HIGH COURT OF AUSTRALIA

IN SHOPPE PTY LTD v SMITH

GIBBS, Stephen, Jacobs, Murphy and AICKIN JJ

8 November 1976 - Sydney

Gibbs J This appeal, from a judgment of the Court of Appeal of New South Wales, raises a short question as to the construction of two deeds made between the parties on 25 October 1971 and 26 November 1971. The respondent had been appointed receiver of three companies which had, during the financial years ended 30 June 1965 to 30 June 1971, inclusive, sustained losses which might be available to be carried forward for 7 years and offset against assessable income gained in any of those later years, under the provisions of s 80 of the Income Tax Assessment Act 1936, as amended. They were what is known as " loss companies " and the apparent purpose of the deeds was to effect a sale by the respondent to the appellant of the benefit of the losses for tax purposes.

The second deed was a variation of the first and replaced cl 5 of the first deed by a new cl 5, which is the provision whose terms give rise to the questions in the present case. Clause 5, as amended, provided as follows: -

" 5(a) Prior to the date of completion the receiver shall produce to the purchaser income tax returns of the companies, C W Wall & Co Pty Ltd, C W Wall (Produce) Pty Ltd and G F L Sugden & Co Pty Ltd for the financial years ended 30 June 1965 to 30 June 1971 inclusive and statements of losses from 30 June 1971 to the date of completion. The purchaser shall have the right to dispute the quantum of the total taxable losses appearing in such income tax returns and statements of losses provided that the purchaser serves on the receiver written notice specifying what is disputed. Within seven (7) days from the receipt by the receiver of such notice of dispute the dispute shall be determined by the President of the Institute of Chartered Accountants or his nominee acting as an expert and his decision shall be final and binding upon the parties hereto.

" (b) The purchaser covenants with the receiver that: (i) It has paid to the receiver an amount of four thousand dollars ($4,000), which sum is deemed to include the consideration referred to in cl 1 hereof. This shall be held by the receiver as a deposit pending completion.

(ii) On the date of completion it shall pay to the receiver the sum of fifteen thousand nine hundred and forty dollars fifty cents ($15,940.50) (representing fifteen cents (15 C ) for each dollar of losses incurred not later than the 30th day of June 1965) less the sum of four thousand dollars ($4,000) previously paid to the Receiver.

(iii) On the 31st day of December 1972 it shall pay to the receiver a further sum calculated at the rate of sixteen cents (16 C ) for each dollar that the taxable profits of C W Wall & Co Pty Ltd, C W Wall (Produce) Pty Ltd and G F L Sugden & Co Pty Ltd for the period from the date of completion to the 30th day of June 1972 exceeded the sum of one hundred and six thousand two hundred and seventy dollars ($106,270).

(iv) On the 30th day of September 1973 it shall pay to the receiver a further sum calculated at the rate of seventeen cents (17 C ) for each remaining dollar of the taxable losses of the companies C W Wall & Co Pty Ltd, C W Wall (Produce) Pty Ltd and G F L Sugden & Co Pty Ltd as disclosed in the income tax returns of the companies for the financial year ended 30 June 1965 to 30 June 1971 inclusive and in the statements of losses from the 30th day of June 1971 to the date of completion. "

The amounts of the losses incurred by the three companies in the years 1965 to 1971, both inclusive, are not in dispute. In total they amounted to $548,214, of which the losses incurred in the year ended 30 June 1965 amounted to $106,270. The agreement embodied in the deeds was completed on 10 December 1971. The amounts mentioned in cl 5(b)(i) and 5(b)(ii) were paid. The dispute is as to the effect of cl 5(b)(iii) and 5(b)(iv).

In the year ending 30 June 1972 the companies derived assessable income which, after allowable deductions other than those under s 80 , totalled $176,421. In their income tax returns they claimed to deduct a corresponding amount of the losses previously incurred but the Commissioner disallowed the deduction, in intended exercise of his powers under s 80B(5) of the Income Tax Assessment Act. The companies have objected to his decision. The objection has been disallowed and has been referred to a Board of Review but the question is, as yet, unresolved.

