//
© 2026 Zoe. All rights reserved.
Zoe is a legal information platform. Always consult the Federal Register of Legislation for authoritative text.
[1960] HCA 17
High Court of Australia
1960-07-01
Menzies JJ
Original judgment source is linked above.
For the reasons stated I do not think that a loss or outgoing was incurred within the meaning of s. 51 (1). It is perhaps desirable in order to avoid misapprehension to add one or two observations. In the first place, I have not thought it desirable to go over the process of accounting adopted by the company: still less to discuss the result in figures. To no small extent the process of accounting is dealt with in what I said in the former case [3] , though the period was earlier and there are certain additional complications in the later period. But my chief reason for refraining from dealing with these matters is that I regard them as introductory only to the real problem and as likely to be a source of confusion or, perhaps I should say, distraction from it.
It is perhaps necessary to say that if I have drawn inferences of fact I regard it as open to the Court to do so. For the authority to state the special case lies, I think, in s. 18 of the Judiciary Act 1903-1950. The provision standing as s. 198 (1) of the Act applies still, it seems, only to appeals directly from the Commissioner governed by the provision standing as s. 197.
Lastly, it is perhaps desirable to say that the appellant company has adopted an accounting period under s. 18 consisting of the calendar year.
Two questions were submitted for the consideration of the Court by the special case as amended at the hearing. They are as follows: "1. Upon the facts stated did the appellant as claimed in par. 48 hereof incur in the income year 1936 a loss or outgoing in the nature of an exchange loss, in relation to the discharge of its indebtedness to the old supplier as set out in pars. 44 and 45 hereof, which was an allowable deduction under s. 51 of the Income Tax Assessment Act 1936? 2. If so, whether the appellant was, in the circumstances of the case, entitled to a deduction, pursuant to s. 80, in the income year ended 31st December 1939, of any part of the loss disclosed in the year of income referred to in question 1. after taking the so called exchange loss into account." I answer the first question No. If it were necessary for me to answer the second question I would hold that a valid assessment for the year 1936 in pursuance of s. 136 no longer existed having regard to the course taken as set out in pars. 7 to 15 of the special case and the annexures to such paragraphs, and therefore that there was no barrier to the application of s. 80.
This is a case stated by Taylor J. in an appeal by the taxpayer company, Caltex Ltd., against a decision of a Board of Review, which disallowed an objection by the company to an assessment of income tax. The accounting period of the company is the calendar year, and the assessment in question relates to income of the year 1939. The company claims that, for the purpose of ascertaining its taxable income of that year, it is entitled under s. 80 of the Income Tax Assessment Act 1936-1940 Cth to deduct from assessable income a "loss" alleged to have been "incurred" by it in the year 1936. The question whether it incurred such a loss in 1936 depends in turn primarily on whether the company, for the purpose of ascertaining its taxable income of that year, was entitled under s. 51 of the Assessment Act to deduct from assessable income what has been described for brevity as an "exchange loss" - that is to say, a loss alleged to have been incurred by reason of variations in the rate of exchange subsisting at relevant times between the United States dollar and the Australian pound. The first of the two questions asked by the case stated is whether such a deductible loss was incurred in 1936. The second question (which does not arise if the first is answered in the negative) is concerned with a contention of the Commissioner that no such loss can in any case be deducted from the company's assessable income of 1939, because the company's liability to tax for the income year 1936 was determined not by the normal process of ascertaining assessable income and allowable deductions, but under the special provisions of s. 136 of the Assessment Act 1936. The facts relevant to the first question are set out in detail in the case stated, and may be summarized as follows.
The company was incorporated in New South Wales in 1918 under the name The Texas Company (Australasia) Ltd. It changed its name to Caltex Ltd. on 1st January 1941. Under its original name it was the appellant in Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation [1] . That appeal was concerned with income of the years 1929 to 1933 inclusive, and one of the questions raised related to certain "exchange losses" which the company claimed were allowable deductions under s. 51, and it will be necessary later to refer to this case. The company carried on business in Australia, but it was controlled by persons resident in the United States, the whole of its shares being held by or on behalf of persons there resident. Its business (so far as material) consisted in selling in Australia petroleum and petroleum products imported by it from the United States.
Before 30th June 1936 the company had obtained its trading stock from an American company which was from time to time referred to in its books by different names, but which was owned or controlled by the Texas Corporation of New York, and which is described in the case stated as "the old supplier". In addition to trading stock the company also purchased from time to time from the old supplier plant and equipment and other items of a capital nature, and the old supplier from time to time rendered financial assistance by way of loan and otherwise to the company. All debts owing by the company to the old supplier, whether for trading stock or of a capital nature, were payable in dollars in the United States. Remittances in partial payment of its indebtedness were from time to time made by the company, which for this purpose used Australian pounds to purchase U.S. dollars. Such payments were not specifically appropriated in the company's books to particular items, but it was possible "to trace the liabilities which the remittances during a year operated to discharge, and, by apportionment or otherwise, to attribute a proper part to liabilities incurred on account of revenue" [1] .
