Memorex Pty. Ltd. v. Federal Commissioner of Taxation.
Judges: Davies JPincus J
Einfeld J
Court:
Full Federal Court
Pincus J.
This is an appeal from the Administrative Appeals Tribunal constituted by a presidential member, relating to assessments of income tax [reported as
Case
U98,
87 ATC 589
].
The appellant carried on business during the relevant years as a supplier of computer equipment such as disc drives, tape drives, printers, visual display units and the like. It bought the goods from its American parent company and initially either sold or leased them to customers. The dispute relates to the sale of leased items, many of which were sold either during the currency of a lease, at its termination or during a holding-over period. The appellant's principal contentions are that the leasing of computer equipment should have been regarded as a separate business or a separate part of its business, that the leased equipment constituted part of the capital structure of that business, and that profitable sales of such equipment gave rise to capital gains. It was also contended, in effect, that the circumstance that the leased goods were depreciable under the Act protected the profits on their sale from taxation.
Since the only appeal available is one on a "question of law", under sec. 44(1) of the Administrative Appeals Tribunal Act 1975, the proceedings are inherently narrower in scope than the former appeal under sec. 196 of the Income Tax Assessment Act 1936, from a decision "involving a question of law". Under
ATC 5045
that provision, the appellant could canvass the whole case once it was demonstrated that a question of law was involved.Here there is certainly at least one question of law in the case, namely whether sec. 59(2) of the Income Tax Assessment Act exhaustively prescribes the extent to which profit on the sale of depreciable goods is included in assessable income - a matter dealt with below - but any other question sought to be raised on the appeal is beyond the jurisdiction of this Court unless it be one of law.
That appears to me to create some difficulty with respect to the question whether the receipts in issue, from sales of leased equipment, constitute income in accordance with ordinary usages and concepts. There is authority that, at least when all the material facts are found, that is a legal point:
Hayes
v.
F.C. of T.
(1956) 96 C.L.R. 47
at p. 51
per
Fullagar
J.;
XCO Pty. Ltd.
v.
F.C. of T.
71 ATC 4152
at pp. 4154-4155;
(1971) 124 C.L.R. 343
at p. 348
per
Gibbs
J. On the other hand,
Mason
J. (as his Honour then was) in
Hope
v.
The Council of the City of Bathurst
80 ATC 4386
at p. 4389;
(1980) 144 C.L.R. 1
at p. 7
pointed out, after quoting from
Hayes case
that:
"... special considerations apply when we are confronted with a statute which on examination is found to use words according to their common understanding and the question is whether the facts as found fall within these words."
His Honour went on to refer to authority for the view that if the material before the Court "reasonably admits of different conclusions as to whether the appellant's operations fall within the ordinary meaning of the words", then the conclusion to be drawn is a question of fact. That view has been applied in, for example.
The Jedko Game Company Pty. Limited
v.
Collector of Customs (N.S.W.) (10 March 1987, unreported)
in this Court. That case was an appeal in a similar class
-
i.e. a revenue appeal from the Administrative Appeals Tribunal to this Court
-
and the appeal failed on the ground that has just been mentioned. The Court held that the material before the Tribunal reasonably admitted of differing conclusions as to whether the goods there in question fell within the ordinary meaning of the relevant words; no question of law arose. A similar problem was dealt with in this Court in
Times Consultants Pty. Limited v. Collector of Customs (Qld)
(11 September 1987, unreported), but the Court was divided as to whether there was a question of law involved.
No objection in point of jurisdiction was taken on behalf of the respondent, but that cannot overcome the difficulty. To come to the central point of the appeal, it could hardly be said that only one conclusion is reasonably possible as to whether in the particular circumstances of the case the receipts from the sales of leased goods constituted income in accordance with ordinary usages and concepts. I do not find it easy to see how, if the view acted on in the Jedko case (above) were applied, the conclusion the Tribunal reached on that point could be reversed here.
