Caltex Ltd v Commissioner of Taxation

Caltex Ltd v Commissioner of Taxation - [1960] HCA 17 - HCA 1960 case summary — Zoe

[20]

But the present case appears to me to be entirely different from the Texas Co.'s Case [1] . In the earlier case it could be truly said that a loss had been incurred, because payments had been made in final discharge of debts owing for goods supplied, and the real financial effect on the company of exchange variations was, in respect of each relevant consignment of goods, definitively fixed and ascertained by the payment and as at the date of payment. The company's American indebtedness was pro tanto discharged, and nothing that happened thereafter could affect this position. It is only in such circumstances that a loss of the nature in question can be held to have been "incurred". The present case is entirely different. It may no doubt be said, as a matter of legal analysis, that the debt of the company for goods supplied by the old supplier was finally discharged by the two payments made in New York in 1936. But this is only part of the truth. The substance and reality of what happened was simply that one creditor was substituted for another. That was what was intended, and that was what was achieved. The same result could have been achieved in other ways. It might have been achieved by a contract of novation, without any payment being made at all. If this course had been adopted, it would have been clear that no exchange loss was involved. In fact the transaction took another form, doubtless because it was considered simpler and more expeditious and convenient - and perhaps with a hopeful eye on Commonwealth income tax law. But the question whether an exchange loss arose from it cannot depend on the form which the transaction took. That question must depend on the substantial effect of what was done on the financial position of the company, and the essential facts are that the company's American indebtedness was not discharged, but remained unchanged, and the real financial effect on the company of exchange variations was not, in respect of the goods remaining to be paid for, definitively fixed and ascertained by payment and as at the date of payment. If we take our stand at the end of 1936, we find ourselves unable to say whether the company will if and when it does come to discharge finally its American indebtedness, make an exchange gain or an exchange loss. As at that time, no exchange gain has been derived, and no exchange loss has been incurred. If the exchange movements before 1936 had been in favour of Australia, I have no doubt that the company would have strongly (and rightly) objected to being assessed on the footing that it had derived an exchange gain.

[31]

This, of course, meant that one dollar liability was discharged, and another dollar liability, of the same amount but to a new creditor, was created. But the question is whether this involved the appellant in any actual ascertained loss or outgoing of Australian pounds in excess of the number which had previously been allowed for. So far as the discharge of the liability to the old supplier is concerned, the answer must depend upon whether the dollars that were used to satisfy that liability were the appellant's or the new supplier's. If the case told us nothing more about the transaction than that the new supplier lent sufficient dollars to the appellant and the appellant used them to pay its debt to the old supplier, the answer would no doubt be that the dollars paid to the old supplier were the appellant's, so that the second of the propositions I have taken from the Texas Case [1] would apply. But the case stated does tell us more. It shows that the lending by the new supplier was a step in an agreed process. The description of the lending as having been made "to enable it (the appellant) to discharge part of its indebtedness to the old supplier" obviously means, in the context, that the new supplier paid the requisite number of dollars into the appellant's bank account in pursuance of an agreement between them that the appellant should pay those dollars to the old supplier in discharge of its debt. When the appellant performed its part of the agreement, as it did on the same day, what was it doing but completing the process by which the parties had agreed that dollars of the new supplier should be used for the purpose of getting the new supplier into the shoes of the old supplier so far as the appellant's outstanding indebtedness was concerned? The process must be regarded as an entirety, for it was devised as an entirety. To split it up, and allow no difference between this case and the case of a simple borrowing followed by a payment of a dollar debt out of the proceeds, would be to deal not with this case but with another. The object of the affair was one which might equally have been achieved by the new supplier's taking an assignment of the appellant's debt from the old supplier for a consideration equal to the amount owing. What was done differed from that in form and differed from it in legal effect; but it did not differ from it in one respect. The appellant had not to lay out any pounds or suffer any loss of pounds' worth. There was an outgoing on the part of the new supplier, an outgoing effected in two stages, and that was all.

