J Rowe & Son Pty Ltd v Commissioner of Taxation

J Rowe & Son Pty Ltd v Commissioner of Taxation - [1971] HCA 80 - HCA 1971 case summary — Zoe

[14]

Mr. Rowe gave evidence that the collection of money is a difficult part of the company's business and requires extensive checking of the accounts and the sending out of letters and sending collectors to call on customers. When a customer finds difficulty in keeping up his payments, his agreement is sometimes varied so that the period for repayment is extended and the amount of the instalment reduced. Mr. Rowe said that in the course of a year two-thirds or up to three-fourths of the terms customers go into default at some time or other. Out of 5,000 accounts there are 1,500 changes of addresses in a year. In most cases where default continues and the contract is terminated, a voluntary return of the goods is made and it is not necessary to seize them. The goods returned are much reduced in value as compared with new goods. Some goods are lost because the goods or the customer cannot be found. The company took out insurance against that loss but later discontinued that insurance. It is not the practice for the company to sue for unpaid instalments, as it is considered that this would not be economically wise. Mr. Rowe said that the collection system is "the very heart of the business" and that it is extensive and costly. I do not think that he was deliberately untruthful in any of his evidence but on some matters his knowledge was far from precise and I think that in some respects he had a tendency towards exaggeration. The evidence showed that the collection of instalments called for an expenditure of time and money which was significant, but the cost of it, so far as this could be ascertained from the evidence, was relatively not high having regard to the size of the business. The appellant failed to provide satisfactory evidence as to the proportion of the instalments which could not be collected or as to the amount of the losses sustained in consequence of the voluntary return or the repossession of goods. I mention those features of the evidence, although I do not regard them as having in the end any effect on the result of these appeals, because in the questions put to expert witnesses and in some of the submissions made on behalf of the company, I think that the business was treated, to an extent not fully warranted by the evidence, as being exceptional, both as to the difficulties and the expense of the collection of debts and as to the losses sustained because of default. I do not doubt that it was necessary in a business sense to attend regularly and diligently to the collection of the instalments or that risks were involved in delivering goods on extended terms to customers of the class with which the company dealt. Nevertheless I think it is a proper conclusion on the evidence that the company expected that it would receive a sufficient proportion of the instalments on the terms contracts to make it profitable for it to carry on that part of its business, bearing in mind that the instalments included the terms charges. Evidence has not been produced which satisfies me that that expectation was disappointed or that experience proved that the addition which ought to be made to the cash price when making these contracts had been calculated at too low a figure to compensate the company for the delay in getting its money and for the expenses and risks involved in this type of business.

[17]

It is time now to state how the company compiled its income tax returns and how the respondent dealt with them. In the 1965 year the sales on instalment contracts were shown in the trading account separately from the cash sales and "credit sales". They were described as "sales over a deferred future period" and an amount called "provision for contingencies" was deducted. But together with the other sales, they went to make up a total figure for sales from which was derived a "gross margin before commission" and ultimately a "gross margin", which became the first item in the profit and loss account for that year. On the latter account the net trading result was shown as £56,578.3s.6d. In the income tax return for that year, to which were attached the trading account and the profit and loss account and other explanatory annexures, the last-mentioned figure was shown, in the statement of the taxable income, as the first item. But adjustments were then made of which I need not set out all the details. The object of the adjustments was to give effect to a view that for tax purposes the amount of the sales over a deferred future period ought not to go into the accounts in the year in which the sales were made. In relation to sales of that character all that should go in was an item described in the return as "cash and all considerations received in respect of sales over a deferred future period". The amount to which that description was given has been treated by both parties as including not only cash actually received in the tax year but also the amount of all instalments which became payable within that year. The result of the adjustments made on the first page of the return was that a loss for the year of over £100,000 was shown instead of the profit which appeared as the net trading result in the company's accounts. The explanation forwarded with the return included, in relation to the sales over a deferred period, the following statement of the company's contentions:

[18]