It may be that because of the specific decisions of single Judges of the High Court referred to above - i.e. in the XCO and Hayes cases - the proper course is to treat it as settled that the question whether, on precisely defined facts, a receipt constitutes income in the ordinary sense is one of law. One should perhaps be encouraged to adopt that view by the consideration that otherwise Tribunal decisions on such matters which are not rationally able to be reconciled must be left undisturbed, as not containing any legal error.
I have come, in the end, to the conclusion that for reasons of substance the appeal must fail and that it is right to express my views on it without coming to a conclusion on the jurisdictional point. It has to be kept firmly in mind, however, that no merely factual point is open on such an appeal as this.
The case concerns profits on sales in four financial years, and with one exception which will be mentioned, the circumstances relating to the sales appear to have been much the same in each year.
If the equipment purchased from the parent company was disposed of, that occurred, according to the evidence, in one of the following ways:
- 1. Outright sale - the principal method of disposition.
- 2. Lease to a customer for a period and then sale to that customer either during, or at the expiration, of the lease.
- 3. Scrapping of equipment.
ATC 5046
According to the findings of the Tribunal, the "average term" (by which, presumably, is meant the usual term) of leases, was two years, but some were for four years. The useful life of the equipment was about five years. In three of the years in question, namely those ending 31 December 1976, 31 December 1977 and 31 December 1978, the sum of $194,372, in total, of the profits in question was derived from sales made during the first 12 months of leases and the sum of $138,588 was derived from sales made during the second 12 months of leases. The total amount of profit derived from all sales of previously leased equipment in those years was $395,028. It appears, then, that about 84% of the profits in question in those years came from sales made within the first two years of leasing.
It seems evident that sales of leased equipment well before the equipment had reached the end of its useful life were fairly commonly made and give rise to the bulk of the profits the source of the present dispute. It is true that receipts from sale of leased equipment were considerably less in total, during the four relevant years, than the gross income of the appellant's business; but such receipts were nevertheless substantial, and according to the findings totalled some $1.3 million.
During the seven years from 1976 to 1982 inclusive, some 190 disposals of leased equipment, producing profits, took place.
In the light of these figures, it could not have been (and indeed was not) argued that the relevant sales were insufficient in number or amount to constitute or be part of a business of trading in the equipment in question. The main contention which was made was that the leased equipment should be regarded as being in a quite distinct category and that equipment falling into that category was not bought for trading, but for leasing, and was therefore capital equipment.
Reliance was placed upon remarks made by the High Court in
F.C. of T.
v.
Myer Emporium Ltd.
87 ATC 4363
;
(1987) 61 A.L.J.R. 270
, quoted below. That case concerned the question whether a lump sum received by a company in consideration of an assignment of its right to receive interest on a loan it had made was income or capital. In discussing the "proposition that a mere realisation or change of investment is not income", the High Court said that such profits (at ATC p. 4368; A.L.J.R. p. 274):
"... may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realised subsequently in order to capture the profit arising from their expected increase in value..."
The Court went on to say:
"It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from the mere realisation."
Counsel for the appellant relied upon these remarks in support of the view that, there being no intention to sell at a profit at the time of acquisition, and no other reason to treat the assets as revenue assets, the profits were capital. He relied also upon remarks made by
Jacobs
J. in
London Australia Investment Co. Ltd.
v.
F.C. of T.
77 ATC 4398
at p. 4410;
(1977-1978) 138 C.L.R. 106
at p. 128
.
The critical part of the discussion in the
Myer Emporium case,
for present purposes, is the qualification "if the asset be not a revenue asset on other grounds". The High Court has more than once had occasion to deal with the contention that a dealer in certain property should not be treated as a dealer in relation to sales not falling into the ordinary pattern of its trading business. In
Investment and Merchant Finance Corporation Limited
v.
F.C. of T.