In the books of the company the invoice price of trading stock (which included f.o.b. cost, freight and insurance) was credited to the old supplier at or about the date of shipment. (This was, of course, in accordance with ordinary commercial practice [2] ). But a considerable period (apparently never less than a year) elapsed between the entry in the books of a particular shipment of trading stock and the making of a remittance to New York in payment for that shipment. If, therefore, the rate of exchange between the Australian pound and the U.S. dollar rose or fell in the period between shipment and payment, the company would have to pay less or more than the invoice price in Australian pounds in order to obtain the necessary dollars for the making of the payment. The way in which the company kept its accounts from time to time with a view to providing for and dealing with fluctuations in the rate of exchange is described in the case stated, and references are made to it in the Texas Co.'s Case [3] . It is a matter of considerable complexity, and the practice varied from time to time, but I do not think that it affects the substance of the position now in question, and I do not think it necessary to refer further to it.
Up to the end of 1929 the exchange rate between England and Australia and between Australia and the United States remained fairly steady and expressed perhaps little more than cost of transfer. At the end of 1929 the cost in Australia of £E100 was £A102 2s. 6d., and the £A would purchase $4. 783. In 1930 there was a slight movement against Australia, but it was negligible. In 1931 there was a further downward movement, and in September of that year, when England abandoned the gold standard, the £A became worth only $2.981. The lowest point ($2.547 to the £A) was reached in November 1932. A partial recovery of the £A in terms of dollars took place during the next three years. During the years from 1930 to 1933 the company retained and invested very considerable sums in Australia, but, although it carried at all times a very large dollar indebtedness to the old supplier, it continued to make remittances from time to time effecting payments on account of that indebtedness in dollars in New York. For this purpose it used Australian pounds to purchase U.S. dollars. It was in respect of these remittances that the company (under its original name) claimed deductions for income tax purposes which were the subject of one of the questions raised in the Texas Co.'s Case [1] .
The question in the present case is not concerned with those remittances, but arises out of events which took place in 1936. It is necessary, however, to refer first to something that was done in 1932. In August of that year a letter was sent to the company in Sydney from its office in New York (where, as has been said, control of the company resided). The letter referred to the "alarming situation" created by the depreciation of the £A which had followed England's departure from the gold standard in September 1931. It stated that an arrangement had been made with the old supplier to defer payments on the indebtedness incurred prior to 25th September 1931 until some later date, and it directed the Australian office of the company to separate its account current with the old supplier into two accounts to be called "Account A" and "Account B". In Account A were to be entered all transactions booked since 25th September 1931, and the balance of indebtedness incurred before that date was to be carried to Account B, subject to the qualification that remittances made during the last three months of 1931 were to be debited to Account B. The directions contained in this letter were carried out by the company. All dealings between the company and the old supplier were thereafter debited or credited in Account A. As for Account B, some further entries were made in it in pursuance of a direction given by New York in 1933, but, apart from that, it stood unaltered until it was closed, as will be seen, in 1936. The practical effect of what was done in pursuance of the letter of August 1932 was to "fund" the company's debt to the old supplier as at 25th September 1931, no date being fixed for payment of the funded debt, and no interest being payable thereon.
In 1936 the Texas Corporation of New York and the Standard Oil Co. of California formed a new company named California Texas Oil Company Limited, and this new company, which is called in the case stated the "new supplier", became as from 1st July 1936 the sole supplier of petroleum and petroleum products to the appellant company.
At the time of, or very shortly after, the incorporation of the new supplier, it was apparently decided in New York that the account of the appellant company with the old supplier should be closed as at 30th June 1936, and that the outstanding indebtedness of the company to the old supplier should be transferred to the new supplier. This was effected by means of two payments made in dollars in New York. The first of these payments was made on 1st July 1936, and the second on 27th November 1936. In each case the new supplier lent to the company a sum in dollars, drawing a cheque for that sum and paying it into the company's bank account in New York. (The terms of the "loan" are not stated.) On the same day the company drew a cheque on that account for the full amount of dollars received from the new supplier, and paid it into the bank account of the old supplier in New York. No Australian money figured in any way in either loan or in either payment. The effect of the second payment was to discharge completely the indebtedness of the company to the old supplier, and to leave the company owing a debt of the same amount in dollars to the new supplier.