[39]

This, it seems to me, is of the essence of the decision in the earlier case and it is not out of place to examine why the members of the Court came to this conclusion. No member of the Court experienced any difficulty in holding that a trader incurs an additional "loss" or "outgoing" when, in purchasing foreign currency to discharge an overseas debt, he is compelled to lay out a larger sum in Australian money than it would have been necessary for him to find if he had paid for his goods at the time of their purchase. Nor, does the contrary appear to have been seriously contested by the respondent. What was contended in answer to the taxpayer's claim was that any additional expenditure so incurred in any one year in respect of purchases made in an earlier year was not incurred in the course of gaining or producing the assessable income of the year of remittance and, alternatively, that, in the special circumstances of the case, the additional expenditure in question was of a capital nature. The latter argument was founded on the assertion that the creditor had allowed the indebtedness to remain outstanding over a lengthy period in order to provide the debtor with working capital. But the members of the Court directed their attention to the initial point as well as to the problems involved in these contentions and, in the result, it was held that the taxpayer was entitled to deductions as claimed. Latham C.J. took the view that the fact that a taxpayer "has made a preliminary estimate of the amount required to discharge his foreign debts does not preclude him from claiming later a deduction of any increased amount which in fact he has to pay" [1] . Dixon J. (as he then was) took a somewhat different view. He was disinclined to accept the proposition that any additional expenditure so incurred should be regarded as "a falsification of a prior estimate" [2] . Rather, he thought, it should be regarded as part of the cost of defraying the original liability and he added "where liabilities are not fixed in their monetary expression, whether because of contingencies or because they are payable in foreign currency, a difference between the estimate and the actual payment must be borne as a business expense" [1] . There was, however, common agreement that the additional expense or cost could be taken into account in the year of remittance. I should, perhaps, add that Starke J. understood the Commissioner to concede that "such losses or outgoings might, in circumstances other than exist in the present case, be legitimately claimed as deductions under and by virtue of the Income Tax Assessment Act 1922-1934 " [2] .

[41]

At first sight it might appear that the present case is no more than a repetition of its predecessor. But, although the decision in the earlier case solves some of the problems which might, otherwise, have arisen in the present case, it is said that there is a significant difference between the manner in which the earlier payments were made and that in which the two final payments were made. There was, of course, no such difference. Every payment, whether preceded by a remittance, or not, was a payment made in dollars by the appellant to the old supplier in New York. But the dollars required for the two final payments were obtained by the appellant in a manner quite different from the foreign currency which was the subject of the earlier "remittances". When the appellant was about to close its account with the old supplier it was decided in consultation with the new supplier that its outstanding indebtedness to the former should be discharged. In pursuance of this decision the new supplier, on 1st July 1936, advanced to the appellant in New York a sum sufficient to enable the latter to make a payment of 7,000,000 United States dollars to the old supplier. This advance was made by the old supplier paying the necessary sum in dollars to the credit of the appellant's bank account in New York. Thereupon, on the same day, the appellant drew a cheque on that account for 7,000,000 dollars and paid it into the New York account of the old supplier. The old supplier's account in the appellant's books was on the same day debited with the amount paid in dollars and with the Australian pounds equivalent obtained by converting the amount so paid at the rate of exchange then prevailing which was approximately four dollars to the pound. Dollars for the final payment on 27th November 1936 were provided by an advance made in precisely the same manner so that it will be seen that the provision of dollars to meet these two payments did not involve the appellant in the immediate expenditure of any Australian currency. It did, no doubt, incur an obligation to repay the loans which were made to it but this obligation was, it seems to me, on capital account and any subsequent "exchange loss" incurred in discharging that liability was for that account also.

[42]

