Administrative Appeals Tribunal
Dr YFR Grbich (Senior Member)
This case concerns the carry forward of company losses. In particular, it focuses on the operation of the continuity of business test in s 80E of the Income Tax Assessment Act 1936. A company can only carry forward losses from one year to the next if it has substantial continuity of business. The question at issue is whether, having shed an activity from the original profit earning activities which generated a significant proportion of its income, the company can be characterised as carrying on ``the same business as it carried on immediately before the change'' of ownership. These provisions are part of an anti-avoidance scheme designed to prevent trafficking in loss companies.
2. The taxpayer is a limited liability proprietary company incorporated in 1979. Its 10,000 issued shares were held by another company. On 5 August 1980 this shareholder company sold a majority of shares in the taxpayer company. From that date the continuing ownership test in s 80A of the Income Tax Assessment Act 1936 was not satisfied. In the year ended 30 June 1980 the taxpayer company made a loss of $68,245. It was accepted by the parties that its loss for the period from 1 July 1980 to 5 August 1980, as pro rated, was $2,230. Of the total loss of $70,475, claims to carry forward $10,759 are in dispute. The total tax at issue is $5,271.91.
3. The problem is that during the year ended 30 June 1980, 1981 and 1982 the taxpayer generated a considerable part of its income from its agency for sale in Australia of a particular and distinctive agricultural machine. For the sake of anonymity, let us call it the ``Magic Milking Machine'', MMM for short. The secrecy provisions under which this Tribunal operates prevent it from exploring the specifics of real life situations which would give its opinions the impact and immediacy of the opinions of our judicial brethren. As Justice Holmes might have said, the life of the common law has been decisions about live humans and real facts rather than abstractions. We must resort to such constructs as we can generate as a modest second best. During the 1980 tax year $25,553 gross profit was generated by the revolutionary MMM and $14,724 from consulting and administration. In 1981 it was $20,476 and $83,581. In 1982 it was $6,547 and $90,590 and after that gross profits from the MMM ceased while the gross profits from the agricultural consulting and administration climbed to over $100,000 each year.
4. An agreed statement of income and losses for the relevant years was as follows:
1980 1981 1982 1983 1984 Income from consulting, management and administrative fees: Fees 14,724 83,581 90,590 112,741 109,920 Sundry income - expenses recovered 2,874 3,848 9,340 - - ------- ------- ------- --------- --------- Total $17,598 $87,429 $99,930 $112,741 $109,920 ------- ------- ------- --------- --------- Gross Profit from sale of MMMs: Gross profit per accounts 25,553 20,476 6,547 - - Freight reimbursements - 383 171 - - Less: direct expenses - freight and storage (2,404) (2,326) (725) - - -------- -------- ------- ------- ------- Total $23,532 $18,321 $5,822 - - -------- -------- ------- ------- ------- Net loss from interest in agricultural venture - - - - $1,361 -------- -------
------- ------- ------- 1985 1986 1987 1988 1989 1990 Income from consulting, management and administrative fees: Fees 121,612 135,844 67,464 87,535 63,394 90,536 Sundry income - expenses recovered - - - - - - --------- --------- -------- -------- -------- -------- Total $121,612 $135,844 $67,464 $87,535 $63,394 $90,536 --------- --------- -------- -------- -------- -------- Gross profit from sale of MMMs: Gross profit per accounts - - - - - - Freight reimbursements - - - - - - Less: direct expenses - freight and storage - - - - - - Total - - - - - - --------- --------- -------- -------- -------- -------- Net loss from interest in agricultural venture $1,799 $2,331 $1,635 $1,823 $3,506 $6,618 --------- --------- ---------- ------- ------ ------
A varied range of profits and losses in later years, plus the effluxion of the seven year time limit on some, ensured that many losses were absorbed and that the only amounts at issue in this hearing were $10,759 in taxable income, which the taxpayer purported to carry forward and claim in the year ended 30 June 1988.
5. Of course, the continuity of business test in s 80E operates only if the relevant company fails the continuity in beneficial ownership test in s 80A. At the relevant time, the rule was that a company could carry forward losses of a particular income year for seven years but only if it satisfied one or other of the tests. Having failed the s 80A test, the company needed to satisfy the test in s 80E(1)(b), that the ``company carried on at all times during the year of income the same business as it carried on immediately before the change [in ownership] took place''.