These transactions in New York had, of course, to be recorded in the company's books of account in Australia. As at 30th June 1936 the company's Account A and Account B with the old supplier were combined into one account, so as to produce one combined balance expressed in dollars and also in pounds. The combined dollar balance was converted to Australian pounds at the rate of exchange prevailing on 30th June 1936. The amount of Australian pounds arising upon this conversion substantially exceeded the combined balance of pounds produced by the combination of the balances of Accounts A and B, and the amount of the excess was treated by the company in its books of account as an "exchange loss", and carried to a "deficit adjustment account". When the first of the two payments in New York was made on 1st July, the old supplier's account was debited with the amount paid in dollars, and the equivalent in pounds was obtained by converting at $4 to the £A, which was approximately the rate of exchange then prevailing. When the second payment in New York was made on 27th November, the old supplier's account was debited with the amount paid in dollars and an amount in pounds equal to the balance of pounds remaining to the credit of the old supplier in the combined account. The number of pounds thus entered to close the account was greater than the pounds equivalent of the dollar payment at the rate of exchange prevailing on 27th November, and the difference was treated by the appellant company as a further "exchange loss" and carried to "deficit adjustment account". The total amount which the company debited to "deficit adjustment account" was £A398,065 16s. 9d. and it claims to be entitled to deduct from its assessable income of 1936 a sum of approximately £A380,000, which is arrived at by eliminating all capital items from the account. Upon this case stated, however, we are not concerned with any question of amount.
If the appellant company is to succeed in its claim that the amount carried to deficit adjustment account (or any other amount) is deductible from its assessable income of the calendar year 1936, it must bring the case within the terms of s. 51 (1) of the Income Tax Assessment Act 1936: Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1] . That is to say, it must show that the amount of the deduction claimed represents a "loss incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income". The case stated does not, in my opinion, disclose that any loss was "incurred" by the company in 1936 by reason of variations in the rate of exchange between the Australian pound and the U.S. dollar.
It is not, of course, to be denied that variations in a rate of exchange between two countries may involve, as a consequence to a trader, either an assessable profit or a deductible loss. The position has been twice fully explained by Dixon C.J. - once in the Texas Co.'s Case [2] , and again in Armco (Australia) Pty. Ltd. v. Federal Commissioner of Taxation [3] . An Australian taxpayer who imports goods for which payment must be made in dollars in New York must (whether or not he keeps his accounts also in dollars) record his purchases in his books in the year of purchase in terms of Australian pounds, and for this purpose he will apply the rate of exchange prevailing at the time of purchase. Let it be assumed that that rate is $4 to the £A. On the day when he comes, in the same or a later accounting period, to pay for a purchase so recorded, the rate of exchange may have moved to $3 to the £A or $5 to the £A. The taxpayer will have to expend, in order to provide the necessary dollars in New York, either more or less in £A than the amount at which the goods were entered in his books. In the former event there is an "exchange loss": in the latter event there is an "exchange gain". If the payment is made in an accounting period later than that in which the purchase was taken into account, the exchange loss or gain will be properly brought into account in the later accounting period. This is because it is only in the later accounting period that the gain has been "derived" or the loss "incurred". The gain derived is assessable income of the later period: the loss incurred is an allowable deduction in the later period.
A good illustration of the position outlined above is found in the Texas Co.'s Case [1] . In that case the present appellant, under its earlier name, successfully maintained that it had incurred deductible exchange losses when it made payments in dollars in New York for goods purchased and entered in its books in earlier accounting periods when the rate of exchange was more favourable to Australia than on the dates of the payments. Another example of the same kind of thing arose incidentally in Ballarat Brewing Co. Ltd. v. Federal Commissioner of Taxation [2] , where discounts treated as allowable in an earlier period might be disallowed in a later period.
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.
It was said that the effect of the transactions of 1936 was to substitute a debt on capital account for a debt on revenue account. If this be so - and I am far from satisfied that it is so - it may affect the internal accounting of the company, but I am unable to see how it is relevant to the present question, or how it makes it possible to say that a loss has been incurred.
