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ENERGY RESOURCES OF AUSTRALIA LTD v FC of T

Judges:
Lindgren J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2003] FCA 26

Judgment date: 28 January 2003

Lindgren J

Introduction

1. This proceeding is one of four brought by the applicant (``ERA'') against the respondent (``the Commissioner'') by way of appeals under s 14ZZ of the Taxation Administration Act 1953 (Cth) against appealable objection decisions of the Commissioner. The other three proceedings (NG 703 of 1998, N 73 of 1999 and N 639 of 1999) have been settled. The parties have also resolved all issues raised in the present proceeding save one, which I will identify below.

2. ERA's objections which gave rise to the Commissioner's objection decisions, which, in turn, gave rise to the various proceedings related to the assessments of taxable income and tax for the two years of income ended 30 June 1993 and 30 June 1994 (respectively, ``the 1993 year of income'' or ``the 1993 year'', and

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``the 1994 year of income'' or ``the 1994 year'').

3. The parties were in dispute as to the value of trading stock on hand at the beginning and at the end of each of those two years of income. There was no dispute that the value of the trading stock was to be ``its cost price'' as referred to in subs 31(1) of the Income Tax Assessment Act 1936 (Cth) (``the ITAA'' - subs 31(1) is set out below). The parties were in dispute, however, as to what was the amount of that cost price. They subsequently agreed that an ``absorption cost method'' was applicable to give that amount and that that method required that there be taken into account certain items of cost which had in fact been omitted from the amounts on which the assessments were based. Accordingly, the parties agree that application of the absorption cost method would signify an increase in the figures for trading stock on hand at the beginning and at the end of each of the two years mentioned, on which the assessments were based.

4. The Commissioner has found no difficulty in increasing the cost price of the trading stock on hand at the beginning and end of the 1994 year of income or at the end of the 1993 year of income. But increasing it as at the beginning of the 1993 year of income has proved problematic. The difficulty arises from the facts that:

  • • the cost price as at the end of the year ended 30 June 1992 (``the 1992 year of income'' or ``the 1992 year'') remains unchanged; and
  • • s 29 of the ITAA provides, relevantly, that:
    • ``[t]he value of... each article of... trading stock to be taken into account at the beginning of the year of income shall be its value as ascertained under this... Act at the end of the year immediately preceding the year of income.''

The section required that the value of each article of ERA's trading stock at the beginning of the 1993 year be its value as ascertained under the ITAA at the end of the 1992 year. Understandably, ERA is dissatisfied with the Commissioner's assessment of its taxable income for the 1993 year based on an unincreased trading stock figure for the beginning of that year and an increased trading stock figure for the end of that year. The question is whether the ITAA requires this result.

5. The value of trading stock on hand at the end of the 1992 year (and the beginning of the 1993 year) was returned as being $86,994,492, yet it is now agreed that the value produced by a proper application of the absorption cost method is $103,925,157 - an increase of $16,930,665. It is common ground that by reason of effluxion of time, the possibility of the Commissioner's amending the assessment in respect of the 1992 year had ceased to be available: see subss 170(1) and (2) of the ITAA. The Commissioner submits that by reason of this circumstance coupled with the operation of s 29 of the ITAA, the value of trading stock on hand at the end of the 1992 year, unalterably fixed at $86,994,492, is necessarily also the value of trading stock on hand at the beginning of the 1993 year.

Relevant legislation

6. In respect of the 1993 and 1994 years of income, ss 28 and 29, and subs 31(1) of the ITAA provided, relevantly, as follows:

``TRADING STOCK TO BE TAKEN INTO ACCOUNT

28(1) Where a taxpayer carries on any business, the value, ascertained under this subdivision , of all trading stock on hand at the beginning of the year of income, and all trading stock on hand at the end of that year shall be taken into account in ascertaining whether or not the taxpayer has a taxable income.

28(2) Where the value of all trading stock on hand at the end of the year of income exceeds the value of all trading stock on hand at the beginning of that year, the assessable income of the taxpayer shall include the amount of the excess.

28(3) Where the value of all trading stock on hand at the beginning of the year of income exceeds the value of all trading stock on hand at the end of that year, the amount of the excess shall be an allowable deduction.

VALUE AT BEGINNING OF YEAR OF INCOME

29(1) The value of live stock and of each article of other trading stock to be taken into account at the beginning of the year of income shall be its value as ascertained under this or the previous Act at the end

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of the year immediately preceding the year of income.

...

VALUE AT END OF YEAR OF INCOME

31(1) Subject to this section, the value of each article of trading stock (not being live stock) to be taken into account at the end of the year of income shall be, at the option of the taxpayer, its cost price or market selling value or the price at which it can be replaced.''

(my emphasis)

The expression ``this subdivision'' in subs 28(1) is a reference to Subdivision B of Division 2 Pt III of the ITAA. That subdivision comprised ss 28-37, and therefore included, relevantly, ss 28, 29 and 31. The expression ``previous Act'' in s 29 is a reference to the Income Tax Assessment Act 1922 (Cth) (No 37 of 1922) (``the 1922 Act''): see the definition of the expression in subs 6(1) of the ITAA.

7. In summary:

  • (a) Subsection 28(1) required that for the purpose of ascertaining whether ERA had a taxable income, there be taken into account, at the beginning and end of each of the 1992, 1993 and 1994 years of income, the value of ERA's trading stock on hand at each of those times;
  • (b) Pursuant to subss 28(2) and (3):
    • (i) if the value of all trading stock on hand at the end of a year of income exceeded the value of all trading stock on hand at the beginning of that year - the excess was to be included in ERA's assessable income (subs 28(2));
    • (ii) if the value of all trading stock on hand at the end of a year of income was less than the value of all trading stock on hand at the beginning of that year - the shortfall was an allowable deduction (subs 28(3)).
  • (c) Pursuant to subs 31(1), ERA duly elected that each article of its trading stock on hand at the end of the 1992, 1993 and 1994 years of income be the ``cost price'' of that article;
  • (d) Section 29 provided that the value of each article of ERA's trading stock to be taken into account at the beginning of each year of income was to be ``its value as ascertained under this... Act at the end of the year immediately preceding the year of income''.

The facts in more detail

General

8. The parties are not in dispute over the relevant facts.

9. On 12 September 1980 ERA acquired the Ranger uranium mine and other assets.

10. At all relevant times ERA's principal business activity has been the mining of uranium ore, the treatment of the ore into uranium concentrates and the sale of the uranium concentrates to overseas purchasers.

11. In
Philip Morris Ltd v FC of T 79 ATC 4352; (1979) 38 FLR 383, decided on 19 July 1979, Jenkinson J accepted the Commissioner's submission that it was appropriate, in determining the ``cost price'' of trading stock for the purpose of subs 31(1) of the ITAA, to utilize the ``absorption costing method''.

12. In Taxation Ruling IT 2350, issued on 31 July 1986, the Commissioner stated:

``5. As the decision in the Philip Morris case illustrates there are two methods of ascertaining the cost of manufactured trading stock which are recognised for accounting purposes. The first, known as direct costing or variable costing, takes into account the cost of materials and the cost of labour used directly in the manufacturing operations. The second method, known as absorption costing or conventional costing, has regard not only to the costs of materials and direct labour but takes into account also what are known as indirect costs, e.g. factory overheads.

