A.G.C. (Advances) Ltd. v. Federal Commissioner of Taxation.Judges:
Full High Court
Barwick C.J.: The Court is asked, pursuant to sec. 18 of the Judiciary Act, 1903-1969, a series of questions upon the basis of facts agreed by the parties and stated by the Chief Justice. The essential facts are that the appellant, formerly Waymouth Guarantee and Discount Company Limited, has carried on and still carries on the business of a financier lending money and financing the purchase of goods by means of hire purchase agreements. At all material times the appellant has held a money lender's licence under the laws of the State of South Australia, where is situated the company's office and its principal scene of business.
Until 17th April 1970 the appellant was a subsidiary of Master Butchers Limited, a company incorporated in South Australia under the provisions of the Industrial and Provident Societies' Act 1864 of that State. During the time the appellant carried on business as such a subsidiary, its hire purchase transactions were mainly entered into in respect of customers of a group of companies which manufactured or dealt in small domestic electrical appliances sold by door to door canvass throughout the States of mainland Australia. In respect to each hire purchase transaction, the appellant kept in its accounts an item styled ``interest'' which represented the amount of the terms charges payable under the hire purchase agreements less the sum allowed to the company introducing the transaction in return for an indemnity to the appellant against default by the hirer. It is conceded that the appellant returned as assessable income a total of the sums thus described as terms charges.
In December 1968 inspectors were appointed under the Companies Act of South Australia to investigate the appellant's affairs, whereupon the appellant suspended its business operations, except for carrying out certain transactions of no present moment. On 13 March 1969 the Supreme Court of the State of South Australia approved a scheme of compromise and arrangement (the scheme) in relation to the appellant, Master Butchers Limited and Combined Industries Limited - another subsidiary of Master Butchers Limited. The scheme became operative on 17 March 1969 (the scheme commencement date). The issued capital of the appellant at that date consisted of 1,000,000 shares of $2 each paid to the sum of 30c each, of which Master Butchers Limited held 990,940 in its own name and had some part of the balance of the issued capital held in trust for it. There was an uncalled liability of $1,700,000 in respect of all of its shares.
At that date there was due to the appellant a large sum for money lent and for balances due on hire purchase. It is conceded that at that date the appellant was the legal and beneficial owner of these book debts.
The scheme was in the nature of a creditor moratorium in respect of all three companies for the space of five years from the scheme commencement date. Under the scheme a special manager was appointed for its term. He was to be the agent of each company to conduct its affairs as part of the group companies (Master Butchers Limited, the appellant and Combined Industries Limited), with power, also described in the document as a duty -
- 1. To enter into possession of and recover all the assets of the group companies (meaning of each of the said group of companies).
- (i) To carry on the business of Master Butchers Limited and of Combined Industries in any way he should deem most advantageous and beneficial to the interests of members and scheme creditors.
- (ii) To wind up the affairs of the appellant and to realise its assets and to have power to carry on the appellant's business to such an extent as the manager might think necessary for the beneficial winding up of the appellant, with power to sell the undertaking of the company and the losses and structure of the appellant.
- (i) To carry on the business of Master Butchers Limited and of Combined Industries in any way he should deem most advantageous and beneficial to the interests of members and scheme creditors.
- 3. To take such steps by way of legal proceedings or otherwise in the name of the company as he might consider necessary to get in the debts due to the group companies.
- 4. To realise any asset of the group companies as he might think fit and, in consultation with the financial advisers and auditors of the group companies, write off any debt shown in the books of one of the companies.
- 5. To pay any dividend to scheme creditors whenever there are sufficient funds in the group companies' bank account to do so.
The special manager was to pay into a nominated bank account all moneys received by the group companies. During the continuance of the scheme 75% of the group companies' trading profit was to be available for distribution to scheme creditors who should rank equally for dividend on the amounts proven by them to be owing by any of the group companies. Provision was made for the ascertainment of the scheme creditors.