It is this last-mentioned circumstance that is said to differentiate the present case from the earlier case. Whilst it is conceded that if the appellant had laid out Australian currency to purchase the United States dollars necessary to make the two final payments it might properly have claimed as a deduction so much of the amount expended as exceeded the cost at which its supplies had originally been taken into account in Australian currency, the assertion is made that, since there was no expenditure of Australian currency, there was no transaction involving exchange and, therefore, no so-called "exchange loss". It should, perhaps, be mentioned that it is suggested that the decision in the earlier case supports the contention involved in this proposition and some members of the Board of Review seem to have thought that it did. But the decision in that case was concerned only with "remittances" made in the manner shown by the facts before the Court and it is no authority for the proposition that a so-called "exchange loss" can occur only when that procedure is followed in discharging an obligation to pay foreign currency in another country. It is, of course, true that if an Australian company has dollar credits of its own readily available in the United States or, if it obtains dollar credits in some other way without laying out Australian currency, it does not incur an "exchange loss" in the sense that it purchases dollars at an unfavourable rate of exchange. But a trader does not incur an "exchange loss" merely by purchasing foreign currency in those circumstances; the result of his purchase is that he obtains money's worth for his Australian currency. Indeed, immediately after his purchase he may reconvert his foreign currency to Australian currency without loss. His "exchange loss" occurs when he expends his foreign currency so obtained in payment for goods purchased at a time when the rate of exchange was less unfavourable. In the result he incurs an additional expenditure either as part of the cost of his goods or as part of the cost of paying for them. But if he has readily available dollar credits of his own can it be said that he does not incur any additional cost if, instead of purchasing a draft, he resorts to those credits for the purpose of discharging his liability? It is, I think, incontestable that an Australian trader who, by payment, discharges a liability to pay a million dollars in New York, expends in terms of Australian currency precisely the same amount whether he has his own dollar funds available or whether he purchases a draft or adopts some other means of securing the necessary United States funds. In either case his expenditure will, for the purposes of his business, be taken into account in Australian currency. Indeed, since s. 20 of the Income Tax Assessment Act 1936-1939 required that, for all the purposes of the Act, income wherever derived and any expenses wherever incurred should be expressed in terms of Australian currency, this is precisely what the appellant was required to do.

[43]

These latter observations serve to indicate that a too literal understanding of the expression "exchange loss" may tend to obscure the problem in the case by suggesting that the fundamental question is whether the taxpayer has actually exchanged an amount in one currency for its equivalent in another. But the fact that, in such a case, the trader obtains an equivalent in foreign currency denies that the transaction, at that stage, results in a loss. His loss, as already pointed out, occurs when he discharges an overseas liability contracted at a time when the rate of exchange was less unfavourable to him. Likewise, he may incur an "exchange loss" as a payee. If an Australian trader were to sell goods on credit to a United States buyer for a specified number of dollars payable in Australia he would incur such a loss, if before payment, the rate of exchange were to move in favour of Australia. Initially, the sale price would be taken into his accounts in Australian currency at the rate of exchange prevailing at the date of the sale. But, although upon payment he would be paid the equivalent of the specified number of dollars, he would be entitled to receive and would actually receive a lesser sum in Australian currency than that originally taken into account. (Anderson v. Equitable Assurance Society of the United States [1] , Ottoman Bank of Nicosia v. Chakarian [2] , Cummings v. London Bullion Co. Ltd. [3] , In re Russian Commercial and Industrial Bank [4] , and in Re United Railways of the Havana and Regla Warehouses Ltd. [5] .) To my mind the defect in the respondent's argument is that it selects as its basis an expression - "exchange loss" - which is no more than a commercial term conveniently used to denote some of the effects which fluctuating rates of exchange may produce in trading transactions and then, after giving a too literal meaning to the expression, it denies that any such loss can occur except in the case of a trader who has exchanged a sum in one currency for its equivalent in another. The problem is, however, considerably wider than the literal meaning of that expression would appear to suggest to some minds. But it cannot be solved in the manner initially suggested on behalf of the appellant. At the outset of the appeal it was suggested that the mere fact that in 1936 the appellant's dollar liability to the old supplier, expressed in terms of Australian currency, had by adjustment in its books assumed a magnitude in excess of the cost at which its supplies had originally been taken into account establishes that an "exchange loss" was made. But mere entries in books of account do not create "exchange losses" although they may, in appropriate circumstances, reveal them. What we are concerned with are not merely entries in books of account; the critical question is whether, in making the two final payments, the appellant incurred losses or outgoings within the meaning of s. 51. To my mind the answer to this question must, in the circumstances of the case, be answered in the affirmative, for the difference between the amount at which its cost for stock was originally taken into account and the cost of discharging its liability, both being expressed in terms of Australian currency, truly represented an additional cost incurred in carrying on its business. The use of a trader's own dollar funds to discharge a dollar indebtedness overseas means, of course, that the trader is no longer in a position to convert the dollars used to Australian currency. And, expressed in terms of that currency, he incurs an additional cost which is just as real and significant as if it had been necessary for him to expend Australian currency to secure dollar funds for the purpose of making the payment in question. The truth of this proposition may, I think, be demonstrated by a simple illustration. An Australian trader sells goods in New York on 30th June and contemporaneously receives there the sum of a million dollars as the purchase price. Hypothetically, the rate of exchange that day is four dollars to the £A. For the purposes of Australian income tax he will, therefore, be required to bring into account the sum of £A.250,000 as assessable income. But if, on 30th June, he owes in New York the sum of 1,000,000 dollars for goods purchased six months previously - when the rate of exchange was five dollars to the £A - he may use his 1,000,000 dollars credit to discharge this liability. If he does he will be left without any dollars to remit to Australia. But, unless the view which I have expressed be correct he would be required, for income tax purposes, to bring into account as assessable income the sum of £A.250,000 and would obtain no deduction in respect of his purchases over and above the sum of £A.200,000 which was his cost, or estimated cost, at the time when he made them. This would mean, of course, that although he had received 1,000,000 dollars in New York and had expended the whole of that amount there on the same day to pay for his earlier purchases, he would be treated as if he had retained a surplus, expressed in Australian currency, of £50,000.

