Commission of Taxation v. Werchon, E.J. [1982] FCA 169

Federal Court of Australia|1982-08-11|Before: Sheppard JJ, Smithers J, Tadgell J

Income tax = shares purchased with a view to making a loss -

taxation avoidance scheme - whether loss deductible if sale within 12 months regardless of purpose of acquisition - interpretation of s.52 - whether s.52 has restricted meaning or states a general principle - use of proviso generally and to ascertain the scope of basic words - effect of notification

under s.52 which falsely states purpose of acquisition -

Income Tax Assessment Act 1936 (Cwth) ss. 26(a), 26AAA, 43,

The Commissioner of Taxation for the Commonwealth of Australia

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, ON APPEAL from the Honourable ' Mr. Justice Tadgell of the Supreme Court of Victoria

Between: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF. AUSTRALIA

The order of the Supreme Court of Victoria dated 4

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. ON APPEAL from the Honourable . Mr. Justice Tadgell of the Supreme Court of Victoria

' Respondent COURT: Smithers, Northrop and Sheppard JJ. WHERE MADE: Melbourne DATE: 11 August 1982

THE COURT ORDERS THAT:

The appeal be allowed.
The order of the Supreme Court of Victoria dated 4

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j 3. The respondent pay the appellant's costs of the { appeal and of the proceedings in the Supreme Court {

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' VICTORIA DISTRICT REGISTRY ) VG Nos. 21 & 22 of 1982 ) GENERAL DIVISION )

Mr. Justice Tadgell of the Supreme Court of Victoria

Between: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA

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Smithers J.:, These are two appeals from judgments of the Supreme Court of Victoria in which it was adjudged that certain losses on the sale of certain shares within twelve months from their acquisition were allowable deductions under

the provasions of s.52 of the Income Tax Assessment Act (the

"During the year of income ending on 30 June 1975 the appellants, Mr. and Mrs. Werchon, held a 47 per cent interest, each in a partnership business of a bookmaker in the Northern Territory called T.J.T. Enterprises. The day-to-day operations of the business were the responsibility of Mr. Werchon. His accountant, who had prepared his income tax returns for some years, suggested to

rM. Werchon during the 1975 year of income that he consult a Mr. Sheehan, saying that he might be.

able to help him reduce the incidence of income tax. In consultation with Mr. Werchon, Mr. Sheehan suggested a plan which was designed greatly to minimise the former's assessable income from the profit of the partnership for the current financial year. The plan was explained in uts essential features by the Board of Review in the ' following terms, which I am content to adopt -

'It was a simple concept and had features in common with a dividend-stripping operation. Broadly, it envisaged the purchase of shares with borrowed funds; their sale after a declaration of dividend at an amount equivalent to the cost price reduced by the amaunt of the dividend; the diversion (for

the benefit of family trusts) of an amount (in tax-free form) equivalent to the dividend, and

the proceeds of sale, to pay off the original indebtedness.'!

The proposed plan was implemented and the income tax return for the partnership for the year ending

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shares of $176,995 had resulted in a reduction of the profit of the partnership from $178,079 to

$1,084. The partners' individual freturns disclosed income from the partnership proportionate to their respective partnership interests. The claim for a deduction from the

partnership income of the loss said to have been incurred on the sale of shares was subsequently

that the taxable income of each of Mr. and Mrs. Werchon as assessed was increased by $83,188."

It 18 unnecessary to set out the details of the mode of implementation of the plan suggested by Mr. Sheehan. Suffice it to say that it was conceded by Counsel for the respondents that the shares in question were acquired for

resale at a loss and that the purpose of the scheme of which

that procedure was a part was to produce an ultimate loss.

With a view to satisfying the requirement of: the proviso to s.52 the taxpayers gave notification to the Commissioner in a document annexed to the partnership's income

tax return for the year ending 30 June 1975 in the following

"COMPANY SHARES PURCHASED AND SOLD AS PART OF A PROFIT MAKING UNDERTAKING YEAR ENDED 30TH JUNE

During the year, the Partnership undertook a profit-making arrangement involving the purchase of two companies and sale of one of them prior to the end of the year. The two companies involved. were M.V. Johnston Motors Pty. Ltd. and Rabbit Limited.

