'Appl 1 Det 'yt ots Dist Stele v emational ta - [1940] HCA 9 - HCA 1940 case summary — Zoe

CTHHCA

'Appl 1 Det 'yt ots Dist Stele v emational ta

[1940] HCA 9

High Court of Australia|1940-07-01

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Court

High Court of Australia

Decision date

1940-07-01

Source

Original judgment source is linked above.

Judgment (685 paragraphs)

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AiR Giksio Sf BATR 'Appl 1 Det 'yt ots Dist Stele v emational ta Meche Celesldy Bron Py, Mireles pas 2 rl" ine ie Shel Insrmee 'ern (oa (1939-1940, Fall RS? SE, SOD RTFCR ATR Steele vy DCT 19595 161 LR 201 . [HIGH COURT OF AUSTRALIA.] THE TEXAS COMPANY (AUSTRALASIA) APPELLANT ; LIMITED . AND THE FEDERAL COMMISSIONER OF TAXA- Responvent. TION THE FEDERAL COMMISSIONER OF TAXA- APPELLANT ; TION: =: 2 H 4 AND THE TEXAS COMPANY (AUSTRALASIA) 'Ruspouomiee LIMITED =. sh. ee H.C. or A, Income Tax (Cth.) - Assessable income - Deductions - Purchase abroad for sale in 1939-1940. / -Australasia - Price payable in foreign currency - Delayed payments - Bachange Sia - Variation of rate - Increased amount paid - Business carried on in New era Zealand - Expenditure and outgoings incurred thereby - Income ' chargeable" Pate with tax abroad - Eaxempt income - Control of business abroad - Loss - Percentage nt 4 A of total receipts - Distribution of petrol - Petrol pumps - Costs of installation and pee maintenance - Ordinary income tax and " properly" tax - Concurrent lability MELBOURNE, - Amount of taxable income - Method of ascertainment - Distribution of petrol - 1940, Petrol pumps - Costs of installation and maintenance - Board of review - Powers eee: - Variation of own decisions - Making of assessments - Income Tax Assessment SyDxeEy, Act 1922-1934 (No. 37 of 1922 - No. 18 of 1934), secs. 4, 13, 14 (1) (g), 23 (1) April 8. (a), 25 (€), 26 (2), 28, 44, 51 - Income Tax Act 1930 (Nos. 51 and 61 of 1930), rae sec. 74 - Income Tax Act 1933 (No. 41 of 1933), sec. 5. wisn, and" Petroleum products were purchased by the taxpayer company in the United

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to assess or not to assess and likewise jurisdiction to do one or the other ; but it was jurisdiction as to the exercise of a discretionary power. The board obviously determined in July 1937 not to assess itself and to submit the matter to the commissioner. That was an exercise of a discretionary power on the part of the board, which, although competent so to do, the court will not override nor, in the circumstances, will it itself assess. Even though the board's decision is not an exercise of a judicial power of the Commonwealth, it is, probably, an exercise of a semi-judicial power. Question 7. - The answer to this question should be that upon the board finding the normal net profits in the particular year it should then have said that if the taxpayer had traded in a normal way that was the profit it would have had, that was the taxable income, but it would have the benefit of losses carried forward from previous years, in relation to its liability. A taxpayer should get the benefit of past losses on one basis or another. The fixing of a percentage upon gross receipts without taking into account past losses goes far beyond the obvious intention of sec. 28 and works a real and grave injustice. In such a case sec, 28 would be used not to correct an anomaly but to inflict a penalty. Notwithstanding that the power exercised is a discre- tionary one this court has jurisdiction to consider whether such a decision is good or bad. This court will interfere when it is affirma- tively established (a) that there is not any material at all upon which the decision could be properly reached ; (b) that the decision is so irrational as not to deserve to be called a decision; and (c) that there has been a misdirection in law (Moreau v. Federal Commis sioner of Taxation (1); Robertson v. Federal Commissioner of Taxa- tion (2) ). A decision which ignores losses is, in an administrative sense, irrational. Question 8. - The words " business carried on in Australia" in sec. 28 mean a business carried on in Australia and not elsewhere, or in Australia only. The taxpayer's business during some of the years under consideration was not such a business, and, therefore, did not come within the scope of the section. Question 9. - The taxpayer does not ask for any answer to question 9 as framed, when read relevantly to the year 1933 which is proposed to be introduced into it; but does ask for an order as to what is the (1) (1926) 39 CLR. 65. (2) (1987) 57 C.L.R. 147.

