Case G58

Judges: JL Burke Ch
RE O'Neill M

CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 27 August 1975.

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C.F. Fairleigh Q.C. (Member): The issues are whether the taxpayer, a proprietary company, is entitled to deductions for depreciation on a Ford motor car (sec. 54) and to deductions upon the disposal or loss of the vehicle (sec. 59) and whether the notices of assessment of additional tax - Division 7 - (consequent on the adjustments to the income)

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can be sustained. As the parties agreed during the hearing of the references that business use was 70% there is no question as to expenditure or as to proportion of business use.

2. The events which gave rise to the present problem are as follows -

• (a) Whilst the taxpayer's managing director was in the United States in the latter part of 1966 he purchased on behalf of the taxpayer on 24 October 1966 a new Ford motor car.
• (b) Payment was made for the vehicle and costs associated therewith on 26 October 1966 by ``sight draft drawn at Hong Kong and Shanghai Banking Corporation of California U.S.A.''
• (c) Apart from the driving of the vehicle to the wharf to be loaded on board ship (a total of about 200 miles) the vehicle was not used in the United States.
• (d) The vehicle was shipped from Los Angeles, U.S.A., on 26 October 1966 and was landed in Australia on 10 November 1966.
• (e) On 10 November 1966 fees in respect of the sight draft were paid to the Commonwealth Bank, Sydney.
• (f) On 10 November 1966 the taxpayer's managing director signed the standard form of one of the major hire purchase companies whereby he made to that company an offer to hire the vehicle on hire-purchase terms. (He stated in evidence that he made the offer as nominee of the taxpayer and this was not challenged by the Commissioner.) On the same day the taxpayer (per the managing director) signed a letter addressed to that hire purchase company. The opening paragraph of that letter is: ``In consideration of your purchasing from us (the Ford motor car) in respect of which you have received or are about to receive an offer to hire we warrant...'' The last sentence in that letter is: ``This offer shall be deemed accepted by your purchasing the goods''.
• (g) On 11 November 1966 inward wharfage and harbour rates and some minor shipping expenses were paid.
• (h) On 11 November 1966 the documents pursuant to the Customs Act were completed by an agent of the taxpayer and furnished to the Customs officer.
• (i) On 14 and 16 November 1966 some parts of customs duty and sales tax were paid.
• (j) On (possibly) 15 November 1966 (and within the period 10 November 1966 to 16 January 1967) the formal passing of title to the vehicle to the hire purchase company took place.
• (k) In December 1966 the vehicle was converted to right-hand drive at a cost of $1,200 and the total outlays to that point of time were $7,295.90.
• (l) On 16 January 1967 the hire-purchase company signed the acceptance of the taxpayer's offer to hire the vehicle.
• (m) Until mid November 1967 (probably 15 or 17 November) the vehicle was used in Australia on the business of the company (70% use).
• (n) On 15 or 17 November 1967 a notice of seizure of the vehicle pursuant to the Customs Act 1901 (as amended) was served on the taxpayer and a Customs officer forthwith took possession of the vehicle. Thereupon the taxpayer's managing director was charged on three counts in respect of the vehicle, two of making an entry false in a particular in breach of sec. 234(e) of the Customs Act and one of evading payment of duty in breach of sec. 234(a) of the Customs Act . All three offences ``occurred'' on 11 November 1966 (sub-para. (h)).
• (o) On 11 August 1971 the taxpayer's managing director was convicted on the three charges aforesaid. (An appeal was not lodged. Apparently neither he nor the taxpayer lodged a claim consequent upon the vehicle being seized, or if that occurred this was not followed up by an action under sec. 207 of the Customs Act .)
• (p) The periodic payments required to be made to the hire purchase company pursuant to the offer and acceptance were made by the taxpayer as though the agreement continued in full force and effect.

3. (a) Section 229 of the Customs Act states that

``The following goods shall be forfeited to the Crown -

• (i) All goods in respect of which any entry invoice declaration answer statement or representation which is false or wilfully

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  misleading in any particular has been delivered made or produced.''

(b) Section 262 of the Customs Act states that ``Where the committal of any offence causes a forfeiture of any goods the conviction of any person for such offence shall have effect as a condemnation of the goods in respect of which the offence is committed''.

4. The first question is the date upon which title to the Ford car passed to the Crown in right of the Commonwealth of Australia. The particulars given in support of the notice of objection claim a loss or disposal as at (mid) November 1967, alternatively 11 November 1966.