The scheme provided for priority of payment amongst the scheme creditors and subject to certain priorities, the special manager was to appropriate all other moneys not otherwise required for the purposes of the scheme and available for distribution, to payment of dividends and interest to scheme creditors in the same priority and order as if the group companies were being wound up. In his dealings with third parties, the special manager was to conduct the same on behalf of the group companies under the disclosed authority of himself as special manager. It was provided that if the contingent obligation of Master Butchers Limited to the appellant of $1,700,000 in respect of uncalled capital were waived, the net worth of Master Butchers Limited as at 1 December 1968, namely $675,000, would during the continuance of the scheme be distributed to scheme creditors. However, it was provided that on and from the commencement date of the scheme, all scheme creditors who were then creditors of the appellant would become creditors of Master Butchers Limited, and that any claim which they might have or, but for the scheme, would have had against Waymouth should thereafter be deemed to be against Master Butchers Limited which assumed full liability therefor.
The special manager collected money from debtors of the appellant and paid it into a special manager's account as directed by the scheme. Out of this account the special manager was able to pay a dividend of 20 cents in the dollar to the scheme creditors in October 1969, and another dividend of 10 cents in the dollar in June 1970.
On 23 December 1969, by an agreement in writing between Master Butchers Limited, the appellant, the scheme manager and the Australian Guarantee Corporation Limited of Phillip Street, Sydney, Master Butchers Limited agreed to sell, and the Australian Guarantee Corporation as purchaser to buy, Master Butchers Limited's shareholding in the appellant for the sum of $14,500 payable in cash against the handing over of share transfers duly executed.
It was agreed that prior to the date of completion of the purchase of the shares, the appellant in reduction of its indebtedness to Master Butchers Limited would transfer to Master Butchers Limited all its assets other than debts owing to the appellant, in consideration of the release by Master Butchers Limited of the appellant from all debts and liabilities present and future and all claims which Master Butchers Limited might have against the appellant at the date of completion, including any arising after that date out of any transaction or omission prior to the date, to the extent to which the amount of those claims might exceed the total amount of money otherwise payable under the agreement by the appellant to the Master Butchers Limited.
The appellant agreed with Master Butchers Limited and the special manager to pay to Master Butchers Limited in reduction of its indebtedness as and when demanded by the
ATC 4061manager or by Master Butchers Limited, such amount as was equal to the net amount received by the appellant after the date of completion by way of collections of the debts due to it, up to an amount of $2,750,000 after deducting all costs and expenses incurred by the appellant in the collection or attempted collection of the debts, including commission paid to any collecting agent.
The appellant also agreed with Master Butchers Limited and the special manager that it would pay Master Butchers Limited in reduction of its indebtedness an amount equal to 22½ cents in the dollar of the amount by which the deduction for debts written off in any year exceeded the amount of the pre-acquisition assessable income of that year. The expression ``pre-acquisition assessable income'' was defined as all amounts brought into account as assessable income of the appellant in any assessment of its income for any year and arising out of any transaction entered into by the appellant before the date of completion, including any collections of the debts whether before or after the same are written off. There were other obligations undertaken by the company to Master Butchers Limited to which I need not refer.
On 17th April 1970 by deed the Master Butchers Limited released the appellant from all debts and liabilities both present and future, and all claims which the Master Butchers Limited might have had against the appellant at the date of completion including any arising after the date of completion out of any act, transaction or omission prior to the date of completion to the extent to which the amount of those claims exceed the total of money expressed to be due or payable by the appellant to the Master Butchers Limited under specified clauses of the agreement to which I have already referred.
On 17th April 1970 the appellant appointed Master Butchers its agent for a period of five years from that date to collect and receive in trust and deliver to the appellant or its banker as the appellant might direct, all sums received in respect of debts owing to the appellant at 17th April 1970, and Master Butchers Limited was authorised in the name of the appellant to commence proceedings for the recovery of such debts.
The transfer of shares was completed on 17th April 1970 whereupon the appellant resumed the business of a financier as before. On 8th May 1970 the name of the appellant was changed to its present name. The appellant has since continued to carry on business as such a financier.
In the year ended 30th June 1970 the appellant wrote off as bad debts amounts totalling $243,838 shown in its books as owing to it at the beginning of that year. The sum of $243,838 comprised-
- 1. The sum of $76,296 being debts due for money lent.
- 2. The sum of $38,620 being the total of certain hiring charges made by the appellant in respect of hire purchase agreements, and brought to account as assessable income in years prior to the year ending 30th June 1970.