6. It is the official view that the absorption cost method is the correct means of ascertaining the cost of trading stock on hand at the end of a year in a manufacturing business. This view was endorsed in the Philip Morris case.''

13. On 30 October 1989 Australian Accounting Standards AASB 1019, ``Measurement and Presentation of Inventories in the Context of the Historical Cost System'' and AASB 1022, ``Accounting for the Extractive Industries'', were approved by notices published in the Commonwealth Gazette. AASB 1019 and AASB 1022 operated in respect of financial periods ending on or after 31 December 1989. They were amended on 23

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August 1991 by Australian Accounting Standards AASB 1025, ``Application of the Reporting Entity Concept and Other Amendments'', in respect of financial periods ending on or after 30 June 1992.

14. The Accounting Standards mentioned in the preceding paragraph required a relevant reporting entity to arrive at the value of stock on hand by the use of the ``absorption costing method''. The Accounting Standards were enforced by ss 297, 298 and 299 of the Corporations Law. As a relevant reporting entity, ERA presented its financial statements in respect of the 1990 year of income and subsequent years of income in accordance with the Accounting Standards, including the requirement that the value of trading stock on hand be ascertained by the use of the absorption costing method.

15. In each year of income following its acquisition of the mine on 12 September 1980, in both its audited financial statements and its income tax returns, ERA purported to bring to account:

  • • the value of its trading stock on hand at its cost price; and
  • • the value of its trading stock on hand at the beginning of a year of income at the same value as that at the end of the immediately preceding year of income.

16. But there was a difference as between the financial statements and the income tax returns. This concerned the manner in which the amount of the cost price was arrived at. As noted in [14] above, in the financial statements the absorption cost method referred to in [11]-[14] was applied in the 1990 year and subsequent years of income. But in the income tax returns in respect of those years, a ``modified absorption costing'' method, which omitted certain items of cost, was used. Therefore, the amount of the value (cost price according to the modified absorption costing method) shown in those income tax returns was lower than the amount of the value (cost price according to the absorption costing method) shown in the financial statements in respect of the same years.

Income tax returns and assessments - 1992, 1993 and 1994 years of income

17. ERA furnished its income tax return on 15 March 1993 for the 1992 year of income, on 15 March 1994 for the 1993 year of income, and on 15 March 1995 for the 1994 year of income.

18. In connection with each of those income tax returns:

  • • ERA exercised the option given to it by subs 31(1) of the ITAA to bring to account under s 28 of the ITAA the value of its trading stock on hand at the end of the year of income at ``cost price''; and
  • • the figure for ``cost price'' was arrived at by the use of the modified absorption costing method mentioned above.

19. Section 166 of the ITAA required the Commissioner from, inter alia, the returns, to make assessments of the amounts of ERA's taxable income and of the tax payable thereon. But because ERA was a company, and therefore a ``relevant entity'' within the meaning of Division 1B of Part VI of the ITAA (see the definition of ``relevant entity'' in s 221AK of the ITAA), by the operation of s 166A, the Commissioner was taken on the date of the furnishing of each return:

  • • to have made an assessment of ERA's taxable income for year of income to which the return related; and
  • • to have served a notice of deemed assessment on ERA under his hand in the form of the return.

Objections in respect of the 1993 and 1994 years of income

20. ERA lodged notices of objection in respect of the 1993 and 1994 years of income, the effect of which was to contend that certain costs which, because the modified absorption cost method had been used, had not been taken into account as part of the cost price of trading stock, should have been taken into account.

21. By its objection of 18 June 1996 to its assessment for the 1993 year of income, ERA contended that:

  • (a) the value of its trading stock on hand at the beginning of that year should be increased by $47,917,976 from $86,994,492 to $134,912,468 (this amount of $134,912,468 was the amount disclosed in ERA's financial statements for that year, increased by an amount claimed to be foreign shipping and handling costs);
  • (b) the value of ERA's trading stock on hand at the end of that year should be increased by $36,079,516 from $82,049,940 to

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    $118,129,456 (this amount of $118,129,456 was the amount disclosed in ERA's financial statements for that year, increased by an amount claimed to be foreign shipping and handling costs).

22. On the basis contended for by ERA in its objection, the value of trading stock on hand at the beginning of the 1993 year of income exceeded the value of trading stock on hand at the end of that year by $16,783,012, rather than only $4,944,552 as disclosed in the income tax return for that year - a larger allowable deduction under subs 28(3) of the ITAA.

23. By its objection of 18 June 1996 to its assessment for the 1994 year of income, ERA contended that:

  • (a) the value of its trading stock on hand at the beginning of that year should be increased by $36,079,516 from $82,049,940 to $118,129,456 (as noted in [21](b) above, this amount of $118,129,456 was the amount disclosed in ERA's financial statements for that year, increased by an amount claimed to be foreign shipping and handling costs);
  • (b) the value of ERA's trading stock on hand at the end of that year should be increased by $28,941,640 from $86,829,852 to $115,771,492 (this amount of $115,771,492 was the amount disclosed in ERA's financial statements for that year, increased by an amount claimed to be foreign shipping and handling costs).

24. On the basis of the income tax return furnished by ERA, the value of trading stock on hand at the end of the 1994 year of income exceeded the value of trading stock on hand at the beginning of that year by $4,779,912 - an amount of assessable income under subs 28(2) of the ITAA. But on the basis contended for by ERA, the value of trading stock on hand at the beginning of that year exceeded the value of the trading stock on hand at the end of that year by $2,357,964 - an allowable deduction under subs 28(3) of the ITAA.

Adjustment in respect of the 1992 year of income

25. By a letter from its tax agent, KPMG, to the Commissioner, also dated 18 June 1996, ERA raised for consideration by the Commissioner the question of the correct valuation of trading stock in respect of the 1992 year of income so that the Commissioner might, if he considered it appropriate, issue an amended assessment for that year by:

  • (a) increasing the value of trading stock on hand at the beginning of the 1992 year of income by $37,776,246 from $83,317,794 to $121,094,040 (this amount of $121,094,040 was the amount disclosed in ERA's financial statements for that year, increased by an amount claimed to be foreign shipping and handling costs); and
  • (b) increasing the value of trading stock on hand at the end of the 1992 year of income by $47,917,976 from $86,994,492 to $134,912,468 (as noted in [21](a) above, this amount of $134,912,468 was the amount disclosed in ERA's financial statements for that year, increased by an amount claimed to be foreign shipping and handling costs).

26. The time within which the Commissioner could amend the assessment for the 1992 year of income pursuant to s 170(2)(b) of the ITAA had not expired and had some nine months to run when KPMG wrote their letter to the Commissioner. Amendment in accordance with the letter would have meant that, instead of an excess of closing stock over opening stock of only $3,676,698, the amount of that excess would have been $13,818,428 - an increase in assessable income of $10,141,730. But the Commissioner did not amend the assessment for the 1992 year, and after 15 March 1997 it was too late for him to do so.

