Caltex Ltd v Federal Commissioner of Taxation

106 CLR 205

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(Decision by: Dixon CJ)

Between: Caltex Ltd
And: Federal Commissioner of Taxation

Court:

Judges:
Dixon CJFullagar J
Kitto J
Taylor J
Menzies J

Subject References:
Taxation and revenue
Income tax
Debt payable in foreign currency
Exchange loss
Allowable deduction

Legislative References:
Income Tax Assessment Act 1936 (Cth) - s 51(1); s 80; s 136

Hearing date: 7 September 1959; 8 September 1959; 9 September 1959; 10 September 1959; 1960 September 1959; 5 April 1959
Judgment date: 5 April 1960

SYDNEY

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Decision by:
Dixon CJ

The primary question in this case concerns the claim of the appellant company that in the year 1936 by reason of a dollar transaction in the United States of America it incurred a loss or outgoing forming an allowable deduction under s. 51 (1) of the Income Tax Assessment Act 1936-1940 (Cth). Should this claim be sustained? The question is obscured and, if one may say so, given an exaggerated appearance of complexity by the intricacy of the facts or, perhaps it would be more correct to say, of the accounting which leads up to it. But extricated from the merely complicating and historical circumstances giving rise to the problem, it may be stated simply enough.  

The appellant company over a period of years incurred a large dollar indebtedness in the United States. It is an Australian company which was incorporated in New South Wales under the name of the Texas Company (Australia) Ltd , a name it bore until the beginning of 1941 when it changed it to Caltex Ltd But it was controlled from abroad, that is to say from the United States of America. The business of the company is to import petrol and petroleum products and sell them here and in New Zealand. The dollar debt which it incurred over a period was for supplies chiefly of trading stock from the United States. The price of some plant equipment and other capital items was included but for the purpose of the question to be decided that complicating factor can be neglected. At the material date the debt consisted of a balance of account covering a long period, that is to say the excess of the dollar cost of supplies over remittances and certain adjustments by way of financial assistance to the Australian company, the appellant. The identity of the creditor or creditors is not very clearly stated in the special case, which says, "the company had obtained its trading stock of petroleum and petroleum products in United States of America from an American company (hereinafter referred to as the `old supplier') which since 1928 was owned or controlled by the Texas Corporation of New York. In the books of the company (i.e. the appellant company) the old supplier was sometimes referred to as the Texas Company, New York, but since about 1928 as either the Texas Company, Incorporated in Delaware, or the Texas Company, Incorporated in California."  

Purchases of trading stock were of course taken into the appellant company's merchandising accounts in Australian money at an amount obtained by converting the dollar price into Australian money at rates of exchange prevailing at the time. A system of dollar cost adjustments was instituted and practised for some years reflecting variations in the movements of exchange, movements which in general tendency were adverse to Australia. How far this was allowable under s. 29 and s. 31 of the Assessment Act we need not inquire. It is not here in question and in any case may have been of no practical importance in ascertaining taxable income in view of the use made by the Commissioner of s. 28 of the Income Tax Assessment Act 1922-1935 and s. 136 of that of 1936.  

It is certain, however, that by 1st July 1936 the cost in Australian pounds of obtaining an amount of dollars which would pay the outstanding dollar indebtedness to the American company or companies mentioned would greatly exceed the aggregate of the cost in Australian money at which the stock in trade had been taken into the merchandising accounts, less of course the cost in Australian money of the remittances. In saying this it is assumed that the remittances are taken into account and by some means there is an ascertainment of the amount of the indebtedness properly attributable to the f.o.b. cost of items of stock-in-trade.  

Now 1st July 1936 may be regarded as the material date for the purposes of the question in the case. That is made clear by two passages in the special case. The first says that in the year 1936 the Texas Corporation of New York and a company called the Standard Oil Company of California formed a new company, California Texas Oil Company Limited, which company on and from 1st July 1936 became the sole supplier of petroleum and petroleum products to the appellant company. The other passage says that on 1st July 1936 this new company, which is called in the special case the "new supplier", lent to the appellant company a sum of dollars to enable it to discharge part of its indebtedness to the "old supplier". The passage goes on to say that the loan was effected by means of a payment in dollars to the credit of the appellant company's bank account in New York and that on the same day that company drew a cheque on that account for the full amount of dollars borrowed and paid it into the New York account of the "old supplier". At that date the rate of exchange between Australia and New York was four dollars to the pound. This payment did not completely close the account of dollar indebtedness. The company called in the special case the "old supplier" had shipped supplies before the material date but these were not received by the appellant company until later. In the same way as on 1st July 1936 a second loan in dollars was made on 27th November 1936 by the new company to wipe off this indebtedness to the old.  