- 3. Of the balance of $128,922 no more than $100,000 represented so much of hire purchase instalments owing to the appellant which did not include any terms charges. Of this amount some $38,000 was owing by debtors who could have successfully pleaded the Statute of Limitations at the time the debts were written off. But no point is now made of this fact.
The appellant in its return of income for the year ended 30th June 1970 claimed the sum of $243,838 as a deduction. The Commissioner disallowed the whole claim.
In the year ended 30th June 1971 the appellant wrote off as bad debts amounts totalling $1,126,117 shown in its books as owing to it at the beginning of that year. The sum of $1,126,117 comprised -
- 1. A sum of $765,367 due for money lent.
- 2. $360,750 due under hire purchase agreements, of which the sum of $90,861 represented the total of hiring charges which had been returned as assessable income during years prior to the year ending 30 June 1971.
Of the balance of $269,889, part of the said sum of $360,750, the respondent concedes that no more than $220,000 was owing to the appellant at the date of the writing off. Again some part
ATC 4062of the $220,000 represented debts for an amount of $35,000 in respect to which the Statute of Limitations might have been pleaded.
In its return of income for the year ended 30 June 1971 the appellant claimed the sum of $1,126,117 as a deduction which the Commissioner disallowed.
The questions asked by the case raise the validity of the claims to deduction in respect of these amounts. The claim as to the debts for money lent and for hiring charges is made under the provisions of sec. 63 of the Income Tax Assessment Act (1936-1970) (the Act). The claim as to the other parts of the instalments due under hire purchase agreements is made under the provisions of sec. 51 of the Act.
The basis of the Commissioner's disallowance of the claim to the deduction for the bad debts, for money lent and for hiring charges was that upon its proper construction the scheme extinguished the beneficial ownership of the appellant in its book debts as at the commencement date of the scheme, and that the case was governed by this Court's decision in
G.E. Crane Sales Pty. Ltd. v. F.C. of T., 71 ATC 4268; (1971) 126 C.L.R. 177. In that case, upon a construction of a scheme of arrangement, the Court held that the company to whom the debts had been incurred, and whose affairs were the subject of the scheme of arrangement, had by the terms of the scheme lost its beneficial interest in those debts and had no interest in them at the time it purported to write them off as bad debts. The case turned on the construction of the scheme of arrangement and on the particular facts of that case.
The submission of the Commissioner in the present case is that, under the scheme here, there was by implication an assignment by the appellant of its beneficial interest in all the book debts due to it at the date of the commencement of the scheme, and that consequently at the time it purported to write off the debts there were no such debts due to it. Counsel for the Commissioner agreed that that was the only question of law in the case and that the appellant must succeed if in truth there was no such assignment. The Commissioner begins with the concession that the legal title to the debts did not leave the appellant, and that there are no express words of assignment in the scheme of the beneficial interest in the debts. However, he insists that upon the construction of a scheme as a whole it must be concluded that the clear intention of the scheme was that the appellant should from its date cease to have any beneficial interest in the debts.
After careful consideration of all that was put to the Court by Counsel for the Commissioner, I am unable to find in the scheme any support for the Commissioner's submission. Indeed at every point the indications in the scheme, in my opinion, are to the contrary. The scheme, as I have said, constituted a creditors' moratorium for a given number of years. Master Butchers Limited, of which the appellant was then a subsidiary, under the scheme ``took over'' the debts due by the appellant, and the creditors of the appellant, of Master Butchers Limited and of the other subsidiary became as they were styled ``group creditors''. The principal sources from which the scheme contemplated that the group creditors might receive payment of their debts or at any rate dividends in respect thereof were firstly, the amount collected from debtors of the appellant, and, secondly, part of the profits which might be made by carrying on the business of Master Butchers Limited by the special manager. Debts due to the appellant as they were recovered were to be paid into the special manager's account, as were 75% of the trading profits of Master Butchers Limited. The special manager was to take possession of the assets of the appellant including its book debts. As agents of the appellant the special manager was to recover the debts, and on recovery pay the proceeds into the nominated account as a contribution to a fund out of which dividends would be paid to the group creditors. Not merely were there no words of assignment to the special manager or to the group creditors of the debts owing to the appellant, but it was quite unnecessary for the purpose of implementing the scheme that the special manager should have any property, legal or equitable, in those debts. It was sufficient that he was put in possession of them, authorised as an agent of the appellant to collect them, and placed under an obligation to use the proceeds for the benefit of creditors. Of
ATC 4063course, upon the collection of money in satisfaction of a debt due to the appellant, the appellant lost its property in the debt to the extent of the amount collected, and the money collected was at the disposal of the special manager. But that conclusion denies an assignment of the debt at the commencement of the scheme.
