CTHHCA

Commissioner of Taxation (Cth) v Suttons Motors

[1985] HCA 44

High Court of Australia|1977-06-30|Before: Dawson JJ, Tadgell J, Toohey J, Jenkinson J, Jenkinson JJ, Stephen J, Mason J, Jacobs J

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At a glance

Source facts

Court

High Court of Australia

Decision date

1977-06-30

Before

Dawson JJ, Tadgell J, Toohey J, Jenkinson J, Jenkinson JJ

Source

Original judgment source is linked above.

Judgment (23 paragraphs)

[1]

High Court of Australia Gibbs C.J. Wilson, Brennan, Deane and Dawson JJ. Commissioner of Taxation (Cth) v Suttons Motors (Chullora) Wholesale Pty Ltd [1985] HCA 44

[2]

1985, July 11 Gibbs C.J., Wilson, Deane and Dawson JJ.

[3]

Suttons Motors (Chullora) Wholesale Pty. Ltd. ("the taxpayer") is a member company of what may conveniently be called "the Suttons Group". At relevant times, the overall activities of the Suttons Group included carrying on in Sydney a business of retailing new motor vehicles manufactured by General Motors-Holden's Ltd. The function of the taxpayer was to act as the Suttons Group's "wholesaler": it obtained delivery of and subsequently purchased the new vehicles from General Motors Acceptance Corporation, Australia (G.M.A.C.), which is the Australian "finance company" within the General Motors-Holden's Group and which had purchased the vehicles from the manufacturing company in that Group, and sold them to Suttons Motors (Chullora) Pty. Ltd. ("Suttons Motors") which was the taxpayer's holding company and the Suttons Group's "retailer". The reason for the separate identity of the taxpayer as the Suttons Group's "wholesaler" was that it resulted in the liability to pay sales tax being moved from a company in the General Motors-Holden's Group to a company (the taxpayer) in the Suttons Group and a corresponding ability to retain the funds to satisfy the sales tax liability within the Suttons Group until they had to be paid over to the Commissioner. In issue in the present appeal is the entitlement of the taxpayer to a "trading stock valuation adjustment" deduction pursuant to s. 82D(1) of the Income Tax Assessment Act 1936 Cth ("the Act") of "the prescribed percentage of the value" of certain motor vehicles in the assessment of its taxable income (or loss) for the tax year ended 30 June 1977. It is common ground that the taxpayer's entitlement to that deduction depends upon whether the relevant vehicles were, at the commencement of that tax year, "trading stock on hand in relation to" a business "that was carried on by the taxpayer immediately before the commencement of the year of income" within the meaning of those words as used in s. 82D(1).

[10]

On the findings of the learned trial judge, the relevant vehicles were, at the commencement of the tax year, in the possession and at the risk of the taxpayer pursuant to a "floor plan agreement" with G.M.A.C. Title had not however passed to the taxpayer and, under the terms of the floor plan agreement, would not pass until what was in fact the wholesale purchase price payable by the taxpayer, though included in what was described as a "Hiring Amount", was paid by Suttons Motors on the taxpayer's behalf. It is unnecessary for present purposes to investigate the effect of the fact that it appears to have been the settled practice that that payment would not be made by Suttons Motors until the day following a sale of the particular vehicle to a retail customer with the result that Suttons Motors would appear to have purported to pass title to the vehicle before it had obtained title from the taxpayer. Whatever may have been the rights (e.g., by reason of the doctrine of estoppel, the provisions of the Sale of Goods Act 1923 N.S.W., s. 26 or the provisions of the Factors (Mercantile Agents) Act 1923 N.S.W., s. 5) of such a retail customer in relation to the particular vehicle in the event of some subsequent dispute, the position between the taxpayer and those with whom it dealt would appear to have been that the taxpayer purchased and obtained title to the vehicle when the "Hiring Amount" was paid and immediately resold the vehicle to Suttons Motors at the price at which it had purchased it, but on the basis that Suttons Motors would discharge the taxpayer's liability for sales tax. The arrangements between the Suttons Motors Group and G.M.H. involved the payment by Suttons Motors of what may loosely be described as a "delivery" fee and of a "charge" in respect of the period between the time when a particular vehicle came into the possession of the taxpayer and the time when it was purchased by the taxpayer from G.M.H. for resale to Suttons Motors. Tadgell J. correctly commented that this "charge" represented, in "practical terms", "interest" on the amount outlaid by G.M.A.C. in effectively financing the acquisition of the particular vehicle during the period between delivery to the taxpayer and ultimate purchase by the taxpayer at the time when a retail sale was made by Suttons Motors. The Suttons Group's liability to pay this "charge" and the settled course of dealing combined to produce a situation where, as a matter of commercial substance as distinct from strict legal obligation, the taxpayer was effectively committed to the ultimate purchase of the particular vehicle from the time it took delivery unless it either ceased to carry on business or was relieved of that practical commercial obligation by some other arrangement within the Suttons Group. The evidence was that no vehicle delivered to the taxpayer was ever in fact returned to G.M.H. by reason of a decision by the taxpayer not to purchase it.