27. By a letter from its tax agent, KPMG, to the Commissioner dated 20 March 1997, five days after expiry of the four year period within which the Commissioner might have amended the assessment for the 1992 year, ERA ``formally'' withdrew the ``request'' made in its letter to the Commissioner of 18 June 1996, stating that:

``... to the extent the letter of invitation, dated 18 June 1996, constitutes an application for an amended assessment for the year ended 30 June 1992 for the purpose of section 170(6), that application is withdrawn.''

Determination of objections in respect of the 1993 and 1994 years of income

28. By notice dated 8 December 1998 the Commissioner informed ERA that its objection of 18 June 1996 against its assessment for the 1993 year of income had been allowed in part

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by increasing the value of trading stock on hand at the end of that year of income by $10,041,018 from $82,049,940 to $92,090,958. The Commissioner did not, however, increase the value of trading stock on hand at the beginning of that year as sought by ERA. ERA's appeal against the Commissioner's decision to disallow in part its objection in respect of the 1993 year is this present proceeding, N 72 of 1999.

29. By notice dated 8 December 1998 the Commissioner informed ERA that its objection of 18 June 1996 against its assessment for the 1994 year of income had been allowed in part by:

  • (a) increasing the value of trading stock on hand at the beginning of the year of income by $10,041,018 from $82,049,940 to $92,090,958; and
  • (b) increasing the value of trading stock on hand at the end of the year of income by $9,085,818 from $86,829,852 to $95,915,670.

ERA's appeal against the Commissioner's decision to disallow in part its objection in respect of the 1994 year is proceeding N 73 of 1999, which, having now been resolved by agreement, is no longer before me.

Agreement on value and matter remaining in dispute

30. It is now agreed between the parties that the following costs, which were not taken into account by ERA in determining the cost price of its trading stock as at the end of the 1993 and 1994 income years, ought to have been taken into account in accordance with the absorption costing method: 

Costs of Trading Stock
at end of 1993 and 1994 years
                                           30 June 1993    30 June 1994
1.1 Mine accounting, management and EDP      $3,331,288      $2,934,058
1.2 Supply department                         1,474,326       1,289,797
1.3 Human Resources                           2,866,312       2,340,873
1.4 Environmental Monitoring                  1,296,663       1,333,759
1.5 SHARP                                     1,025,590       1,054,807
1.6 Site Services                             2,104,979       1,836,924
2.1 Mine administration                         599,795         488,771
2.2 Environmental Monitoring                    208,379         147,701
                                            -----------     -----------
TOTAL                                       $12,907,332     $11,426,690
                                            ===========     ===========

The orders made by consent in proceeding N 73 of 1999 incorporated those ``uplifts''.

31. However, the parties are in dispute as to whether costs within the same categories, which:

  • (a) were required by subs 31(1) to be taken into account in determining the cost price (that is, in accordance with the absorption costing method) of ERA's trading stock by as at the end of the 1992; but
  • (b) were not in fact so taken into account in ERA's income tax return, or, therefore, in the Commissioner's deemed assessment, in respect of that year;

were required by s 29 of the ITAA, on its proper construction, to be or not to be taken into account in determining the value of ERA's trading stock at the beginning of the 1993 year of income.

32. The amounts of those costs are now agreed as follows (as noted at [5] above, they would increase the trading stock figure as at the beginning of the 1993 year from $86,994,492 to $103,925,157): 

            

Costs of Trading Stock                    1 July 1992
at start of 1993 year                 (variation from
                                        30 June 1992)

1.1 Mine accounting, management and EDP    $4,971,565
1.2 Supply department                       1,784,894
1.3 Human Resources                         4,254,230
1.4 Environmental Monitoring                1,442,036
1.5 SHARP                                     831,159
1.6 Site Services                           2,537,748
2.1 Mine administration                       930,758
2.2 Environmental Monitoring                  178,275
                                          -----------
TOTAL                                     $16,930,665
                                          ===========

33. The issue referred to in [31] above is now the sole issue in dispute in the proceeding. The parties have agreed on appropriate alternative forms of orders to be made, according to my resolution of that issue.

My reasoning on the present appeal

General

34. Was:

  • • the erroneous figure of $86,994,492 in fact returned by ERA, and therefore in fact ``taken into account'' by the deemed assessment, as the value of trading stock on hand at the end of the 1992 year; or
  • • the correct figure of $103,925,157 which, pursuant to the exercise by ERA of the option given to it by subs 31(1) in favour of cost price, should have been returned by ERA and therefore should have been ``taken into account'' by the deemed assessment as the value of that trading stock;

the value of trading stock on hand at the end of the 1992 year ``ascertained under this... Act'' for the purpose of s 29?

35. I will indicate my view as to the proper construction of s 29 before addressing the authorities.

36. The only value which subs 28(1), the opening provision in Subdivision B, required and allowed to be taken into account in ascertaining whether ERA had a taxable income was the value ``ascertained under [Subdivision B] of all trading stock on hand at the beginning of the year of income, and of all trading stock on hand at the end of that year''. Subdivision B headed ``Trading Stock'' comprised ss 28-37 which contained detailed provisions as to how trading stock, or trading stock of particular kinds, was to be ``taken into account'', either generally or in particular circumstances. Those provisions included s 29 and subs 31(1).

37. The word ``under'' appears in subs 28(1) and s 29. It is necessary to have regard to the context in order to identify the meaning of the word intended in a particular case. Dictionaries give the relevant definition as ``in accordance with'' (The New Shorter Oxford English Dictionary (1993), 16b ; The Macquarie Dictionary (1988), 16 ). Meanings recognised as possibilities in the cases include ``in accordance with'' (
Gilbert v Western Australia (1962) 107 CLR 494 at 516), ``pursuant to'' and ``by virtue of'' (
R v Clyne; ex parte Harrap [1941] VLR 200 at 201 per O'Bryan J) and ``by'' (
R v Tkacz (2001) 25 WAR 77 at [23]-[26] per Malcolm CJ). The word ``under'' admits of degrees of precision and exactness on the one hand, and of looseness and inexactness on the other. Since the many provisions of Subdivision B which follow subs 28(1) address the very matter of the manner of ascertainment of value of trading stock, and since s 28 is the general provision requiring the difference between the value of trading stock on hand at the beginning and at the end of a year of income to be taken into account, I think it quite clear that the words ``ascertained under'' in subs 28(1) mean ``ascertained in accordance with''. Accordingly, subs 28(1) required the value, ascertained in accordance with the succeeding provisions of Subdivision B, and not otherwise, of all trading stock on hand at the beginning of the year of income, and all trading stock on hand at the end of that year, to be taken into account in ascertaining whether or not the taxpayer had a taxable income.

38. But this understanding of the meaning of the word ``under'' in subs 28(1) does not resolve the question before me because the succeeding provisions of Subdivision B include s 29 itself as well as subs 31(1).

39. The first of the succeeding provisions of Subdivision B, subss 28(2) and (3), set out earlier, were important provisions of general application. They required an arithmetical exercise of subtraction to be performed. They are silent, however, as to the basis of value required or permitted to be used. (It has been recognised in a different context that at least

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ordinarily, on general principles, the same method of valuing stock would have to be used as at the beginning and at the end of a year of income in order that the true profit or loss for the period may be ascertained:
Bombay Commissioner of Income Tax v Ahmedabad New Cotton Mills Company Ltd (1929) 46 TLR 68.)

