American Thread Co v Federal Commissioner of Taxation

73 CLR 643

---

(Judgment by: STARKE J)

American Thread Co.
v Federal Commissioner of Taxation

Court:

Judges: Latham CJ

Starke JDixon J
McTiernan J

Subject References:
Taxation and revenue
Income Tax
Assessment
Assessable Income
Deduction
Losses of previous years

Legislative References:
Income Tax Assessment Act 1936 - ss 38-43,; 80

Hearing date: 29 October 1946; 30 October 1946; 20 December 1946;
Judgment date: 20 December 1946

Melbourne

---

Judgment by:
STARKE J

Case stated pursuant to the Income Tax Assessment Act 1936-1943 and the Judiciary Act 1903-1946.

The question stated is whether the appellant, the taxpayer, is entitled to a deduction from its income for its accounting period which ended on 31st December 1942 of the sum of (Australian) PD2,392, or any part thereof as a loss pursuant to s.80 of the Income Tax Assessment Act 1936-1943.

It is stated that the taxpayer is a company incorporated in Scotland and there carrying on the business of manufacturing thread which it imports into and sells in Australia. Substantially it derives no income directly or indirectly from Australian sources other than that derived from its imports and sales already mentioned.

The taxpayer is not a resident of Australia.

The Commissioner assessed the taxpayer to income tax for the financial year 1943-1944 based on income derived during the year ended 31st December 1942 pursuant to the provisions of the Income Tax Assessment Act 1936-1943, Part III., Division 2, Subdivision C-"Business carried on partly in and partly out of Australia." He appears to have assessed the taxpayer pursuant to s. 40 rather than s. 38 or s. 39. The taxpayer disclosed an assessable profit from its Australian business for its accounting period which ended on 31st December 1942 of PD1,906 sterling,(Australian) £ 2,392, but it claimed to deduct a loss of PD1,906 sterling,(Australian) PD2,392, which it had incurred in its Australian business in its accounting period which ended on 31st December 1941. The Commissioner disallowed this claim and assessed the taxpayer to income tax for the sum of (Australian) PD2,392.

But for the provisions of Subdivision C the taxpayer would be entitled to the deduction claimed pursuant to the provisions of s. 80 of the Act.

Now Subdivision C provides a special method of ascertaining assessable income in the case of taxpayers carrying on businesses partly in and partly out of Australia. And s. 43 (1) enacts that:

"(1) The assessable income of a taxpayer shall include any profit derived by him in the year of income which, under the provisions of the subdivision, is derived or deemed to be derived in Australia and the proceeds of any sale to which this subdivision applies shall not otherwise be included in his assessable income.

(2) No amount taken into account in ascertaining any such profit, and no expenditure incurred directly or indirectly in or in relation to any such sale" (that is a sale to which the subdivision applies) "shall be an allowable deduction."

The profit derived by the taxpayer in the year of income 1942 ascertained pursuant to Subdivision C was, as already stated, (Australian) PD2,392. And s. 43 (2) enacts that no amount taken into account in ascertaining that profit is an allowable deduction. The deduction claimed by the taxpayer was not taken into account in ascertaining any such profit and so far the sub-section is inapplicable. But the sub-section also enacts that no expenditure incurred directly or indirectly in or in relation to any such sale shall be an allowable deduction.

Deductions allowed under ss. 38 and 39 include expenses incurred in transporting goods to and selling them in Australia in the accounting period though I apprehend that expenses of the character mentioned commonly treated as belonging to the accounting period though not actually expended in the accounting period would be rightly deducted (cf. Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation ^[F1] , at p. 309). So, therefore, the expenditure dealt with in s. 43 (2) refers to other expenses incurred, I apprehend, in the accounting period directly or indirectly in or in relation to the sales of any such goods. The object of the section is to disallow as deductions amounts taken into account in ascertaining profit in the accounting period for the purpose of Subdivision C and expenditure incurred directly or indirectly in that period in or in relation to sales to which the subdivision applies.

But the deduction claimed in the present case has not been brought to account in ascertaining the profit derived by the taxpayer in the accounting period, the year of income 1942, pursuant to Subdivision C nor does any part of it represent expenditure incurred directly or indirectly in that period in or in relation to the sale of goods to which the subdivision applies. It is a loss incurred in respect of sales to which Subdivision C applied in the accounting period 1941 and has no relation directly or indirectly to any sales to which the subdivision applies for the accounting period 1942.

In my opinion, therefore, there is nothing in this case to exclude the operation of s. 80 of the Income Tax Assessment Act.

The answer to the question stated should be in the affirmative as to the whole sum of (Australian) PD2,392.