5. In
Powers v. Maher (1959) 103 C.L.R. 478 at pp. 482-483 Kitto J. referred to a submission that the operation of sec. 229(i) in a case to which it applies is to divest the property in the goods from the owner, and to vest it on the Crown, immediately upon the delivery, making or production of the statement, etc., and Kitto J. concluded that whatever be the true view ``clear it is that whenever a state of affairs arises in which any one of the decriptions of goods contained in the eighteen paragraphs of sec. 229 is satisfied, that section intends to effect at once some change in the legal situation with respect to those goods, be it a transfer of ownership to the Crown or only the creation of a right in the Crown to bring about such a transfer by immediate seizure''. His Honour left open the question whether it is on occurrence of the stated facts or on seizure that the change of ownership occurred. He further said (pp. 483-484) that the goods must be in Australia - not in the sense that the goods must be in Australia when the statement, etc., is made, ``but that the divesting, or the arising of the right in the Crown to divest by seizure, occurs either at the time of importation or at the time of delivery, making or production of the statement, etc., whichever of these times is the later''.

6. It was held by Dixon C.J., McTiernan, Webb and Kitto JJ. in
Burton v. Honan (1952) 86 C.L.R. 169 that the Customs Act validly empowers an officer of Customs to seize forfeited goods although they have passed into the hands of a bona fide purchaser for value. The present significance of that is that passing of property in the Ford car from the taxpayer to the hire purchase company and back again as hirer on some dates from or about 10 November 1966 to 16 January 1967 becomes unimportant when viewed in the light of all the facts.

7. Dixon C.J. said (at p. 176) that: ``On authority it is clear that under the provisions of sec. 229 provided the facts exist which justify a forfeiture, the title to the goods vests in the Crown when the forfeiture takes place in consequence of the occurrence of the facts. No further proceedings are requisite to make title, although of course further proceedings may be necessary either to vindicate the title of the Crown or to exclude the claim of some person asserting a right to the goods''. At p. 180 Dixon C.J. said that the true owner of the goods, if forfeiture has taken place, will be the Crown. The three other members of the High Court agreed with the reasons of Dixon C.J.

8. In
Scott v. James Patrick & Co. Pty. Ltd. (1968) 42 A.L.J.R. 38 at p. 42 Windeyer J. said: " The liability to a penalty arises, as in other cases a forfeiture does, immediately a state of facts occurs which gives rise to the liability; cf. per Barry J. in
Little's Victory Cab Co. Pty. Ltd. v. Carroll (1948) V.L.R. 249 at p. 253 . I would add to the cases which his Honour there mentions Gelston v. Hoyt in the United States (1818) 3 Wheat. 246... I think that as soon as the liability to penalty arises the power of detention arises and subsists until the penalty payable be ascertained and paid or security be given. "

9. The paragraph in the Victory Cab case to which reference was made is as follows: " The general scheme of the Act upon this subject so far as it concerns goods (which by sec. 4 includes all kinds of moveable personal property) appears to be as follows: (1) sec. 229 enacts `The following goods shall be forfeited to His Majesty' and then deals with goods and chattels in a variety of situations. The characteristic common to each situation is a dealing with goods or chattels in contravention of the provisions or purposes of the Act. Immediately upon the occurrence of the facts specified in any of the sub-paragraphs of sec. 229 the property in the goods involved is divested from the owner and vested in the Crown (
The Annandale (1877) 2 P.D. 179 , (1877) 2 P.D. 218 (C.A.) ;
United States v. 1960 Bags of Coffee (1814) 8 Cranch 398 ;
Lyons v. Smart (1908) 6 C.L.R. 143 at p. 161 per O'Connor J. The seizure when made relates back to the time of the wrongful act that causes the forfeiture ( The Annandale (1877) 2 P.D. 179 at p. 185) " . The passage in Lyons v. Smart refers to goods which are prohibited imports

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and so is not germane to the facts of the present case.

10. The parties to proceedings in the High Court may dispute (as in Powers v. Maher (supra) ) the date upon which property in the vehicle was vested in the Crown but the decisions in Scott v. James Patrick & Co. Pty. Ltd. and in Little's Victory Cab Co. Pty. Ltd. v. Carroll (supra) (which is referred to by Windeyer J. without any qualification) require the Board to hold that ownership of the Ford motor car was vested in the Crown (to the exclusion of all others) on 11 November 1966. Accordingly, regardless of the fact that the taxpayer ``sold'' the vehicle to the hire-purchase company within the period 10 November 1966 to 16 January 1967 (perhaps on 15 November 1966) the taxpayer had no legal or equitable interest in the vehicle from 11 November 1966 onwards. (See also Case B44,
2 T.B.R.D. 193 at para. 5.)