40. But the matter of the basis of value is addressed in later provisions in Subdivision B. Sections 29 and 31 deal, respectively, with the value to be determined at the beginning and at the end of a year of income. Whereas s 28 required to be brought to account ``all trading stock on hand'' at the beginning and at the end of the year of income, ss 29 and 31 address individual articles of such trading stock, and accept the possibility of the use of different bases of value as between one article and another.

41. Subsection 31(1) expressly gives the taxpayer an option as between three identified bases of value in respect of an article of trading stock on hand at the end of a year of income. But in the absence of s 29, a different basis of value could be used in respect of the same article at the beginning, only a moment later, of the next year of income. (Section 29 presupposes the existence of the same business from year to year:
Cribb v FC of T (1960) 13 ATD 238; [1963] QdR 541.) Section 29 excludes this possibility by requiring the value of an article at the beginning of the year of income to be ``its value as ascertained under this... Act at the end of the year immediately preceding the year of income''. In this way s 29 ``links'' adjoining years of income and makes the exercise of the option under subs 31(1), in effect, also an exercise of an option in respect of the basis of value to be applied to the same article at the beginning of the immediately following year. At the end of the latter year, the taxpayer will again have the option under subs 31(1) of choosing, for example, whichever basis of value yields the lowest closing stock figure. But, as always, that choice will involve the disadvantage of a low opening figure for the following year. Likewise, the choice of a basis directed to enjoying a high opening figure for a year will involve the disadvantage of a high closing figure for the immediately preceding year.

42. In the ordinary case where the basis of value selected pursuant to the option given by subs 31(1) is duly implemented, s 29 will produce the result that the value of an article at the beginning of a year of income and the end of the immediately preceding year of income will be the same amount of money. But the basis of value selected was not duly implemented in the present case.

43. In my opinion, the word ``under'' in s 29 means ``in accordance with'', as it does in subs 28(1). The opposing submission of the Commissioner requires the words ``its value as ascertained under this or the previous Act'' in s 29 to be read as if they meant something like ``the amount at which it was valued''. But the provisions of the ITAA for the ascertainment of the value of trading stock are found only in Subdivision B, and include, relevantly, subs 31(1). By contrast, the provisions for the making of an assessment of an amount of taxable income and of the tax payable thereon found in Pt IV (ss 161-177) of the ITAA do not contain provisions ``under'' which (whether in the sense of ``in accordance with'' which, or even ``pursuant to'' which) the value of an article of trading stock is ``ascertained'', as s 29 contemplates. The legislature might have repeated in s 29, subs 28(1)'s more specific reference to Subdivision B, but apparently because of the need to refer also to the previous Act, the drafter found it more convenient to use the more general language ``this or the previous Act''.

44. Accordingly, in view of the way in which ERA exercised its option under subs 31(1), the only value which s 28 required and permitted to be taken into account as the value of all of the articles of ERA's trading stock on hand at the end of the 1992 year of income, was their value ascertained as being their cost price, that is, their true cost price, that is, their cost price ascertained by application of the absorption costing method. All of ERA's articles of trading stock on hand at the end of the 1992 year were apparently also on hand at the beginning of the 1993 year. It follows, in view of the way in which ERA exercised its option under subs 31(1), that s 29 required that they also be valued at their true cost price, that is, in accordance with the absorption costing method, at the beginning of the 1993 year.

45. The construction of s 29 urged on behalf of the Commissioner would ``entrench error''. No matter how great the under valuation or over valuation of trading stock on hand at the end of

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the immediately preceding year, the same erroneous amount would be entrenched as the opening value in respect of the year in question, at least once the power to amend the assessment for the immediately preceding year had ceased to be available.

46. The meaning contended for by the Commissioner, described in [43] above, is that expressed in subs 10(2) of the Canadian Income Tax Act RSC 1985 (5th Supp), c 1 (``the Canadian Act''). Subsections 10(1) and (2) of that Act are as follows:

``(1) For the purpose of computing a taxpayer's income for a taxation year from a business that is not an adventure or concern in the nature of trade, property described in an inventory shall be valued at the end of the year at the cost at which the taxpayer acquired the property or its fair market value at the end of the year, whichever is lower, or in a prescribed manner.

...

(2) Notwithstanding subsection 10(1), for the purpose of computing income for a taxation year from a business, the inventory at the commencement of the year shall be valued at the same amount as the amount at which it was valued at the end of the preceding taxation year for the purpose of computing income for that preceding year.''

(my emphasis)

It is interesting that the problem of ``incorrect valuation'' is dealt with expressly in subs 10(3) of the Canadian Act as follows:

``Where the inventory of a business at the commencement of a taxation year has, according to the method adopted by the taxpayer for computing income from the business for that year, not been valued as required by subsection 10(1), the inventory at the commencement of that year shall, if the Minister so directs, be deemed to have been valued as required by that subsection.''

There was no occasion for the ITAA to provide for the possibility of a nonconforming end-of-year value because s 29, by the use of the formula ``its value as ascertained under this or the previous Act'', allows only for a value correctly determined in conformity with the exercise of the option given by subs 31(1).

47. For the reasons given above, I think that the words ``ascertained under this... Act'' in s 29 mean ``ascertained in accordance with the provisions of this Act providing for the ascertainment of value'', and those provisions are found in Subdivision B and include subs 31(1).

The authorities

48. I turn now to refer to the authorities, generally in chronological sequence.

49. ERA relies on
Baillie v FC of T (1927) 40 CLR 156 (``Baillie''). In order to understand this case, it is necessary to appreciate the legislative provisions touching the treatment of livestock with which it was concerned.

50. The Commonwealth Parliament first imposed an income tax by the Income Tax Assessment Act 1915 (Cth) (No 34 of 1915) (``the 1915 Act''). That Act provided in s 14, relevantly, as follows:

``14. The income of any person shall include-

  • (a) profits derived from any trade or business and converted into stock-in-trade or added to the capital of or in any way invested in the trade or business:
    • Provided that for the purpose of computing such profits the value of all live-stock, produce, goods and merchandise (not being plant used in the production of income) not disposed of at the beginning and end of the year in which the income was derived shall be taken into account;...''