After its purchase, M.V. Johnston Motors Pty. Ltd. declared a dividend of $177,000 to Rabbit Limited. After 1ats reserves had been depleted, M.V. Johnston Motors Pty. Ltd. was then sold

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for an apparent loss of $176,995. Rabbit Limited however, has increased in value by more

than this and the Partnership's consolidated overall position has improved. As the end of the financial year occurred before = any distribution was made by Rabbit Limited, the

benefit of the 1uncrease in the worth of Rabbit Limited w1ll not be received until it makes a

sufficient distribution which will be in the 1975/76 financial year. As any receipt next

-year will be subject to tax, the loss this year must be claimed as a deduction. Accordangly, the loss on the sale of company

shares amounting to $176,995 is claimed as an allowable deduction under s.52 of the Income

Tax Assessment Act." Counsel for the respondent argued that notification in these terms amounted only to notification that property had been acquired for the carrying on or carrying out of a profit- making undertaking or scheme whereas the deducations claimed by the appellants were sought on the footing that there had been a loss upon a sale of shares and not a loss from the

carrying on or carrying out of an undertaking or scheme.

However for the purpose of these appeals the document is treated as one notifying that the property in question "has been" acquired for the purpose of profit making

by sale or far the carrying on or carrying out of a profit

The appellant argued that s.52 of the Act did not apply to a loss incurred on a sale of property not acquired for the purpose of profit making by sale or from the carrying

on or carrying out of any profit making undertaking or scheme

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whether or not the sale had occurred within twelve months from the acquisition of the property. The respondents on the other hand contended that the natural meaning of the substantive words of s.52 applied to a loss on a sale of property wathin twelve months because, whatever the purpose of the acquisition of the property, any profit on the sale thereof, would have

been assessable income by virtue of the provisions of s.26AAA

It is necessary to refer to the hastory of s.26(a) and s.52. and the introduction in 1973 of s.26AAA.

By 3.2 of Act' No. 50 of 1930, s.4 of the Income Tax

Assessment Act 1922 was amended by inserting in the

any person of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme"

By s.14 of the same Act, s.26 of the Act of 1922 was amended t

by omitting sub-section (1) and inserting in its stead the

"(1) Where a loss is made in any year by any person -

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(b) if he is resident, in carrying on a business the proceeds of which (if any) derived from sources outside Australia would not be wholly exempt from income tax under the provisions of sub-paragraph (1) of paragraph (q) of sub-section (1) of s.14 of this Act;

(c) upon the sale of any property the profits Gif any) from the sale of which would have been assessable as income of that person,

that person shall be entitled to a deduction of that loss from the net assessable income (if any) derived by him in that year."

In 1936 the definition of assessable income remained as it had

been enacted in 1930 but the provisions of s.26(1)(c) were

incorporated in a new section, s.52 of Act No. 27 of 1936 an

"Any loss ancurred by the taxpayer in the year of. income upon the sale of any property or from carrying on or carrying out of any undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in

his assessable iuncome, shall be an allowable deduction. "

It is to be noted that whereas s.26(1)(c) referred to a loss by any person on the sale of any property, s.52 as enacted in 1936 refers to any loss ancurred upon the sale of any property and or from the carrying on or carrying out of

By s.1l of Act No. 58 of 1941, s.52 of the Act was*

amended by adding at the end thereof the following proviso:-

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"Provided that, in respect of property acquired by the taxpayer after the date of the commencement of this proviso, no deduction shall be allowable under this section (except where the Commissioner, being satisfied that the property was acquired by the taxpayer for the purpose of profit-making by sale or'for the carrying on or carrying out of any profit-making undertaking or scheme, otherwise directs) unless the taxpayer, not later than the date upon which he lodges his first return under this Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit-making by sale, or for the carrying on or

carrying out of any profit-making undertaking or scheme;"

(a) a reference to property generally or to a particular kind of property includes a reference to an estate or interest in property or in that kind of property, as the case may be;"

(a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section; and

(b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest ain the property before the expiration of the period af 12

months from the date on which he purchased the property,

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then, subject to this section, the assessable income of the taxpayer includes any profit arising from the sale of the property or interest."