I should perhaps add that I do not regard the mere fact that there was in 1936 no actual transfer of funds between Australia and New York as necessarily decisive against the taxpayer. I would think it quite possible that an Australian trader might make a real exchange loss as a consequence of receipts and payments of dollars in New York without any actual exchange operation. An example may be taken. A. an Australian trader, whose accounting period for income tax purposes is the calendar year, on 1st August purchases goods in New York for $1,000,000 payable in New York. The rate of exchange on that date is $5 to the £A, and he takes the goods into his books as "Purchases - £A200,000". On 1st November he sells goods in New York for $1,000,000. By this time the rate of exchange has fallen to $4 to the £A, and he takes these into his books as "Sales - £A250,000". On 2nd November, the rate of exchange being still $4 to the £A, he receives $1,000,000 in New York as the price of the goods he has sold, and on the same day he uses this sum to pay for the goods bought in August. On the face of things A. has made a trading profit of £A50,000, but the dollars which he used to pay for the goods bought were worth not £A200,000 (the figure at which the goods purchased stand in his books) but £A250,000, and it may well be that A. could be said to have made an exchange loss of £A50,000, which could be set off against the nominal trading profit of £A50,000. But this example is quite different from the present case. In the example, if A. can be said to have incurred a loss, it is only because a trading debt has been finally discharged by him and nothing has taken its place. A. knows exactly where he stands by reason of an exchange movement. In the present case the company has merely substituted one creditor for another, and it does not know with certainty whether it will ultimately be richer or poorer by virtue of exchange movements.
The first question in the case stated should, in my opinion, be answered: - No. On this view the second question does not arise, and I express no opinion upon it.
The case of Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation [1] shows that where a trader in Australia buys stock-in-trade for a price payable in United States dollars: (1) the price, expressed in terms of Australian pounds at the rate of exchange ruling at the time of the purchase, is an outgoing incurred in gaining or producing the trader's assessable income, and accordingly is an allowable deduction by virtue of s. 51 (1) of the Income Tax Assessment Act 1936-1940 Cth in the year of the purchase; and (2) if the rate of exchange moves against Australia so that when the trader comes to pay the price in dollars he has to forego more Australian pounds than those which formed the allowable deduction under [1] , the excess pounds constitute a loss or outgoing incurred in gaining or producing the trader's assessable income in the year of the payment (assuming that his business is still continuing), and accordingly are an allowable deduction under s. 51 (1) in that year.
In the statement of the second proposition I have used the word "forego" to cover both the case where the trader expends Australian pounds in purchasing the requisite number of dollars, and the case where he uses for the payment dollars which he has acquired otherwise than in exchange for pounds, for example by a sale of goods for dollars, by an issue of dollar debentures, or by a gift of dollars from a rich uncle. In the first case he incurs an outgoing of the excess number of pounds. In the second case he incurs a loss to the extent of the excess number of pounds, for that number of pounds, as well as the number originally treated as the allowable deduction, is wrapped up in his dollars when he parts with them.
In the present case, the appellant, a trader in petroleum and petroleum products, bought stock-in-trade from time to time over a long period prior to July 1936, from a company which has been called the "old supplier", for prices payable in United States dollars. In successive years, certain amounts in Australian pounds were treated by the appellant and the Commissioner as allowable deductions under s. 51 (1) in respect of the dollar indebtedness thus incurred, and they included provision for exchange at the then current rate; but the rate of exchange was moving generally against Australia, and the situation on 1st July 1936 was that the total number of Australian pounds which had been treated as allowable deductions in respect of the dollar indebtedness then outstanding was substantially less than the number of pounds that would have been needed to purchase at the then ruling rate of exchange enough dollars to discharge the indebtedness.
If, on that day, the appellant had discharged the indebtedness out of its own resources, either buying dollars with pounds or utilizing dollars of its own, the difference between the equivalent of the dollar indebtedness expressed in pounds at the then rate of exchange and the number of pounds previously allowed as deductions in respect of the indebtedness would have been an allowable deduction, being covered by the second of the propositions which I have taken from the Texas Case [1] . In particular if the present case had been the simple one of a debtor first augmenting his resources of dollars by borrowing, e.g. from a bank on overdraft, and then meeting a dollar liability out of the borrowed fund, I should think that the principle of the Texas Case [1] would apply.
But what occurred was altogether different. The old supplier was a company "owned or controlled" (as the case stated puts it) by another company called the Texas Corporation of New York. The latter joined with the Standard Oil Company of California to form a new company, which has been called in these proceedings the new supplier, and on 1st July 1936 the old supplier ceased to supply the appellant with petroleum and petroleum products. The new supplier took its place so far as future supplies were concerned. And it took its place so far as the outstanding indebtedness for past supplies was concerned, also. This it did by a procedure which the case stated describes in these words: "On 1st July 1936 the new supplier lent to the company (the appellant) a sum of dollars to enable it to discharge part of its indebtedness to the old supplier. The loan was effected by means of a payment in dollars to the credit of the company's bank account in New York and on the same day the company drew a cheque on that account for the full amount in dollars borrowed and paid it into the New York account of the old supplier". The procedure was repeated on 27th November 1936, with the result that the appellant no longer owed dollars to the old supplier, but owed the new supplier the amount in dollars which it formerly owed the old supplier.
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.