71 ATC 4140
;
(1971) 125 C.L.R. 249
, a dealer in shares sold some of them for 0.02% of their purchase price. The transaction was, of course, one of dividend-stripping and it was argued that the shares in question did not form part of the ordinary share trading business (ATC p. 4143; C.L.R. p. 257);
McTiernan
J. so held (ATC p. 4144; C.L.R. p. 258). However, the majority were of a contrary opinion,
Barwick
C.J. holding that "... neither the attainment of profit nor the expectation of it is essential for a particular commercial transaction to form part of the business of dealing in the commodity purchased" (ATC p. 4142; C.L.R. p. 255).
Walsh
J. said (ATC p. 4149; C.L.R. p. 269):
"In the case of a company the business of which includes dealing in shares, it could
ATC 5047
scarcely be doubted that shares which it buys and which it intends to resell would generally be regarded as part of its trading stock... I cannot think that it ought to be denied that this is so in relation to particular shares, merely for the reason that the company expects or intends that the resale of those shares will be at a lower price than the cost price."
His Honour went on to hold that even if the shares were not trading stock, a deduction should be allowed under sec. 51 of the Act as the loss was one "incurred in carrying on the appellant's business" (ATC p. 4150; C.L.R. p. 272).
In
F.C. of T.
v.
Patcorp Investments Limited
76 ATC 4225
;
(1976) 140 C.L.R. 247
, the Court was urged to depart from the view it had adopted in the case just mentioned.
Gibbs
J.. with whom
Stephen
J. agreed, rejected a contention that:
"... the transactions presented such extraordinary features that they should properly be regarded as isolated dealings, not forming part of the ordinary ebb and flow of the business of share trading..."
His Honour went on to hold that the circumstance that the transactions were not intended to produce a commercial gain, but were carried out to obtain a taxation advantage and not to make a profit, did not take them outside the scope of the share-trading business.
Although the point was not discussed by the Court in
Curran
v.
F.C. of T.
74 ATC 4296
;
(1974) 131 C.L.R. 409
because it was there common ground (see per
Gibbs
J. at ATC p. 4302; C.L.R. p. 417) that the shares were trading stock and should be treated as such, the result of that case was consistent with the
Investment and Merchant Finance case
and the
Patcorp case.
It was suggested by counsel for the appellant, during the course of argument, that the recent decision of this Court in
F.C. of T.
v.
John
87 ATC 4713
provided a basis for distinguishing the line of High Court authority to which I have referred. I do not so read the case.
Bowen
C.J. pointed out at p. 4718 that there was no established business of trading in shares, and
Beaumont
J. (pp. 4735-4736) decided the matter on the basis that at the outset the taxpayer was not engaged in any business and her partners in the transaction in question were not persons who had otherwise engaged in the business of trading in shares.
In my view the Patcorp case and its like show the difficulty of abstracting, when dealing with an established trader in a particular kind of property (such as the appellant), certain sales of that sort of property from the rest of the sales. Patcorp demonstrates that it is not necessarily enough, in order to justify that course, to show that the sales sought to be separated out were not of property bought for resale at a commercial profit; I do not see why the circumstance that the sales in issue here were of equipment originally leased should be thought to require that such sales be treated as taking place in a distinct business.
In my view, the argument advanced on behalf of the appellant is somewhat similar to that rejected by this Court in
F.C. of T.
v.
Marshall and Brougham Pty. Ltd.
87 ATC 4522
;
(1987) 73 A.L.R. 261
. The taxpayer there managed a group of building companies and invested the group's cash in short-term loans, one of which proved to be irrecoverable. The loss was held to be on revenue account, although the majority thought the taxpayer was not in the money-lending business.
Bowen
C.J. said at ATC p. 4528; A.L.R. p. 268:
"From some aspects the business engaged in by the taxpayer might be regarded as a separate enterprise or a diversion from its ordinary business... It is necessary to place an interpretation upon what was done concerning this investment of multiple amounts from time to time in the short term money market with two financial institutions. It appears to my mind to be more an integral part of the whole business carried on by the taxpayer in its management of the affairs of the group, rather than a separate enterprise or a separate use of capital assets of its own..."
