Davies J

Hill J
Sackville J

Full Federal Court

Judgment date: Judgment handed down 7 July 1995

Davies, Hill and Sackville JJ

The Court:

The applicant, Placer Pacific Management Pty Ltd (``Placer'') appeals from the decision of the Administrative Appeals Tribunal (``the Tribunal'') constituted by a Deputy President, affirming the objection decision of the respondent Commissioner of Taxation. At issue was the allowability to Placer of a deduction of an amount of $383,379 paid by Placer in the accounting period ended 31 December 1989, a substituted accounting period adopted in lieu of the year of income ended 30 June 1990.

The facts before the Tribunal were not in dispute. They were raised by a statement of agreed facts and issues signed on behalf of the parties and were intended to put before the Tribunal the facts relevant to the dispute.

Placer had carried on, amongst other businesses, a business of manufacturing conveyer belts. In June 1978 it contracted with Newcastle Wallsend Coal Company Pty Ltd (``NWCC'') for the supply of a conveyor belt to be installed in the Ellalong Colliery. Two months later it entered into a contract with the Goodyear Tyre and Rubber Co (Australia) Ltd for that company to supply as subcontractor to Placer rubber conveyor belting for the conveyor belt to be installed at the Ellalong Colliery. Ultimately the conveyor system was installed and commissioned on or about April 1979.

NWCC claimed the conveyor system to be defective in certain respects and commenced legal proceedings against Placer in the Supreme Court of New South Wales on 17 August 1981. The originating process in those proceedings was served on 13 September 1982.

In the meantime, on 10 July 1981 Placer sold the business and assets of its conveyor belt division, with the exception of some uncompleted contracts, to Fox Manufacturing Company Pty Ltd (``Fox''), a company the ownership of which, initially, was as to two- thirds the applicant and as to one-third Clyde Industries Limited (``Clyde''). Under that agreement Placer remained liable to complete the uncompleted commercial contracts at its own risk and costs. The arrangement provided that Clyde would purchase Placer's shares in Fox in two instalments, the first on 31 December 1982 and the second on 30 June 1984 with management and control of Fox being shared until 30 June 1984. The outstanding contracts were to be completed by Placer engaging Fox as a subcontractor. In this way the outstanding contracts were all completed on or before 30 June 1984. Under the contractual arrangements, however, Placer continued to be liable in respect of any claim arising from the conduct of the conveyor belt business before its sale to Fox, including the claim by NWCC.

After 30 June 1984 the business activities of Placer consisted of manufacturing activities unrelated to the conveyor belt division which further activities were sold in 1985 and 1987 so that from and after 31 December 1987 Placer's activities consisted exclusively of investment and management of related corporations.

The claim made by NWCC was ultimately settled out of court and it was as a result of that settlement that Placer was required to pay and did pay the sum of $325,000 together with legal fees of $58,379, in total $383,379. Placer claimed a deduction for the two amounts in its return of income, requesting the Commissioner to rule upon its claim under s. 169A of the Income Tax Assessment Act 1936 (``the Act'').

In due course that ruling was given. It made the Commissioner's position clear. While accepting that prima facie the two amounts were available for deduction under s 51(1) of the Act, the Commissioner ruled that the amounts would only be deductible if it could be shown that there had in fact been no change in the nature of Placer's business as a manufacturer of conveyor belts. This not being the case, the claim for a deduction was rejected. Upon an assessment being issued in accordance

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with the ruling, Placer objected and the objection was disallowed. In a letter notifying the disallowance the Commissioner indicated that he considered that Placer had not satisfied the ``continuing business'' test said to have been laid down by the High Court in
Amalgamated Zinc (De Bavay's) Ltd v FC of T (1935) 3 ATD 288; (1935) 54 CLR 295.

The issue tendered to the Tribunal as stated by agreement between the parties was whether in these circumstances the amounts paid by Placer were allowable deductions under s 51(1). The Tribunal's reasons reflect the dispute which was tendered to it.