So far as the incurring of liability to the new supplier is concerned, it is plain what answer must be given to the question whether the happenings on 1st July 1936 and 29th November 1936 brought upon the appellant any accrued and actual necessity to suffer a loss or make an outgoing of Australian pounds in excess of the number previously allowed for. The liability undertaken to the new supplier was to pay the same number of dollars as was previously owing to the old supplier. Whether the provision already made on account of exchange in the allowable deductions of previous years would prove sufficient to cover exchange when the time should arrive for paying the debt, remained after the 1936 transactions the same open question that it was before. Not until the appellant should come to discharge the liability could it ascertain whether any loss or outgoing beyond the provision made would fall upon it.
For these reasons, I would answer the first question in the case stated: No. Of the facts relating to the second question I need say no more than that I take the same view as the Chief Justice.
According to its financial records as they stood at the end of June 1936 the appellant, a company incorporated pursuant to the laws of New South Wales but controlled principally by non-residents, owed to a company, described as The Texas Company - New York, the sum of 10,186,408 United States dollars payable in New York. The latter company is referred to in the case as the old supplier. The business of the appellant was that of importing into and selling in Australia petrol and petroleum products and its indebtedness was for stocks of these products and for some minor capital items which had been supplied to it by the old supplier over a number of years prior to 30th June 1936. As and from 1st July 1936 no further orders for stock were placed with the old supplier though supplies continued to come forward in fulfilment of past orders until September 1936. On this account the appellant, during this latter period, incurred a further dollar liability to the old supplier payable in New York. The additional amount was, apparently, 643,605 dollars. The appellant's aggregate indebtedness to the old supplier was discharged by two payments made during that year, namely, a payment of 7,000,000 dollars made in New York on 1st July 1936 and a further payment of 3,830,013 dollars in the same place on 27th November 1936. The circumstances in which these payments were made is of prime importance in the case and it will be necessary shortly to discuss the material facts as they have been agreed upon by the parties.
Before doing so, however, it should be mentioned that on and after 1st July 1936 the appellant placed its orders for supplies of petrol and petroleum products exclusively with The California Texas Oil Company Limited, a company which was formed in New York at the beginning of that year. This company, which was formed by the old supplier and the Standard Oil Co. of California, is referred to in the case as the new supplier. The course of the appellant's trading with this company is of no consequence in the case; it is mentioned only because of the part which it played in connexion with the discharge by the appellant of its liability to the old supplier.
As already appears the appellant had for many years obtained its supplies of stock from the old supplier. Its purchases were frequent and extensive and for a number of years during which it incurred liabilities for purchases there were marked variations in the exchange rate between Australia and the United States of America. In general, the movement was against Australia though there were periods of partial recovery. In these circumstances, the appellant adopted the practice, as detailed in the case stated, of making monthly adjustments to the old supplier's account in its books - which were kept in dual currency - in order to reflect in the credit entries in Australian currency the fluctuations of the exchange rate from time to time. Of necessity a system of averaging was employed with respect to balances carried forward in this account from month to month but it is unnecessary for the purposes of the appeal to discuss, in detail, the method employed. What is of importance to observe is that when on 1st July 1936 and 27th November 1936 the appellant made the two payments mentioned in discharge of its liability to the old supplier the Australian equivalent of the United States dollars then paid was substantially higher than, either, the cost at which its supplies had, in Australian currency, originally been taken into account, or, the amount at which, by reason of adjustments of the nature mentioned, that cost then stood in the appellant's books. In these circumstances, the appellant claims that in 1936 it incurred expenditure which pursuant to s. 51 of the Income Tax Assessment Act 1936-1940, was an allowable deduction from its assessable income. It should be mentioned that by arrangement with the respondent the appellant had adopted calendar years for the purposes of its accounting and, therefore, it was said, a deduction on this account should have been allowed in respect of the year of income which ended on 31st December 1936.
According to the method of accounting adopted by the appellant the so-called "exchange loss" which it suffered amounted to nearly £400,000 but, after excluding so much of this as was referable to items chargeable to capital account, it is claimed that a deduction of £380,000 should have been allowed. The respondent denies that any such "exchange loss" was incurred; he claims that the nature and effect of the relevant transactions were not such as involved the appellant in any loss of that character. But he does concede that, if, in the circumstances of the case, it is proper to conclude that such a loss was incurred, it was substantial in amount and that if it had been taken into account in the year ended 31st December 1936 it would have resulted in a trading loss which, apart from one matter which requires our special consideration, might have been carried forward to the year ended 31st December 1939 pursuant to the provisions of s. 80 of the Act. The particular matter to which I refer is that it was contended by the respondent that for the year ended 31st December 1939 the appellant was assessed pursuant to the provisions of s. 136 of the Act and that this circumstance precluded the appellant from taking into account in that year any unabsorbed loss or losses from previous years. We are, therefore, concerned to inquire first of all whether in the circumstances the appellant did, as claimed, incur revenue "losses" or "outgoings" of the nature suggested in gaining or producing its assessable income or in carrying on its business for the purpose of gaining or producing such income and, if so, whether the appellant was, pursuant to s. 80, entitled to a deduction in the income year ended 31st December 1939 of any part of the loss incurred in the earlier year.