The Income Tax Assessment Act 1918 (Cth) (No 18 of 1918) inserted in s 3 of the 1915 Act the following definition:

```Value', in relation to live stock, means the value as prescribed.''

Regulations prescribed that, for the purpose of par (a) of s 14, the value of livestock at the beginning and end of the year was to be calculated on the basis of the cost price of the stock. The ``Report of the Royal Commission on Taxation'' of 1922 recommended that in future, stock-owners be allowed and required to show the value of their livestock on hand at the end of an accounting period at cost or at market value, whichever was the less.

51. The 1922 Act repealed the 1915 Act and subsequent Acts which amended it, and s 16(a) of the new Act dealt with the subject matter which had previously been addressed in s 14(a) of the 1915 Act. There followed a series of amendments of s 16(a) which it would be

ATC 4034

tedious, and is unnecessary for a proper consideration of Baillie, for me to recount. I have read, but derived no assistance from, the parliamentary debates on the Bill for the legislation which introduced into s 16(a) the first proviso, which immediately followed each of pars 16(a)(i) and (ii) (see below), and which was the precursor to s 29 of the ITAA.

52. Incorporating the amendments effected by the Income Tax Assessment Act 1924 (Cth) (No 51 of 1924), which was assented to and commenced to operate on 20 October 1924, s 16(a) provided as follows:

``16. The assessable income of any person shall include-

  • (a) profits derived from any trade or business and converted into stock-in-trade or added to the capital of or in any way invested in the trade or business:
    • Provided that for the purpose of computing such profits the value of all live stock (not being live stock used as beasts of burden or as working beasts), and trading stock (not being live stock), not disposed of at the beginning and end of the period in which the income was derived shall be taken into account...
    • For the purposes of this paragraph `Value' means-
      • (i) in the case of trading stock (not being live stock) - the actual cost price or market selling value of each article of trading stock, or the price at which each article of trading stock can be replaced, at the option of the person in respect of each article:
      • Provided that the value adopted in relation to any article of trading stock as the value of that article as at the end of the period in which the income was derived, shall, for the purposes of the assessment of the person's income derived in the next succeeding period, be deemed to be the value of that article as at the commencement of that next succeeding period ; and
      • (ii) in the case of live stock (not being live stock used as beasts of burden or as working beasts) - the cost price or market selling price at the option of the person which shall be exercised by notice in writing signed by him and delivered by him at the office of the Commissioner on or before the prescribed date. The cost price in relation to natural increase of live stock shall be the value per head of the live stock selected by the person within the limits prescribed and the value so selected shall be used for the purposes of the assessment of the financial year beginning on the first day of July One thousand nine hundred and twenty-three and of all subsequent years;
      • Provided that the value adopted in relation to any live stock, as the value of that live stock, as at the end of the period in which the income was derived, shall, for the purposes of the assessment of the person's income derived in the next succeeding period, be deemed to be the value of that live stock as at the commencement of the next succeeding period :
      • Provided also that any option exercised in pursuance of this sub- paragraph for the purposes of an assessment for the financial year beginning on the first day of July One thousand nine hundred and twenty-four or any subsequent year, shall be irrevocable and shall, if the person, in the notice of his option, so requires, apply to the assessment of his income tax for the financial year beginning on the first day of July One thousand nine hundred and twenty-three and shall apply to the assessment of the person's income derived in the period in respect of which the option is exercised and to assessments in respect of all subsequent periods;''

(my emphasis)

The above was the form of s 16(a) involved in Baillie.

53. In Baillie, the taxpayer derived his income wholly from his proportion of the profits of a pastoral business. In his return of income for the year ending 30 June 1923, livestock on hand were valued at ``average cost price''. In assessing the profits of the business for that year, the Commissioner brought into

ATC 4035

account the value of the livestock at that average cost price as at as at 1 July 1922 and 30 June 1923 in accordance with the return.

54. In the taxpayer's return of income for the year ending 30 June 1924, livestock was again valued at ``average cost price'' as at the beginning and end of the year. But Act No 51 of 1924, assented to on 20 October 1924, introduced the provision for the taxpayer to exercise his option as between cost price and market selling price by notice in writing signed by the taxpayer and delivered at the office of the Commissioner on or before ``the prescribed date'' (see subpar (a)(ii) set out above). The taxpayer delivered to the Commissioner a notice of exercise of option dated 30 January 1925 requiring that as at 1 July 1923 and 30 June 1924 ``value'' for the purposes of s 16(a) should mean ``market selling price''. Thus, if full effect were given to the exercise of the option, there would be a discrepancy between the value as at 30 June 1923 (average cost price) and the value as at 1 July 1923 (market selling price).

55. In assessing the profits of the business, the Commissioner brought into account the livestock as at 1 July 1923 at the closing average cost price which had appeared in the taxpayer's return for the year ending 30 June 1923, and as at 30 June 1924 at their market selling price which had been opted for by the taxpayer. On 4 December 1925 the Commissioner wrote to the taxpayer as follows:

``I desire to advise that the assessment for the year ended June 1924 has been amended by the adoption, as at 30th June 1924, of the market values asserted by you. Stock on hand at 1st July 1923 has been brought to account at the closing average cost values as at 30th June 1923. Section 16(a)(ii)... first proviso, prohibits the Department from adopting the values submitted, as fair market values at 1st July 1923.''

The letter reflects the approach taken by the Commissioner in the present case.

56. In a joint judgment, all members of the Court (Gavan Duffy, Powers, Rich and Starke JJ) stated as follows (at 160-161):

``In our opinion the Commissioner's amended assessment cannot be supported. Section 16(a) enacts that assessable income shall include profits of a specific kind, and provides that for the purpose of computing such profits the value of the live-stock not disposed of at the beginning and end of the period in which the income was derived shall be taken into account. Section 16(a)(ii) defines value as the cost price or market selling price at the option of the taxpayer exercised in the prescribed fashion and contains the following proviso: `Provided that the value adopted in relation to any live- stock, as the value of that live-stock, as at the end of the period in which the income was derived, shall, for the purposes of the assessment of the person's income derived in the succeeding period, be deemed to be the value of that live-stock as at the commencement of the next succeeding period.' In our opinion the expression `value adopted' means value adopted in pursuance of an option exercised under the preceding portion of the sub-section and the proviso does not refer to any value adopted before the exercise of that option. In this case the appellant has chosen `market selling price' as the criterion of `value', and the profits must be ascertained in pursuance of the first proviso to sec. 16(a) by taking into account the market selling price of the live-stock at the beginning and at the end of the period in which the income was derived.''

57. Baillie is not on all fours with the present case. The first proviso to subpar 16(a)(ii) followed immediately the terms of the grant of the option and therefore it may be seen more easily than in the present case that the provision which linked closing and opening values referred to a closing value for the immediately preceding year arrived at in accordance with the exercise of the option. Nonetheless, the Court's reasoning at least suggests that s 29 of the ITAA likewise operates only in respect of a value at the end of the immediately preceding year ascertained in accordance with, relevantly, the exercise of the option given by subs 31(1). Moreover, there is no suggestion in the extraneous materials preceding the enactment of the ITAA that it was intended to change the law in the present respect.

58. The Commissioner relies on
Rowntree v FC of T (1934) 3 ATD 32 (``Rowntree''), a decision of Davidson J in the Supreme Court of New South Wales. The taxpayer carried on business as a storekeeper and a grazier and was the proprietor of a stud farm. He selected ``cost price'' as the basis of the valuation of his