Hereafter J refer to the provisions of s.52 which precede the

Those words in their natural meaning refer to losses on the sale of property generally. They refer to sales of property which may not have been "acquired" at all, or which may have been acquired for the purpose of being sold at a loss

or for no specified pyrpose, or for the purpose of profit

making by salé. It is only with respect to this last class of ease that the words have ever had practical application since s.26 was amended by the ansertion therein of sub~section (1)(c) set out above, unless, by reason of the enactment of s.26AAA in 1973, they relate to a sale of property within twelve months of acquisition whether it was acquired for the purpose of profit making by sale or for the carrying on or carrying out of a profit making undertaking or scheme or otherwise. It is argued that tne situation envisaged by s.26AAA falls naturally within the ordinary meaning of the basic words whatever the purpose for which the taxpayer

acquired the property and even if that purpose was to sell it

operation and only one and that was in providing for the

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allowance of a deduction in respect of losses incurred in situations specified in s.26(a). That the language chosen for 8.52 extends, according to ats natural meaning, beyond those situations could have reflected only one of two circumstances. Either that language was chosen merely as a convenient way of referring to gituations which could only arise under s.26(a) and was meant to cover those and nothing else, or it was chosen to enact a general principle which would apply, should a law be made at any time, under which a loss occurring in

circumstances where had there been a profit, that profit would

It is not to be readily accepted that language having a clear unambiguous import is to be given a restricted meaning. On the other hand it is not likely that a statute should have been enacted in terms having no application to the law as it stood when made, and to be put in storage, so to speak, against the day when some law not in contemplation at the time, might be made to which it might apply. In this case no such law ever came into force unless the law enacted in

s.26AAA, forty three years after the enactment of s.26(1)(c)

The respondent contends that there is nothing intrinsically unacceptable in the notion that in 1930 and 1936 Parliament might have taken the opportunity to declare a

general principle. The appellant in reply pointed out that

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both in 1930 and 1936 the enactment concerning allowances for losses were clearly and obviously linked with the very specific provisions which have become the current s.26(a) of

There can be little doubt that despite the width of the natural meaning of language of s.52 that section was enacted for the express purpose of permitting the deduction from income of a loss suffered in the course of the sale of property genuinely acquired with a view to profit making by its sale or from the carrying out of an undertaking or scheme

which was genuinely a profit making undertaking or scheme. Section 26AAA provides for the inclusion in assessable income of a profit made within a specified time. ,It does not concern itself with the purpose for which the property was ,acquired. Jo it, it matters not that the property was acquired for sale at a loss or otherwise. The critical factor in relation to s.52 is said to be that a loss 'uncurred on the sale of property within twelve months of

acquisition 1s a loss upon the sale of a property the profit

(if any) from which sale would have been included in the

It is said for the appellant that the circumstances that the provisions of s.52 are wide enough to embrace cases

additional to those the subject of s.26(a) is not significant

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and that the legislative intention disclosed therein is that those provisions apply only to cases the subject of s.26(a).

And 1t is said that there is judicial authority to support

this view. Thus as Windeyer J. put it in Investment &

Merchant Finance Corporation Lid. v. Federal Commiss2oner of

Taxation (1970) 120 C.L.R. 177, 188, "Section 26 and s.52 are in a sense counterparts", the latter "reflects, in an obverse way, the provisions of paragraph (a)" of the former. In the same case, on appeal, Menzies J. said ((1971) 125 C.L.R. 249, 266) of s.52 that "It is a companion section to s.26(a) and it applies only when that. provision would apply to a profit, which if made, would have to have been included in assessable income". However those comments were made in relation to issues which were solved without the necessity for consideration of the question whether, for instance, had there been in force a provision such as s.26AAA, or a provision of a Similar nature, s.52 would have been applicable thereto. To

my mind therefore the question of the proper construction of

"s.52 is one not determined by authority and in respect of

which its application to a situation arising under a provision

such as s.26AAA remains undetermined and of some uncertainty.

It was suggested by Mr. Forsyth for the respondents that the form of words adopted in s.14(1)(c) of Act No. 50 of 1930 may have reflected a situation which might arise under s.43 of the Act. He conceded that that section and indeed

subdivision (c) of division 2 of the Act in which it occurs

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was directed to the determination of profit on trading transactions originating overseas where real prices of goods bought could not be satisfactorily identified. That subdivision had no concern with losses on such transactions.

(See American Thread Company v. Federal Commissioner of

Taxation (1945) 73 C.L.R. 643) Mr. Forsyth's suggestion was

that there maght be an isolated transaction not incidental to the carrying on of any business, a profit from which would fall wathin subdivision C of the Act but a loss from which would not be a deduction pursuant to s.51 of the Act. He submitted that that would be a special case which would fall within s.52 if the basic words are interpreted as submitted by the respondent. However it is difficult to think that there really was a link between that possible special case and the choice of the language in s.14(1)(c) of Act No. 50 of 1930. It may be noted also that although s.26AAA was not in force when Menzies and Windeyer JJ. made their several observations