[45]

The respondent, however, maintains that even if the views already expressed be correct they do not conclude the answer to the problem in favour of the appellant. As was pointed out it is, of course, true that the new supplier might have become substituted for the old supplier as the appellant's creditor without the latter incurring any so-called exchange loss. Such a result might have been achieved by an assignment of the old supplier's debt to the new supplier or, with the concurrence of all three parties, by the process of novation. If either of these courses had been adopted it would not have been possible for the appellant to say that it had expended dollar currency to discharge its debt. The fact is, however, that there was no assignment of the debt and there was no agreement by way of novation; the old supplier's debt was discharged by payments made by the appellant out of its own moneys. Yet, since the moneys lent to the appellant by the new supplier were lent for the purpose of enabling it to make these payments the respondent asserts that we should deal with the case as if there had been an assignment or an agreement by way of novation. To my mind the answer to this contention is that the appellant discharged its dollar indebtedness for stock-in-trade out of its own dollar funds and it is of no consequence that it borrowed dollar currency to enable it to make the payments. The substance of the argument for the respondent on this point is that, even if the appellant would have been entitled to succeed if the payments to the old supplier had been made out of dollar funds available to it in New York for its general purposes, the fact that the loans made by the new supplier were made to it for the express purpose of making those payments precludes it from asserting that it suffered any so-called exchange loss. This is an argument which I find difficult to understand for the payments were in fact and in law made out of its own moneys and, to my mind, it is of no consequence whether it borrowed the moneys which enabled it to make the payments in question for that specific purpose or not. Again, it was said, that the loan from the new supplier was on capital account and that, therefore, any "exchange loss" suffered was of the same character. But this contention should be rejected. It may be - though at this stage it is impossible to say - that an "exchange loss" will be incurred when, and if, the loan is repaid and if this should occur the loss will, of course, be on capital account. But the mere fact that the loan represented a capital liability does not mean that when the moneys advanced were used for the purpose of discharging the appellant's income liability any additional cost thereby incurred and expressed in terms of Australian currency was not chargeable to income and properly deductible under the provisions of s. 51.

[46]