It appears that Income Tax is assessable on amounts received from these terms sales only when received. For accounting purposes it appears that the normal procedure is to regard the sale as being a normal sale and to make provision in regard to the deferred income. It appears however that the provisions of the Income Tax Act have to be considered in preparing the Income Tax Return of the Company and for this reason adjustments have been made to the taxable income which has been returned. The returns for the 1966 and 1967 years were made in conformity with the same contentions. In those years the company adopted a different procedure in compiling its own trading and profit and loss accounts and it is useful to refer to the trading account for the 1966 year. Cash sales and credit sales are shown at figures which come to a total of $866.819. A blank space is left opposite the words "sales over a deferred future period". A footnote states that credit sales do not include proceeds of sales made under contract which have not been realized and are not realizable at 30th June 1966 and it refers to a note on the balance sheet. The latter note states that a "contingent asset" amounting to $518,450 exists in relation to the amount owing on contracts for the sale of merchandise, moneys from which have not been realized and are not realizable at the date of the balance sheet. In the 1966 year the profit and loss account showed as the net trading result a loss of over $257,000. This amount, after immaterial adjustments, was shown in the return as a loss for that year. When a loss brought forward from the 1965 year was added a loss was shown of over $477,000. Subsequently an adjustment, made because of an error which had been discovered, reduced that loss. In the 1967 year the profit and loss account showed only a small loss as the net trading result, and in consequence of an adjustment shown in the return there was a surplus for that year, but the loss brought forward from the previous year was so large that the final figure in the return was a loss, to be carried forward, of about $249,000.

[24]

