Moffatt v Webb
16 CLR 120(Decision by: Griffith C.J.)
Moffatt v Webb
Court:
Judges:
Griffith CJBarton J
Isaacs J
Gavan Duffy J
Subject References:
Taxation and revenue
Income tax
Assessment
Deduction
Outgoings
Whether incurred in production of income as a grazier
Whether Commonwealth land tax deductible
Legislative References: - Income Tax Act 1895 (Vic) No 1374
Hearing date: 28 February 1913; 3 March 1913; 11 March 1913; 12 March 1913; 13 March 1913Judgment date: 13 March 1913
MELBOURNE
Decision by:
Griffith C.J.
This is an appeal from a decision of the Supreme Court of Victoria upon a special case stated under the Income Tax Act , the question raised being whether the appellant is entitled in the assessment of the income of his business of a grazier to deduct the Commonwealth land tax paid by him in respect of the land on which he carries on that business. As I understand the case, it is found as a fact that the appellant used the land-which is large, but not very large for Australia, comprising about 18,000 acres-solely for the purpose of grazing. The question is whether he is entitled to deduct that land tax from his income.
Sec. 9 of the Income Tax Act 1895 provides that
"(1) All losses and outgoings actually incurred in Victoria by any taxpayer in production of income ... shall be deducted from the gross amount of such taxpayer's income."
The second paragraph of that section provides that
"In estimating the balance of the income liable to tax no sum shall be deducted therefrom for"
several matters enumerated, nine altogether, two of which only it is necessary to mention, namely:
"(g) Any disbursements or expenses whatever not being money wholly and exclusively laid out or expended for the purposes of such trade;"
and
"(h) The rent or annual value of any dwelling-house or domestic offices or any part of such dwelling-house or domestic offices except such part thereof as may be used for the purposes of such trade not exceeding such proportion of the said rent or annual value as may be allowed by the Commissioner."
The first point taken for the appellant is that land tax is an outgoing incurred in production of income under the circumstances I have stated. Nothing turns upon the succeeding words of the section, "all taxes payable by him under any Act of the Parliament of Victoria except this Act," because that deduction is not limited to taxes in respect of the land used, but includes any taxes imposed upon the taxpayer under any law of Victoria in respect of any matter whatever.
In considering whether the land tax is an outgoing I am greatly assisted by the decision of the House of Lords in the case of Russell v Town and County Bank [F1] . In that case the deduction claimed was in respect of the annual value of premises occupied by the respondents, and claimed to be occupied solely for the purposes of their business of bankers. The question there arose under 5 & 6 Vict. c. 35, s. 100 and Schedule D. Lord Herschell in his speech said (2):
"The case is a case under Schedule D, and to be dealt with according to the rules provided in relation to that schedule. It is asserted on behalf of the appellant that the rules prohibit all deductions except those which are expressly authorized by the Act, and that this deduction not being a deduction allowed, the respondents are not entitled to insist upon it.
"The duty is to be charged upon `a sum not less than the full amount of the balance of the profits or gains of the trade manufacture, adventure, or concern;' and it appears to me that that language implies that for the purpose of arriving at the balance of profits all that expenditure which is necessary for the purpose of earning the receipts must be deducted, otherwise you do not arrive at the balance of profits, indeed, you do not ascertain, and cannot ascertain, whether there is such a thing as profit or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word `profits' in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name `profits' can properly be applied."
It appears to me that the words of s. 9 (1) which I have read, simply embody that principle in express language. The tax in England is upon the profits or gains. To ascertain the profits you must deduct all expenditure necessary for the purpose of earning the receipts. This is substantially the same thing as deducting the "outgoings incurred in production of income."
In the same case to which I have already referred, Lord Herschell went on to say [F2] :
"My Lords, it is quite true that the section provides that `the duty shall be assessed, charged and paid without other deduction than is hereinafter allowed;' and I will assume, for the purposes of this case, that that does prohibit (although the words certainly appear to be applicable to the duty) the making of any deductions from the balance except those allowed by the subsequent provisions of the Act. It is to be observed that, properly speaking, there is nothing to which those words are applicable. The provisions of the Act do not expressly allow any deductions. What they do is to prohibit certain deductions with certain exceptions, and therefore it may perhaps, in a sense, be said that having prohibited certain deductions with certain exceptions, the excepted things are allowed.
"Now it is not disputed that the annual value of premises exclusively used for business purposes is properly to be deducted in arriving at the balance of profits and gains. I am, of course, speaking, for the moment, of premises which are not used in any way as a place of dwelling, but are exclusively business premises. But there may be a question where the right to make that deduction is to be found. I am myself disposed to think that it is allowed because it is an essential element to be taken into account in ascertaining the amount of the balance of profits. If not it can only be included by a very broad extension of the terms actually used, as being a disbursement or expense which is money wholly and exclusively laid out or expended for the purposes of the trade. It is quite true that, strictly speaking, the annual value where the premises are owned and not rented, is not money laid out or expended for the purposes of the trade, but it is admitted, and must, I think, have been admitted, that in either the one way or the other that deduction is to be made, because inasmuch as it is clear that even in the case of a dwelling-house a part of which is used for purposes wholly unconnected with the trade, the annual value of the portion which is used for the purposes of the trade is to be deducted, it is evident that it can never be contended that in the case of premises used, not for the purpose of a dwelling at all, but exclusively for trade purposes, the annual value is not to be deducted. The annual value is, therefore, to be deducted somehow. It is to be deducted either by taking it as an element before arriving at the balance of profits and gains, or as included in a very broad construction of the provision relating to disbursements and expenses."