The result of the foregoing observations is that I think that the first question raised by the case stated should be answered in favour of the appellant and it is necessary, therefore, to consider the problems raised by the second question. For the purposes of this question it must be assumed that the appellant's trading activities during 1936 resulted in a loss though the facts before us do not enable us to specify its magnitude. This, by agreement between the parties, will be a matter for further consideration in the event of the second question being answered in the affirmative. In the circumstances it is sufficient to say that the answer to the first question means that the appellant made a trading loss during 1936 and that it is apparent from the case stated that no part of this loss had, pursuant to s. 80 of the Act, been claimed or allowed as a deduction in the income years which intervened between 1936 and 1939. In the ordinary course of events, therefore, the appellant would have been entitled in 1939 to deduct the loss from its assessable income or so much of it as was required to reduce its taxable income to nil. But as already indicated, events did not follow the ordinary course. First of all, the appellant was assessed to income tax in respect of the income year which ended on 31st December 1936 pursuant to s. 136 of the Act. This section at the relevant time was in the following form: "Where any business carried on in Australia - (a) is controlled principally by non-residents; (b) is carried on by a company a majority of the shares in which is held by or on behalf of non-residents; or (c) is carried on by a company which holds or on behalf of which other persons hold a majority of the shares in a non-resident company, and it appears to the Commissioner that the business produces either no taxable income or less than the amount of taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall, notwithstanding any other provision of this Act, be liable to pay income tax on a taxable income of such amount of the total receipts (whether cash or credit) of the business as the Commissioner determines". For the purposes of this section the respondent determined that £513,914 was the amount of the total receipts on which the appellant was liable to pay income tax and he assessed the tax payable at £25,695 14s. 0d. (See Notice of Assessment - annexure A). The next thing to be mentioned is that this assessment was the subject of a number of objections and, that thereafter, several conferences took place between the respondent and representatives of the appellant. These are referred to in pars. 8 to 14 of the case stated and the relevant annexures. It is, however, necessary that some particular reference should be made to the various matters which were discussed and to the decision which was ultimately reached. The conferences were concerned with the appellant's taxation liability for the years 1929 to 1938 inclusive and not for the year 1936 alone. Furthermore, grounds exist for thinking that the conditions which the parties ultimately accepted as fixing their respective rights and liabilities were determined more by a comprehensive view of the appellant's trading results over this lengthy period rather than by independent reviews of the results of each particular year. Indeed, so much may be thought to appear from the respondent's letter of 26th March 1941 (annexure B). The proposal made by this letter was the basis of the subsequent "settlement" but following this letter there were further discussions because the appellant was not prepared to accept the conditions contained in pars. (iii) and (iv). Subsequently, on 30th April 1941 it was proposed by the appellant's advisors that for these paragraphs there should be substituted the provision set out in their letter of that date (annexure D). This amendment was acceptable to the respondent and on 5th May 1941, he purported to determine the matters in dispute in the manner appearing in the memorandum (annexure E). The relevant portion of this memorandum is in the following terms:

[52]

For the respondent it is contended that where liability to tax in respect of any one year arises because of a determination of the commissioner pursuant to s. 136 the actual trading results of that year, as determined by ordinary accounting methods, are of no consequence as far as s. 80 is concerned. This proposition is, of course, denied by the appellant but it seems apparent that the fundamental and only purpose of s. 80 is to permit a taxpayer, within specified limits, to carry forward from one year to another revenue expenditure which has not been absorbed by income of the earlier year. This contemplates the setting off of expenditure against income in the earlier year and, in the event of a deficiency of income, the allowance of a deduction, calculated by reference to the deficiency, in the later year. In other words it provides a means whereby, in the deduction of revenue expenditure incurred over a period of years, a taxpayer may disregard the existence of separate and successive accounting periods when seeking to ascertain the extent of his taxable income in some later year of that period. The section, of course, operates only when a taxpayer's allowable deductions for an earlier year exceed his assessable income for that year and, therefore, where it appears that he had no taxable income. But if he is assessed pursuant to s. 136 in any year he becomes liable to tax upon a conventional sum which, for the purposes of the Act, is "taxable income". And this is so even if, on ordinary accounting principles, his business has produced no taxable income. That being so it seems reasonably clear that if the machinery provided by the lastmentioned section be employed in assessing a taxpayer in one year he cannot hope to invoke the aid of s. 80 to carry forward from that year, as a deduction in a later year, any business loss disclosed by ordinary accounting practice. To conclude otherwise would be to ignore entirely the fundamental purpose and effect of s. 80. That section, in effect, is intended to authorize the Commissioner to disregard ordinary accounting principles where they do not provide a true reflection of the income producing capacity of a business and it would be strange indeed if a taxpayer, precluded by its provisions from asserting for income tax purposes that he had suffered a loss in one year and having been assessed to tax upon some portion of his total receipts, should then be permitted to carry the asserted loss forward to the next income year as a deduction in that year.