The Commissioner relied upon De Bavay's case. Placer, on the other hand, submitted that comments made by the High Court in De Bavay had been ``modified'' by what was later said in
AGC (Advances) Ltd v FC of T 75 ATC 4057; (1974-1975) 132 CLR 175. After discussing these two cases the Tribunal referred to what were said to be several decisions of this Court as well as decisions of Boards of Review and of the Tribunal which had confirmed and applied the principles established in De Bavay. The decisions cited were
Inglis v FC of T 80 ATC 4001; (1979) 28 ALR 425;
Freeman & Ors v FC of T 83 ATC 4456;
FC of T v Riverside Road Lodge Pty Ltd (In Liq) 90 ATC 4567; (1990) 23 FCR 305; Case R65,
84 ATC 468; Case S30,
85 ATC 280 and Case U177,
87 ATC 1020. Placer, before the Tribunal, relied upon Case 127,
4 CTBR (NS) 760 in the face of what the Tribunal referred to as ``overwhelming authority''.

In finding against Placer, the Tribunal said:

``The basic proposition in De Bavay is that if a business ceases completely, the relevant nexus between the earning of the assessable income and incurring of deductions after the business ceases, is broken. Any suggestion that the relevant nexus may still endure after cessation of business has only been made in the context of a relative [sic] short break, or in the winding down of the business.

In the present case the claim arose in August 1981 out of the operations of the applicant's business in April 1979. The payment of the outgoings did not take place until 1989. This was at least four years after the applicant had ceased its business. On the authority of the cases to which I have referred, the relevant nexus does not exist between the outgoing and the income of the business, both because of the period of time that has elapsed since the business ceased and the fact that the outgoings were not relevantly connected with the earlier operations of the applicant.... I consider myself bound by all the authorities that have followed AGC and have applied De Bavay in one way or another. If there is to be a different perception of the law, then higher authority than this Tribunal will be required to determine it.''

Placer duly appealed to this Court pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975. Such an appeal is an appeal on, that is to say limited to, a question of law. When the matter came before Hill J for directions, both parties requested that the jurisdiction of the Court to hear the application, which is brought in the original jurisdiction of the Court, be exercised by a Full Court. The ground for so doing was that the case involved the determination of a significant matter of principle, namely, the applicability in the circumstances of the present case of the decision of the High Court in De Bavay and the correctness of De Bavay in the light of what was subsequently said by the High Court in AGC (Advances). On this basis an order was made by the Chief Justice accordingly.

It was thus a matter of some surprise to the Court that the Commissioner submitted that the Tribunal's finding was one of fact only and thus not susceptible to appeal to this Court. Emphasis was placed by the Commissioner in support of this submission upon the fact that the terms of settlement of the claim between Placer and NWCC had not been put in evidence and that in some way the Tribunal's decision had depended upon this fact. It was said that the deductibility of a voluntary outgoing required analysis of the purposes for which settlement of the proceedings was obtained.

A perusal of the reasons of the Tribunal did not in any way suggest that the Tribunal's conclusion was arrived at by virtue of any concern that the settlement was effected for some extraneous purpose. No such case was made before it. Indeed the Tribunal referred to the settlement as ``a negotiated settlement''. No other inference would have been open to the Tribunal from the material submitted to it. Nor was any non arm's length relationship ever hinted at. Although there is some reference in

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the Tribunal's reasons to the voluntary nature of the payment, that was in the context of a submission that there was a distinction between losses and outgoings, the one being involuntary and the other voluntary. The submission was rejected and was not repeated before us.

With respect to the submissions carefully made by senior counsel for the Commissioner, there is no doubt that the present case involves a question of law capable of appeal to this Court. An issue as to whether an outgoing is incurred in gaining or producing assessable income may involve a pure question of fact:
FC of T v Brixius 87 ATC 4963. But the words of s 51(1) are not used in the section just in their ordinary sense. Terms such as ``income'', ``capital'' and ``incurred'' have been the subject of much judicial exposition. The issue in the present case is not one to be resolved by a finding of fact. It is a question of law, an issue turning on the proper construction and operation of s 51(1). Another way of stating the question of law is: whether, when all the facts have been fully found or agreed, those facts must fall within the section: cf
Hope v The Council of the City of Bathurst 80 ATC 4386 at 4389; (1980) 144 CLR 1 at 7 per Mason J with whom Gibbs, Stephen, Murphy and Aicken JJ agreed.