ATC 4036

livestock for the purposes of s 16(a) of the 1922 Act, and for many years, in his returns, followed the method laid down by the Commissioner for arriving at cost price (this was an ``average cost price'' method). Until the year 1929-1930, the Commissioner accepted the returns and made assessments on the basis returned. In that year the taxpayer bought six head of cattle at a high price, but the Commissioner refused to allow the taxpayer to bring them into the calculation of average cost price of livestock on hand at the end of the year. The Commissioner insisted that the animals which were still on hand at the end of the year should be valued separately at their actual price.

59. Davidson J held that the method of valuation adopted in the assessment was correct. His Honour stated (at 35-36):

``It then appears to me that the position must be this, that as the appellant sent in from year to year as the value of his stock a figure which he ascertained, not by taking their true cost price but by some other method of his own, and as the Commissioner had seen fit to accept that price over a number of years, that they had acted as if the agreement made by the election of the taxpayer had been carried into effect. The latter had elected to take as his basis of value the cost price for the beginning and end of the period; he had sent in something which must have represented that it was the cost price, and the Commissioner was pleased to accept it until he arrived at a certain stage when he proposed to bring into force what he considered to be, and what I think to be, a proper method of assessing the values under the terms of the section.

If the argument of the appellant is given effect to it must mean one of two things, either the whole of the previous figures must be opened up or they must be abandoned altogether, and the Commissioner must now make a completely new start and accept the figures which the taxpayer produces as being the proper cost price and value of the stock which he had throughout this period. I do not think that that would be fair in the circumstances, because the parties have been acting on another basis right up to the commencement of this particular period, and I think that when they have done that the taxpayer cannot turn round and say that he wants the whole course altered and some other system adopted which is based on an entirely different footing. So far as values up to that time are concerned, I think he is estopped from taking any other attitude than that of treating the figures which he had sent in from time to time as being the cost price of the various cattle which were being dealt with.''

60. The issue raised in Rowntree was quite different from that before me. The issue was one as to the correct method of arriving at cost price in the circumstances of the particular case. In the present case this is not in issue. Rather, it is common ground that the ascertainment of cost price requires the use of the absorption costing method. The present case would be closer to Rowntree if the Commissioner were contending that the modified absorption costing method which had, for years, been used by ERA in its returns and accepted as appropriate by the Commissioner, correctly gave the ``cost price'' of ERA's trading stock on hand.

61. The Commissioner does not submit that ERA is estopped, by reason of the returns which it furnished in respect of earlier years of income, from requiring that the assessment in respect of the 1993 year be made in accordance with the ITAA. Rowntree did not turn on the construction of s 29. It is not persuasive for present purposes.

62. The ITAA was enacted following ``The Third Report of the Royal Commission on Taxation'' of 1934. That Report recommended certain changes in relation to livestock but said nothing in relation to other trading stock. On his Second Reading Speech on the Bill for the ITAA, Treasurer Casey remarked, in the context of a proposed change to allow a taxpayer to alter, with the Commissioner's consent, an election made as to basis of value of the natural increase of livestock (under the 1922 Act, the election was expressed to be irrevocable - see the second proviso to subpar 16(a)(ii)) set out at [52] earlier):

``But it is obvious that in providing this elasticity, the taxpayer cannot be allowed to change his values at will without some check, as he might do so as an act of mere caprice or for the purpose of reducing his taxable income to the minimum from year to year. With the concession of this elasticity, however, one definite requirement of the bill is that the closing value in the one return must always be the opening value in the

ATC 4037

subsequent return. This is essential to prevent the evasion of taxation.''

(Parl Debs, HR, 5 December 1935, at 2724)

ERA did not ``change [its] values at will'', and far from seeking to revoke its election, insists on having it implemented. The second last sentence in the passage above describes the ordinary case, not one, like the present case, in which effectuation of the taxpayer's election has miscarried.

63. The ITAA introduced as ss 28, 29 and 31 those provisions which were set out as ss 28 and 29 and subs 31(1) at [6] earlier, with the one qualification that the words at the beginning of subs 31(1) ``Subject to this section'' did not then appear in s 31.

64. Two Taxation Board of Review decisions, while not binding on me, happen to accord with my view at to the proper construction of s 29. In Case 10
(1947) 14 CTBR 68, it was the taxpayer who submitted that the Commissioner was required to use as the opening stock figure in any year of income the figure, even if it was erroneous, which he had used as the closing stock figure at the end of the immediately previous year. The members of the Board of Review did not accept the submission. The reference to the Board related to the seven years of income ending 31 August 1938 to 31 August 1944 inclusive, and the issue mentioned arose in relation to the beginning of the 1939 year of income on 1 September 1939 and the end of the 1938 year of income on 31 August 1938.

65. Mr Nimmo, a member of the Board, stated (at 99-100):

``Once the Commissioner had decided to exercise the power of amendment given to him by Section 170(2) and to commence with the 1938 year, it was his duty to ascertain, in accordance with subdivision B of Division 2 of Part III of the Act, the correct value of the stock on hand at the beginning and at the end of that year, and this he did in the manner described above. To accept counsel's argument would be to hold that where the Commissioner is entitled to amend the assessments for more than one year of income, he can only amend for all years or not at all. With this, I cannot agree. It so happens in this case that I have come to the conclusion that the Commissioner has no power to amend the assessment for the 1938 year. Does it follow that because the value of the closing stock for that year cannot be adjusted by the Commissioner, he cannot amend the assessment for the 1939 year because to do it properly he would have to make adjustments to the value of the opening stock which would make it differ from the value of the closing stock figure for the 1938 year? I think not. The Act gives the Commissioner a discretion in the matter of amendments, and, excluding for the purposes of this consideration the question of evasion, he was, in my opinion, entitled to commence with the year 1938 if he thought fit.''

66. Similarly, Mr Cotes, another member of the Board, stated (at 110-111):

``It was argued at the hearing that unless and until the assessment for `the 1937 year' was amended, it was not possible for the Commissioner to substitute an altered stock figure as at the beginning of `the 1938 year' for the purpose of making an amended assessment. In my view, Section 29 presupposes that, in determining the stock value at the beginning of a year for the purpose of making an assessment of the taxable income for that year, the value of stock at the end of the previous year would have been correctly ascertained in accordance with the provisions of Section 31. It is possible, of course, to make varying calculations of the aggregate value of stock on hand at any date, all of which would comply with the requirements of Section 31; and, in my opinion, the true purpose of Section 29 is to ensure that the particular aggregate value of stock at the close of any income year, determined in accord with the provisions of Section 31 , is to be the value of stock adopted at the beginning of the following year. If, therefore, the value of stock at 31st August, 1937, was incorrectly shown in the return for the year ending at that date, and it is possible to determine a substituted value in accordance with the provisions of the Act, that substituted value is the one to be taken to account in ascertaining the amount to be included in or deducted from the assessable income of the year ended 31st August, 1938, irrespective of whether or not the assessment of the previous year is amended. In my opinion, the Commissioner, in determining the assessable income, has just as much power

ATC 4038