It is common ground that the " taxable profits " mentioned in cl 5(b)(iii) mean the assessable income less deductions other than deductions under s 80 . It appears to follow that the sum mentioned in cl 5(b)(iii) is to be calculated at the rate of 16 C upon $70,151, which is the difference between $176,421 and $106,270. It further appears that the amount payable under cl 5(b)(iv) would be calculated at the rate of 17 C on $371,793. The latter sum represents the difference between $548,214, the total taxable losses, and $176,421, the losses which were used in the year of income ending on 30 June 1972 to offset the taxable income earned in that year. But on behalf of the appellant it is submitted that no amount has yet become payable under cl 5(b)(iii) or 5(b)(iv). The argument may be expressed as follows: Under cl 5(a) the appellant can challenge the statement of tax losses appearing in the respondent ' s accounts, but after the date of completion the three companies would have been under the appellant ' s control. The amount payable under para (iii) depends on the determination of the " taxable profits " (as they are described) for a period when the companies were under the appellant ' s control. The amount payable under para (iv) cannot be determined until the amount payable under para (iii) is known. Yet the respondent is not given any right to challenge the accounts of the companies or of the appellant. Therefore, the expression " taxable profits " in para (iii) must mean the profits that appear when the liability of the companies to incur income tax is finally assessed. The review is pending before a Board of Review, and the process of assessment has not been completed. Therefore, the amount payable has not yet been quantified.

This argument was not put in the Court of Appeal. It does not appear to be covered by any ground of appeal. It would not have been available to the appellant if the parties had delivered pleadings and if the appellant had not expressly raised it by its pleading. Nevertheless, I find it convenient to deal with the argument, because it may be disposed of very shortly. Both paras (iii) and (iv) provide in express terms for payment on specified dates, which are not related to any assessment procedure and which in the nature of things would probably be reached before that procedure had been completed. The " taxable profits " and " taxable losses " mentioned in those two paragraphs are the profits and losses which were in fact derived and made, and which can be objectively determined. There is nothing in the deeds to suggest that those expressions are used to mean profits (or income) or losses finally assessed or allowed. The suggestion that it was in some way unfair that the respondent should have no right, comparable to that given to the appellant by cl 5(a), to challenge the accounts of the companies or of the appellant, even if accepted, would not justify a departure from the clear words of the clause. However, in any case, it does not appear to me unfair or surprising that the respondent was not given a right to challenge the accounts of the companies or of the appellant, because if the appellant wrongly inflated the companies ' profits for the year ended 30 June 1972, although it would then be obliged to pay only 16 C instead of 17 C in the dollar, it would have to make payment 9 months earlier than would otherwise have been required. In any case, since the question is one of fact, if the accounts were wrong they might be challenged in legal proceedings brought to enforce the obligations created by the deeds.

The alternative argument presented by the appellant, which was the argument relied on in the Court of Appeal, is that the sum mentioned in para (iv) will not become payable unless the Commissioner ' s disallowance of the deductions is reversed. This argument is that " taxable losses " in para (iv) mean losses allowed as deductions. The difference between the two submissions put on behalf of the appellant is that, according to the first, payment is to be made when the taxable profits and losses are ascertained by completion of the process of assessment, even if the deductions are not allowed, whereas, according to the second argument, payment under para (iv) is not to be made unless the deductions are allowed. This argument, which attributes to " taxable losses " in cl 5(b)(iv) a different meaning from that which the same expression bears in cl 5(a), depends, like the first argument, on the view that " taxable profits " in cl 5(iii) means profits ascertained by assessment. Like the first argument, it involves not only reading into the deeds expressions which are not there, but also disregarding the plain requirement which the deeds do contain, for payment at specified dates. The construction which the Court of Appeal gave to the deeds may or may not have achieved the actual intentions of the parties, but it gives effect to their intentions as expressed in the deeds.

The questions as to payment of interest which were litigated before the Court of Appeal were not raised before us.

I would dismiss the appeal.