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proper legal result of what the board indicated. Question 94. - The board had power to decide that no percentage should be fixed. What the board did in fact in July 1937 as regards the year 1933 was to set aside the existing assessment and to determine that the taxpayer, for that year, did not come within the operation of sec. 28. That decision was correct and should not be interfered with. Whether the commissioner decides rightly or wrongly it is between the commissioner and the board to settle what are the powers and what are the percentages. Properly construed, sec. 28 does not mean that where a foreign-controlled business does not produce any taxable income it must be assessed on a percentage of the total receipts. The section, having regard to its obvious purport, lends itself to being read down. The prima-facie meaning of words used in a taxing Act may always be modified (Astor v. Perry; Duncan v. Adamson (1)). If the phrase "taxable income" in sec. 28 be not capable of being controlled either by extending the qualifying clause to it or the introduction of some such word as "such," the court should imply after the words " such percentage " the words "if any." Questions 10 and 11. - Question 11 should be answered, No. It is important to note that the further tax is imposed upon a portion of a whole, the whole being described as the taxable income derived by any person. The definition of assessable income in sec. 4 of the Act means the amount of income remaining after all deductions allowed by the Act have been made. When one operates under sec. 28 the ordinary provisions of the Act are superseded entirely ; it is put into a special category in a particular case which, as here, might work what is perhaps an extremely unfair result. An arbitrary assessment, if made under sec. 28, is a special assessment. It is not meant, when one speaks of taxable income derived from property, that a company can be assessed for what is primarily business income and be re-assessed on another basis altogether which might be quite different from and more prejudicial to a taxpayer than the first method of property tax. The validity or otherwise of sec. 28 was dealt with in British Imperial Oil Co, v. Federal Commissioner of Taxation (2). A company liable under sec. 28 of the Income Lax Assessment Act is not liable under sec. 7a of the Income Tax

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Act 1930 (sec. 5 of the Income Tax Acts 1931, 1932 and 1933). The power to fix a percentage gives a power to take account of every relevant circumstance ; this power should be exhausted. If the answer to question 11 is in the negative then question 10 should be answered in the affirmative. Sec. 7A (sec. 5) of the Income Tax Act subjects three specified classes of property to a special imposition, loosely termed property tax, although the third class need not be income from property in the usual meaning of that word. The finding was that the rents referred to constituted an item of business income not from property. This item was part of personal exertion income although subjected to the special tax on the face of it and it was subject to all the business expenditure. The pumps were used as an incident of running the business. Rent from the pumps was income of the taxpayer's business incurred wholly and solely in the course of gaining or producing the assessable income. Unless the expenditure in connection with the pumps was incurred those pumps might not exist as they do, and income would not be derived from them. The view expressed in Victoria Park Racing and Recreation Grounds Co. Ltd. v. Federal Commissioner of Taxation (1) covers this matter. The taxpayer does not own the land upon which the pumps are erected, but is merely a licensee, thus rents therefrom are not rents in the ordinary sense and do not come within pars a or b of sec. 7A (1) (sec. 5 (1) ) of the Income Tax Act. Question 12, - If the answer to question 11 be in the affirmative and the ordinary method of assessment indicated in question 10 be applicable to the case, the only remaining thing to be done as regards question 12 is to carry forward the arbitrary taxable income determined under sec. 28, ascertain the appropriate percentage of the receipts from money included in the total receipts ascertained under sec. 28; and charge the special tax upon property upon that sum, The board misdirected itself in two respects: (a) that pump rent was income from property, and (b) that the expenditure was incurred with a view to expanding the sales of the business.