Those were the only submissions made ultimately in counsel's closing address. But in the course of making them a third basis of assessment was discussed. This was that, as at the time when the sale took place, the consideration for which it was made should be valued and the amount of the valuation brought into the income for that year. Counsel did not contend that this was the appropriate method to be used in this case for computing the taxable income, but I think it is necessary to consider it because I think it is important that I should explain why it is that in my opinion the problem in this case is not to be solved by adopting a method, which at first sight might seem better designed than any other to establish what a seller of goods does really obtain in exchange for them, when he sells them at a price payable by instalments over a period. By evidence called on its behalf, the company sought to make out a case that its rights under the instalment contracts had no value or, at least, that it was not practicable to value them. Mr. Summerville, a manager of a large finance company, was called to say that his company does not buy traders' debts, nor do other finance companies, and that in his opinion it was almost impossible in a business sense to value book debts of this kind. This evidence was used in an endeavour to apply to this case certain authorities which were said to indicate that the method of valuation is proper if it is practicable but, if it is not, then debts should not be brought into account until the time for payment of them arrives: see Absalom v. Talbot [1] and Harrison v. John Cronk & Sons, Ltd. [2] . To those authorities I shall refer again later. But I do not think that the evidence of Mr. Summerville about valuing the debts is of any assistance in the circumstances of this case. If it should be accepted that if the debts were taken into the market for sale then probably no one would buy them, and that it is not possible to estimate in advance what would be the price paid for them if someone did buy them, this does not provide any basis for a conclusion that the debts had no value or had a minimal value to the company. It would be quite wrong in my opinion to conclude that the company engaged on a large scale in the business of selling on instalment contracts and favoured that form of trading, but was really exchanging its goods for something which had practically no value. We are concerned with the trading debts of a business which is not in the course of being wound up but is a going concern. If valuation is to be regarded as relevant to the problem, the valuation must be an estimate of what, at the time to which the valuation refers, the debts are worth to the company. I should think that this would have to be estimated by discounting the total face value of the debts to bring them to a present value and also by taking into account estimates as to the proportion of the debts which would be collected and of the losses which would probably be incurred by reason of default. Obviously it would not be practicable to value the debt created by each individual transaction. The valuing would have to be done according to a formula by which the face value of the debts was discounted to an extent which was calculated to be the proper extent, upon taking into account factors such as those to which I have referred. These factors are, of course, the same as those which it is natural to suppose that a businessman would consider when deciding the amount which in an instalment contract ought to be added as a terms charge component to the sale price of the goods. In this case it was not proved that if you applied such a method of valuation to the gross face value of the debts, the amount by which you would discount them would be the same as the amount of the terms charges, nor was it proved in my opinion that it would not be the same or approximately the same. It was suggested that the manner in which this company conducted its business was such that no assumption could be made that, in fixing the eleven per cent per annum used in computing the terms charges, the company paid any attention at all to what was needed to cover bad debts and collection costs and so on. I did not find this suggestion convincing. But in any event, there really was no proof that the amount of the terms charges was not adequate to cover those contingencies and to leave a reasonable return on the money outstanding on the sales. It is true that Professor Gynther, an expert witness called by the respondent, was disposed in parts of his evidence to suggest that in relation to instalment contracts an amount being a little less than the sale price component in the contracts might sometimes be the amount which in the accounts for the year in which the transactions were made would give a true reflection of the trading for that year. The suggestion was that it was proper to bring into the sales for the year the full amount of the sale price, but that there might be circumstances in which it would be right, also, to make and show in the accounts a provision for bad debts. But as I understood the evidence of this witness, he was not stating an opinion that in this case such a provision was necessary, in order that the true result of the year's trading should be shown, but was saying only that there might be cases in which such a provision ought to be made. But I need not review that part of his evidence in detail because, in the first place, I think that what he said on this point does nothing to qualify the other important evidence which he gave and to which I shall refer again and because, in the second place, counsel for the company has not made any submission that the challenged assessments should be reduced for the reason that what this witness said about bad debts shows that there should have been brought into the income of a particular year not the "sale prices" of the transaction but a slightly reduced figure designed to allow for bad debts. If such a submission had been made, it might have given rise to some problems as to whether effect could be given to it consistently with the provisions of the Act. The debts payable in the future could not be treated directly as bad debts or written off as such. But probably, if it were to be decided that the proper method of arriving at the income was one in which the debts were valued as at the date of the transactions, the provisions of the Act would not preclude the valuer from taking into account, when making his valuation, the risks as to bad debts. In my opinion however that question need not be pursued. It may perhaps be thought that for practical purposes the method adopted by the respondent, by which the trade debts created by the instalment contracts were treated by bringing the "sale price" immediately into account and by dealing separately with the terms charges, does not differ greatly from the result which would be attained by setting out to value, as at the date of the transactions, the rights vested in the company. But whether that be so or not, neither party has contended that it is this latter method which should be used in this case. The respondent's contention that the sale price should be brought to account in the year when the transaction takes place is based on the propositions that this accords with accepted accountancy principles applicable to trading of this kind, that it is necessary in order that a true picture may be obtained of the result of the year's trading and that what the Act requires is that the net gain of the trader in that year should be included in his income for the purposes of taxation. Those propositions are denied by the company. In place of them it puts forward the two contentions to which I have already referred and does not seek to support any third method of dealing with the problem as being a proper one to adopt in this case.

[25]

