Ravenshoe Tin Dredging Ltd v Federal Commissioner of Taxation

(1966) 116 CLR 81
40 ALJR 76

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(Judgment by: Barwick C.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:
Barwick C.J.

1966, May 13.

The following written judgments were delivered:-

BARWICK C.J. The appellant taxpayer in the year of income ending in June 1961 carried on tin mining operations in the State of Queensland and from those operations derived its only income. In that year the company had a "net profit" for taxation purposes of 174,873 pounds. This sum represented its income from mining operations less such deductions as s. 51 of the Income Tax and Social Services Contribution Assessment Act 1936-1961 (Cth) (the Act) authorized. However, such operations carried on in prior years had not always proved profitable with the result that as at the commencement of the taxation year 1960-1961, the appellant had available to it for the purposes of s. 80 of the Act a sum of 142,034 pounds representing unrecouped "losses" within the meaning of that section. (at p87)

As tin is a prescribed metal or mineral within the meaning of s. 23A (1) of the Act, the appellant was entitled to have an amount of its income, which might otherwise be subject to income tax, exempt from such tax. (at p88)

The controversy between the appellant and the respondent Commissioner of Taxation is as to the use to be made of the amount of the unrecouped "losses" in the calculation of the appellant's taxable income, having regard to the terms of s. 23A (1) and of s. 80 of the Act. The respondent Commissioner calculated the taxable income of the appellant by first deducting from the amount of the said "net profits" from the mining operations the amount of the unrecouped "losses" and then applying the provisions of s. 23A (1) to the balance treating that balance as the assessable income within the meaning of that section. He assessed the appellant to tax accordingly. The appellant appealed to this Court against this assessment, claiming that the proper method of computing its taxable income is first to deduct from the amount of the said "net profits" an amount equal to one-fifth thereof, and thereafter to deduct the amount of the unrecouped "losses" from the remaining four-fifths. The balance, according to the appellant, was its taxable income. (at p88)

The contentions of the parties are set out by my brother Taylor in his judgment on the hearing of the appeal against the assessment, and I have no need to repeat them, or the precise figuring which each party derived from them. These submissions were repeated in the hearing of this appeal from his Honour's order dismissing the appellant's appeal against the assessment ; but, as it seems to me, much greater emphasis has been placed before this Court on the significance of the word "relates" in s. 23A (1) and upon the nature of the "losses" which s. 80 makes deductible than would appear to have been the case in the argument before his Honour. (at p88)

It is convenient first to set out the precise terms of relevant parts of each section :

"80. (1) For the purposes of this section, a loss shall be deemed to be incurred in any year when the allowable deductions (other than the concessional deductions and the deductions allowable under this section) from the assessable income of that year exceed the sum of that income and the net exempt income of that year, and the amount of the loss shall be deemed to be the amount of such excess.

(2) So much of the losses incurred by a taxpayer in any of the seven years next preceding the year of income as has not been allowed as a deduction from his income of any of those years shall be allowable as a deduction in accordance with the following provisions:

(a)

where he has not in the year of income derived exempt income, the deduction shall be made from the assessable income ;

(b)

where he has in that year derived exempt income, the deduction shall be made successively from the net exempt income and from the assessable income ;

(c)

where a deduction is allowable under this section in respect of two or more losses, the losses shall be taken into account in the order in which they were incurred.

(3) In this section 'net exempt income' means-

(a)

where the taxpayer is a resident - the amount by which his exempt income derived from all sources exceeds the sum of the expenses (not being expenses of a capital nature) incurred in deriving that income, and any taxes payable in respect of that income in any country outside Australia or under the Income Tax Ordinances of the Territory of Papua and New Guinea ;

"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 p89)

It is at once apparent, in my opinion, that the Act contemplates that the deductions authorized by s. 80 will be made at a point in the computation of the taxable income after the amount of net exempt income (if any) has been ascertained. Section 23A (1) does provide for the computation of an amount of exempt income for, in my opinion, the sum calculated in accordance with that section is exempt income within the meaning of that expression as defined. Accordingly, one might well expect from the language of s. 80 itself that the relevant application of s. 23A (1) to the taxpayer's circumstances would be complete before occasion arose to apply s. 80. (at p90)

The use of the expression "assessable income" both in s. 23A (1) and in s. 80 (1) (a) was suggested as a difficulty in the way of the appellant's contention to the above effect. But it is clear that the expression "assessable income" is not used throughout the Act inflexibly with the same denotation. In my opinion, the mere use of the adjective "assessable" in s. 23A (1) to denote the income with respect to which a calculation is to be made does not compel the conclusion that this is the same amount of income as that against which s. 80 requires the "losses" of which it speaks to be put. An examination of s. 23A (1) shows, I think, that the reference to assessable income in that section is clearly not a reference to the same sum as is mentioned in s. 80 (2) (a). What s. 23A (1) directs is a calculation to determine an amount of exempt income. It assumes that there is an amount of income which has been derived from the sale of a prescribed metal or mineral and which, apart from the section, would continue wholly to be assessable income. It directs that a fraction of this amount of income shall be set aside as exempt income and thus no longer a component of the assessable income. Section 25 does at least require that exempt income shall not be included in that assessable income which is to become the taxable income. Section 23A (1) does not provide for a deduction but for an exclusion. (at p90)