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taking into consideration or allowing anything for exchange losses, and for this reason, that under sec. 28 what the commissioner, and later the board, was required to do was to consider what would have been the position of the taxpayer if it had not been controlled abroad and what would be the ordinary income expected to arise. If the taxpayer had not been controlled abroad it, doubtless, would have had its capital needs supplied in some other way, e.g., by share capital, or by loans. The matter of percentage under sec. 28 is left to the opinion of the commissioner, so where the board of review, under the provisions of the Act, has taken the place of the commis- sioner and bona fide exercised its judgment that judgment is not open to review in this court (R. v. Arndel (1); Moreau v. Federal Commissioner of Taxation (2); Metropolitan Gas Co. v. Federal Commissioner of Tacation (3); Australasian Scale Co. Ltd. v. Commissioner of Taxes (Q.) (4); Robertson v. Federal Commissioner of Taxation (5) ). There is not any interference in any way on the part of the commissioner in the conduct of the taxpayer's business. He accepts what has been done by the taxpayer, but contends that what was done creates a capital outlay. Question 2. - This question depends upon the meaning of the word " chargeable " in sec. 14 (1) (q) of the Income Tax Assessment Act. As there used it means brought into account. The meaning of the word " chargeable" was dealt with in R. v. St. Clement Danes (6). Sec. 14 (1) (gq), using the word. chargeable in that sense, refers to a gross amount being brought in and that prevents the reasoning advanced on behalf of the taxpayer from applying. Sec. 14 deals with classes of income; income in the abstract. The principle stated in Webster v. Deputy Federal Commissioner of Taxation (W.A.) (7) that the gross income is taken and then everything allowed by the Act and nothing else is deducted therefrom cannot be applied throughout the Act in all places, e.g., it does not apply in sec. 26, or in sec. 14. Deduction of business losses is provided for in sec. 26 of the Act, and as it is clear that the business losses incurred in New Zealand do not come within the provisions of that section it follows that such losses are not deductible at all.

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That section is exhaustive. Those provisions support the view that income in sec. 14 (1) (q) means gross income. Sec. 26 does apply to companies. Question 3. - This should, upon the proper contruction of the provisions of sec. 44 and sec. 51 (4) of the Act, be answered in the affirmative. Question 4. - This also should be answered in the affirmative. The power of the board of review to assess is to be found in see. 51 (4) and in sec. 44. There was only one assessment for the taxpayer for the year. The board could not assess until it had determined the matter as to special property tax. On the question whether the assessment is one or more than one, see R. v. Deputy Commissioner of Taxation (S.A.); Ex parte Hooper (1) and Federal Commissioner of Taxation v. Hoffnung & Co. Ltd. (2). It was impossible for the board to make an assessment on the occasion of its first decision because all the materials necessary therefor were not then before it. When the board gave the first decision it had a power to assess which it had not yet exercised and which it subsequently exercised. The first decision was an interim decision necessary for the purpose of appeal by the parties and, thereafter, to issue the assessment on the basis of the resultant figures. Question 5. - An affirmative answer should be made. The board had power not only to set aside the assess- ment, but also to determine what the percentage should be: See " sees. 28, 37 and 44. Question 6. - The assessments referred to were valid assessments. The board of review did not upon the giving of its decision in July 1937 become functus officio. On that occasion the board did not perform its function under sec. 51: it merely made an interim assessment of its opinion and upheld a ground of objection. It did not make the decision that was required. to be made, that is, as to what should be done about the objection to the whole assessment as such, until October 1937. The board considered the matter and took the view that the matter had been left open to it to make the assessment. It is agreed that if it be decided that exchange or losses should be brought in then to that extent in respect to the early years the assessments would not be correct assessments. Question 7. - There were not any losses assessed ; therefore the answer should be: No, the board was not (1) (1926) 37 C.L.R. 368, (2) (1928) 42 O.L.R. 39.