In approaching the first question it is, of course, necessary to examine the circumstances in which the two payments in question were made. What had happened was that either because the appellant company needed working capital for the conduct of its business, or, because it became uneconomic to convert depreciated Australian currency to United States dollars, or, what is more likely, because of a combination of these factors, the appellant's liabilities to the old supplier had, to a large extent, been allowed to remain outstanding. Remittances were, however, made from time to time and "exchange losses" were incurred when this was done. These "losses" were the subject of discussion in an earlier case before the appellant assumed its present name (Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation [1] ) when it was held that they constituted allowable deductions pursuant to s. 51. It does not appear precisely how these remittances were made but, presumably, each one was made through the appellant's bankers who, at the cost of the appellant in Australian currency, made available to its use in New York an equivalent amount in United States dollars which was then used to discharge, by payment in New York, part of its outstanding liability. Whether or not the cost to the appellant was contemporaneously discharged by it or merely charged to its account does not appear. But this is of little moment for it either expended the necessary amount in Australian currency or incurred an obligation to pay it at some future time and, in either case, it was in a position to assert that in making these payments to the old supplier it had incurred revenue "losses" or "outgoings" of the character specified in s. 51.
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] .
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.
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.
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.
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.
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:
(a) I assess the taxable income for the year ended -
31.12.1929 at £65,592 31.12.1930 at £55,620 31.12.1931 at £37,613 31.12.1933 at nil
(b) I accept the decision of the Board of Review for the year ended 31.12.1932 and accordingly the taxable income for that year is reduced to £232,434. (c) In respect of each of the income years ended 31.12.1934 to 31.12.1937 (for which years the company has been assessed on an amount equal to 20% of its total receipts) I consider 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) but in the circumstances do not think it proper to assess and charge tax on any percentage or amount of the total receipts of the business. (d) In respect of the income year ended 31.12.1938 for which year no assessment has yet issued, I consider that the company is properly assessable under the provisions of Section 136, but I do not think it proper to assess and charge tax on any amount of the total receipts of the business.
This decision was communicated to the appellant by letter on 26th May 1941, which intimated: "With reference to the communication of the 26th March last, addressed to Messrs. Minter Simpson & Co., of Sydney from the Commissioner's Office, I desire to inform you that your Assessments for the years ended the 31st December, 1929, to the 31st December, 1938, inclusive, have been adjusted in the manner indicated therein. The resultant credit of £251 14s. 0d. is being applied in part payment of the Assessments in respect of Non-Resident Insurers, Notices of which are enclosed and the balance of tax now payable is £349 15s. 10d. In view of the action now taken to reduce to "Nil" your Assessments on income derived during each of the years ended the 31st December, 1934, to the 31st December, 1937 inclusive, the Objections lodged in connexion with those Assessments are being regarded as having lapsed."
It remains only to be said that no amended assessment or assessments issued and that the parties were, apparently, satisfied to treat this letter as a final and effective determination concerning the appellant's liability to income tax for the years under review. This, of course, meant that it was accepted that the appellant's taxable income for 1936 was "Nil" and that, therefore, there was no existing liability to tax in respect of that year.
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.
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".
Of course, as both parties agreed, the assessments already made could not have been reduced to nil merely by an informal "settlement". Yet the appellant asserts, and the respondent agrees, that as a result of what happened, the liability of the former for income tax originally assessed in respect of the income year 1936 was discharged. According to the respondent what happened resulted in an amendment of the s. 136 assessment. But it is asserted that the amended assessment was itself an assessment pursuant to s. 136. In my view, however, there are insuperable difficulties in accepting this last proposition for the only manner in which the authority given by s. 136 may be exercised is by the Commissioner "determining" some amount of the total receipts of a business as taxable income. In spite of the respondent's expressed view "that the company is properly assessed under the provisions of Section 28 (Section 136 for the income year 31.12.1935 and subsequent years)" his opinion that it would not, in the circumstances, be proper "to assess and charge tax on any percentage or amount of the total receipts of the business", conclusively indicated a failure at that stage to exercise any authority committed to him by s. 136. Furthermore, it is difficult to see how it could have appeared to the respondent, whilst he held that opinion, that the company's taxable income was "less than the taxable income which might be expected to arise from" its business and this, of course, was a condition precedent to the operation of the section (Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation [1] ).