I must now consider the two contentions upon which the company relies. The first is that nothing can be brought into account before it is paid or payable. Counsel argued that accounting concepts were not relevant. It was said that the Act taxes "income derived" and that concepts and methods which are applicable to the ascertainment of "profits" or "profits and gains" are not appropriate under the Commonwealth Act, as they are under legislation in the United Kingdom. There are important differences between the legislation in force here and that in force in England. But I am of opinion that there is not really a difference between the concept of income and that of profit or of gain which is significant for the purpose of answering the questions raised by these appeals. One important difference which is asserted by the argument to exist is that, whereas in a computation of profits the matching of costs or expenditure against revenue is accepted as essential, there is no need and no legal justification for any such requirement in computing "income" for the purposes of the Act. To my mind it seems clear that the method which the company adopted for arriving at its income produced a result entirely contrary to the true result of the trading of a particular year. Stock went out from the company's ownership and possession and to a large extent nothing appeared in the accounts to replace it. To illustrate this point, an example was used in evidence of a transaction, supposed to occur just before the close of a tax year, in which the total sum offered for goods was supposed to be $240, of which $200 was the "sale price" and $40 the terms charge. It was supposed that the cost of the goods which would be included in the expenditure side of the account was $150 and that no instalment was yet paid or payable at the close of the year. According to the company's method there would be in that year's accounts a loss on the transaction, because goods worth $150 had gone and nothing had come in to match them. If the Act has the effect that for its purposes that is the result of such a transaction that must of course be accepted. But I do not think that it has that effect. Later I shall refer to some judicial statements which, if applied to this case, might indicate that the Act does have that effect, and might suggest that in the example given it could properly be said that no income had been derived during the year in question. But I do not think that I am required by authority to take that view, and I do not think that it should be accepted as applicable in the circumstances of this case. I think that it would perhaps be easier to accept it, if the stock in hand of a trader were to be regarded as a capital asset and if increases and decreases in it were merely additions to or subtractions from the trader's capital and were therefore irrelevant to questions of income and income tax. But this is not so. The difference between the value of trading stock on hand at the beginning and at the end of the year is included in the assessable income or is an allowable deduction as the case may be (s. 28). Mr. Mahoney sought to rely on the provisions of s. 28 in aid of his argument but I think they tell against it. They give to movements of stock a direct effect on the assessable income. This seems to me to weaken the argument that although an outgoing of stock may need to be matched by revenue in order to provide a true account of the profit of the year, it need not be so matched in order to provide a true account of the "income" of the year. At all events I cannot regard the Act as giving "some definite direction" which operates to preclude the use in dealing with these transactions of the method of inquiry which seems in the circumstances of the case to be "calculated to give a substantially correct reflex of the taxpayer's true income". The words just quoted appear in the judgment of Dixon J. in Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (commonly called Carden's Case) [1] .

[26]

That case does not provide for me the answer to the question raised by the present appeals, but for several reasons I think it is important to make some examination of it. In the first place I think it indicates that the differences between the Commonwealth Act and the English income tax law may more often be of importance in deciding questions as to the allowance of deductions (as for example in Federal Commissioner of Taxation v. James Flood Pty. Ltd. [2] ) than in determining the manner in which, or the period at which, items of revenue should be taken into account in computing income (or profits) and in particular in determining the use which may properly be made of the principles and methods recognized and followed in making those computations in business and in commerce. I do not mean that questions as to income or as to profits cannot be affected by special provisions in a particular Act. But generally speaking I am of opinion that Carden's Case [1] and other cases suggest that when a decision is required as to the time at which a transaction is to be brought to account or as to the extent to which accepted business and accountancy methods are relevant, the making of such a decision is not greatly affected by any distinction between the ascertainment of the profit of the year and the ascertainment of the income of the year. The South Australian Act considered in Carden's Case [1] provided that income included "every kind of profit and every kind of gain". In this respect it was closer to English legislation than to the terms of the Commonwealth Act. But most of what Dixon J. said [2] as to the use of commercial and accountancy principles appears to me to be as much applicable to the Commonwealth Act as to the South Australian Act or the English legislation. It is appropriate to add at this point that it was affirmed in the judgment of the Court in Arthur Murray (N.S.W.) Ltd. v. Federal Commissioner of Taxation [1] , that in determining what is income for the purposes of the Commonwealth Act regard may be had to accounting and commercial principles.