So here: no doubt a possible view of the matter is to treat the leasing activities as a distinct enterprise, but the more reasonable view of the matter, being that accepted below, is that sales of leased equipment were during the years in question an integral part of the appellant's business as a supplier of computer equipment. The leasing part of the business was not separate in a physical or accounting sense from the rest of the appellant's business. Counsel for the appellant contended that there was one
ATC 5048
important matter distinguishing the assets leased from those initially acquired for sale, namely that each and every item was, at the time of purchase from the parent, earmarked as one intended for leasing or for sale. There was, however, no specific finding in favour of the appellant on that point, and an examination of the evidence relating to it makes one doubt that any such finding would have been open. That was so because it was not shown that none of the items leased to customers was taken from stock, rather than being specifically imported against an order. At all material times, equipment of substantial value was held in stock.I said above that there was an exception to the proposition that the circumstances relating to the sales in question appear to have been much the same in each year. That exception is that in mid-1978 the appellant received instructions from its parent, which was short of cash, to "generate cash whatever way we could". The appellant responded to that by selling a considerable quantity of leased equipment to a company called Hunter Street Finance Ltd. The evidence was that the sale prices were calculated on the basis of the value of the unpaid rental. The assignee arranged that the appellant would continue to collect the rental from the customer and pass it on. According to evidence presented on behalf of the appellant, the title in the equipment passed to the assignee finance company; the sales were apparently not by way of security only.
Counsel for the appellant argued that, whatever might be said about other sales of leased equipment, the 1978 sales in question were "by any standard extraordinary" and were not steps taken in the course of the appellant's business.
It seems to me clear, however, that the circumstance that the sales were made in response to an urgent need for cash does not require that they be treated differently for tax purposes. During the relevant years, the appellant's business was directed toward deriving profit from the distribution of computer equipment, principally by sale, but also through leasing. That some of the sales were of leased equipment does not, in accordance with the views expressed above, put the profits derived from them in a special category, nor in my opinion does the additional circumstance that the leased equipment sold to Hunter Street Finance Ltd. was sold in response to a liquidity crisis. It often happens in business that a trader sells goods in such a situation more quickly and cheaply than he would otherwise have done, but that cannot change the character of the sales and make them capital transactions.
Subject to two remaining matters, then, the conclusion arrived at is that the Tribunal was correct in its conclusion that the profits were properly taxable as income under sec. 25(1) of the Act. The two points not so far dealt with are, firstly, a contention that the profit was wrongly calculated and, secondly, the argument based on sec. 59(2) of the Act referred to above.
Calculation of amount of profit
Counsel for the appellant argued that the goods which were first leased out and later sold were not, at the time of first acquisition, trading stock. He said the proper method of calculating the profit was to treat them as having been taken into stock immediately before sale and at their then value.
This point is not taken, or even hinted at, in any of the notices of objection, but assuming it to be available to the appellant, the argument should, in my opinion, be rejected.
It was based upon authorities of which the most recent is
F.C. of T.
v.
Whitfords Beach Pty. Ltd.
82 ATC 4031
;
(1982) 150 C.L.R. 355
. There, land was initially bought by the respondent company with no profit-making purpose, but after many years the shares in the company were acquired by shareholders who intended to, and did, subdivide the land and sell it. The majority of the Court said that the proceeds of sale were assessable under sec. 25(1), but did not have to deal with the question of quantum. However, the case at least implicitly approves the basic method of determination of profit which the Commissioner had used, namely that the land should be brought in at its value when committed to the profit-making undertaking or scheme in question, although there was some doubt as to the precise details of that process: see per
Gibbs
C.J. at p. 360.