A fair reading of the Tribunal's reasons makes it abundantly clear that the only reason the Tribunal refused to Placer a deduction was the view the Tribunal took that this conclusion was required by the decision of the High Court in De Bavay. It is the correctness of that reasoning which Placer puts in issue in the present appeal.

De Bavay's case arose under the provisions of s 23(1)(a) of the Income Tax Assessment Act 1922-1934, the predecessor to s 51(1). The taxpayer in the year of income had paid contributions to a statutory fund pursuant to the Workman's Compensation (Broken Hill) Act 1920 (NSW) which required an employer of mine workers employed in Broken Hill on 1 May 1919 to contribute to a fund out of which compensation was payable in the event of death or incapacity of those mine workers from pneumoconiosis or tuberculosis. As at 1 May 1919 the taxpayer had been engaged in the business of treating tailings and producing zinc concentrates and other metalliferous substances and had employed mine workers at Broken Hill. It discontinued this business in 1924, although its liability to contribute to the fund continued. The payments in question arose in the 1932 and 1933 income years during which years the taxpayer derived no income from the treatment of tailings or the production of zinc concentrates. Its assessable income in those years was confined to income from investments and from a hall at Broken Hill in which it had an interest.

The High Court unanimously held that the amount of the contribution was not deductible in the year of income. The judgments recognise, at least to a limited extent, that the words ``incurred in gaining or producing the assessable income'' could not be interpreted as requiring that the outgoings sought to be deducted be designed to produce income in the year in which those outgoings were incurred. So much had been rejected earlier by the Privy Council in
Ward & Co Ltd v Commissioner of Taxes [1923] AC 145 where it had been pointed out that in any trade, expenditure was designed to produce results not only in the year of income in question but in subsequent years.

Latham CJ, after referring to Ward and commenting that the decision depended upon a not very strict construction of the New Zealand legislation, said (at ATD 294; CLR 303-304):

``So it has also been held that expenditure which has a direct relation to income of a past year can be deducted in a later assessment year where it is of such a character that, in a continuing business, it must be met from time to time as a part of the process of gaining assessable income
Herald and Weekly Times Ltd. v. Federal Commissioner of Taxtion [1932] 48 C.L.R. 113. But even this benevolent interpretation cannot assist the taxpayer in a case like this, where there has been a complete cessation of the income-producing operations out of which the necessity to make the outgoing arose.''

Dixon J, while accepting that a wide meaning should be given to the expression ``incurred in gaining or producing the assessable income'', read those words however, as referring to the assessable income from which the deduction was to be made. As the actual expenditure was, to use his Honour's words, ``completely dissociated'' from the gaining or producing of the assessable income of the year in which the contributions were made, it was not deductible. It was for that reason that his Honour held that

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there was no connection between the ``assessable income'' (that is to say the income of the year in which the outgoing was met) and the expenditure. The joint judgment of Rich and Evatt JJ and the judgment of McTiernan J merely express conclusions but afford no guide as to the principle to be applied. Starke J, after pointing out that it was unnecessary to trace items of expenditure and allocate them to particular items of income, said (at ATD 296; CLR 307):

``But in the present case the expenditure had nothing whatever to do with the appellant's income in the years in question. It was connected with and incidental to its mining operations, which had ceased long before the years in which the deduction is claimed. It was not, therefore, actually incurred in gaining the assessable income of the years 1931-1932 and 1932-1933.''

