radaich v. Smith (1959) 101 C.L.R. 209 at pp. 214, 219 and 222. That proposition is accepted by the Commissioner, but he says that both the labels and the accounting procedures adopted by the taxpayer are correct in substance and are consistent with the true legal position.
"Trading stock" is defined by sec. 6(1) as including "anything... acquired or purchased for purposes of... sale". The Commissioner emphasises the width of that definition and the fact that it is an inclusive not an exclusive, definition:
F.C. of T. v. St Hubert's Island Pty. Ltd. 78 ATC 4104 at pp. 4106-4107, 4111-4112, 4113-4114, 4117, 4120-4122; (1977-1978) 138 C.L.R. 210 at pp. 215-216, 224-225, 228-229, 235, 241-243;
F.C. of T. v. Suttons Motors (Chullora) Wholesale Pty. Ltd. 85 ATC 4398; (1985) 157 C.L.R. 277 at pp. 281-282. But, as the Commissioner does not suggest any way in which the taxpayer's equipment could fall within the ordinary meaning of the term "trading stock" otherwise than by virtue of the statutory meaning given it by the wording of the definition itself, this fact is of no particular significance in the present case.
The Commissioner submits that each and every piece of equipment purchased by the taxpayer is acquired by it for the purposes of sale. He argues that, properly characterised, the taxpayer's business is both hiring and selling scaffolding equipment. Otherwise than for the occasional special purchase by it of equipment specifically for the purpose of resale, the taxpayer makes no distinction between the equipment which is purchased to be hired and that which may later be sold (or treated as having been sold). The Commissioner says that all equipment is purchased with the view that it is available for sale if required. The mere contemplation of a possible sale - one which the taxpayer is prepared to undertake as more than a mere incidental dealing with its property - is sufficient to bring the transaction within the definition, the Commissioner says, relying upon
Ducker v. Rees Roturbo Development Syndicate Ltd. (1928) A.C. 132 at pp. 141-142. The statutory definition, the Commissioner submits, does not recognise any concept of a dominant purpose for which the equipment is acquired. That equipment which is in fact sold by the taxpayer is taken from the general pile. The purchase of every piece of equipment in that general pile with a view that it will be available for sale if required thus brings it, within the wording of the definition, it is put by the Commissioner, and once equipment is trading stock it remains always as trading stock:
F.C. of T. v. Murphy (1961) 106 C.L.R. 146 at pp. 153-154.
I am satisfied on the evidence (which was not itself in dispute) that, in relation to any individual item of equipment purchased by the taxpayer, it was purchased with no more than the contemplation of a mere possibility that it could be sold in the future if required. I do not accept that the alteration in about 1975 of the description of the taxpayer's business in its display advertisement in the Yellow Pages telephone directory (from the "hire" to the "sale or hire" of scaffolding equipment) made any alteration in fact to the position investigated by the Board of Review in relation to the year ended 30 June 1949. The Board found that hiring was the rule and that sales were the exception. In my view, that was still the position in the period from 1975 to 1981. The substantial bulk of the taxpayer's equipment is not in fact sold. The taxpayer's dominant business is hiring scaffolding equipment, not selling it. The availability of that equipment for sale is the same now as it was in 1949, and I agree with the Board's finding that hiring is the rule and sales the exception.
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On the Commissioner's argument, these findings would make no difference because, he says, the mere possibility of sale in the future is sufficient. The taxpayer argues that a purchase contemplating the mere possibility of sale one day if required does not fall within the definition. It is indeed difficult to see why the mere availability of the equipment for a possible sale if required should be regarded logically as converting a purchase for the substantial purpose of hiring out the equipment into an acquisition of it for the purposes of sale.