It is true that under the scheme the group creditors agreed to accept whatever came to them under the scheme in satisfaction of what was due to them from any one of the three companies - the appellant, Master Butchers Limited and Combined Industries Limited: that is to say that on the expiry of the scheme the debts of the group creditors would be deemed to have been paid. But that fact does not warrant any inference that the group creditors were to be entitled to so much of the debts of the appellant as had not been collected at the termination of the scheme. No provision whatever was made by the scheme for the transfer to the group creditors of such debts at the termination of this scheme; nor was there any mechanism whereby such debts could then be collected by or on behalf of the group creditors. In my opinion, the proper construction of the scheme is that for its period the special manager as agent of the appellant was to collect as much of the debts due to the appellant at the date of the commencement of the scheme as he could, and that upon the expiry of the scheme his authority would cease, meantime the terms of the scheme determined how the moneys collected were to be dealt with. The debts remained throughout in the legal and equitable ownership of the appellant and on the expiry of this scheme could be dealt with by the appellant as its own. In my opinion, there was no assignment whatever of the special manager or to the group creditors or to Master Butchers Limited. That being so, nothing said by the Court in G.E. Crane Sales Pty. Ltd. v. F.C. of T. (supra) has any bearing on the resolution of the present question. In my opinion the appellant was entitled to the deduction claimed in respect of the amounts written off in each year for debts due, for money lent, and for hiring charges in respect of hire purchase agreements as claimed.
The other component, the unpaid instalments of hire, clearly cannot be written off under sec. 63 of the Act. But, in my opinion, they may be written off under sec. 51. The appellant was in business in financing hire purchase transactions. Following a common commercial practice it took title to the chattel, paying out the seller of it and then hiring it under hire purchase to the ``purchaser''. In this way the cost of the chattel became part of what may properly be described as circulating capital. The purchase of the chattel for the purpose of enabling the legal formalities of hire purchase to be observed was not the acquisition of a capital asset. It was the acquisition of something much more akin to trading stock. In my opinion upon the failure to recover the amount paid for the chattel there was a trading loss made in the gaining of assessable income, that assessable income being the hiring charges made by the hire purchase agreement under which the chattel was made available to the hirer.
Of course, it will be the actual amount thus lost by the appellant which will be deductible; that is to say the actual amount which the appellant could claim as a debt from the hirer at the time the amounts are written off. There has been no particular examination in this case of what that sum might be. But the concession by the Commissioner that certain sums were owing to the appellant at the date when the writing off took place suffices to establish what the appellant lost in not recovering the amount of the instalments of hire (excluding hire charges).
We were informed by both counsel at the outset of the argument in this case that there was only one matter to be decided, namely, whether by the scheme upon its proper construction the appellant had assigned its beneficial interest in the debts due to it at the date of the commencement of the scheme. Indeed, counsel for the Commissioner in opening his argument expressly said that unless he could make good the proposition that the appellant had so assigned its beneficial interest in the debts the appellant must succeed in the case.
However, notwithstanding these statements, counsel at the end of his argument raised two further points. The first point was that, upon
ATC 4064the assumption that there had been no assignment of the beneficial interest in the debts no precise relationship existed between the writing off of the debts, which for this purpose seems to have been regarded by counsel as the time at which the loss was incurred, and the gaining of assessable income which was the subject of the return in the particular year in which the deduction was sought to be made. The second point was that the business carried on by the appellant at the termination of the scheme was a different business to that which the appellant carried on before the scheme was entered into; or put another way that the break in the conduct of the appellant's business during the period of the operation of the scheme, prevented the business being regarded as a ``continuing'' business. Reliance was placed in this connection upon the decision of this Court in
Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (1935) 54 C.L.R. 295.