In its objections which it lodged at an earlier stage the appellant had claimed that the assessment for the income year 1936 was, for a number of reasons, excessive and that the provisions of s. 136 had been applied in error. It is unnecessary to go into the substance of the objections but it is clear that the subsequent discussions between the parties were, in a substantial measure, concerned with matters which they raised. It is, perhaps, not too much to say that discussion and consideration of some of the matters induced the Commissioner to reconsider the assessment and to make a fresh decision. In these circumstances, it seems to me, the better solution of the problem now under consideration is to hold that, in effect, the respondent must be taken to have accepted sufficient of the substance of these objections to enable him to exercise his powers under s. 170 (7). Upon that view there was, pursuant to the objections originally raised, an amendment of the original assessment though it was not made in the usual formal manner and since, for the reasons already given, it was not made in the exercise of any authority given by s. 136, the appellant was entitled in the income year 1939 to take into account the loss made during the income year 1936.
For these reasons each of the questions raised by the case stated should, in my view, be answered in the affirmative.
The taxpayer is an Australian company whose principal business during the time with which this appeal is concerned was to sell in Australia petroleum products bought from companies in the United States of America belonging to the American group by which the taxpayer was itself controlled. During the income year ended 31st December 1936 the taxpayer, by two payments, one of $7,000,000 on 1st July and the other of $3,830,013 on 27th November, paid off liabilities amounting to $10,830,013. This sum was owing to one supplier called the old supplier and was in the main for oil supplied before the end of 1932, but as to $1,134,056 it was for supplies from the beginning of 1933 up to 30th June 1936, and as to $643,635 it was for supplies subsequent to 30th June 1936. The dollars to make these payments were provided by borrowing from another supplier, the new supplier, with which the taxpayer placed its orders after 1st July 1936.
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?
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.
At first I was disposed to think that the Texas Case [1] , in addition to deciding what I have just set out, went further and recognized that the course which the taxpayer followed in making monthly adjustments to bring up to date the expression in pounds of its dollar commitments to its supplier, was a permissible course for the purposes of income tax. On further consideration, however, I do not think the decision in that case went beyond recognizing that the monthly adjustment of the cost of stock on hand was unobjectionable; it accepted the adjusted figures of what was owing to the supplier for the purpose of calculating the loss when the dollar debt was actually paid but it gave no countenance to the process of adjustment itself as something permitted by the Income Tax Assessment Act. I merely add that if the Texas Case [1] had recognized that such a practice was permissible for taxation purposes, it would have seemed to me to indicate that the adjustments from time to time of a dollar liability still owing would inevitably presage a final adjustment at the date of its discharge however effected. Furthermore, an immediate consequence of this limited view of the decision in the Texas Case [1] is that it removes any foundation for the argument which was at one time advanced on behalf of the taxpayer but subsequently discarded, that the recalculation which took place on 30th June 1936 did of itself entitle the taxpayer to the deduction claimed; but even if the Texas Case [1] had gone further than I think it did, it would not have supported that argument.
Mr. Tait, for the Commissioner, contended, however, that even upon payment of the dollar debt there was no loss or outgoing for the purposes of s. 51, because no pounds had been outlaid or lost. The answer to this argument is, I think, that dollars worth some hundreds or thousands of pounds more than the number of pounds at which trading goods were necessarily taken into stock for income tax purposes were expended to pay for the goods and that expenditure therefore involved the taxpayer, who had of necessity to keep accounts in Australian pounds, in a loss or outgoing in carrying on its business. In reaching this conclusion, I rely upon the Texas Case [1] as a decision that the difference between the taxpayer's estimate or book entry in terms of pounds of the dollar payment to be made and the actual payment expressed in pounds is an allowable deduction as part of the taxpayer's cost of carrying on its business. There are also practical considerations that support this conclusion. These are indicated by the instances given by Taylor J. in his reasons for judgment which I have had the advantage of reading. What these show in essence is that where an Australian taxpayer uses dollars available to it in the United States for the discharge in the United States of a dollar trading liability which it has, perforce, expressed in pounds in its Australian books for income tax purposes, there would seem to be no good reason for treating it as in a different position from that it would have been in if it had transferred its dollar resources to Australia and had then, by the expenditure of pounds, purchased dollars with which to discharge its dollar liability in the United States. In either case, it would seem that the words of Dixon J. already quoted from his judgment in the Texas Case [1] are applicable: - "A difference between the estimate and the actual payment must be borne as a business expense" [2] .
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.