The definition of "trading stock" in sec. 6(1) does not, as the Commissioner points out, expressly identify the relevant purpose of the acquisition as being the taxpayer's dominant purpose. Neither, of course, did sec. 26(a), yet the similar (but not identical) purpose identified in that section came universally to be accepted, after some initial doubts, as speaking of the taxpayer's main or dominant purpose; the cases are collected in
Jacob v. F.C. of T. 71 ATC 4192 at pp. 4193-4194; (1971) 45 A.L.J.R. 568 at p. 569. I can see no logical reason why the same interpretation should not be given to the relevant purpose in the statutory definition of "trading stock" in sec. 6(1). There is nothing said in any of the cases discussing the concept of dominant purpose in sec. 26(a) which would adequately distinguish that purpose from the purpose with which I am now concerned.
In
Buckland v. F.C. of T. (1960) 34 A.L.J.R. 60 at p. 62, Windeyer J. - speaking of the first limb of sec. 26(a) - denied that a taxpayer's appreciation at the time when he acquired property that it could be sold at some time in the future at a profit if it were necessary or desirable to do so brought the profit subsequently made upon such a sale within sec. 26(a) where the taxpayer's dominant purpose in acquiring it was to retain the property as a revenue producing asset. These were not considered by his Honour to be inconsistent and incompatible modes of use. That analogy can aptly be applied in the present case. I accept, as do both parties, that items or property employed in a business must be either trading stock or plant. The two concepts are quite incompatible, and the same item of equipment cannot be both at the one time. The mere possibility that some pieces of equipment from the general pile of equipment available for hiring could be sold to someone such as governmental or semi-governmental authorities (to whom the unfavourable economics of the transaction do not appear to matter) is hardly incompatible with an intention when purchasing the equipment that it will be used for hiring.
It is not, as I understand it, argued by the Commissioner that a contemplation by the taxpayer at the time of acquisition that some of the equipment may subsequently be lost or destroyed and that it would accordingly receive a payment in relation to that equipment made the purpose of its acquisition one for sale. I leave to one side for the moment the issue of whether such a payment to the taxpayer constitutes a sale in any event, as the Commissioner asserts. Even assuming for the moment that it does constitute such a sale, it would in my view be quite absurd to suggest that such a contemplation on the part of the taxpayer could make the acquisition one for the purposes of sale. What is contemplated is only the payment of liquidated damages (or a penalty) pursuant to a contract when the equipment is lost or destroyed. It cannot be said that such a "sale" was in truth one of the purposes of acquisition at all - dominant or subordinate, primary or secondary.
I am therefore satisfied by the taxpayer (which bears the onus of proof) that, except for the occasional equipment specially purchased specifically for the purpose of the resale (which equipment is not in issue in this appeal), the taxpayer does not purchase its scaffolding equipment for the purposes of sale. I am satisfied that the taxpayer's equipment is plant, and that it is not trading stock within the meaning of the Act.
Before dealing with the alternative bases upon which the Commissioner argues that the payments received by the taxpayer in relation to lost or destroyed equipment amounts to assessable income, I should record briefly two further arguments put by the taxpayer in support of its argument that the equipment was not trading stock.
The first was that the payment of such damages (or penalty) by the hirer pursuant to the obligation imposed by the hiring contract does not constitute the transaction one of sale because, the taxpayer argues, title in the equipment does not thereby pass to the hirer. There is a long line of authority which holds
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that the satisfaction of a judgment in detinue or conversion effects such a transfer of title; see for example,Brimstead v. Harrison (1872) L.R. 7 C.P. 547 at p. 551;
Ex parte Drake; in re Ware (1877) 5 Ch.D. 866 at pp. 870-871. I see no logical reason why the satisfaction of such an obligation without the existence of a formal judgment in detinue or conversion is any different in principle. It seems to me to be incongruous that, if equipment which had been lost were subsequently found by the hirer, the taxpayer would be entitled to retake possession of that equipment where the hirer had already paid to it the damages (or penalty) provided by the hiring contract. The Commissioner also argued that the condition of hire providing that the lost or destroyed equipment "will be charged for by the Owner [the taxpayer] at the Owner's latest current list price" effects a transfer of title as soon as the payment is made, but it is unnecessary to resolve that issue.
