Ravenshoe Tin Dredging Ltd v Federal Commissioner of Taxation

(1966) 116 CLR 81
40 ALJR 76

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(Judgment by: Taylor J.)

RAVENSHOE TIN DREDGING LTD.
v FEDERAL COMMISSIONER OF TAXATION

Court:

Judge:
Taylor J.

Judgment date: 28 April 1965

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Judgment by:
Taylor J.

1965, April 28.

TAYLOR J. delivered the following written judgment:-

This is an appeal against the assessment of the appellant to income tax in respect of income derived during the year ended 30th June 1961. Tax was assessed upon a taxable income of 26,271 pounds whereas the appellant's taxable income according to its return was 32,839 pounds. But the appellant was a company whose business during the relevant period consisted solely of the carrying on of mining operations of the character specified in s. 23A (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1960 (Cth) and part of its income was "exempt from income tax" pursuant to the provisions of that section. According to the appellant's calculations this part of its income amounted to 34,974 pounds whilst according to the method of assessment employed by the respondent it amounted only to 6,568 pounds. The appeal involves consideration of the proper method of assessment of this item pursuant to the section in question which reads as follows:-

"23A. (1) Where a person carries on mining operations in Australia or the Territory of Papua and New Guinea for the purpose of, or for purposes which include, the production of a prescribed metal or mineral, an amount equal to one-fifth of the amount remaining after deducting from so much of the assessable income of that person as is attributable to the production or is derived from the sale of the prescribed metal or mineral produced by those operations-

(a)

all allowable deductions which relate to that income; and

(b)

so much of any other allowable deduction as, in the opinion of the Commissioner, may appropriately be related to that income, shall be exempt from income tax." (at p82)

It is common ground that after deducting specified deductions, which are not in question, from what were characterized in an annexure to the appellant's return as its net profits for the relevant year there remained an amount of 174,873 pounds. But this was not the taxable income of the appellant for it was entitled, pursuant to s. 80 of the Act, to take into account losses made during previous years amounting to 142,034 pounds. The difference between the methods employed by the appellant and the respondent in calculating the amount of the former's exempt income results from the manner in which, respectively, they sought to deduct the amount of these losses. The appellant, purporting to apply the provisions of s. 23A, calculated one-fifth of the amount of 174,873 pounds - 34,974 pounds - and deducted the latter amount from the former figure, producing an amount of 139,899 pounds. Thereafter it set off the amount of its previous losses, first of all against the amount of 34,974 pounds, which it regarded as exempt income for the purposes of s. 80, and then the balance of its losses - 107,060 pounds - against the figure of 139,899 pounds, leaving as its taxable income the amount of 32,839 pounds. The respondent, on the other hand, deducted from the amount of 174,873 pounds the total amount of the appellant's past losses - 142,034 pounds - producing a figure of 32,839 pounds and treated one-fifth of this amount - 6,568 pounds - as exempt income for the purposes of s. 23A. The difference between these last two figures - 26,271 pounds - he then treated as the appellant's taxable income. In other words, he treated the total amount of the past losses as deductions of the character specified in par. (a) of s. 23A (1). That is to say, he treated the total amount of the past losses as allowable deductions relating to the appellant's assessable income.

It is contended that this method of assessment was erroneous for the deduction for which s. 80 (2) (b) provides is, in the first place, a deduction from exempt income, which is not assessable income, so that in order to apply the provisions of s. 80 (2) (b) the amount, if any, of the taxpayer's exempt income must first be ascertained. (at p83)

For the respondent, however, it is contended that the appellant did not derive any exempt income within the meaning of that expression as it is used in s. 80 (2) and that it is impossible to treat any part of its income as "net exempt income" as defined in s. 80 (3). Accordingly, it is said, the deduction of the appellant's past losses must be made from its assessable income before finally ascertaining the amount one-fifth of which is treated by s. 23A as income exempt from income tax. In support of the respondent's contention reference was made to other sections of the Act, in particular many paragraphs of s. 23, which place outside the category of assessable income particular kinds of income and it was pointed out that s. 80 (2), which was to be found in the Act prior to the enactment of s. 23A, was designed, so far as its references to exempt income and net exempt income are concerned, to deal with cases of that character. Accordingly it was necessary to provide that net exempt income, and not the whole of the exempt income, should be first of all applied in making up past losses. So sub-s. (3) of s. 80 defined the "net exempt income" of a taxpayer to mean for the purposes of the section " . . . the amount by which his exempt income derived from all sources exceeds the sum of the expenses . . . incurred in deriving that income . . . ". It is, it is said, impossible to fit into the scheme of the section income exempted from tax which is, itself, a net amount and which as the provisions of s. 23A (1) acknowledge, initially forms part of a taxpayer's assessable income. (at p84)

As I see the case, however, the problem falls to be resolved by a consideration of the meaning and substantial effect of s. 23A (1). If it appears that in the application of that section past losses should not be taken into account until after ascertainment of that part of a taxpayer's income which it provides shall be exempt from income tax then the appeal must succeed and the exempt income, which is a net amount, treated as "exempt income" and "net exempt income" for the purposes of s. 80. If, on the other hand, the section reveals an intention that past losses are to be regarded for the purposes of the section "as allowable deductions which relate to that income", that is, the taxpayer's assessable income, then the appeal must fail. (at p84)