The first of these points is clearly insupportable. It is not possible now, to construe sec. 51 to mean that the expenditures and losses to be deducted must relate precisely to the assessable income which is returned for a year in which the expenditures are made or the losses are suffered. In the application of this unduly condensed provision, it has not been possible to utilise the definite article so as to require the expenditure in question to have produced or to have assisted to produce the assessable income of the particular year of the expenditure. Nor can it be construed to require that the loss be similarly related to the assessable income of the particular year - see
F.C. of T. v. Finn (1961) 106 C.L.R. 60 and cases there cited.
Thus expenditure in a particular year, for stock which may remain on hand being progressively sold over a period of years, will be allowable in the year in which the purchase is made, although in truth it may be demonstrable that no part of that which was purchased was sold in that year and therefore that it did not directly contribute to the assessable income of that year. Equally, payment for goods which had been purchased and sold in a prior year will be allowable as a deduction in the year that payment to the creditor is made, see
Ward & Co. Limited v. C. of T. (N.Z.) (1923) A.C. 145 at p. 148.
In Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (supra), the expression ``a continuing business'' was used to qualify the occasion when an expenditure not precisely related to the assessable income of a particular year was an allowable deduction. The description was intended, in my opinion, to convey the notion that in the case of an expenditure, the business of the taxpayer in respect of which the expenditure was made would probably in due course reflect in its income the proceeds or effects of that expenditure, or that it would already have done so where the expenditure was discharging an outstanding liability. I do not regard the expression ``continuing'' in such a temporal sense that if there were any break in the carrying on of the business for some reason, the business could not be regarded relevantly as continuous.
In any case, Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (supra) was concerned with an expenditure and not with a loss. Its facts were unusual, the appellant company having discontinued its business in connection with the recovery of metals and having become an investment company. Its assessable income in the particular year was derived wholly from investment, leaving aside some trifling transactions with which I need not concern myself. The time interval between the conclusion of the business of recovering minerals and the tax year in question was considerable. The case passed off against the taxpayer on the footing that there was no possible relationship between the expenditure and the assessable income in the tax year in question. Although the case was not concerned with the incurring of a loss, Sir John Latham observed upon the difficulty of regarding a loss as something which could gain or produce income. He suggested a reading of the section which retained the definite article. He decided that if the expenditure in question in the case were to be regarded as a loss it could not have been made in the course of carrying on a business.
Perhaps it would have been more satisfactory in that case to have read the section there under consideration in a sense which
ATC 4065related expenditure or loss to the gaining of assessable income which may have been already gained and returned or which may yet be gained and returned. See the discussion in
Ronpibon Tin N.L. v. F. C. of T. (1949) 78 C.L.R. 47 at p. 56, where it is suggested that the reference to the assessable income is really a reference to ``assessable income'' generally. In the case of Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (supra), the liability to make the worker's compensation payments was undoubtedly a liability which was incurred in the gaining of assessable income upon the mineral-recovering activities. That income had already been returned. It may be that, because of the terms of the Income Tax Assessment Act, the current value of the payments to be made in the future under the Workers' Compensation (Broken Hill) Act, 1920 could not have been deducted in determining the assessable income of any one year. But the obligation to make the payments was a business liability which sprang out of the carrying on of the business which had yielded assessable income. On a construction of the section which included expenditures which related to the gaining of assessable income ``generally'', it might properly have been said that the later payments of compensation had been incurred as a cost of gaining the assessable income which had already been returned and taxed. But an interpretation was adopted which required a relationship of some undefined kind between the expenditure and the assessable income of the year in question. This interpretation whilst on the one hand not requiring the tracing of the expenditure into the assessable income of the particular year, does require some relationship between the expenditure and the assessable income of that year. No particular logical prescription of that relationship is suggested in the judgment of the Court.
However that may be, I do not regard that case as deciding that, even in the case of expenditure, the business in respect of which the expenditure is made must be or has already been carried on without any substantial break. It seems to me that the most that could be deduced from the construction of the section applied in Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (supra) in relation to an expenditure is that where there has been a break in the carrying on of the business yielding the assessable income of the particular year that business must in its nature be substantially the same as that which was carried on at the earlier period of time.
