Case M19

Judges:
AM Donovan Ch

LC Voumard M
G Thompson M

Court:
No. 2 Board of Review

Judgment date: 21 March 1980.

A.M. Donovan (Chairman); L.C. Voumard and G. Thompson (Members)

The company involved in this reference was incorporated as a private company on 23 April 1972. For the period from incorporation until 30 June 1972, and for each of the three years ended 30 June 1975, it incurred losses, and in its return for the year ended 30 June 1976, it claimed to deduct those losses in determining the taxable income of that year. But on 4 April 1973, changes had occurred in the beneficial ownership of shares in the taxpayer company such as admittedly denied the deduction claimed, so far as it related to losses incurred prior to that date, unless the taxpayer could be shown to have satisfied the ``same business'' test imposed by sec. 80E(1) of the Income Tax Assessment Act.

2. That provision reads:

``80E. (1) Subject to sub-section (2), where -

  • (a) the whole or a part of a loss incurred by a taxpayer, being a company, in a year before the year of income would not, but for this section, by reason of a change that has taken place in the beneficial ownership of shares in the company or in any other company, be taken into account for

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    the purposes of section 80 or section 80AA;
  • (b) the first-mentioned company carried on at all times during the year of income the same business as it carried on immediately before the change referred to in paragraph (a) took place; and
  • (c) the first-mentioned company did not, at any time during the year of income, derive income from a business of a kind that it did not carry on, or from a transaction of a kind that it had not entered into in the course of its business operations, before the change took place,

sections 80A and 80DA do not prevent the whole of the loss being so taken into account.''

In the circumstances of this case, subsec. (2) is not material.

3. The two questions that sec. 80E(1) raises are -

4. We find the relevant facts to be as follows:

5. Given these facts, it seems to us that the taxpayer's claim must fail. In argument we were invited by the representative of the Commissioner to follow the view expressed by Gibbs J. in
Avondale Motors (Parts) Pty. Ltd. v. F.C. of T. 71 ATC 4101 at pp. 4105-6, namely, that the expression ``same business'' in the then sec. 80E(1)(c) imports more than a business of a similar kind, and requires that the business carried on during the year of income should be indentical with that carried on immediately before the disqualifying change in beneficial ownership. In the case before us the necessary identity is lacking. The original business included the buying of partly finished houseboats, putting them into a finished condition, using for that purpose the taxpayer's own labour, and selling them. After 4 April 1973, there was a gap of several months before the company began a business of buying boats (not including houseboats) that were completely finished and in a saleable condition, and selling them. And this, in our view, was not an identical business. This view is further supported to some extent by the matters referred to in para. 4(e) and (f).

6. The taxpayer's argument to the contrary was based largely on the finding of the majority of the Full High Court in
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 that there had been no change in the nature of that taxpayer's business. At 75 ATC at p. 4066, Barwick C.J. said: ``The nature of the company's business, both before and at the conclusion of the scheme when the company resumed activities, was that of a financier, lending directly to borrowers and also servicing hire purchase arrangements. There was no change in the nature of the business at all. I conclude that in point of fact it was the same business which was carried on after a break, a break which it might be noted was not for the purpose of abandoning the business but rather to enable its continuance.'' And Mason J., who agreed with the Chief Justice, said (ibid, at p. 4072) that on the facts there was ``no indication that the character of the business changed in any respect. That there was a change in the personality of the shareholders and of the clients with whom the appellant did business is immaterial to the question whether a different business came into existence, so long as the character of the business remained unaltered.''

7. Of course, the A.G.C. (Advances) case is readily distinguishable from the one with which we have to deal, both on the facts and as regards the statutory provision involved (in the context from which the two quotations cited above are taken, sec. 51). And it might also be observed that in none of the judgments was there any reference, nor, with respect, was it necessary to make any reference, to the Avondale Motors case or to


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sec. 80E. But even if it be said that for the purposes of that section a business can remain the same business, despite some interruption, provided its nature and character remain unchanged, the change in the business of this taxpayer was, in our opinion, a change in its nature and character. On any test, therefore, the company has failed to bring its claim within the ``same business'' test prescribed by sec. 80E, and it is not necessary to consider the second question set out in para. 3 of these reasons.

8. It follows that for the reasons given we would uphold the Commissioner's decision on the objection and confirm the assessment. By that assessment the Commissioner disallowed as deductions the losses incurred by the company between its incorporation and 4 April 1973, apparently on some time basis treating part of the losses shown in the return for the year ended 30 June 1973, as incurred after the disqualifying change of beneficial ownership, and therefore deductible. Such an apportionment may, on the facts, have produced a generous result for the taxpayer, but the Commissioner's representative very properly disclaimed any wish to adjust the deduction allowed, and the Board expressly refrains from doing so.

Claim disallowed


 

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