Some forty years later the High Court came to consider, in the context of the present Act, the deductibility of losses written off by AGC (Advances) Limited at a time when it had ceased to carry on its financing business. In the meantime the High Court had decided
Ronpibon Tin NL & Tongkah Compound NL v FC of T (1949) 8 ATD 431; (1949) 78 CLR 47 and
FC of T v Finn (1961) 12 ATD 348; (1961) 106 CLR 60, both cases on s 51(1) of the Act. In a unanimous judgment the Court in the former case (Latham CJ, Rich, Dixon, McTiernan and Webb JJ) pointed to the ``very important differences'' between s 51(1) and its predecessor, s 23(1)(a), particularly in the ability to apportion, now contained in s 51(1), and the alternative basis for the deduction in the second limb of the sub-section. In the course of the judgment their Honours construed the words ``such income'' in the second (``business'') limb of s 51(1) as meaning ``income of that description or kind'' and indicated that (ATD 435):

``... perhaps they should be understood to refer not to the assessable income of the accounting period but to assessable income generally. If they were so interpreted, they would cover a case where the business had not yet produced or had failed to produce assessable income and the alternative would then itself suffice to authorize the deduction of a loss made in a distinct business.''

Nevertheless their Honours expressed the view that otherwise the first limb remained unchanged and bore its original meaning. In a passage oft repeated their Honours (at ATD 436; CLR 57) said of that first limb:

``In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''

In Finn Dixon CJ had occasion to consider the significance of the words ``the assessable income'' in relation to the first limb of s 51(1), remarking that it was impossible to suppose that an expenditure directed at gaining future income was not allowable. Accordingly his Honour said (at ATD 351; CLR 68):

``The better view, however, is that s. 51 as now drawn does not in either limb require a rigid restriction to the gaining or production of assessable income of the current year.''

In AGC there were divergent views expressed. Gibbs J would have refused AGC a deduction under s 51(1) for the debts written off. His Honour said (at ATC 4068; CLR 192):

``The fact that the losses were incidental and relevant to the production of income in earlier years does not in itself prevent the losses from being deductible under sec. 51... However, sec. 51 does not authorize the deduction of losses that relate to income derived in earlier years if there has been a complete cessation of the business in the course of which that income was produced. This is established by Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T.''

His Honour distinguished the case where there had been a complete cessation from that where there had been a merely temporary cessation of profit-earning operations.

Mason J referred to De Bavay's case and Ronpibon and said that in construing the first limb of s 51(1) it was open to the Court to determine whether the words ``the assessable income'' should refer to the assessable income of the taxpayer in a particular year in which the expenditure was incurred or the assessable income of a taxpayer generally without regard to division into accounting periods. In his Honour's view the latter view was ``irresistible''. His Honour said (at ATC 4071; CLR 197):

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``It is inconceivable that Parliament intended to confine deductions to losses and outgoings incurred in connection with the production of income in the year in question and to exclude losses and outgoings incurred in connection with the production of income in preceding or succeeding years.''

Turning to the second limb his Honour continued (ATC 4071-4072):

``It may be argued that if the taxpayer has ceased to carry on particular business, a loss subsequently sustained in relation to that business cannot be described accurately as a loss incurred in carrying on that business, or at any rate one incurred in carrying it on for the purpose of gaining or producing assessable income. But the soundness of the argument depends on what is meant by `incurred'. A loss constituted by the writing off of a bad debt is no doubt incurred, in the sense that it is sustained, at the time when the debt is written off, and that may occur in a given case after the taxpayer has ceased to carry on as a going concern the business in which the debt was created. Yet even in such a case it may be correct to speak of the loss as having been incurred in the carrying on of the business. This is because the occasion for the loss is to be found in a transaction entered into in the carrying on of the business for the purpose of producing assessable income, that is, in the agreement by which the debt was created. Because the loss had its origin in such a transaction the loss may be said to be one which was incurred in the carrying on of the business for the purpose of producing assessable income, notwithstanding that its true character as a loss is not finally ascertained until the debt is written off.''

In his Honour's view the true test to apply was to ask whether the occasion of the loss or outgoing was to be found in the carrying on of a business for the production of assessable income. Upon this test the amounts written off were deductible under the second limb of s 51(1) and it was unnecessary for his Honour to consider whether they might also be deductible under the first limb of the subsection.

As an additional ground his Honour was, in any event, of the view that on the facts the appellant company carried on the same business at relevant times and that the character of its business had not changed. Such cessation of business as there had been was merely intended to be temporary and not permanent.