For the appellant it is said that in this situation &

it is permissible to seek assistance from the proviso which was introduced long before s.26AAA was introduced. It was

said by Viscount Maugham in Jennings v. Keely (1940) A.C. 206 at pp.217 - 218:-

coming to his conclusion by his view that the farst .,part of the section was the operative

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point unambiguously to a particular legislative view of the

meaning of the basic words of a provision it is permissible and indeed imperative to have regard thereto. The

observations quoted above as to the true principle are in

In considering the proviso it is necessary, first, to refer again to the view on which the respondents' contention is based, namely, that although not expressly so stated, the basic words of s.52 are to be construed as enacting that any loss incurred by the taxpayer upon the sale of any property, whether that property was acquired for the purposes of sale at a profit, or with no purpose in mind, or even, for the purpose of selling 1t at a loss, then the loss is allowable as a deduction. It is to be observed that if the section were to be so read then it would be of no importance at all, whether the Commissioner was satisfied that the property was purchased for resale at a profit, or that the 'taxpayer should establish that it was or was not. On this assumptzon the taxpayer is entitled to his deduction in respect of the loss in any event even if he bought the property with a view to selling it at a loss. But the proviso is concerned essentially with the question of whether the property in question was acquired for sale at a profit or otherwise. It provides that a loss is not allowable as a deduction unless one of two conditions is satisfied, namely,

that the Commissioner, being satisfied that the property was

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acquired by the taxpayer for profit making, directs that the loss be allowable, or, that the taxpayer, not later than the date on which he lodges his first return under the Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit making by sale or for the carrying on or carrying out of a profit making undertaking or scheme. It is not to be thought that the mere giving of the notice is to take the place of the Commissioner being satisfied as to, or as proof of, the fact stated therein. The giving of the notice merely operates to render applicable the basic words of the section so that if a deduction is otherwise allowable thereunder it will not be disallowed 'by the proviso. Therefore, one asks, what 1s the purpose of the proviso? The answer, I think, is

that it as directed to protecting the revenue in a certain

Where a taxpayer having acquired property and having

thereafter sold it at a profit in circumstances in which he

-has not, antecedenily, made any binding declaration or

concession that he acquired it for sale at a profit he is ina

position to contend, rightly or wrongly, but possibly successfully, that he did not acquire the property for the

achievement of two practical abjectives in relation to the

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operation of ss.26(a) and 52. First it discourages' the practice whereby a man who has acquired property for the purpose of profit making by sale and has sold the property at a profit may pretend that he did not acquire the property for profit making. by sale and may claim to be entitled to the profit he has made free of tax as a simpJe capital gain. It does this by enacting that, should there be a loss instead of a profit on the sale of the property then, subjeet to the exception mentioned in the proviso, entitlement to an allowance of a deduction in respect of that loss is iost, unless, upon lodging his first return after acquiring the property the 'taxpayer has notified the Commissioner that he has acquired the property for the purpose of profit makang by sale or for the carrying on or carrying out of a profit making

Secondly. in the case of a taxpayer who has in fact

acquired property for loss making by its sale, and has not

sold the property before he lodges his first return after acquiring it, the proviso operates to deprive him of the opportunaty of contending later that he has acquired it for profit making by sale, unless he has committed himself in advance of making 'the loss, by making to the Commissioner the assertion specified in the proviso namely, ihat the

property was acquired by him, in substance, for profit making.

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Notwithstanding the proviso, a man, having acquired property for profit making by sale, and having made such profit and not having given the notification specified in the proviso is in a posation, unhampered by any previous assertion as to the purpose of acquiring the property, to contend that he did not acquire the property for profit making by sale. If he has given such notification he is considerably embarrassed in contending to the contrary of its terms. But if he refrains from giving the notice, and makes a loss on the salo of the property, then, according to the proviso, that loss will not be allowable as a deduction under s.52 of the Act.

To protect hamself against tnis eventuality he must notify the

It is apparent therefore that the primary aim of the proviso is to ensure, so far as its terms will do so, that a