By these two dollar transactions the Australian company-the appellant-is said to have incurred a loss or outgoing deductible under s. 51. I am unable to agree that such a loss or outgoing was incurred. The transaction appears to me to leave the appellant company owing the same number of dollars and simply to substitute the California Texas Oil Company Limited as the creditor for the Texas Corporation incorporated in Delaware or the Texas Company incorporated in California. It is said that the indebtedness to the latter was on revenue account whereas that to the former is a loan and is on capital account. To my mind it does not appear from the facts stated in the special case that it is so, but I cannot see that it matters if it be so. Section 51 (1) provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions, with certain exceptions not presently material. To come within the provision there must be a loss or outgoing actually incurred: it does not include a loss or outgoing which is no more than impending, threatened or expected; it is not a matter depending upon proper commercial principles or accountancy practice but upon the legal criterion set by s. 51 (1): see Federal Commissioner of Taxation v James Flood Pty Ltd; ^[F1] New Zealand Flax Investments Ltd v Federal Commissioner of Taxation. ^[F2] To substitute one creditor for another or to convert a liability on account of revenue into a liability on account of capital is not to incur a loss or outgoing in such a sense. In Armco (Australia) Pty Ltd v Federal Commissioner of Taxation ^[F3] there was a question whether a manufacturer and trader was entitled to a deduction on account of the increase in the outlay involved in purchasing dollars at a more unfavourable rate of exchange in order to discharge a dollar debt incurred in a long past accounting period for stock in trade and raw material. All the members of the Court were of opinion that, apart from considerations not here relevant, the deduction would be allowable and in that we followed the decision of this Court in the case of the now appellant reported as Texas Co (Australasia) Ltd v Federal Commissioner of Taxation, ^[F4] a decision relating to an earlier period of time. In the case of Armco (Australia) Pty Ltd v Federal Commissioner of Taxation, ^[F5] I attempted to state the basis upon which the allowance of such a deduction was based and I shall take the course of repeating the explanation of why the increased amount required to purchase the exchange formed a trading loss or outgoing which would be an allowable deduction from the assessable income of the accounting period in which it was incurred. For it is just as important in this case as it was in that cited to see how such a result would be reached.

"It would arise from the fact that it is a continuing business, depending upon the purchase or manufacture of goods and their resale. The accounts are, of course, made up, not on a basis of receipts and disbursements, but upon the commercial basis of valuation and credit. Nevertheless in such a case actual expenditure in a later accounting period arising from a fortuitous increase in the amount of the liabilities taken into it from the prior period may form a proper debit in the later period, notwithstanding that the item relates to purchases or costs of manufacture included in an earlier accounting period. The comparison made between the beginning and end of an accounting period means that stock in trade and purchases are taken into account not by reference to what is actually paid for them, but according to the value assigned to the one and the liability incurred in acquiring the other. That is done, of course, entirely independently of the period within which the actual disbursement of money is made to discharge the liability. If, as is commonly the case, the amount of the liability is fixed and incapable of subsequent variation, the disbursement itself whenever made could never matter for the purpose of computing profit or loss in that or any subsequent period. But if for any reason the amount is capable of changing, as is the case when the indebtedness is in a foreign currency and the rate of exchange may alter, a further question arises. If the change takes place in a subsequent period and actual payment is then made, is the increase or decrease, as the case may be, to be attributed to the prior period and the net profit or loss reassessed? Obviously not. It is to be taken in as an item belonging to the subsequent period; for the reason that, with continuing trading, when increases beyond the estimates by which assets and liabilities are carried out of one period into the next occur, they must be treated as incidents of the system and they must be regarded as belonging to the period in which they accrue or are realized". ^[F6]

 

The problem in the present case appears to me to come down to the question whether for the purposes of s. 51 (1) losses by reason of the movement of exchange were realized or definitively accrued to the appellant company in virtue of the transaction of 1st July 1936 and the later similar transaction of 27th November 1936.  