[28]

It is recognized in Carden's Case [1] and also in other cases that, although it may be natural to think of income as being confined to something actually received it has nevertheless been accepted that the book debts of a trader may be treated as part of his income. Without setting out the passages, I refer to the dissenting judgment of Latham C.J. [2] and to the judgment of Dixon J. [3] . In the judgments to which I have just referred, statements are made which raise the question whether the established principle that income may include trade debts is limited in its application to trade debts which have already become due. This is a question which has caused me a good deal of difficulty. In Carden's Case [4] , Latham C.J. said that it is well established that book debts of a trader are to be taken into account as income "at least where those book debts fall due during the year in respect of which he is making his return". That statement leaves the question open. But elsewhere his Honour used phrases which suggest that what forms part of the income is limited to debts which in the relevant period have become due (see [5] ). See also the judgment of Dixon J. [6] . But in Carden's Case no question was at issue which required a decision to be made as to the precise application of the rule that a trader's book debts are to be taken into account in computing his income. The question was whether income should be reckoned only by cash receipts or should be reckoned on an earnings basis. In the recent case of Henderson v. Federal Commissioner of Taxation [1] , the question at issue was a similar one, but in the circumstances of that case it was held [2] that, "what such a business earns in a year will represent its income derived in that year for the purposes of the Act". Later it was stated [1] that, "only fees which have matured into recoverable debts should be included as earnings". But the point there being made was that an allowance ought not to be included for "work in progress", where the fees had not yet been earned, because the work which had to be done to entitle the taxpayer to payment had not been completed. At the end of his reasons Barwick C.J. explained the sense in which he had used the word "recoverable".

[35]

In John Emery and Sons v. Commissioners of Inland Revenue [2] a perpetual annuity was received from a purchaser as part of the price of land. This was a marketable security with a well-known market value. It was held that that value had to be added to the receipts credited in the accounts, for the purpose of ascertaining the amount of trading profits. It seems clear that this has no bearing on the present problem. In Harrison v. John Cronk and Sons, Ltd. [1] sales were made of land with houses erected on them. The purchasers borrowed the purchase price from a building society on mortgage. The vendor guaranteed the repayment to the society of part of the advance. All or part of the sum guaranteed was retained by the lender as a deposit, on terms that it would be released to the vendor when an agreed amount had been repaid by the purchaser. It was held that the sums forming the deposits ought not to be treated as receipts of the vendor's trade at the time of the sales. If they could be valued as at that time the value should then be brought into account. If this were not practicable, they should be brought in as and when they were released. I do not think that the case states any principle which governs the present case. I have discussed earlier the question whether the contractual rights of the company should be valued and have given reasons for putting aside in this case that method of dealing with the sales. I do not doubt that in some cases money payable at a future date ought to be left out of account until it is received or perhaps until it falls due. But the question is not whether this should ever be done but whether it should be done in relation to trading debts in the circumstances of the present case. Those observations apply also to the case of Absalom v. Talbot [2] , to which I have already referred. The divergent views there expressed depended in part on provisions in the legislation under review differing from those of the Commonwealth Act. In my opinion the facts of the case were substantially different from those of this case. It is worth noticing that Lord Atkin [1] drew a distinction between sales of goods "on terms of ordinary commercial credit, three or six months or even more" on the one hand and "credits extending over many years" on the other. His Lordship's discussion of the question appears to me to reinforce the view which I think may be derived from the Australian cases, namely, that it is really a question of fact whether the debts created by the instalment contracts in this case, so far as they represent the sale price of the goods, should be brought in as part of the revenue of the year in which the contracts were made or should be dealt with in some other way.

[38]

The view that the method adopted by the company does not give a "substantially correct reflex of the taxpayer's true income" [2] is supported by the evidence of Professor Gynther, which in general I found to be acceptable and very pursuasive. I need not refer to it in great detail. The witness said that the "trading profit" (the difference between the normal sale price and the cost price) should be brought to account at the time of the sale and the terms charges should be brought to account "on some basis, possibly the 78 rule or some other actuarial basis for the life of the debt". He added a qualification that "one would need to make some allowance for the probability of non-payment of the debt". A few comments on that evidence are required to explain how I think it should be understood and what assistance may be derived from it. It was made plain by his evidence as a whole that by his reference to "trading profit" he did not mean to suggest that it was the profit component alone which should be brought to account at the time of the sale. Subject to the qualification he made about an allowance "for the probability of non-payment", he meant that the whole of the normal sale price (including the cost element) should be taken into account at the time of the sale. I have already discussed the qualification relating to doubtful debts. For reasons which I have given, I do not think it affects the question I am now considering. It is to be observed that what the witness said about the treatment of the terms charges on some actuarial basis did not coincide precisely with the respondent's treatment of those charges, which has been described above. This is a point however which is not relevant to the consideration of the company's primary submission. There has not been a separate submission that the assessment should be reconsidered simply because of the manner in which this witness stated his opinion as to the way in which the terms charges should be brought to account. It is not the treatment by the respondent of the terms charges which has been challenged, but the treatment of the sale price.