to correct a valuation of stock at the beginning of an income year, by adding back a deduction wrongly made by the taxpayer from a value previously ascertained in conformity with Section 31, as he has to correct any other item necessary to be taken into account for the purpose of making an assessment and which has been shown to be incorrect. For purposes of the application of Section 28, the Act only contemplates the correct ascertainment of the excess or otherwise of the stock at the close of the period in comparison with that at the beginning thereof, and the actual quantum of the stock at each date is only material insofar as it enables this difference to be determined.''

(emphasis in original)

67. The Chairman, Mr HH Trebilco, stated (at 80) that he had reached the conclusion that:

``the company, in its various returns, made an option for cost price in terms of Section 31 of the Act and that the adjustments made by the Commissioner were necessary to give proper effect to that option.''

The facts were, relevantly, on all fours with those of the present case. The passages set out above accord with my views.

68. In the other Taxation Board of Review case, Case 12
(1956) 6 CTBR (NS) 72, the three Members constituting the Board took the same approach as in the case last noted. In issue was the year of income 1 July 1952 to 30 June 1953. Mr Cotes stated (at 74):

``Section 29 requires that:

`The value of live stock... to be taken into account at the beginning of the year of income shall be its value as ascertained under this or the previous Act at the end of the year immediately preceding the year of income.'

It becomes necessary, then, to consider whether the value of live stock on hand at 30 June 1952, as taken into account by the Commissioner in assessing the income of the partnership and of the taxpayer for the year ended on that date, was a value as ascertained under this Act - which means, I think, as properly ascertained in accordance with the requirements of the Assessment Act... If that value was properly ascertained, then s 29, which is mandatory in its terms, requires that that same value shall be taken into account at the beginning of the following year of income.''

The learned Member concluded that the value of livestock on hand at the end of the immediately preceding year of income (30 June 1951) had in fact been properly ascertained in accordance with the ITAA's provisions for such ascertainment. He said (at 75):

``Having regard to the view which I take of the effect of s 29, it is not necessary for the Commissioner to amend his assessments of partnership income for all or any of the years prior to that commencing on 1 July 1952, as a preliminary to his readjustment of stock values to a correct basis for purposes of his assessment of partnership income for all or any of the years prior to that commencing on 1 July 1952, as a preliminary to his readjustment of stock values to a correct basis for purposes of his assessment of partnership income for the year ended 30 June 1953.''

69. Mr Webb, a member of the Board, stated (at 78):

``The fact that [the Commissioner] was precluded from issuing amended assessments in some of the relevant years by the operation of s 170 to bring into tax the correct taxable income does not to my mind preclude him from recalculating upon a correct basis the figures of the partnership business over those years in order correctly to calculate the assessable income of the partnership for the year ended 30 June 1953.''

70. The Chairman, Mr WM Owen, agreed with Mr Webb.

71. Again, the passages set out above accord with my views.

72. Unlike the present case and the two Board of Review decisions just noted,
Australasian Jam Co Pty Ltd v FC of T (1953) 10 ATD 217; (1953) 88 CLR 23 did not concern the question of whether the Commissioner could amend an opening stock figure when he was no longer able to amend the closing stock figure for the immediately preceding year. Fullagar J stated (at ATD 218; CLR 26-27):

``It is on s 31 that the present cases primarily turn. The section in terms allows to the taxpayer considerable freedom of choice. He may adopt one method of

ATC 4039

valuation for one part of his stock, and another method for another part. And he is not bound to adhere from year to year to any method of valuation for any part of his stock: he may change the basis as to the whole or any part of his stock from year to year at will. On the other hand, the section is imperative in that it requires him to adopt for each article of his stock one or other of the three prescribed bases of valuation. He is not at liberty to adopt some other basis of his own. And s 29 requires that the value at which his stock is brought into account at the beginning of a year shall be the value at which it was brought into account at the close of the preceding year: in other words, the opening figure of any year must be identical with the closing figure of the preceding year .''

(my emphasis)

The Commissioner relies on the words emphasised. But his Honour was purporting only to state the effect of s 29 in the ordinary case where the taxpayer has selected one of the three permitted bases of value and the basis selected has been properly applied : in such a case the opening figure for one year of income will necessarily be identical to the closing figure for the immediately preceding year. His Honour was not directing his mind to a situation in which there was a difference between an erroneous figure not sanctioned by the ITAA, which had in fact been brought to account as representing the value of the stock on hand at the end of the immediately preceding year, and a correct figure which the ITAA had required be brought to account as representing the value of the stock on hand at that time.

73. The Commissioner relies on
Kirkpatrick v Commissioner of Inland Revenue [1962] NZLR 493 (``Kirkpatrick''). The New Zealand Commissioner of Inland Revenue reopened the assessments of income for a period of ten years back to, and including, the year 1 April 1947 to 31 March 1948. The taxpayer had understated his income by reporting to the Commissioner in his return for each of the years that he had no unsold wool on hand at the end of the year. Following the taxpayer's death in 1959, the Commissioner issued amended assessments for the ten years allowed under the Land and Income Tax Act 1954 (NZ) (``the New Zealand Act''), commencing with the year mentioned. In fact, wool on hand at 31 March 1947 (and 1 April 1947) was worth £1,842. However, the Commissioner contended that he was required to treat the value of wool on hand at that time as nil. It was agreed that at the end of the year (31 March 1948) the wool on hand was worth £ 2,505. Thus, in making his amended assessment for that year, the Commissioner took into account the £2,505 worth of wool on hand at the end of the year but not the £1,842 worth of wool on hand at its beginning (and at the end of the immediately preceding year). As Barrowclough CJ said, it had to be accepted that the taxpayer had been assessed on £1,842 more than he had actually earned in the year from 1 April 1947 to 31 March 1948.

74. Barrowclough CJ decided the case in favour of the Commissioner on two grounds. The first was based on s 26 of the New Zealand Act. Section 26 was, relevantly, as follows:

``Except as aforesaid [i.e. except in proceedings on objection to an assessment under Part III of [the New Zealand Act]] every such assessment and all the particulars thereof shall be conclusively deemed and taken to be correct and the liability of the person so assessed shall be determined accordingly.''

His Honour held, by reference to authority, that he was bound to treat the taxpayer's return, and the fact that it showed no wool as being on hand at 31 March 1947, as a ``particular'' of the assessment.

75. The comparable provision in the ITAA is subs 177(1) which is as follows:

``The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.''

I do not think that the notion of ``the amount and all the particulars of the assessment'' embraces the amount returned by ERA as the closing figure for trading stock for the 1992 year. The ``particulars of the assessment'' in subs 177(1) have been said to be limited to ``the amount of the taxable income and the amount of the tax payable thereon'', and, perhaps,

ATC 4040

particulars of any additional tax imposed by way of penalty for a late or an incorrect return:
DFC of T v Clyne 82 ATC 4070 at 4071; (1982) 60 FLR 45 at 47 per Hunt J (followed by Enderby J in
Commonwealth of Australia v Opiel 86 ATC 5013 and by Hill J in
Webb v DFC of T (No 2) 93 ATC 5123; (1993) 47 FCR 394). It may be suggested that this line of authority is inapplicable because ERA's return was ``deemed to be a notice of the deemed assessment and to be under the hand of the Commissioner'' (s 166A(b) of the ITAA), but I do not think so. The deemed assessment of which the return is deemed to be a notice, is still one of taxable income and tax payable, and it is only those parts of the return which state those amounts to which subs 177(1) applies.

76. The second ground relied on by Barrowclough CJ was the New Zealand counterpart of s 29 of the ITAA. This was subs 98(3) of the New Zealand Act, which was, relevantly, as follows:

``The value of the trading stock of any taxpayer to be taken into account at the beginning of any income year shall be its value as at the end of the last preceding income year.''

The New Zealand provision omitted the crucial words ``as ascertained under this... Act'' which occur in s 29 of the ITAA. For this reason, the New Zealand provision is distinguishable from the Australian one.