No question arises in this case as to deduction for annual value, but I am strongly disposed to think a compulsory payment such as land tax would fall within the words "annual value," if it were not otherwise deductible as an outgoing. No one would dispute that rent would be a deductible outgoing. The deduction of annual value is apparently intended to put the freeholder on the same footing as a lessee.
The argument may be summed up thus: The possession of land is necessarily incident to carrying on the business of a grazier; the payment of land tax is a necessary consequence of the possession of land of taxable value, whether the land is freehold or leasehold; the payment of land tax is therefore a necessary incident of carrying on the business of grazing. The case therefore seems to me to come within the exact words of the first paragraph of s. 9.
It is contended by the respondent that, even if that is so, the payment of land tax is not a payment made wholly and exclusively for the purpose of the trade. It is said: "True, the grazier could not carry on his trade without paying it, but he would have to pay it whether he carried on his trade or not, and therefore it is not an expenditure for the purpose of his trade."
A good deal of light is thrown upon that contention by the case of Smith v Lion Brewery Co Ltd [F3] . In that case the respondents, who were brewers, had acquired certain licensed houses, commonly called "tied houses," by means of which they earned profits which they could not have earned without them, but which did not form part of the trade premises in which the business of brewing was carried on. Certain payments having become due in respect of the ownership of those houses, the question was whether the respondents were entitled to deduct those payments as being wholly and exclusively laid out or expended for the purposes of their trade of brewers. The Court of Appeal, by a majority, had decided that they were so entitled [F4] . On appeal to the House of Lords, the House was equally divided in opinion. Under those circumstances the opinion of the Law Lords who agreed with the decision of the Court of Appeal is to be taken to be the law. But, on reading the speeches of the learned Lords who were of a different opinion, it seems to me that all the House was of one mind as to the principle which governed the case, and which, I think, governs this case also. I will refer to two or three passages from the speeches.
Lord Halsbury quoted the language of the special case which had been stated by the Commissioners of Income Tax as follows [F5] :
" `The Lion Brewery Company are as part of their business and as a necessary incident of the profitable exploitation of such business the owners of' these premises which `have been acquired' by them `in the course of and solely for the purposes of their said business.' "
He thought that that was sufficient to dispose of the matter. After referring to a suggestion which had been made that the deduction claimed was in the nature of a premium of insurance, he said [F6] :
"He must if he carries on that business or that trade pay this tax; it is the act of the legislature which makes him pay it, and it is not a thing that is open to his own will or option.
"Under these circumstances it appears to me that it would land us in a very serious difficulty if in any question like this we were called upon ourselves to do that which is the action of a business man, to find out what exactly he may or may not treat as part of the adventure, part of that which is necessary to be carried on."
Lord Atkinson , who agreed with Lord Halsbury , remarked [F7] :
"Now what is the nature of the levy for compensation" (that is, the deduction which was sought to be made) "under the Licensing Act 1904? First it is a compulsory levy. Though paid in the first instance in full by the publican in possession, it is, in the ultimate result, paid in part by him, and in part by every person having an interest in the premises. No doubt it is paid by those persons interested simply because they have the particular interest, irrespective of who or what they are, or what their position or avocation in life may be; but a portion of the contribution levy is by the legislature imposed and charged upon every interest in the premises, which portion the owner of that interest must pay. And it certainly would appear to me that where a trader deliberately acquires any particular interest in the licensed premises wholly and exclusively for the purpose of using that interest to secure a market for the commodities he manufactures, the money he must expend to satisfy the charge thus imposed is necessarily disbursed wholly and exclusively for the purposes of this his trade."
It was suggested faintly in this case that there may be a difference between a case where land is acquired for the purpose of carrying on the business of grazing, and where land already in possession is applied to that purpose. I mention the point, but I think it is impossible to make any distinction of that sort. Otherwise the principle applicable to the liability to income tax would depend upon the motive which was present in the mind of the taxpayer some years before the tax was assessable. As Lord Shaw said in the Lion Brewery Case [F8] , at p. 168:
"In my opinion, the words `purposes of such trade' do not mean the motives animating the minds of the traders, but do mean the purposes to and for which the money is applied and expended."
The dissenting Lords in that case did not think that there was so close a connection between the business of brewing and the ownership of the houses in respect of which the compensation levy was made, that it could be said that the expenditure was wholly for the purpose of the brewing business. Here no question of nexus arises. The land taxed is the very land on which the business is carried on; and, as I have already pointed out, it is impossible to carry on the business of grazing on that land without paying the tax. It seems to me, therefore, that the tax falls within the words "a payment made wholly and exclusively for the purpose of the trade," as construed in that case.
A third point made for the Commissioner was that land tax is capital expenditure. I confess that I am unable properly to appreciate that argument. The cases relied on in support of it were cases in which money or money's-worth was paid or given as the price of something to be used in order to earn income. It is impossible to say that land tax is paid for the purpose of acquiring anything. It may secure the taxpayer against being disturbed in his possession, but it certainly adds nothing to his capital-some people might think it diminishes it.
For these reasons I come to the conclusion that the deduction ought to be allowed. Beckett J. inclined to that view, although he did not formally dissent from the judgment of the Court. On reading the judgments of the other learned Judges, it seems to me that the matter was not presented to them in the way which leads me to the conclusion I have formed.
I think that the appeal should be allowed.