But the matter is advanced further in favour of the appellant's submissions, when the terms of s. 23A (1) are further considered. In my opinion, it would be difficult, to say the least, having regard to the evident purpose of s. 23A (1) to read assessable income as meaning the described assessable income after all deductions for which the Act provides have been made; for the section in subpar.

(a)

is careful to qualify the deductions of which it speaks. The allowable deductions to be made from the assessable income from the sale of prescribed metals or minerals are to be those which "relate" to that income. The allowable deductions in the nature of losses or outgoings within the meaning of s. 51 and which relate solely to the production of the income from the sale of prescribed metals or minerals will not be difficult to identify. Where such a loss or outgoing does not relate solely to the production of such income, sub-par. (b) of s. 23A (1), in my opinion, enables the Commissioner to apportion an expenditure, being an allowable deduction, so as to determine what part of it ought to be regarded as related to the production of that income. In my opinion, that is the function of that sub-paragraph. The word "relate" in sub-par. (a) of that section, in my opinion, describes only those allowable deductions which solely relate to the production of the income from the sale of the prescribed metal or mineral. (at p91)

In the case in hand, the whole amount of the deductible losses resulted from the carrying on of the mining operations which resulted in the sale of tin. But if such "losses" could be regarded as relating to the production of income in a subsequent year, subpar.

(b)

in my opinion, would authorize the Commissioner to apportion the "losses" in a case where the losses were derived from more than one kind of operation so as to apply to the income derived from the sale of the metal or mineral that part of the losses which he regarded as related to that income. (at p91)

However, in my respectful opinion, losses resulting from operations in past years cannot be regarded as in any relevant sense "related" to the income of the current year. Once annual accounting to ascertain assessable income is undertaken, apart from special statutory provisions, the financial experience of the year is, as it were, isolated from earlier and from subsequent years: so to speak, it is self-contained. This is true, in my opinion, though the closing balances of one year became the opening figures for the next year's accounting. By contrast the balance sheet, in its item of accumulated profits or losses, whether carried into an item of shareholders' funds or kept in an appropriation account, endeavours to overspan the annual accounting in relation to profits or income, so as to reflect the total experience of the enterprise to date. The losses of prior years, in my opinion, have no place in an annual account of profits or of income. They are neither of the nature of a receipt nor of a disbursement in or relating to that year. (at p91)

Apart from the general position in annual accounting, s. 23A (1) of the Act seems to me to intend to exempt from income tax a portion of the income derived from the sale in the year of tax of the prescribed metal or minerals diminished by the amount of allowable deductions which the gaining or production of that income in that year attract, either wholly or partly, in the latter case an apportionment being made. The idea of setting against that net income, losses of prior years, in my opinion, is quite foreign to the purpose and intention of the section. (at p91)

Further, when the real nature of a deductible "loss" is considered, the matter becomes to my mind even clearer. First, these "losses" are not themselves actual expenditures either in the tax year, or for that matter in any year nor need they necessarily result from any actual expenditure. They are derived from the operation of the Act, perhaps partly from what it includes (or excludes) in or from assessable income and perhaps partly from the deductions which it permits from that assessable income. Thus, they are figures arrived at by setting against the assessable income gained or produced in a year the appropriate amounts of allowable deductions, which have proved to be greater in amount than that assessable income. To the extent to which they are not recouped in accordance with the provision of s. 80, they are aggregated from year to year. These figures, in my opinion, do not "relate" to the income derived in a subsequent tax year. Consequently, the amount of unrecouped losses ought not to be included in the sum by which the assessable income from the sale of tin is to be diminished for the purposes of s. 23A (1). (at p92)

In my opinion, the calculation called for by s. 23A (1) should be made before the application of s. 80: the assessable income of which s. 80 (2) (a) speaks should not include any exempt income and, in particular, should not include the amount resulting from the calculation called for by s. 23A (1) and, lastly, in that calculation, no part of the unrecouped losses within s. 80 should be deducted from the "net income" derived from the sale of the prescribed metal or mineral. (at p92)

It follows, in my respectful opinion, that this appeal should be allowed, the respondent's assessment of the appellant's income tax for the year ending June 1961 should be set aside, the amount of the appellant's taxable income as shown in such assessment be increased to the sum of 32,839 pounds and the appellant assessed to tax accordingly. (at p92)