Logically, it has to be admitted that there is something to be said for the view that a similar method of calculation should be adopted here. Instead, the respondent has simply assessed on the basis that the difference between purchase
ATC 5049
price and sale is assessable income. That course has the support of the actual result of a number of cases in the High Court in which a similar situation was dealt with. InColonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604 , a life insurance company was taxed on the profits derived from shares and debentures, the amount in question being the difference between cost and sale price. No point was taken as to whether the entire sale price, or merely the profit, came in under sec. 25(1), but the Court distinctly held that the profit was "income according to ordinary usages and concepts": pp. 615, 621. In
Australasian Catholic Assurance Company Limited v. F.C. of T. (1959) 100 C.L.R. 502 , a similar result ensued. There, the facts were rather close to the present since the property in question had for some time been leased. Menzies J. held that what an insurance company makes or loses in changing its investments:
"... is, I think, properly to be regarded as something to be taken into account, together with intermediate income, in deciding whether, overall, the investment produced a profit or a loss. Any profit realised on sale is of the same character as the annual income, and both go to make up the return."
Again, in London Australia Investment Company Ltd. v. F.C. of T. 77 ATC 4398; (1977) 138 C.L.R. 106, a case concerning share sales made by an investment company, a similar result ensued.
In none of these cases was any attempt made to defend as a matter of principle the notion that profit, rather than gross income, came in. However, the point was briefly alluded to by
Mason
J. (as his Honour then was) in
Commercial and General Acceptance Ltd.
v.
F.C. of T.
77 ATC 4375
at pp. 4380-4381;
(1977) 137 C.L.R. 373
at pp. 382-383
. His Honour referred to the use of the expression "gross income" in sec. 25(1) and said:
"No doubt in the context of the Act that income is to be ascertained in the first instance by reference to the gross income receipts of the taxpayer, but in my view it also includes a net amount which is income according to the ordinary concepts and usages of mankind, when the net amount alone has that character, not being derived from gross receipts that are revenue receipts."
It appears to follow from these cases that it may be correct to treat a profit as "gross income" under sec. 25(1) in certain circumstances, and that it is right to do so in circumstances such as those here in issue. It should be added that if the contention made on behalf of the appellant were accepted, it would seem right to bring into the accounts not the retail but the wholesale value of the items sold.
Overlapping with depreciation provisions
The second point which needs to be dealt with is the submission that sec. 59(2) of the Act exhaustively sets out the extent to which, when depreciable items are sold, profit is to be brought to account. It was said that sec. 59 specifically prescribes the tax effect of the sale of property which has been depreciated, so that other provisions of the Act under which profits might have been included in assessable income have no operation.
Suppose a taxpayer buys a piece of property for resale, but pending resale uses it in his business; then sec. 54(1) of the Act says:
"Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction."
If the property is "plant or articles owned by a taxpayer", depreciation may be claimed. Suppose the property has been bought for $20,000, but is, in the course of its use, depreciated down to $10,000; it is sold for $30,000. If the appellant is right, then the amount to be included in assessable income is that prescribed by sec. 59(2), which reads as follows:
"If that consideration exceeds that depreciated value, the excess, to the extent of the sum of the amounts allowed and allowable in assessments for income tax under this Act and any previous law of the Commonwealth in respect of depreciation, shall, subject to the succeeding provisions of this section, be included in his assessable income of that year."
ATC 5050
So $10,000, being the depreciation allowed, would come into assessable income. But if the Commissioner is right, a total of $20,000 comes into assessable income - $10,000 under sec. 59(2) and $10,000 under sec. 25 or (at relevant times) the former sec. 26(a).
Assuming that it is suggested that the sec. 59(2) sum should be brought in, to the exclusion of that which would be included under sec. 25 or 26(a), that must be on the basis that the former provision is specific and the latter are general. But in my opinion neither may reasonably be described as more specific than the other. Further, the Commissioner's argument does not produce an absurd result: when the property in question turns out not to have depreciated at all, it does not seem irrational to require the tax saved under the depreciation allowance to be "paid back" in addition to taxing the profit on sale; there is no overlap.
It follows that all the contentions made on behalf of the appellant fail and the appeal must be dismissed with costs.
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