11. Therefore the issues are reduced to a claim -

• (a) Section 54(1) - a deduction for depreciation on the vehicle from 24 October 1966 to 11 November 1966;
• (b) Section 59 - a deduction on the basis that the vehicle was ``disposed of (or) lost'' on 11 November 1966.

12. To succeed on claim (a) the taxpayer has to prove that for some part of the period from 24 October 1966 to 11 November 1966 the vehicle was used for the production of assessable income, or that the vehicle comes within the description of ``property being plant or articles... installed ready for use for that purpose and... held in reserve by'' the taxpayer.

13. On the evidence (para. 2) the vehicle was not used for the production of assessable income during any part of the period 24 October 1966 to 11 November 1966, and it would not be appropriate on that evidence to hold that the vehicle comes within the description aforesaid. The taxpayer has failed to establish a claim for depreciation. The claim for a deduction on loss or disposal only arises where ``depreciation has been allowed or is allowable'' and so both claims would fail.

14. It could be said that the vehicle was ``disposed of'' by force of the reasoning in
Henty House Pty. Ltd. (In Vol. Liqn.) v. F.C. of T. (1953) 88 C.L.R. 141 at pp. 150-151 (on the submission that that decision overruled Case B44, 2 T.B.R.D. 193 on this point).

15. In Henty's case it was held that there was no logical foundation to exclude from the expression ``disposed of'' a deprivation of property by any means of involuntary alienation; the rationale of the section applies as much to such dispositions as for example to a sale by a sheriff under a writ of fieri facias as it does to dispositions made voluntarily or by the authority of the taxpayer himself. Williams A.C.J. and Webb, Kitto and Taylor JJ. in their joint judgment said that the apparent object of sec. 59 in respect of the relevant property is to give an allowable deduction for the whole of that portion of the cost of the property which the taxpayer fails to recover when the property becomes no longer available to him for the production of assessable income and that ``The entire expression `disposed of lost or destroyed' is apt to embrace every event by which property ceases to be available to the taxpayer for use for the purpose of producing assessable income, either because it ceases to be his or because it ceases to be physically accessible to him, or because it ceases to exist''. In particular they said that the words ``is disposed of'' " are wide enough to cover all forms of alienation, as Dixon and Fullagar JJ. remarked in
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at p. 110 and they should be understood as meaning no less than `becomes alienated from the taxpayer' whether it is by him or by another that the act of alienation is done. Neither the words themselves nor the setting in which they appear afford any support for the view that cases of involuntary alienation fall outside their meaning " .

16. Accepting that the ratio of Henty's case favours the taxpayer the problem would then be one of quantification of the loss pursuant to sec. 59(3) which provides that: ``The consideration in respect of disposal, loss or destruction means... (d) in the case where property is disposed of otherwise than by sale - the value, if any, of the property at the date of disposal''. There is no evidence to show that the calculation would result in any sum as an allowable deduction.

17. If the taxpayer could succeed to the point of proving a disposal and a quantification of loss under sec. 59(3) the taxpayer would then fail on the principle that a deduction would not be permissible in respect of a penalty imposed for breach of the law.

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18. In the joint judgment of Gavan Duffy C.J. and Dixon J. (as he then was) in
Herald & Weekly Times Ltd. v. F.C. of T. (1932) 48 C.L.R. 113 at p. 120 it is said -

``The cases of
I.R. Commrs. v. Von Glehn ( (1920) 2 K.B. 553 ; 12 T.C. 232) and
I.R. Commrs. v. Warnes & Co. ( (1919) 2 K.B. 444 ; 12 T.C. 227 ) which decide that penalties imposed for breaches of the law committed in the course of exercising a trade cannot be deducted... The penalty is imposed as a punishment of the offender considering as a responsible person owing obedience to the law. Its nature severs it from the expenses of trading. It is inflicted on the offender as a personal deterrent, and it is not incurred by him in his character of trader. Lord Sterndale M.R. in Von Glehn's case (at p. 566) said: `It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading'.''

19. The conclusion is that the taxpayer has failed to show that the decisions of the Commissioner are erroneous and therefore all the assessments now under review should be confirmed.

Claims disallowed