For the appellant it is asserted that one-fifth of the "amount remaining" ascertained in accordance with s. 23A is by force of the section removed from the category of assessable income. It is an amount which is "exempt income" as defined by s. 6 and is removed from the category of assessable income (s. 25) though the starting point for the calculation which the section requires to be made is the taxpayer's assessable income or, perhaps, more precisely, the amount which would constitute his assessable income were it not for the provisions of s. 23A (1). That being so it is impossible, it is contended, to say what part, if any, of the past losses can be said to relate to the taxpayer's assessable income until the amount of exempt income has been calculated. The submission is reinforced by reference to the fact that until 1942 the whole of a taxpayer's income derived from activities similar to those of the appellant was assessable income and it is asserted that, in these circumstances, the prototype of s. 23A was enacted for the purpose of removing from that category a part of the income derived from the carrying on of such activities. Further it was pointed out that in cases arising under provisions such as, for example, s. 23 (o) the degree of tax relief afforded is, in substance, measured only by a net amount for the effect of s. 51 is to exclude as deductions losses and outgoings incurred in relation to the gaining or production of exempt income and it was suggested that by s. 23A it was intended to provide a partial exemption of much the same character. (at p85)

There may be something to be said for this point of view but on the whole I do not think the language of the section supports it. The starting point of the calculation which the section requires to be made is the assessable income of the taxpayer, or where he derives other income, so much of his assessable income as is attributable to the specified activities. Accordingly the figure taken as the starting point includes the amount which the section subsequently declares to be exempt from income tax. There is then to be deducted from the assessable income, or such part of it, "all allowable deductions which relate to that income and so much of any other allowable deduction as, in the opinion of the Commissioner, may appropriately be related to that income". It may be that s. 23A was framed without consideration of the problem which arises in this case, but what the section plainly enough requires is that where a taxpayer's assessable income is wholly derived from activities of the kind prescribed a net amount shall be ascertained by reference to the taxpayer's assessable income and to "all allowable deductions which relate to that (assessable) income". In other words, it requires an account to be constructed which takes, on the one side, the whole of the taxpayer's assessable income and, on the other side, all allowable deductions which relate to that assessable income. Until that account has been constructed it is impossible to say whether the taxpayer has any income which is exempt from income tax within the meaning of s. 23A and, for the purpose of constructing it, regard may properly be had to s. 80 which allows a deduction of past losses from assessable income. Such a deduction is, for the purpose of constructing such an account, an allowable deduction "relating to" the taxpayer's assessable income. (at p85)

In such cases the effect of the section is not to remove a portion of a taxpayer's income from the category of assessable income but rather to exempt from liability to tax part of his taxable income assessed in accordance with the Act. But as the section is designed to deal also with cases where a taxpayer derives part only of his assessable income from activities of the character specified, it was not possible simply to express the extent of the exemption by reference to a proportionate part of a taxpayer's taxable income, for it by no means follows that allowable deductions relating to assessable income derived from activities of the specified character will bear the same ratio to the total amount of deductions relating to the total assessable income, as assessable income of the former character bears to total assessable income. It is for this reason, no doubt, that the section requires a separate account to be constructed starting with that part of the assessable income which is attributable to activities of the specified character, and thereafter, stipulates that there shall be deducted from that assessable income all allowable deductions which relate to that income whilst, at the same time, the section authorizes the Commissioner, by par. (b), to make an appropriate apportionment "of other allowable deductions", that is to say, deductions which relate to the taxpayer's assessable income generally some part of which can be related only by an appropriate apportionment to that part of the taxpayer's assessable income which has been derived from activities of the specified character. (at p86)

For these reasons the appeal should, in my opinion, be dismissed. (at p86)

From this decision the appellant appealed to the Full High Court. ( at p86)

N. H. Bowen Q.C. (with him L. J. Priestley and A. M. Gleeson), for the appellant. The exempt amount under s. 23A of the Income Tax and Social Services Contribution Assessment Act should be calculated first, and then s. 80 (2) (b) of the Act should be applied so as to set off losses brought forward successively from that exempt amount and then from the remaining assessable income. This is consistent with s. 23A, for past losses do not "relate to" income of the later year, and the income on which the exempt amount is based is found by the prior deduction only of deductions that "relate to" that income. The expression "assessable income" in s. 23A (1) refers to the provisional assessable income which is subject to a diminution by the operation of that section. (at p86)

A. F. Rath Q.C. (with him C. S. C. Sheller), for the respondent. When account is to be taken of losses within s. 80, and there is also an amount to be exempted under s. 23A, it is necessary at the beginning to ignore s. 23A and to make the appropriate subtractions under s. 80 (2) (a), and not under s. 80 (2) (b), because the amounts exempted pursuant to s. 23A are not "exempt income" within s. 80 (2) (b), since s. 80 originated in the Act of 1936, where "exempt income" referred to sums of money exempt as received, and not to amounts determined to be exempt not as at the time of receipt, but by reference to later calculation, such as under s. 23A, which was introduced as a wartime measure (and thus in s. 23A an amount is said to be "exempt", but not to be "exempt income"). Further, as the amount of exempt income under s. 23A must be determined by applying it to the facts, it cannot be determined until the deductions referred to in s. 23A (1) have been made, and since s. 80 losses are deductions "relating to" income within the meaning of s. 23A (1) (a), these losses are deducted first, and then the exempt income is calculated as one-fifth of what remains. "Relate" is a word of every wide import. None the less, not all losses in prior years will relate to the income in question and so fall under s. 23A (1) (a), and accordingly it was deemed appropriate to confer a discretion under s. 23A (1) (b), as to deductions not necessarily so related. A question may therefore arise whether the expenditure which led to the loss led to, or was associated with, the earning of income in the later year or whether an appropriate opinion has been formed by the Commissioner. Another possible view of the word "relate" is that it includes all deductible amounts: see Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47 , at p 56 . (at p87)

N. H. Bowen Q.C., in reply.

Cur. adv. vult. (at p87)