[40]

An experienced accountant, Mr. Wylie, was called on behalf of the company. He was an independent witness and completely honest, but in so far as his views on matters relevant to the present problem differed from those of Professor Gynther, I found the evidence of the latter to be more persuasive. When an outline of the facts of the company's trading was given to Mr. Wylie, he said that he thought the sales should be brought to account "to the extent that they fall due for payment". This was in view of the total circumstances of the company. He emphasized that his opinion depended on the circumstances and it was evident that what had been put to him concerning the problems of collection weighed heavily with him. He said also that he would not like to try to put a value on the debts. I have already stated my views as to evidence about their value. When questioned about what should be done with regard to the trading stock involved in the instalment sales Mr. Wylie said he would not include this in the balance sheet "as trading stock as such". It would be put, in effect, into a suspense account under some such title as "equity in stock on deferred sales". This means that there would be a balancing item in respect of the equity in stock that had gone out from the store and been delivered to buyers. On cross-examination about a hypothetical sale on twenty-four months' terms for a total of $240 of an article which had cost the company $150, he agreed that a loss of $150 could not properly be shown. He agreed that if the $150 were shown as a loss on 30th June in the year of the sale, then in the company's accounts over the next two years a profit of $240 would be shown and he said he could not agree with that approach. I have considered that evidence and the further explanations given by Mr. Wylie in re-examination as to what he meant by a balancing item in respect of the equity in stock. I am satisfied that in so far as the question before me is to be decided by reference to accepted commercial and accountancy practice, Mr. Wylie's evidence does not support the first submission for the Company and is indeed in conflict with it.

[43]

As I understood the argument, counsel for the company meant by "the cost to the taxpayer" not merely the wholesale price which the company paid for its stock to those from whom it bought it, but the total of all the outgoings, up to the time of the sale by the company of the goods, which were necessary to enable the sale to be made. It was described as "the costs up to the point of sale". But no evidence was directed to showing, even in general terms, how that cost was to be ascertained or to showing whether the books and records had been kept in such a manner that the calculations could now be made which would be necessary, if the argument were accepted. The submissions for the company did not define precisely how effect ought to be given to this alternative basis of computation. Counsel said that if it were accepted in principle, the matter could be remitted to the respondent for further consideration and there might be a subsequent agreement between the parties as to how it ought to be worked out. I do not doubt that in many cases, where the Court is satisfied that a wrong basis of assessment has been used and is satisfied that some other basis is correct in principle, but the evidence does not prove in detail the results to be obtained by the use of that other basis, the Court may deal with the matter by remitting it for further consideration. Nevertheless I think that it is incumbent upon an appellant taxpayer to establish with some degree of particularity what the proposed basis of assessment is and to establish that it is probable that it will be practicable to apply it in the circumstances of the particular case. I am of opinion that there is much force in the submission of counsel for the respondent that the company has not shown that the application of the profits-emerging principle to these transactions is feasible and in the further submission that there would be no point in requiring the respondent to attempt now to apply that principle, as he has not the information to enable this to be done and it is not shown that the information is available. I do not think that an appellant is entitled to succeed if no more is shown than a possibility that if the matter were remitted for calculation of the tax on a suggested basis, that method could be applied and might perhaps be preferable to that which had previously been used. It has to be remembered that the company used and supported a basis of computation quite different from the alternative basis now proposed. So far as appears, it has not brought forward during the lengthy investigations of the matter or at the hearing of the appeals any analysis of these transactions on a profits-emerging basis.