[53]

But, as already appears, the original assessment pursuant to s. 136 did not, in the events which happened, finally determine the extent of the appellant's income tax liability in respect of the income year 1936. There were objections to this assessment and, thereafter, a considerable amount of discussion took place in an attempt to resolve the differences between the parties. As a result of these discussions, it was said, the matter was "settled" but there was no formal amendment of the assessments under review. Yet the parties regarded what was done as effective and final and it is of some importance in the case to examine exactly what happened in relation to the 1936 assessment. First of all, it may be noticed that on 26th March 1941 the respondent intimated that he was "prepared to finalize all outstanding matters in connexion with the assessments of the Company for all years up to and including the income year ended 31.12.38" on the basis thereinafter specified. As far as 1936 was concerned it was proposed that the appellant should be dealt with on the basis that its taxable income for that year was "Nil" and, therefore, that no tax was payable. But one of the conditions specified was that liability to income tax for each year subsequent to 31st December 1938 should "be determined without taking any account of the trading results of the business of the Company prior to that date". This condition was not acceptable to the appellant and after further discussion and correspondence it was, in effect, agreed that it should not be taken from any agreement of the parties that the respondent had "allowed a deduction in respect of Exchange losses and in respect of "losses of previous years" either wholly or in part" but that the appellant should "be at liberty to contend in respect of any income year subsequent to 31.12.1938 that the Commissioner should allow deductions for Exchange losses and "losses of previous years" respectively". Thereafter the respondent, though expressing the view "that the company is properly assessed under the provisions of Section 28 (Section 136 for the income year ended 31.12.1935 and subsequent years)", formed the opinion that it was not proper "to assess and charge tax on any percentage or amount of the total receipts of the business". This decision was not conveyed to the appellant in these words; it was notified that its assessments for the years ended 31st December, 1929 to 31st December 1938 inclusive had "been adjusted in the manner indicated" in the earlier letter of 26th March 1941. The respondent's notification then went on to say that "In view of the action now taken to reduce to "Nil" your Assessments on income derived during each of the years ended 31st December, 1934, to 31st December, 1937 inclusive, the Objections lodged in connexion with those Assessments are being regarded as having lapsed".

[58]

The taxpayer kept its Australian books in dollars and pounds, and following generally the practice fully described by Dixon J. (as he then was) in Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation [1] , it kept a supplier's account in which it expressed its dollar commitments and payments in terms of Australian currency by converting expenditure and payments in dollars to pounds at the rate of exchange prevailing at the date of expenditure or payment and, as to stock on hand, revising its pound figures monthly according to the fluctuations of the rate of exchange; it seems that it also adjusted the expression in pounds of its large outstanding dollar liabilities at the end of each month at what might be called the average exchange rate of the preceding month. This process of adjustment did not secure an exact correspondence between the book figures and the actual result of the conversion of the balance outstanding at any particular date at the exchange rate of that day, but it did achieve a rough approximation thereto. The taxpayer's outstanding liabilities at 31st December 1932 (which were in effect then funded in "B Account") were not adjusted monthly beyond 31st December 1933 and on that date a total liability of $9,052,351.3 was expressed at £1,866,605 2s. 1d. On 30th June 1936 this dollar liability, together with the further liability of $1,134,056.99 then outstanding (arising out of transactions between 31st December 1932 and 30th June 1936 - "A Account") which stood in the books at £283,993 12s. 10d., was converted into Australian pounds at an exchange rate of $3.996763 to £1 to arrive at a figure of £2,548,664 11s. 8d., which was £398,065 16s. 9d. in excess of the sum of the earlier book figures in pounds. It is this sum that the taxpayer claims and the Commissioner denies is in the nature of an exchange loss deductible under s. 51 of the Income Tax Assessment Act as a loss or outgoing of the taxpayer's business. It is to be observed that the taxpayer is not in strictness claiming as a loss or outgoing the difference between its book figures for dollars owing expressed in pounds and the value in pounds of the dollar payments when actually made; it may be that the £398,065 16s. 9d. claimed as a deduction should be regarded as substantially that difference so far as $10,186,408 of the $10,830,013 paid as aforesaid is concerned, and, in order to deal with the substance of the matter, I am willing to so regard it, leaving the actual figures to be ascertained if this should be necessary. On this basis, the question here at issue comes to this: when the taxpayer bought trading stock at X dollars and later paid for that stock with X dollars obtained without any actual expenditure of pounds, is it entitled to have as a deduction for the purposes of income tax the amount whereby B exceeds A, when A is X dollars expressed in pounds at the rate of exchange prevailing at the date of purchase, and B is X dollars expressed in pounds at the rate of exchange prevailing at the date of payment?