6. The managing director of the taxpayer company gave evidence. The thrust of his evidence and of his counsel's argument was that immediately before the change in ownership the taxpayer ran a business of agricultural investment and management, and rural business administration and that business continued to the present day. The taxpayer acted as a consultant, seeking rural properties for investors, providing ongoing management of properties and advice. The clients were typically overseas investors or from other parts of Australia. It also acted as farm secretary for local farmers, which involved managing books, computerising records and the like. It was argued that the sale of MMM was merely a minor and ancillary activity and that the core business throughout remained the rural consulting and management.
7. The applicant said that, in this three person firm, the MMM agency took only 15% of the time of one employee, a limited amount of a secretary's time and a negligible amount of the time of the managing director. During the early 1980-1982 period the evidence was that most effort was directed at building up the rural consultancy and management business and the MMM venture was incidental to this end. It was used to build up client contacts.
8. The respondent, the Commissioner of Taxation, put two submissions in the alternative. First, that the taxpayer carried on two businesses and that one of them had ceased. Second, that there had been such a significant change in the nature of the taxpayer's business that it could not be characterised the ``same business'' as it carried on in 1980-1981. This ``business'' had two distinct aspects, the MMM agency and the rural consultancy and management operation. The first of these had ceased because it was uncommercial. This ``business'' generated a significant proportion of the proceeds and therefore there was not the degree of continuity demanded in s 80E(1)(b). The resolution of these conflicting positions turns on the precise
ATC 429definition of business we use as a benchmark and on the degree of change necessary before a business can be characterised as no longer the ``same'' business.
9. Relying on s 23(b) of the Acts Interpretation Act 1901, the Commissioner argued that the word ``business'' in s 80E(1)(b) includes the plural ``businesses''. He argued that there were two distinct businesses, the MMM agency and the rural consultancy. The first had ceased by the end of the 1982 tax year and company losses could not be carried forward beyond this date.
10. The Commissioner advanced this proposition with a number of authorities from other contexts in which Tribunals constructed two separate businesses from the same operation. For example, in Case D83
(1953) 4 TBRD 430, Number 3 Board of Review held, in the context of an issue of the taxation on a premium for a lease, that a newsagency's business could be divided into a newsagency and lottery agent. Whatever the imperatives operating in that context, I think it dangerous to extrapolate such a decision into a different context. The issue is whether, on an examination of the facts, this business is naturally a single business or two separate businesses. Rather than dividing, what is a single integrated commercial operation, artificially, into two separate ``businesses'', and deciding the issue at this threshold level, I think that the continuity of business test is applied with more clarity if the Tribunal looks at the precise nature of the business. In my view, there is no warrant for artificially splitting the enterprise into two businesses in this way. This is a single integrated business rather than two distinctive undertakings. This submission fails. It should be noted that a similar argument was rejected by Walton J in
Rolls Royce Motors Ltd v Balmford (1976) 51 TC 319, 344 although he inclined to the view that Rolls Royce did carry on ``six different trades''. But the separate organisation structures for each division and scale of operations was very different from this small and centrally managed company.
11. The second submission relied on the change in the nature of the taxpayer's business to argue that this was not the ``same business... it carried on immediately before the change'' in ownership. The taxpayer would have the Tribunal characterise the ``business'' as an agricultural investment and management consultancy, of which the MMM agency was merely an incidental part, taking little of the time or effort of the company. In contrast, the Commissioner pointed to the large proportion of the company's assessable income generated by this activity before the change in ownership. In clear and well documented argument, counsel for the Commissioner, Mr Allsop, cited a number of propositions. In the absence of any sustained rebuttal, the thrust of his argument can be adopted.
12. The basic rule and policy in the application of s 80E is stated by Gibbs J in the leading authority,
Avondale Motors (Parts) Pty Ltd v FC of T 71 ATC 4101, 4106; (1971) 124 CLR 97, 105:
``The meaning of the phrase `same as', like that of any other ambiguous expression, depends on the context in which it appears. In my opinion in the context of the section the words `same as' import identity and not merely similarity and this is so even though the legislature might have expressed the same meaning by a different form of words. It seems to me natural to read the section as referring to the same business, in the sense of the identical business, and this view is supported by a consideration of the purposes of the section.''
He goes on to explore the policy of stopping trafficking in loss companies and the reasons for the exception for a continuity of business. He says (at ATC 4106; CLR 105-106):
``No injustice would, in my opinion, result from a refusal to treat an accrued loss as a tax deduction where the company after the change carried on a different business, although one of a similar kind. In such a case, as a general rule, there would have been no business reason for the purchase of the shares, but only the wish to obtain the right to claim another's losses as a deduction from one's own income. To allow the accrued losses to be claimed as deductions in a case where shares in a company had been acquired, not for the purpose of carrying on any existing business of the company, but simply for the purpose of `buying' its accrued losses, would be to reward an obvious device for no intelligible reason.''