The second of the taxpayer's further arguments which I should record is that, as the Commissioner has at all times allowed depreciation in relation to the equipment on the basis that it is plant rather than trading stock, an acceptance of his argument that the payments received by the taxpayer are assessable income because there has been a sale of trading stock involves a change in the characterisation of the equipment from plant to trading stock at the very instant that it is lost or destroyed and when it can no longer be said to be stock in hand. There is considerable support in the amended assessments issued by the Commissioner for the taxpayer's argument that this is indeed how the Commissioner has approached the matter. The Commissioner, however, has avoided this considerable conceptual difficulty in his way by arguing that the equipment was at all times trading stock (because of the purposes of sale for which it was acquired), and thus that depreciation had wrongly been allowed by him upon the taxpayer's claim that it was plant. No such conduct on his part can operate as an estoppel against the operation of the Act:
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at pp. 116-117 (cf.
F.C. of T. v. Reynolds 81 ATC 4131 at pp. 4136-4141). The argument thus raises exactly the same issue as to whether the equipment is properly to be characterised as plant or trading stock, an issue which I have already determined in favour of the taxpayer.
I turn then to the Commissioner's alternative arguments. The first is that, even if the equipment is not trading stock, the amounts received (both for sales of depreciated plant and by way of damages or penalty for lost or destroyed equipment) are income within ordinary usages and concepts of mankind. It is unnecessary to do more than cite the familiar trilogy of cases as authorities supporting the assessability pursuant to sec. 25 of receipts which fall within that description:
Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 T.C. 159 at pp. 165-166;
Scott v. C. of T. (N.S.W.) (1935) 35 S.R. (N.S.W.) 215 at p. 219;
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604 at pp. 614-615.
The Commissioner also relied strongly upon what was said in the judgments of the High Court in
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398; (1977) 138 C.L.R. 106. That case did not, however, make any new law relevant to this present case. As in so many cases where the Commissioner has argued that the application of that decision should dictate the same result, the facts of the London Australia case were light years away from the facts of the present case. In the London Australia case (see ATC pp. 4401, 4403-4404 and 4411; C.L.R. pp. 113, 117 and 131), the taxpayer regularly and systematically sold its shares as soon as they reached a certain price (with the resulting drop in dividend yield), as part of a system of switching its investments to produce the best dividend return and pursuant to its policy of investing only in shares with a particular growth potential. The inference was clear that at the time when the taxpayer purchased the shares it had an intention to sell them as soon as the dividend yield dropped in that way or an expectation that they would be so sold (cf. Jacobs J. at ATC pp. 4409-4410; C.L.R. p. 128).
None of those circumstances exist in this present case. Neither the sales of depreciated plant nor the payment by way of damages (or penalty) for lost or destroyed equipment form a regular or systematic part of the taxpayer's business of hiring out its scaffolding equipment. Hiring such equipment remains the proper characterisation of the taxpayer's business, and - despite its contemplation at the time of acquisition of a mere possibility that the equipment could be sold in the future if
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required - there was at that time neither an intention nor an expectation on the part of the taxpayer that the equipment would be disposed of by way of sale. I reject the Commissioner's argument that the amounts received are income within ordinary usages and concepts of mankind. Section 25 has no application here.I should record here that the taxpayer further argued that sec. 25 has no application because sec. 54-62 (dealing with the depreciation of plant) comprise a complete code concerning the tax payable in relation to the disposal of plant upon which depreciation has been allowed. These explicit and specific provisions in the Act are said by the taxpayer to operate to the exclusion of general provisions such as sec. 25 in the same way, for example, as do the provisions of sec. 26(d):
Reseck v. F.C. of T. 75 ATC 4213 at pp. 4215-4216 and 4220; (1975) 133 C.L.R. 45 at pp. 49 and 57; those of sec. 44-47:
R.W. Rutherford & Anor v. F.C. of T. 76 ATC 4304 at p. 4309; and those of sec. 95-102:
F.C. of T. v. Belford (1952) 88 C.L.R. 589 at p. 607.