77. It was submitted that my decision in
Commercial Union Australia Mortgage Insurance Co Ltd v FC of T 96 ATC 4854; (1996) 69 FCR 331 (``Commercial Union'') was consistent with the first ground relied on by Barrowclough CJ in Kirkpatrick. I do not agree.

78. Commercial Union was concerned with income in the form of premiums received by an insurer in respect of its mortgage insurance business. The premiums were treated as being earned, not in the year of receipt, but progressively over the term of the mortgage, generally by reference to the extent of exposure to risk in the respective years of that term. In the four years of income ended 30 June 1989 to 1992, the taxpayer accounted for the earning of premiums on the basis of a certain estimated exposure to risk, but in early 1993 adopted a new basis founded on a new estimated exposure to risk recommended by a firm of consultants. On the new basis, more of a premium was treated as being earned in years two, three and four and less in year five, of the life of a mortgage than under the existing basis. The taxpayer contended that the new basis was applicable, not only to premiums received in the year ended 30 June 1993, but also to premiums which had been received in earlier years and had not, by 30 June 1992, been treated as having been fully earned. The contention signified that a lesser sum was to be treated as assessable in the year in question (the year ended 30 June 1993) and that a greater sum was to be treated as having been earned, and therefore assessable, in earlier years (even though the additional amount had not in fact been included as assessable income in those earlier years).

79. I rejected the taxpayer's submission, holding that the amount assessed as premium income earned in the earlier years was correct, leaving the full balance to be earned in the year ending 30 June 1993 and subsequent years. I so held on the basis of the scheme of the provisions found in ss 166, 174, 175 and 177 of the ITAA.

80. The particular passages on which the Commissioner relies are the following:

``Notwithstanding CUAMIC's [`CUAMIC' was the acronym I used to refer to the taxpayer-insurer] concession that the whole of an amount of premium received is ultimately to be returned as assessable income and its contention that the only difference between it and the Commissioner is one of timing, the position contended for by it can lead to a different result. It can lead to the escape from assessment of premium income which has been received, a result not intended by the legislation. The scheme of the ITAA is that the whole of a premium received (which, it is common ground, is assessable income) will be brought to tax. The facts of the present case illustrate the possibility that part will not be:...

...

In the present case, however, it is common ground that CUAMIC's premium income earned and therefore derived in the year ended 30 June 1993 can be the lesser amount contended for by CUAMIC only if that earned and therefore derived in earlier years was truly greater than the amount returned and taxed for those years. In order for CUAMIC to succeed, it must be

ATC 4041

accepted that the premium income derived by it in earlier years by reference to incidence of risk in those years was greater than that which was included in its assessed taxable income also by reference to incidence of risk, on which the tax payable by CUAMIC was assessed.

...

In my view, the scheme of the provisions to which I have referred is that in the absence of a proceeding under Part IVC of the TAA on a review or appeal relating to the assessments for earlier years, the amount assessed as premium income earned in those years is correct, leaving the balance to be earned in the year ended 30 June 1993 and future years. An alternative way of expressing this conclusion is to say that the scheme of those provisions is that CUAMIC can succeed only if its present appeal in relation to the year ended 30 June 1993 is associated with a proceeding on a review or appeal which would have the effect of increasing commensurately its assessable income, and therefore its taxable income, in respect of the earlier years.''

(at ATC 4861-4863; FCR 341-342)

81. Commercial Union is distinguishable from the present case. Commercial Union involved the question of whether part of premiums received constituted assessable income according to general concepts, derived by the taxpayer in the year ending 30 June 1993. It was common ground that the whole of the premiums received constituted income according to general concepts and was to be returned as derived progressively on an ``earnings'' or ``accruals'' basis. The issue was one as to apportionment as between years of income. I held that, consistently with the scheme of the ITAA, the apportionment to the earlier years was to be treated as correct. In the present case, however, at issue is a series of specific provisions of the Act for the taking into account of trading stock on hand and with the value of it for that purpose. The ``scheme'' of the provisions to which I referred in Commercial Union is not relevant to the circumstances of the present case, which concern the provisions of Subdivision B dealing expressly with trading stock, and, in particular, that scheme cannot detract from the words ``ascertained under this... Act'' in s 29 on their proper construction.

82. Moreover, the taxpayer's submission in Commercial Union directly impugned the notices of assessment for the earlier years: the submission was necessarily that the taxpayer's taxable income was greater than the amounts assessed according to those notices. In the present case, the taxpayer's submission is that one element in the process of assessment of taxable income for the 1992 year (the value attributed to stock on hand at the end of that year) was erroneously low. Standing alone, that error did not necessarily impugn the correctness of that assessment.

Conclusion

83. For the above reasons, s 29 required that the value of trading stock on hand at the beginning of the 1993 year be the amount which, pursuant to ERA's exercise of its option in favour of ``cost price'' and the use of the absorption costing method, should have been taken into account as the value of the stock on hand at the end of the immediately preceding year, the 1992 year.

THE COURT NOTES THE AGREEMENT OF THE PARTIES THAT:

The following amounts which were not taken into account by the applicant in determining the ``cost price'' of its trading stock on hand at the end of the 30 June 1992 year of income for the purposes of subs 31(1) of the Income Tax Assessment Act 1936 (Cth) ought to have been so taken into account: 

            



1.1 Mine accounting, management and EDP    $4,971,565

1.2 Supply department                       1,784,894

1.3 Human Resources                         4,254,230

1.4 Environmental Monitoring                1,442,036

1.5 SHARP                                     831,159

1.6 Site Services                           2,537,748

2.1 Mine administration                       930,758

2.2 Environmental Monitoring                  178,275

                                          -----------

TOTAL                                     $16,930,665

                                          ===========

The following amounts which were not taken into account by the applicant in determining the ``cost price'' of its trading stock on hand at the end of the 30 June 1993 year of income for the purposes of subs 31(1) of the Income Tax Assessment Act 1936 (Cth) ought to have been so taken into account: 

1.1 Mine accounting, management and EDP    $3,331,288

1.2 Supply department                       1,474,326

1.3 Human Resources                         2,866,312

1.4 Environmental Monitoring                1,296,663

1.5 SHARP                                   1,025,590

1.6 Site Services                           2,104,979

2.1 Mine administration                       599,795

2.2 Environmental Monitoring                  208,379

                                          -----------

TOTAL                                     $12,907,332

                                          ===========

THE COURT ORDERS THAT:

1. The appeal be allowed in part.

2. The respondent's objection decision be set aside, and the matter be remitted to the respondent to issue an amended assessment for the year ended 30 June 1993 on the basis that:

  • (a) the value of trading stock on hand at the beginning of the 30 June 1993 year of income be increased by $16,930,665 from $86,994,492 to $103,925,157.
  • (b) the value of trading stock on hand at the end of the 30 June 1993 year of income be increased by $12,907,332 from $82,049,940 to $94,957,272.
  • (c) the amount of the allowable deduction to the applicant for the 30 June 1993 year of income pursuant to subs 28(3) of the Income Tax Assessment Act 1936 (Cth) is $8,967,885.
  • (d) the respondent amend the assessment of the applicant so that the taxable income of the applicant for the year of income ended 30 June 1993 is reduced by $14,064,353 from the taxable income as stated in the amended assessment dated 24 December 1998 to $32,148,650.

3. The proceedings be stood over to 11 February 2003 for argument on costs unless the parties provide short minutes of consent orders as to costs prior to the hearing.


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