13. But Gibbs J does caution (at ATC 4106; CLR 106) that it does not ``follow that a business will not be the same'' merely because ``there have been some changes in the way... it is carried on''. This raises ``questions of degree''. Differences in the nature of the business can eventually pass the point where a qualitative change in the nature of the business takes place. The issue is when that point is reached in a particular case.
14. The inquiry is basically a factual inquiry but such facts should be analysed in the framework of a principled set of guidelines and previous decisions have gone some way to structure the Tribunal's leeways of choice in the way it characterises particular changes. The following changes have been held sufficient for it to be held the business was not the same as that in the benchmark period.
- - Company sells wholesale and retail motor parts and accessories. It disposes of its stock. Eight to nine months later it commences a similar activity with different types of trading stock (Avondale Motors (Parts) Pty Ltd v FC of T 71 ATC 4101; (1970) 124 CLR 97).
- - Company was a brewer. It ceased brewing but bottled and sold beer brewed by another company
Gordon & Blair Ltd v CIR (1962) 40 TC 358 (Scottish Court of Sessions).
- - Company manufactured, sold and installed swimming pools. After the change it merely sold and installed another company's pools (Case K20,
78 ATC 184 No 2 Board of Review).
- - Company was a business offering its land for stock agistment for a fee. After the change it entered into a partnership which conducted a full business of producing wool, lamb and beef (Case K36,
78 ATC 341; No 1 Board of Review).
- - Company was in the business of growing clover and cereals to sell seed and grain. After the change it fattened stock with its seed and grain and became a pastoralist (
Fielder Downs (WA) Pty Ltd v FC of T 79 ATC 4019, Queensland Supreme Court).
- - Before the change the company carried on the business of buying partly finished houseboats, completing construction and selling them. After the change it bought other types of boats, did not carry out construction and sold them (Case M19,
80 ATC 105 (No 2 Board of Review).
- - Rolls Royce Motors Ltd produced motor cars and aero engines. The aero engine division was the largest of six divisions. It caused large losses and put the company into financial difficulties. Four divisions of the company (including the ill-fated aero engine division) were hived off to a government owned company by special legislation. The company carried on with the two remaining divisions (Rolls Royce Motors Ltd v Balmford (1976) 51 TC 319; English High Court).
15. In the case before the Tribunal, the taxpayer carried on much of the same activity as it did before the change, but it shed another activity which was a significant source of gross earnings in the benchmark years. Significantly, the MMM agency survived beyond the change in ownership but ceased well before the years of income in which the loss is claimed. So it was not the change in ownership which generated the change in the nature of the business but general commercial conditions. The purchase of the business, as much as any tax loss, in all likelihood generated the share purchase. The test in s 80E, however, requires the more demanding test that it must carry out the same business at all times during the year of income in which the loss is claimed as it did before the change. Having regard to the clear words of s 80E, it is questionable whether the test of Gibbs J gives a complete picture of the operation of the provision. It is not just the wish to obtain the right to claim another's losses which triggers the operation of the provision. Rather, a substantial change in ownership having taken place, it is necessary for the taxpayer to show that the broad structure of the business remains the same. This is, after all, a saving provision which operates only after a substantial change in ownership has been demonstrated and it would not be unreasonable, particularly in the light of the authorities, to read it reasonably strictly.
16. The problem is not to be resolved by empty verbal debates about denotation and connotation of particular labels for the business. Whether the business is to be
ATC 431characterised as an ``agricultural investment and management consultant'' or as a ``general rural entrepreneur'' cannot resolve the issue. Such denotation is the end point rather than the foundation on which reasoned decision-making should be constructed. The key issue is whether the structure of the business has changed, as opposed to the matters of operational detail which are part of the ongoing adoption of any business to commercial exigencies and changing market realities.
17. My conclusion is that, on balance, there has been such a structural change in the case before the Tribunal. Having regard to the types of changes considered sufficient in the authorities and to the fact that the profits of the MMM agency were such an important part of the taxpayer company's income-generating activities in its early years, even allowing for the fact that most of the taxpayer's resources were deployed to building up its investment and management advisory services. This was more than a mere change in the process by which it ran its business. There was a substantial structural change in the nature of the taxpayer's income-earning activities.
18. Accordingly, and for the reasons given, the decision under review is affirmed.