[59]

The Texas Case [1] establishes that such a difference is deductible when pounds are in fact paid for the dollars, and it is necessary by quotations to indicate the basis of that decision. Latham C.J. said: - "If a taxpayer carrying on business in Australia is to discharge a debt incurred in dollars in the United States of America he must spend a number of Australian pounds dependent upon the current rate of exchange in order to obtain control of the necessary amount of dollars in America. Such expenditure of Australian pounds is an ordinary business expenditure, and the taxpayer is entitled to claim as a deduction the actual outgoing which he makes in order to discharge his normal business debts for stock-in-trade and the like" [2] . Later, in rejecting an argument that the exchange in question was not an allowable deduction because it did not constitute payment for goods, he said: - "In my opinion, the payment may be described as a payment of the price of goods, but it may also be described as an ordinary outgoing for the purpose of carrying on a business as a going concern and a necessary outgoing for that purpose. Accordingly, the amount can be deducted under s. 23 (1) (a)" [3] . Dixon J. (as he then was), after stating the facts, said: - "We are therefore concerned with the difference between, on the one hand, the pounds in which a dollar liability taken into a prior accounting period is expressed or valued for the purpose of accounting or assessment, and, on the other, the actual amount in pounds found in the subsequent accounting period to be required to discharge it" [4] . Later, his Honour said: - "The true nature of the deduction claimed is for the increase in the cost of discharging a past liability for which provision in the accounts was made at a lower figure" [5] . After indicating the nature of the deduction claimed, his Honour said: - "Where liabilities are not fixed in their monetary expression, whether because of contingencies or because they are payable in foreign currency, a difference between the estimate and the actual payment must be borne as a business expense" [6] . Although in that case what was claimed as a deduction was naturally enough described as exchange, it seems to me that the quotations I have made direct attention to the value in pounds of the dollars paid, and the deduction that was allowed was for the increase in the cost in pounds of discharging a past trading liability in dollars over and above the provision made in pounds for doing so.

[65]

Against my conclusion, it can fairly be said that all that happened was the discharge of a dollar liability of X by the payment of X dollars and as X dollars had already been taken into account in Australian currency when the expenditure was incurred, there was, upon payment, no further expenditure in dollars which, by virtue of s. 20 of the Act, ought to be expressed in pounds, nor was there any actual expenditure of pounds; instead of owing X dollars to the old supplier, the taxpayer merely came to owe X dollars to the new supplier. If there were simply a novation or even if the debt to the new supplier should be treated as owing upon revenue account, as the debt to the old supplier clearly was, it may be that the transactions with which we are concerned should be regarded as nothing more than an intermediate adjustment having no significance for income tax purposes and leaving the determination of whether there was a deductible loss or outgoing to be made when the liability was finally discharged. Here, however, the new supplier lent the taxpayer dollars to discharge a liability on revenue account, and that discharge is what seems to me to be important for income tax purposes. An item on revenue account disappeared from the taxpayer's books and was replaced with a new liability to a different creditor on capital account, so that any allowance as a loss or outgoing for income tax purposes must, as it seems to me, be made at the stage of the discharge of the liability for goods or not at all. The purchase of pounds to repay the dollar loan that was obtained from the new supplier could not affect revenue account unless the borrowing of the money was itself part of the taxpayer's trading activity. Borrowing money to carry on business or to pay liabilities incurred in carrying on business is prima facie to increase the capital employed in the business, and there is not sufficient here to give the taxpayer's borrowing any different character. What occurred, therefore, was the discharge of a revenue liability owing to the old supplier with dollars borrowed upon capital account from the new supplier, and at the point of discharge it is necessary to decide whether the taxpayer was worse off in terms of Australian currency than it was when it incurred the original liability. I think it was and that the difference does represent part of the cost in pounds of carrying on business to produce assessable income.