Barwick CJ, in a postscript to his Honour's judgment, indicated his agreement with the conclusions of Mason J on the question of the deductibility under s 51(1). The preceding parts of his Honour's judgment were concerned with criticism of De Bavay's case. The learned Chief Justice distinguished De Bavay on the facts particularly because, in his Honour's view, there had been no relevant change in business of AGC.

In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally, the fact that that outgoing was incurred in a year later than the year in which the income was incurred and the fact that in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility. There is no relevant distinction to be drawn between losses and outgoings. Provided the occasion for the loss or outgoing is to be found in the business operations directed to gaining or producing assessable income, that loss or outgoing will be deductible unless it is capital or of a capital nature.

On the facts of the present case the occasion of the loss or outgoing ultimately incurred in the year of income was the business arrangement entered into between Placer and NWCC for the supply of the conveyor belt which was alleged to be defective. The fact that the division had subsequently been sold and its active manufacturing business terminated does not deny deductibility to the outgoing. A finding to the contrary would lead to great inequity. Many businesses generate liabilities which may arise in the considerable future. Such liabilities are sometimes referred to as ``long tail liabilities''. To preclude deductibility when those liabilities come to fruition on the basis that the active trading business which gave rise to them had ceased would be unjust.

The approach we take is consistent with that taken by another Full Court of this Court in
FC of T v EA Marr & Sons (Sales) Ltd 84 ATC 4580; (1984) 2 FCR 326 where the Court comprising Bowen CJ, Toohey and Lockhart JJ unanimously allowed a deduction to a company in liquidation at a time when it might have ceased to carry on business of amounts owing

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to leasing financiers. The Court regarded De Bavay's case as plainly distinguishable, as indeed it was. However, what is more important is that the payments were deductible because the occasion of the outgoings was to be found in the carrying on of the taxpayer's leasing activities.

It is unnecessary in the present case to consider whether the same result would arise under the first limb of s 51(1) in a case where the taxpayer carried on no business activity: cf FC of T v Riverside Road at ATC 4576; FCR 315.

The case of Inglis v FC of T 80 ATC 4001; (1979) 28 ALR 425 upon which the Commissioner relied, provides no authority to the contrary. It is clearly distinguishable. In that case the occasion of the outgoings in question was not to be found in some prior primary production business. Indeed it had been concluded at first instance that no business had been carried on at all and that conclusion was confirmed on appeal. If anything the expenditure for which deduction was claimed was expenditure to preserve the property as a pastoral property and had the character of capital.

Similarly the comments by Northrop and Fisher JJ in
Paklan Pty Ltd (In Liq) v FC of T (1983) 67 FLR 328 at 351 may be taken to suggest that in that case the occasion of the outgoing to pay retirement benefits being incurred was not to be found at all in the earlier business of the taxpayer.

Ultimately we did not understand senior counsel for the Commissioner to contend otherwise. It was conceded that the mere circumstance that business had ceased for some years did not disentitle Placer to a deduction. Rather it was said that the fact that business had long since terminated was but one among many relevant factors to be considered in determining whether there existed the necessary connection between the outgoing and the production of assessable income as required by the s 51(1).

No doubt it is true that all relevant facts will need to be considered in the circumstances of a particular case. However the present is a case where all relevant facts were known and had been put by agreement to the Tribunal. In our view those relevant facts resulted necessarily in the conclusion that the amounts payable under the settlement to NWCC and the legal costs incurred in respect thereof were allowable deductions in the year of income.

In the result the appeal should be allowed and the respondent Commissioner must pay Placer's costs of it.


(1) The appeal be allowed.

(2) The Decision of the Administrative Appeals Tribunal be set aside and in lieu thereof it be ordered that:

  • (i) The Commissioner's objection decision be set aside and in lieu thereof the objection as to the disallowance of the deduction of $383,379 in the substituted accounting period ended 31 December 1989 be upheld.
  • (ii) The matter be remitted to the Commissioner of Taxation for reassessment accordingly.

(3) The respondent pay the applicant's costs of the appeal.

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