It is not necessary for the purposes of this case to come to any conclusion about the extent of the deduction to which the taxpayer is entitled by reason of the discharge of its dollar debt to the old supplier. This is a matter which the case stated expressly leaves open, and if it be that the adjustments made from time to time in the expression in pounds of the taxpayer's dollar liability should be disregarded altogether for the purpose of taxation, the only consequence would be that a larger deduction would now be available than if those adjustments were to be taken into account, because the result of making them was to increase the expression in Australian currency of the dollar liability.
The first question in the case stated is: - "Upon the facts stated did the appellant as claimed in par. 48 hereof incur in the income year 1936 a loss or outgoing in the nature of an exchange loss, in relation to the discharge of its indebtedness to the old supplier as set out in par. 44 and 45 hereof, which was an allowable deduction under s. 51 of the Income Tax Assessment Act 1936?"
This conclusion necessitates an answer to the second question in the case stated, which, in its amended form, is as follows: - "If so whether the appellant was, in the circumstances of the case, entitled to a deduction, pursuant to s. 80, in the income year ended 31st December 1939, of any part of the loss disclosed in the year of income referred to in question 1 after taking the so called exchange loss into account."
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.
The original assessment made on 22nd April 1938 was, as I have said, admittedly based upon s. 136; it was for £25,695 14s. 0d. upon a taxable income of £513,914 0s. 0d. To this assessment the taxpayer on 1st June 1939 objected, claiming inter alia that s. 136 had no application to its income for the year. At the time, the litigation which led to the Texas Case [1] (which was concerned with assessments for the years 1929 to 1933 inclusive) was proceeding, and after the decision of the High Court in that case in March 1940, negotiations were put in train between the taxpayer and the Commissioner covering taxation for the years 1934 to 1938 as well as for the earlier years. In the course of these negotiations, the Commissioner on 26th March 1941 offered to assess taxation for the years 1929 to 1938 inclusive at £27,121 19s. 10d. and showed how this sum was arrived at. One element in the calculation was that no taxable income and no tax was attributed to the taxpayer for the year 1936. After further negotiations and some modification of the offer which is not material for present purposes, the offer was accepted by the taxpayer, and in a departmental memorandum the Second Commissioner recorded that he had assessed the taxpayer's taxable income and tax for the years 1929 to 1932 inclusive at the figures set out, and for the year 1933 at Nil. The memorandum proceeded as follows: - "(c) In respect of each of the income years ended 31.12.1934 to 31.12.1937 (for which years the company has been assessed on an amount equal to 20% of its total receipts) I consider 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) but in the circumstances do not think it proper to assess and charge tax on any percentage or amount of the total receipts of the business."
It concluded with the following statement: - "There are undetermined objections against the assessments for 1935/36 (income year ended 31.12.1934) to 1938/39 (income year ended 31.12.1937) inclusive. Those objections have not been considered in arriving at the above stated decisions, therefore as the taxable income for each of the financial years 1935/36 to 1938/39 has now been reduced to Nil, the objections should be regarded as having lapsed." The Second Commissioner thereupon on 5th May 1941 wrote to the taxpayer noting its acceptance of the amended offer and informing it as follows: - "I am advising the Deputy Commissioner, Central Office, Melbourne, accordingly in order that he may, under the guidance of the Deputy Crown Solicitor, take the steps necessary to give effect to the settlement." On 26th May the Deputy Commissioner, Central Office, Melbourne, wrote to the taxpayer to inform it "that your assessments for the years ended the 31st December 1929, to the 31st December 1938, inclusive, have been adjusted in the manner indicated" in the offer of the 26th March 1941. The letter concluded with this statement: - "In view of the action now taken to reduce to "Nil" your assessments on income derived during each of the years ended the 31st December, 1934, to the 31st December, 1937 inclusive, the objections lodged in connexion with those assessments are being regarded as having lapsed."
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.
In view of the objection taken by Mr. Tait, I should say in conclusion that I consider that the taxpayer's objection to its 1939 assessment was wide enough to cover the matters upon which I have decided in its favour, because among the grounds of objection there were "(3) That the Company is entitled to a deduction in respect of losses of previous years allowable under section 80" and "(4) That the Commissioner should not have decided" (in respect of the year 1936) "that the Company was assessable under Section 136 but that no amount should be fixed as the taxable income". It is really in answer to the claim for a s. 80 deduction for 1939 that the Commissioner sets up a s. 136 tax liability for the year 1936 and this the taxpayer clearly enough disputes.
In consequence, I think the second question should be answered Yes.
Caltex Ltd
Commissioner of Taxation
High Court of Australia Dixon C.J. Fullagar, Kitto, Taylor and Menzies JJ. Caltex Ltd v Commissioner of Taxation (Cth) [1960] HCA 17