Joss allowed under the basic words of s.52 will in truth have

been incurred in respect of property acquired for profit making by sale or from the carrying on or carrying out of a profit making undertaking or scheme. Of course where property has been both acquired and resold either for profit or at a loss, before the taxpayer lodges his first return after acquiring the property the efficacy of the proviso in this Tespect may be minimal. When the time arrives for the

taxpayer to lodge his return he knows whether he has made a

. However, it 1s apparent that in relation to the second objective mentioned above, namely the prevention of a successful claim for a deduction 2n respect of a loss on the sale of property acquired for loss making, the proviso ensures that the taxpayer simply cannot satisfy the condition subject to which the basic words of s.52 are permitted to speak with regard to the relevant transaction, unless he has notified the Commissioner untruthfully, that he acquired the property for profat making. Of course that is what these respondents have done. The important factor is the light which this aspect of the proviso throws upon the meaning of the basic words. The respondents' pase is that if the basic words of s.52 are permitted to speak with regard to the transaction in respect of which they claam that their loss is an allowable deduction,

those words, upon their proper interpretation, will entitle

them to an allowance of that deduction even though in fact the

purpose of their acqusisition of the relevant property was to

Sell it at a loss. But if that were the law it is unthinkable

that the legislature would have stipulated that to obtain the

benefit of it the taxpayer should be required to give a notification to the Commissioner in terms which, to the taxpayer's knowledge, are quite false. Clearly the statutory

basis on which the proviso 1s constructed is that a loss on

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the sale of a property acquired otherwise than for profit making by sale or for carrying on or carrying out a profit making undertaking or scheme 2s not an allowable deduction

Where the taxpayer gives the notification specified in the proviso, whether true or false, the basic words of 8.52 are permitted to speak with respect to the loss which is claimed. What they say is that the loss is allowable only if the facts are as stated. The fate of the clazm will depend upon the ascertainment of the true facts. In this case the true facts are admitted. The property on the sale of which the loss was 'incurred was acquired by the taxpayer for the

As was said by the learned Judge from whose decision these appeals are brought profit on the carrying on or carrying out of a profit making undertaking or scheme is income whether or not any property dealt with in the undertaking or scheme was acquired for profit making by sale or otherwise. This follows the plain meaning of s.26(a). Accordingly a loss suffered as the outcome of such an undertaking or scheme is an allowable deduction under the basic words of s.52. The learned Judge took the view, and accorded considerable weight to it, that the proviso departs

from the concept of s.26(a) 2n that at enacts that, to qualify

for a deduction in respect of a less from the carrying on or

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carrying out of a profit making undertaking or scheme under s.52. the taxpayer must satisfy the Commissioner or state in his notification to him, as an alternative to satisfying him that property was acquired for the purpose of profit making by sale, that it was acquired for the carrying on or carrying out of any profit making scheme. However, it would seem that the departure is more apparent than real. The proviso is only applicable where the relevant losses are incurred in respect of property. A deduction claimed in respect of a loss from the carrying on or carrying out of an undertaking or scheme, simpliciter, is not affected by the proviso. Its allowance depends on the proper construction of the basic words of s.52.

Where however, a loss is claimed in respect of property dealt

with or intended to be dealt with as part of an undertaking or scheme, in 2uts own right, so to speak, independently of the outcome of the scheme, perhaps because the undertaking or scheme was abandoned, or for some other reason, the proviso is fully applicable to that loss. To subject a loss so claimed 'as a deduction under the basic words, to the requirements of the proviso does not appear to be a departure from the concept imposed in s.26(a). In such a case the purpose of acquisition of the property either for profit making by sale or for the carrying on or carrying out of a profit making undertaking or scheme is relevant as an evidentiary aad, jin the application of the basic words to any ensuing loss. In such a case the requirement that there be a concession or assertion by the

taxpayer, particularly if made before the loss is incurred,

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that the property in respect of which the loss was ultimately incurred was acquired for the carrying on or carrying out of a profit making undertaking or scheme is a reasonable one. It is helpful in the manner disclosed above in the search for the real truth in the resolution under the basic words, of the ultimate enquiry, whether, although the property was acquired in connection with some undertaking or scheme, it should properly be regarded, at least in a broad sense, as having been acquired for the purpose of profit making 'by sale. Accordingly it appears that there is, in the proviso, no such suggested departure.

preceu.c7 1.708 S12 2 vue copy of the Rew...» for Jud went nevein ol hs howour lir. Jicvice Smears

; VICTORIA DISTRICT REGISTRY ) V. No. G.21 of 1982 ) V. No. G.22 of 1982 )

BETWEEN: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Appellant (Respondent) t and TONIA WERCHON and EDWARD , JAMES WERCHON Respondents (Appellants) NORTHROP J. REASONS FOR JUDGMENT 11 AUGUST 1982

These two appeals, heard together, raise a question of general application and importance under the Income Tax Assessment Act 1936, as amended, "the Act", namely whether a loss incurred by a taxpayer on the resale of property before the expiration of the period of twelve months from the date on which the property was purchased by the taxpayer is an

165 of 1973, s.6, and came into operation on 11 December

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (363 paragraphs)