CASE 52/96

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 15 August 1996

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BH Pascoe (Senior Member)

This is an application for review of a decision of the respondent to disallow an objection lodged by the applicant against an assessment of income tax in respect of income of the year ended 31

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May 1994. The applicant sought a deduction for losses of prior years.

2. At the hearing the applicant was represented by its accountant and tax agent and the respondent by an officer of the respondent. There was no dispute as to the basic facts relating to this matter and no witnesses were called.

3. The applicant is a social and sporting club and, on its own account, derived a taxable income of $41,426 in the relevant year. As at 31 May 1994 it was said to have merged with a golf club in the same district. The golf club had incurred losses in that and the prior seven years totalling $1,837,168. The applicant claimed that these carry forward losses were available as a deduction against the income of the applicant.

4. Both clubs were companies limited by guarantee and registered under the Registered Clubs Act 1976 of New South Wales. The merger or amalgamation of the two clubs was said to have been effected under section 17A of that Act which states:

``17A(1) In this section, a reference to the amalgamation of 2 or more registered clubs is a reference to an amalgamation to be effected -

• (a) by the dissolution of those clubs and the formation of a new club;
• (b) by the continuation of one of those clubs and the dissolution of the other club or clubs.''

The remainder of the sections set out the requirements of the Licensing Court to grant an application for registration of the new or continuing club. In this case, meetings of both clubs were held during 1993 which approved the amalgamation to be accomplished by the liquidation of the golf club and the transfer of its net assets to the applicant. The golf club was placed in voluntary liquidation on 19 September 1993 and the assets and liabilities transferred by the liquidator on 31 May 1994. There was some dispute between the applicant and the respondent as to whether the amalgamation occurred on 31 May or 1 June or 2 June, when the Licensing Court granted the application. This timing issue is relevant only if the applicant is successful in its claim for a deduction for the losses incurred by the golf club.

5. It was submitted by the applicant that two taxpayers merged into one and the applicant was a continuing entity in the same form as the two prior entities. It continued operating the same business at the same site and in the same manner as prior to the merger. The applicant relied heavily on a letter written by a then First Assistant Commissioner of Taxation on 27 May 1986 in relation to the merger of two Queensland Rural Co-operatives under the Primary Producers Co-operative Associations Act. It was said that the provisions of that Act were similar to those of the Registered Clubs Act 1976 of New South Wales and that the decision conveyed in the letter of 27 May 1986 should apply to the applicant. The relevant parts of the letter stated:

``2. The particular income tax matter of concern is the continuing availability of income tax deductions for losses incurred by some of the co-operatives, i.e. will the losses be allowable as income tax deductions to the merged entity?

3. The availability of income tax deductions for prior year losses in a merger situation is not specifically dealt with in the Income Tax Assessment Act. It may be said that it is not necessary to deal with the matter specifically because the merged entity did not incur the loss itself - there is no cause to allow the losses to the merged entity. On the other hand the precise status of the merged entity is not at all clear, i.e. it may be that it is not strictly a new entity but a continuation of the former entities.

4. As you will see from the attached letter it has [been] decided to accept that income tax deductions will be allowed to the merged entity for prior year losses incurred by the merging entities. The decision reflects the fact that the merger is not a case of trafficking in losses and that, in reality, the same operations are to be continued by the same people in largely the same way.''

The letter went on to require certain undertakings by the parties. There are two things which can be said about this letter. Firstly, it relates to a merger of entities different from the two involved in this matter and under different state legislation. Secondly, and more importantly, the letter expressed an opinion of an officer of the respondent in 1986 and cannot be binding as a correct interpretation of the law either then or now. It is a well recognized position that the Crown cannot be bound by an

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opinion of an officer of the Crown. The decision taken in 1986 may well have been a practical approach to overcome what might have been seen as a deficiency in the legislation. The particular officer who signed that letter enjoyed a reputation of arriving at practical approaches to the legislation. That opinion, however, has no relevance or authority in this case which must be considered on its own merits and under the legislation as it applied in 1994.