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been made. It has been suggested that a claim for the deduction of increased expenditure resulting from adverse exchange movements where the payment is made in respect of goods acquired in an earlier year cannot be deducted in a later year, because such a deduction would involve a substitution of a cash basis for a credit basis in assessing the company. In my opinion, however, the suggested difficulty disappears if the increased outlay required in a subsequent year to discharge the constant (in this case, dollar) debt is regarded not necessarily as payment of the price of the goods, but as a necessary outgoing made in the normal course of the continuance and mainten- ance of the business as an enterprise conducted for the purpose of profit. The Income Tax Assessment Act, sec. 23 (1) (a), permits the deduction of outgoings (subject to exceptions) actually incurred in gaining or producing the assessable income. Although assessments to income tax are made for separate years, it is established that an expenditure made in one year which does not produce its income- gaining effect till a subsequent year may nevertheless be deducted in the year in which it is made, and so also an outgoing which arises out of income-gaining activities of a prior year may be deducted in a subsequent year when it is actually made (Ward & Co. Ltd. v. Commissioner of Taxes (1); Herald and Weekly Times Ltd. v. Federal Commissioner of Taxation (2); Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Tacation (3)). Thus the mere fact that the deductions claimed relate to the discharge of liabilities incurred in previous years does not in itself prevent a deduction. The cases to which I have referred show that in relation to this matter the law does not insist that when a credit system of accounts has been adopted so that an expenditure is deducted when it is incurred (whether or not the liability which it represents has actually been discharged by payment) it is thereafter impossible to make a further deduction on the same account in a subsequent year when it turns out that a larger expenditure than that antici- pated must actually be made in order to discharge the liability. Income is assessed under the Income Tax Assessment Act in terms of Australian pounds, and taxpayers are taxed in terms of Australian

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disagreement upon all the crucial facts. In the circumstances the Full Court took the only possible course of remitting the appeals to a single justice. The appeals were accordingly brought before me in that capacity. The discussion before the Full Court had made it plain that, unless a commission were issued to take evidence abroad, the appellant could not proceed very far in the strict proof of the facts, the burden of proving which fell upon it, at all events by admissible evidence. Such a commission would not have been returned, if at all, except after the lapse of some years, and the parties seemed to have been sufficiently chastened by the unfortunate course their proceedings had so far followed to listen to the voice of reason and endeavour to agree upon the facts, which, after all, there was not much reason to doubt. The not unnatural reluctance of the commissioner to admit facts which were outside his knowledge, and the great difficulty of reducing the details of complicated trans- actions to a compendious yet accurate statement, proved the source of much delay and many embarrassments in arriving at an agree- ment. The parties, however, brought before me a lengthy statement of facts and a catechism of questions upon both of which they agreed. Although I was not myself perfectly satisfied with the form of the questions or the sufficiency and clarity of the facts I was loath to take any steps to disturb a harmony achieved at the expense of surmounting so many obstacles and of so much labour, and I accord- ingly adopted what the parties had agreed upon and referred the matter to the Full Court. In dealing as a member of the Full Court with the reference I have to remember that the matter must again come before me to be disposed of finally. I think I shall cause myself and the parties less embarrassment by refraining from entering upon a disquisition concerning the matters of law and questions of mixed fact and law which arise under the questions. I have had the advantage already of reading the judgments prepared by the Chief Justice and by Dizon J., which cover the ground of all thirteen questions put to the Full Court and adopt substantially the same view of the greater number of those questions. As to the first five questions those judgments agree except in the form of the answer,

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activities regularly carried on for the production of income. It is not necessary that each item of expenditure should be traced to definite items of income (Ward & Co. Ltd. v. Commissioner of Taxes (1); Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation (2); W. Nevill & Co. Ltd. v. Federal Commissioner of _ Taxation (3)). The commissioner, whilst accepting these decisions. submits: (a) That it does not appear on the admitted facts that remittances were made to the supplier and that it is consistent with the facts stated that the remittances were to the taxpayer's own office in New York; (6) That it does not appear on the admitted facts that the deductions claimed were appropriate to the years in which they were claimed; (c) That the remittances were not wholly or exclusively laid out or expended for the production of the assess- able income. In my opinion the submissions numbered a and b are questions of fact for the justice who hears these appeals. They involve a detailed examination of the facts and the taxpayer's accounts and cannot be satisfactorily dealt with on the materials before this court. Submission c is based on the undoubted fact that the remittances covered expenditure both of a revenue and a capital nature. The remittances were not only for goods or stock supplied but also for plant and other capital items and advances. But whether these outgoings can be disentangled and treated in part as of a revenue nature and in part as of a capital nature is essentially a question of fact for the justice who hears these appeals. It may be that the application of the rule in Clayton's Case (4) will solve the problem, though I should doubt it on the form of such of the accounts as have been submitted to this court ; or some percentage allowance or some other method or evidence. But if it be true, as the taxpayer asserts, that it can demonstrate beyond all doubt that the deductions claimed by it were wholly and exclusively laid out or expended in the sense already indicated, for the production of the assessable income for the years in question in these appeals, then it would be entitled to the deductions claimed. 2. New Zealand losses - In 1930 the taxpayer derived income from its business carried on in New Zealand, but the deductions and