But in any case, in my opinion, Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (supra) has nothing to say as to the deduction of losses. It is quite clear that a loss may not show up for years after money has been ventured in a business. The present is a very good illustration. The hire purchase agreement was entered into, and after a period default is made not only in making the agreed instalments, but in the return of the goods. A considerable interval of time may well elapse between the date of the hire purchase and the realisation that neither the instalments nor the goods are recoverable. The loss from an accounting point of view must occur at the time when the appellant accepts the position that the debt is irrecoverable. If a hire purchase company decided to wind up and to discontinue the granting of hire purchase agreements in a particular year, and in a subsequent year the company in liquidation found itself unable to recover instalments of hire on the goods in circumstances which caused it to write the amount off as a bad debt, it seems to me not merely unjust but unacceptable to hold that it could not deduct that loss as a loss which it had incurred in the course of gaining assessable income. The problem of deciding whether any and if so what relationship should exist between the assessable income of the particular year and the loss, in my opinion, does not arise as it has done in relation to any expenditure.
It is clear enough, it seems to me, that in order to be a relevant loss it must be a loss of money which has been put out in order to gain assessable income. It may be, and I have no need to decide that question at the moment, that if a long period of years separated the two events and meantime the company had started a different business or become an investment company as in Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (supra), it may be necessary if that decision is followed in such a case to say that the relationship between the two had ceased to be sufficiently proximate. It
ATC 4066would suffice for my present purpose that I am not satisfied that, in order to be deductible, the loss which flows from carrying on a business carried on to gain assessable income need necessarily occur in a year when the company is actively carrying on that business.
Further, in the present case, the facts, in my opinion, satisfy the idea of a ``continuing'' business except upon the very narrow view that a business is not relevantly continuing if it has had any substantial break in its continuity, a view which as I have indicated I am unable to accept. Here the scheme was entered into, it seems to me, in order to enable the companies to extricate themselves from their financial embarrassment so as to be able, if they so chose, to continue to carry on the business which had caused them the financial embarrassment. The break in years was relatively short. The fact that the company changed its name in the circumstances of this case can have no possible bearing, in my opinion, upon the nature or continuing nature of the business which the company was carrying on: nor does it matter, in my opinion, that the address from which it conducted its affairs was changed. The nature of the company's business, both before and at the conclusion of the scheme when the company resumed activities, was that of a financier, lending directly to borrowers and also servicing hire purchase arrangements. There was no change in the nature of the business at all. I conclude that in point of fact it was the same business which was carried on after a break, a break which it might be noted was not for the purpose of abandoning the business but rather to enable its continuance.
Since writing the above, I have had the advantage of reading the reasons for judgment prepared by my brother Mason. Having done so, I am in agreement with his opinion that the question of construction of sec. 51 is not concluded by Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (supra) and with his conclusion that the words ``the assessable income'' in that section means assessable income of the taxpayer generally without regard to division into accounts periods. I am in agreement with the reasons which my brother gives for that opinion and conclusion.
In my opinion, the submissions of the Commissioner are insupportable: for that conclusion I have indicated a number of reasons. The simplest is one of fact, namely, that the business was the same business which was carried on after the finish of the scheme as was carried on before. But, in any case, in my view of the section a loss of the circulating capital which had been used to gain assessable income is, in my opinion, deductible.
I am, therefore, of the opinion that the appellant was entitled to a deduction of the amounts written off which were conceded by the Commissioner then to have been owing.
The questions should be answered -
- (a) Yes.
- (b) Yes to a deduction of $76,296 for the year ending 30 June 1970 under sec. 63 and to a deduction of $765,367 for the year ending 30 June 1971 under sec. 63.
- (c) The appellant is entitled to a deduction under sec. 63,
- (i) of $38,620 hiring charges written off in the year ending June 1970 and
- (ii) of $90,861 hiring charges written off in the year ending June 1971;
and to a deduction under sec. 51 in respect of principal sums due under hire purchase agreements of -
- (i) $100,000 written off in the year ending June 1970 and
- (ii) $220,000 written off in the year ending June 1971.
It is unnecessary to answer specifically the question as framed.