6. For the respondent it was submitted that there was no merger or amalgamation of two continuing entities into one. It was said that the factual position was that one entity, the applicant, had continued and had simply acquired the assets and liabilities of the golf club which had been dissolved. The losses were not losses incurred by the applicant.

7. Deductions for losses of prior years are allowable under either section 79E or section 80 of the Income Tax Assessment Act 1936 (``the Act''). The former section applies to losses incurred in a year of income commencing on 1 July 1989 or any later year of income. The latter section applies to losses incurred in any prior year of income. The relevant provisions of section 79E are:

``(1) For the purposes of this section, a taxpayer incurs a loss in a post-1989 year of income equal to the amount (if any) by which the taxpayer's non-loss deductions for the year of income exceed the sum of the taxpayer's assessable income and net exempt income for that year.

(2) ...

(3) Subject to this section, so much of a taxpayer's losses incurred in any of the post-1989 years of income before a particular year of income as has not been allowed as a deduction from the taxpayer's income of any of those years is allowable as a deduction in accordance with the following provisions:

• (a) where the taxpayer has not derived exempt income in the particular year of income, the deduction is to be made from the taxpayer's assessable income of that year;
• (b) where the taxpayer has derived exempt income in that year, the deduction is to be made successively from the taxpayer's net exempt income and from the taxpayer's assessable income of that year;
• (c) where a deduction is allowable under this section in respect of 2 or more losses, the losses are to be taken into account in the order in which they were incurred.

...''

Apart from some minor word differences, the relevant provisions of section 80 are the same. Section 79E uses the expression ``taxpayer's losses'' whereas section 80 speaks of ``losses incurred by a taxpayer''. Section 79E is concerned with losses not allowed as a deduction from the ``taxpayer's income'' whereas section 80 speaks of ``his income''. Under both sections there is a clear requirement for the taxpayer who seeks a deduction for prior year losses to be the same taxpayer who incurred the losses. Other provisions, such as those contained in Subdivision B of Division 2A of Part III and in section 80A of the Act, are designed to exclude deductions for losses in corporate taxpayers where there is a change in control of the corporation.

8. In this case the applicant, as it was prior to 31 May 1994, was not a taxpayer who incurred losses in a prior year. Another taxpayer incurred those losses. The submission by the applicant seeks to have me accept that the golf club, by some metamorphosis that took effect on 31 May 1994, continued in existence but as the applicant and what was two is now one with the golf club continuing as a taxpayer. This submission ignores the straight forward legal position. The golf club which incurred the losses was a separate entity which ceased to exist when it was dissolved. The applicant as a separate entity continued in existence and acquired the assets of the golf club from the liquidator. There was no continuation of the former entity of the golf club. Thereafter the applicant may have continued the operations formerly carried on by the golf club and former members of the golf club may have become members of the applicant, but the applicant remained the same legal entity as it had been prior to the acquisition. The position is no different to any trading company which acquires the business and assets of another company. Any losses incurred by the other company cannot be deducted from income of the purchaser. Here, while the members, and even their advisers, may have described what

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happened with the two clubs as a merger or amalgamation with the operations of the two now being carried on under one name instead of two, the fact is that one club disappeared and no longer exists. The applicant did not incur the losses in question in any prior year or in the year ended 31 May 1994. The applicant was the taxpayer at 31 May 1994 and, presumably, will continue to be the taxpayer in future years but the losses were not incurred by that taxpayer and they were not the taxpayer's losses.

9. It may be seen as a conflict between a sensible practical answer and the limitations of the legislation. Nevertheless the law is clear. Sections 79E and 80 require that it be the same taxpayer or entity in the year of the deduction for past losses as in the year of the loss. If the ``merger'' had been accomplished by the golf club continuing and acquiring the assets of the applicant upon its dissolution the losses may well have been available for deduction subject to the limitations pursuant to sections 50C, 80A, 80DA, 80E, etc. of the Act. But this is not what happened. The golf club ceased to exist and the applicant continued.

10. The Tribunal has no option other than to affirm the decision of the respondent.