So far as depreciated plant is concerned, there could be a substantial difference in tax if sec. 25 were to be applied in lieu of sec. 59, because the amount included in the taxpayer's assessable income by virtue of sec. 59 is limited to the amount of depreciation which had previously been allowed as a deduction whereas that which would be included by virtue of sec. 25 would be the full amount of the profit made. The true position is perhaps by no means clear. The limitation imposed by sec. 59 is easily understood in relation to receipts which are properly characterised as being of a capital nature, but not where the receipts are otherwise of an income nature. Yet the receipt in Reseck v. F.C. of t. was of the latter kind and the more limited assessability by virtue of sec. 26(d) prevailed. In the light of what I have already held in these appeals, it is unnecessary for me to resolve this particular question of law, interesting though it may be, and it is better that I say no more about it.
The Commissioner's second alternative argument is that, if the amounts received by way of damages or penalty for lost or destroyed equipment are not assessable by virtue of sec. 25, they are nevertheless assessable by virtue of sec. 26(j). That section includes within a taxpayer's income:
"(j) any amount received by way of insurance or indemnity for or in respect of any loss -
- (i) of trading stock which would have been taken into account in computing taxable income; or
- (ii) of profit or income which would have been assessable income,
if the loss had not occurred, and any amount so received for or in respect of any loss or outgoing which is an allowable deduction."
Again, there could be a substantial difference in tax if sec. 26(j) were to be applied in lieu of sec. 59, because the amount which would be included in the taxpayer's assessable income by virtue of sec. 26(j) would be the full amount received rather than (as by virtue of sec. 59) limited to the amount of depreciation which had previously been allowed. Whether or not the amount received by the taxpayer by way of damages or penalty should also be said to have been received by way of indemnity (see F.C. of T. v. Wade at pp. 115-116 and 112), the amount received by the taxpayer in the present case was not in any event received in respect of any loss or outgoing which had been allowed as a deduction; nor does it represent a loss of either trading stock or profit or income which would have been assessable income, in accordance with the findings which I have already made. Section 26(j) thus has no operation here.
It follows that the only tax payable in relation to what I have concluded were the sales of plant by the taxpayer was the amount fixed by virtue of sec. 59. The Commissioner next submits that the accounting procedures adopted by the taxpayer are nevertheless not calculated to give a substantially correct reflex of its true income for taxation purposes. I have earlier in this judgment outlined the procedures which have been adopted by the taxpayer, and do not propose to repeat what I said there.
That the procedures adopted are arbitrary in nature, and that they are not precisely accurate, is readily conceded by the taxpayer. They were adopted following an agreement reached between the taxpayer and the Commissioner over 40 years ago. Very few procedures can be completely free from any arbitrary approach. None could be devised in relation to equipment of such a nature as that with which the taxpayer here deals. It is clearly impossible to devise a
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procedure in relation to the taxpayer's business in dealing with equipment of this nature which is both precisely accurate and practical. No more appropriate procedure has been suggested by the Commissioner either in cross-examination or by way of address. I can think of none. By treating its equipment as trading stock during the financial year in which it was purchased, the taxpayer has in my view adopted a procedure for taxation purposes which is too favourable to the Commissioner; most equipment actually sold is disposed of within that first year of the date of its purchase, so that there is little if any set-off in subsequent years in favour of the taxpayer against the inclusion in favour of the Commissioner of the damages or penalty as the sale of trading stock in that first year. The Commissioner cannot complain of that. I am satisfied that the taxpayer's accounting procedures are calculated to give a substantially correct reflex of its true income for taxation purposes.Finally, I come to the Commissioner's entitlement pursuant to sec. 170 to issue amended assessments for the years 1975 to 1980. It is now unnecessary for me to determine this question in the light of the findings which I have already made but, as the question was fully argued (and is one of fact), I propose to make findings in any event.