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In the merchandise account the invoice cost of goods was debited in dollars and converted into Australian pounds at the rate of exchange prevailing at the date of the invoice. But this rate of conversion was adjusted every month. The adjustment or revalua- tion was effected by a process which it is unnecessary to describe in detail ; it is enough to say that it had the effect of converting the dollar value of the goods on hand at the end of the month into pounds at the rate prevailing on that day and of providing for the variation in the exchange when applied to the dollar value of goods sold during the month. Thus the Australian currency equivalent of the dollar value of goods on hand was brought up to date month by month and in the case of goods sold the difference between the Australian equivalent at the old and at the new rate of conversion was brought into the merchandise account. The adjusted values in pounds were reflected in the trading account, whence they found a place in the income tax returns. So far the commissioner, apart from his resort to sec. 28, does not challenge the company's method of taking into account, in relation to its assessment of its income, the effect upon its trading of the variation in the rate of exchange. Nor does he contest the company's next step, which indeed operates, during a movement against Australia, to reduce, not to increase, the claim of the taxpayer which he does contest. That step concerns the difference between the Australian currency equivalent of the dollar value of the goods on hand at the end of the month as appearing from the balance of pounds and dollars shown in the account and the equivalent of those dollars at the rate of exchange prevailing at the end of the month. This difference, being for the period in question an excess of the latter over the former, is carried to the credit of the account with the New-York supplying house, an account which, generally speaking, does not affect the income-tax return. This

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appears to the commissioner that the business produces either no taxable income or less than the ordinary taxable income which might be expected to arise from that business." The board of review interpreted the provision as meaning that whenever a business in Australia controlled from abroad makes a loss, then the commissioner's discretion arises to fix a percentage of gross receipts as the taxable income of the business. This appears to me to be a too literal construction of the words. The alternative expression means, I think, to require a comparison between the ordinary taxable income which the business controlled from abroad might be expected to produce and what it does produce whether nothing or something. t is expressed elliptically, not to say illogically, but I do not think that the mere fact that the business produces no taxable income in a given year is enough to fulfil the condition independently of the question whether the business might have been expected to produce an ordinary taxable income of appreciable amount. The purpose of sec. 28 was stated in British Imperial Oil Co. Ltd. v. Federal Com- missioner of Taxation (1), by Higgins J. : - ' It is not correct to say that sec. 28 purports to allow income tax where there is no income ; in effect, it says merely that the commissioner may assess for income tax a percentage of the total receipts from the business in Australia where the evidence before him is insufficient to show the true income or any income of that business - where ' it appears to the commissioner that the business produces either no taxable income or less than the ordinary taxable income'. A firm that carries on business in London as well as in Australia can easily hide the profits of its Australian business by increasing the invoiced prices of the goods sent to Australia." Starke J. said: - ' The object of sec. 28 is to prescribe a standard for fixing or estimating income in a particular case. It takes the total receipts as the source of income and then prescribe a percentage on those receipts as the standard for assessing income; but it is said that the case in which that standard is prescribed is one in which there is no taxable income. That is true ; but it means no taxable income in reference to other standards set up by the Act, and therefore requiring a standard of its own. It is no secret that income tax has been avoided by companies and (1) (1926) 38 C.LR., at p. 209.