The Australian law of income taxation does not enable traders who incur liabilities in money of other countries in purchasing stock in trade to treat a movement of exchange against this country as establishing a loss deductible as such in the year in which the movement takes place simply because a liability incurred for stock in a prior year remains undischarged. The movement of exchange may have other consequences in a current assessment; it may, for example, indirectly affect the value of trading stock for the purpose of s. 31. But if there is nothing amounting to a realization or definite accrual or establishing of the loss or outgoing in the manner described in Flood's Case ^[F7] as one to which the taxpayer is at least definitively committed, as an outlay ascertained and unavoidable, s. 51 (1) will not avail him. In the previous case of the appellant company ^[F8] that had occurred: the exchange was purchased and the dollars transmitted. In the present case it appears to me that nothing has happened but the novation of a dollar indebtedness, or something equivalent or akin to a novation. If it be said that the appellant company gained possession of dollars which it might have transmitted to Australia converting them in Australian money, one answer at least is, as it seems to me, that it was not so. The special case seems to me to mean that it was not open to the appellant company to do anything else with the proceeds of the cheque given by the California Texas Oil Company Limited than to use them to discharge pro tanto the existing indebtedness to the Texas corporation or corporations (of Delaware or California). But I do not see that it matters. There stood the answerable indebtedness in the same number of dollars to the California Texas Oil Company Limited. In many respects the money of another country must be treated in point of law like goods. It is not currency of this country and it is not a measure of value in this country. It is true that unlike goods, but like some forms of immediately convertible security, the receipt of foreign money may be treated as a derivation of income. But the purpose of introducing the analogy of goods is to illustrate the differences between the changes of value expressed in terms of Australian money and the actual realization of a loss or the "incurring" of a loss or outgoing. It is one thing to deal in values without realization for the purpose of s. 31; another for the purposes of s. 51 (1). Values are ever changeable: so is a rate of exchange.  

For the reasons stated I do not think that a loss or outgoing was incurred within the meaning of s. 51 (1). It is perhaps desirable in order to avoid misapprehension to add one or two observations. In the first place, I have not thought it desirable to go over the process of accounting adopted by the company: still less to discuss the result in figures. To no small extent the process of accounting is dealt with in what I said in the former case, ^[F9] though the period was earlier and there are certain additional complications in the later period. But my chief reason for refraining from dealing with these matters is that I regard them as introductory only to the real problem and as likely to be a source of confusion or, perhaps I should say, distraction from it.  

It is perhaps necessary to say that if I have drawn inferences of fact I regard it as open to the Court to do so. For the authority to state the special case lies, I think, in s. 18 of the Judiciary Act 1903-1950. The provision standing as s. 198 (1) of the Act applies still, it seems, only to appeals directly from the Commissioner governed by the provision standing as s. 197.  

Lastly, it is perhaps desirable to say that the appellant company has adopted an accounting period under s. 18 consisting of the calendar year.  

Two questions were submitted for the consideration of the Court by the special case as amended at the hearing. They are as follows:

"1.

Upon the facts stated did the appellant as claimed in par. 48 hereof incur in the income year 1936 a loss or outgoing in the nature of an exchange loss, in relation to the discharge of its indebtedness to the old supplier as set out in pars. 44 and 45 hereof, which was an allowable deduction under s. 51 of the Income Tax Assessment Act 1936?

2.

If so, whether the appellant was, in the circumstances of the case, entitled to a deduction, pursuant to s. 80, in the income year ended 31st December 1939, of any part of the loss disclosed in the year of income referred to in question 1. after taking the so called exchange loss into account."

I answer the first question No. If it were necessary for me to answer the second question I would hold that a valid assessment for the year 1936 in pursuance of s. 136 no longer existed having regard to the course taken as set out in pars. 7 to 15 of the special case and the annexures to such paragraphs, and therefore that there was no barrier to the application of s. 80.