[63]

When there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by a taxpayer, where outstandings on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts represent in substance a reward for professional skill and personal work to which the expenditure on the other side contributes in only a minor or subsidiary degree, the receipts basis forms a fair and appropriate basis for estimating professional income for the purpose of the Taxation Act 1927-1935 S.A., provided there be continuity in the practice of the profession. In so deciding it was recognized that, when what is subject to tax is income not derived from trading, "there must be something "coming in"; that is for income tax purposes receivability without receipt is nothing": see per Dixon J. [2] . His Honour, however, stated very clearly the basis upon which trading concerns are taxed upon earnings rather than receipts. It was said [3] : The basis of a trading account is stock on hand at the beginning and end of the period and sales and purchases. In such an account book debts represent what before sale was trading stock and it is almost inevitable that they should be taken into consideration upon an accrual and not a cash basis. Earlier his Honour had said [4] : The reasons which underlie the practice of estimating for taxation purposes the income from trade or manufacture by means of a commercial profit and loss account consist in the impracticability of computing income in any other way and in the adoption for fiscal purposes of recognized commercial principles. The computation of profits from manufacture and trading has always proceeded upon the principle that the profit may be contained in stock-in-trade and "outstandings". Latham C.J., who dissented, did so for reasons which are of weight here. The Chief Justice said [1] : In the case of traders, where tax is imposed upon the profits of a trade, profits are calculated both in Australia and in England on an earnings basis; that is to say, the trade debts which fall due to the taxpayer during the year are credited and allowance is made for bad debts. Later it was said [2] : In the case of a trader it is well established that he must take into account book debts owed to him as part of his income, at least where those book debts fall due during the year in respect of which he is making his return. And [1] : trade debts which have accrued due in the relevant year but which have not been paid must be included for the purpose of ascertaining whether or not the business has earned a profit for the year, just as stock in trade at the beginning and end of the year must be taken into account for the same purpose. 1. (1938) 63 C.L.R., at p. 109. 2. (1938) 63 C.L.R., at pp. 154 and 155. 3. (1938) 63 C.L.R., at p. 156. 4. (1938) 63 C.L.R., at p. 155. 5. (1938) 63 C.L.R., at p. 123. 6. (1938) 63 C.L.R., at p. 124. 7. (1938) 63 C.L.R., at p. 125.

[73]

The appellant, a trader, sold goods on terms and the consideration for each sale comprised two components, one representing the sale price and one representing an additional consideration for the deferring of payment of the price. The expert evidence, which my brother Walsh accepted, showed that, from an accountancy and commercial point of view, it is unusual to bring into the accounts of a trader making sales on terms only the payments received or receivable in the year in question, and that to do so does not reveal the true position of the trading, whereas the Commissioner's method, of bringing into account, at the time when a contract of sale was made, the whole of the component representing the sale price of the goods, but not the component representing the additional consideration unless received or receivable during the income year, is in conformity with general accounting principles. The appellant contended that the evidence of the experts in accountancy showed a basis for arriving at profits but not a basis for determining the amount of "gross income derived" within s. 25 of the Income Tax Assessment Act 1936, as amended (Cth). However, for the reasons given by my brother Menzies, I agree that for taxation, as well as for business, purposes income of a trading business is derived when it is earned and the receipt of what is earned is not necessary to bring the proceeds of sales into account. When the Act gives no directions on the point, the question when income is earned, and the method of accounting to be adopted for the purpose of ascertaining the income, depend upon business conceptions and the principles and practices of accountancy (see Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (Carden's Case) [1] and Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation [2] ). The method adopted should be that which is "calculated to give a substantially correct reflex of the taxpayer's true income": Carden's Case [1] .

At a glance

Court

Decision date

Before

Source

Judgment (76 paragraphs)

Parties