It was argued by the Commissioner that the taxpayer had failed to make a full and true disclosure of all the material facts necessary for his assessment. A taxpayer's onus of proof in relation to sec. 170 (
McAndrew v. F.C. of T. (1956) 98 C.L.R. 236 at pp. 269, 273 and 283) does not require him to speculate as to every matter and specifically to anticipate every conceivable fact which the Commissioner may subsequently argue had not been disclosed to him: cf.
Bratty v. A.-G. for Northern Ireland (1963) A.C. 386 at pp. 407-408, 413 and 416-417. The Commissioner bears at least an evidential onus of raising an issue to enable the taxpayer to deal with it in the discharge of his overall burden of proof pursuant to sec. 190: cf.
Purkess v. Crittenden (1965) 114 C.L.R. 164 at pp. 167-168 and 171;
F.C. of T. v. Casuarina Pty. Ltd. 71 ATC 4068; (1970-1971) 127 C.L.R. 62 at p. 72;
Bailey & Ors v. F.C. of T. 77 ATC 4096 at pp. 4103-4104; (1977) 136 C.L.R. 214 at pp. 227-228.
The Commissioner has, however, manifestly failed to point to any material fact of which he claims that he was not previously aware. I have already held that there had been no change in the availability of equipment for sale since 1949. There has been no change since 1949 in the purposes for which the scaffolding has been purchased, or in the real business of the company. Mr Bradley (then the taxpayer's accountant for N.S.W., later the general manager and now a director of the company) together with Mr McInerney (the taxpayer's taxation adviser) were interviewed by an officer of the Tax Department in 1971. I am satisfied that Mr Bradley told that officer everything which he wanted to know concerning the taxpayer's accounting procedures. I am also satisfied that there has been no change in those procedures since 1951. The Board of Review had, of course, investigated the position as it stood in 1949. The Commissioner's amended assessments are actually based upon the material already disclosed to him by the taxpayer in its returns. I hold that the taxpayer has made a full and true disclosure to the Commissioner of all the material facts necessary for his assessment.
In those circumstances, the Commissioner is entitled to issue an amended assessment only to correct an error in calculation or a mistake of fact, and it must be issued within three years of the date upon which the tax became due and payable under the original assessment (sec. 170(3)). The Commissioner called no evidence to suggest the existence of any such error on his part. As stated earlier, he has an evidential burden to do so. Moreover, all evidence is to be weighed according to the proof which it was in power of one side to produce, and the power of the other to have contradicted:
Blatch v. Archer (1774) 1 Cowp. 63 at pp. 65-66 (98 E.R. 969 at p. 970); Stephen's Digest of the Law of Evidence, 12th ed., art. 104;
Stoney v. Eastbourne R.D.C. (1927) 1 Ch. 367 at p. 405;
Morgan v. Babcock & Wilcox Ltd. (1929) 43 C.L.R. 163 at p. 178;
Ex parte Ferguson; Re Alexander (1944) 45 N.S.W. S.R. 64 at p. 70;
Hampton Court Ltd. v. Crooks (1957) 97 C.L.R. 367 at pp. 371-372;
R. v. Guiren (1962) 79 WN 811 at p. 813. In the absence of any evidence from the Commissioner, I am satisfied that no such error exists in the present case. There is also a considerable problem in the way of the Commissioner in relation to the limitation period of three years, but I need not pursue that issue.
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I hold that the Commissioner was not entitled pursuant to sec. 170 to issue amended assessments for the years 1975 to 1980.
I uphold the taxpayer's appeals, with costs. I set aside the Commissioner's amended assessments for the years of income ended 30 June 1975 to 1980 (inclusive) and his assessment for the year ended 30 June 1981. I direct the parties to bring in short minutes giving effect to these reasons to enable a direction to be given that judgment be entered in favour of the taxpayer accordingly. Liberty to apply.
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