[11]

The Commissioner's primary argument is that the relevant vehicles could not be stock in trade for the purposes of s. 82D(1) because the taxpayer had not, at the commencement of the year of income, made any payment in relation to them and was not, at that time, either the owner of them or under any legally enforceable obligation to buy them. We are unable to accept that argument. The relevant vehicles were, at the commencement of the tax year, plainly in the possession and at the risk of the Suttons Group. They were held by the Group for the purpose, and only for the purpose, of being offered for sale in the ordinary course of the composite business which that Group, looked at as a whole, carried on. They represented the stock which the Group held to offer for sale and to sell in the course of that overall business and which it had become entitled to, and commercially though not legally obliged to, purchase from G.M.H. at G.M.H.'s wholesale price at the time it took delivery. If the Group's overall business from the original acquisition of possession of vehicles under the floor plan arrangement to the ultimate retail sale of them to the public be viewed as a composite whole, it appears to us that the relevant motor vehicles were, at the commencement of the tax year, the trading stock on hand in relation to that business within the traditional and central meaning of the term "trading stock". In the courts below it would appear not to have been seriously disputed that the taxpayer had been carrying on business as a wholesaler and that the relevant vehicles had been held in the possession of the taxpayer to sell to Suttons Motors in the ordinary course of that wholesale business. On that approach, it was but a short and obvious step to divide the composite business of the Suttons Group into its component "wholesale" and "retail" businesses and to conclude that the motor vehicles were, for the purposes of s. 82D(1), trading stock which the taxpayer held, at the commencement of the tax year, in relation to its wholesale business.

[14]

The submission that the taxpayer carried on no relevant business at all has a degree of superficial plausibility. The taxpayer, so it was said, had no staff, no bank account, no premises, no stationery, no "competitive activities" and no "intention to pursue nor did it pursue profit or gain" on its own behalf: its "only profit" in the tax year was a payment of $500 which it received from Suttons Motors "for services rendered in providing motor vehicles at short notice and in consideration of financial expenses saved as a result of the wholesale facility provided". Upon analysis, however, the argument involves no more than the proposition that the taxpayer's activities in purchasing from G.M.H. wholesale and selling to Suttons Motors vehicles of a value of millions of dollars (approximately $3.8m) each year could not have been a "business" by reason of the facts that it was carried on through agents who were not its employees and that it was not primarily carried on for the purpose of profit to the taxpayer itself but as part of the overall business activities of the Suttons Group which were directed towards producing profits for Suttons Motors which was the taxpayer's holding company. It may be thought that this proposition comes somewhat unexpectedly from the Commissioner since its implications in other cases involving a member of a group of companies could be large indeed. Be that as it may however, the proposition is untenable in the circumstances of the present case where it would be unreal to isolate the taxpayer's activities of acquiring vehicles from G.M.H. and selling them to Suttons Motors from the context of the overall business of the Suttons Group. It is plain that the Group was, at the commencement of the tax year, carrying on a composite business including, among other things, the wholesale purchase and resale of the vehicles by the taxpayer and the purchase and retail resale of the vehicles by Suttons Motors. The wholesale component of that business was carried on by the taxpayer and that component did not lose its commercial or business character either by reason of the fact that it was carried on by the taxpayer through agents or by reason of the fact that the taxpayer, while operating at a small cash surplus (the $500 fee), did not pursue profit to itself as distinct from overall profit to the Group of which it was a member. At the commencement of the tax year, the taxpayer was carrying on a business and the relevant vehicles were in the process of being acquired by the taxpayer from G.M.H. and were held on hand in the possession of the taxpayer so as to be immediately available to be sold at any time in the ordinary course of that business. They were, at the commencement of the tax year, stock in trade held by the taxpayer on hand in relation to that business. It follows that the taxpayer was entitled to a deduction pursuant to s. 82D(1) of "an amount equal to the prescribed percentage of the value" of those vehicles.

[18]

The phrase "trading stock on hand" is common to s. 28 and s. 82D of the Act. By s. 28(1) the value of all trading stock on hand at the beginning of the income year and the value of all trading stock on hand at the end of the income year are taken into account in ascertaining whether the taxpayer has a taxable income. An excess in the value at the end of an income year over the value at the beginning of the income year is assessable income (s. 28(2)); a deficiency in the value at the end as against the value at the beginning is an allowable deduction (s. 28(3)). The effect of s. 82D(1), broadly stated, is to allow the deduction of a prescribed percentage of the value of any trading stock on hand at the commencement of a year of income. Essential to the notion of trading stock of a taxpayer on hand at a relevant date is the availability of the stock at that date to be traded by the taxpayer, i.e., its availability to be sold or otherwise disposed of for value by him: cf. Farnsworth v. Federal Commissioner of Taxation [10] . If, at a relevant date, a taxpayer owns stock and the stock is physically available to be sold by the taxpayer or otherwise disposed of for value by him, it may be trading stock on hand. A taxpayer does not have trading stock on hand unless he has such a proprietary interest in the stock as to enable him to transfer title to or property in the stock to a buyer or other disponee. If a taxpayer has no such proprietary interest in stock at a particular date, he cannot then sell or otherwise dispose of that stock - unless he has a power of sale over it. But there is no fiscal or commercial justification for adding to a taxpayer's assessable income an increase in value of another person's property, or allowing a taxpayer a deduction for a decrease in value of another person's property, merely because the taxpayer has a power of sale over that property. Nor is there any such justification for allowing a taxpayer a deduction being a percentage of the value of another person's property over which the taxpayer has a power of sale at the relevant date. I do not think that either s. 28 or s. 82D is intended to operate so as to affect the taxable income of one who has only a power of sale over stock owned by another.

Commissioner of Taxation (Cth) v Suttons Motors - [1985] HCA 44 - HCA 1977 case summary — Zoe