[69]

The circumstances of the case to which this question refers are that for the year 1936 in which the taxpayer claims it suffered a loss in the sense of an excess of allowable deductions over assessable income following upon the exchange loss referred to in question 1, the taxpayer was assessed in the first instance under s. 136 of the Act, and it is the contention of the Commissioner that notwithstanding what occurred subsequently, the taxpayer was for the year 1936 liable to pay tax under s. 136 and not otherwise. The Commissioner contends, furthermore, that even if it be a fact that the taxpayer did suffer the exchange loss which it claims to have suffered in the year 1936, that is an immaterial circumstance because an assessment under s. 136 could not result in a loss for the purposes of s. 80, that is, an excess of allowable deductions over assessable income. It is necessary, therefore, to turn to s. 136 of the Act. In the case of an Australian business controlled from abroad - and the business of the taxpayer was admittedly such a business - when it appears to the Commissioner "that the business produces either no taxable income or less than the amount of taxable income which might be expected to arise from that business", s. 136 imposes liability to pay tax "on a taxable income of such amount of the total receipts of the business as the Commissioner determines." The taxable income of a taxpayer falling within the operation of this section is, accordingly, not arrived at by making deductions from assessable income; indeed the raison d'être of the provision is that where such a method produces what may be described as the misleading result of no taxable income at all - to take the extreme case - the taxpayer is not to escape tax but is to be taxed upon a taxable income determined by the Commissioner in the manner provided. The Commissioner claims, therefore, with what appears to me to be sound justification, that an assessment under s. 136 inevitably denies the occurrence of a loss in the year to which the assessment relates which would be available for deduction in subsequent years in accordance with the provisions of s. 80. This conclusion is supported by (1) the method which s. 80 (1) indicates is to be followed in determining whether there has been a loss; (2) the reference in s. 80 to "net exempt income", a conception entirely foreign to s. 136; and (3) the fact that application of s. 136 must result in a "taxable income" which is something quite inconsistent with there being a "loss". The critical point is, therefore, whether or not the taxpayer's taxable income for the year 1936 was determined under s. 136.

[72]

The taxpayer contends and the Commissioner denies that as a result of what occurred there was not left outstanding any assessment under s. 136 for the year 1936. Upon the whole, I agree with the contention of the taxpayer. The starting point in its favour is that if its taxable income and tax was Nil, such an assessment could not have been made under s. 136, because s. 136 is clearly enough directed to imposing tax upon a taxable income in a case where the usual method of assessment would show no taxable income - a nil assessment is not possible under that section. The Commissioner contends, however, that there was no such assessment or, if there was, it was not effective to alter the original assessment, which still stands. There is, indeed, a good deal of uncertainty about the legal effect of what was done, but it does seem clear to me that at the end of the chapter which I have narrated, the original assessment no longer stood: it disappeared either by withdrawal or amendment. To fit what occurred as nearly as may be into the framework of the Act, I am disposed to regard the letter of 26th May 1941, taken with the letter of 26th March 1941, as notice of amendment of the original assessment to reduce the taxpayer's taxable income and tax to nil. It is, of course, extremely unlikely that the Commissioner arrived at such an assessment by process of determining the taxpayer's assessable income in making deductions therefrom, but, whatever he did, he could not have arrived at the result which he did by the application of s. 136. For the Commissioner, it was contended that once s. 136 applied, it applied exclusively and resort could not thereafter be had to any of the other provisions of the Act to determine the tax liability of the taxpayer, and reference was made to the decision of Williams J. in Lever Bros. Pty. Ltd. v. Federal Commissioner of Taxation [1] . For myself, I see no reason why a determination of taxable income under s. 136 should not have been followed by an amended assessment under s. 170 determining taxable income in the ordinary way, if what had previously appeared to the Commissioner to make s. 136 applicable should no longer appear to the Commissioner to involve the application of that section. In the events which happened, it seems to me that the original assessment based on s. 136 disappeared either because the taxpayer's objections were allowed and in consequence the assessment was simply withdrawn, or because the assessment was followed by an amended assessment of no taxable income and no tax made otherwise than under s. 136. In either event, there was for 1936 no such outstanding assessment of taxable income pursuant to s. 136 as to preclude the taxpayer from showing in 1939 that it was entitled under s. 80 to deduct a loss made in 1936.

At a glance

Court

Decision date

Before

Source

Judgment (74 paragraphs)

Parties

Cases Cited (1)