Farnsworth v. F.C. of T.

(1949) 78 CLR 504
23 ALJ 308
9 ATD 33

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(Judgment by: Latham CJ)

Farnsworth
v. Federal Commissioner of Taxation

Court:

Judges:
Latham CJRich J
Dixon J
McTiernan J
Webb J

Subject References:
Income Tax (Cth)

Judgment date: 4 August 1949

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Judgment by:
Latham CJ

This is a case stated in an appeal by Delina Wilhelmina Farnsworth under s. 196 of the Income Tax Assessment Act 1936-1943 from a decision of a Board of Review confirming an assessment of the appellant to income tax in respect of the income year ending on 30th June 1943. Mrs. Farnsworth was a member of the Australian Dried Fruits Association and, in accordance with the rules of the association, in 1943 before the month of June delivered fruit to be processed together with other fruit by a packing company and to be sold by one of the selling agents appointed by the association. Before 30th June 1943 she received cash payments for her fruit amounting to 340 pounds. In her income-tax return she claimed allowable deductions amounting to 350 pounds. The packing company informed the commissioner that in respect of Mrs. Farnsworth sales of fruit from 1st July 1942 to 30th June 1943 produced a sum of 340 pounds, and that "the value of fruit unsold at 30th June 1943" was 648 pounds. The commissioner included the sum of 648 pounds in the assessable income of the appellant for the year. (at p509)

The appellant became a fruit-grower in the course of the income year ending on 30th June 1943. She had no fruit on hand for sale on 1st July 1942. The commissioner applied s. 28 of the Act, which is in the following terms: -

" (1940) 63 CLR 108 , at pp 123, 155 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 of 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.

(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.

(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." (at p510)

Section 31 is as follows: -

"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."

The commissioner treated the amount of 648 pounds as representing the "market selling value" of the appellant's fruit on hand on 30th June 1943. (at p510)

It is provided in s. 6 that "'trading stock' includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock." The appellant's fruit was produced for the purpose of sale. The contention of the commissioner, which was upheld by the majority of the Board, was that the appellant had trading stock on hand at the end of the year of income of the value of 648 pounds, that she had no trading stock on hand at the beginning of that year, and that therefore the sum of 648 pounds should be taken into account as part of her assessable income. The majority of the Board based their decision upon the fact that the appellant's fruit was with her consent mixed with fruit belonging to other persons so that it became incapable of identification. The rule of law is as stated in Halsbury's Laws of England, 2nd ed., vol. 1, p. 746 - "Where the chattels of two persons are intermixed by consent or agreement so that the several portions can be no longer distinguished, the proprietors have an interest in common in proportion to their respective shares." It was held that the several growers, including Mrs. Farnsworth, who sent their fruit to the packing company for processing and subsequent sale became co-owners of the mass of fruit. The majority of the Board held that they did not sell the fruit to the packing company and that the fruit which was unsold was trading stock on hand on 30th June 1943. It was therefore decided that the commissioner had rightly included the sum of 648 pounds in the assessable income of the taxpayer as representing the value of that fruit. (at p510)

The Chairman of the Board dissented. He pointed out that the fruit was sold gradually during the year up to December 1943 and that it was impossible to say whether or not any or any particular quantity of the appellant's fruit had been sold or had not been sold by 30th June 1943. He was therefore of opinion that as none of the appellant's fruit could be shown to be in her hands (or even to be in the hands of the packing company or the selling agent on the date mentioned) it could not be said that the appellant was the owner of any part of the unsold fruit. He held, therefore, that the sum of 648 pounds had no relation to and did not represent the value of any fruit of the appellant shown to be on hand on that date. He was inclined to the opinion that the property in the fruit passed to the packing company upon delivery. Thus he was of opinion that s. 28 did not apply, and that therefore the assessable income of the appellant was truly stated at 340 pounds, which was the sum actually received in the income year. (at p511)

The Australian Dried Fruits Association consists of fruit-growers who have joined the association and have therefore become bound by the rules of the association. The rules provide for the appointment of packing houses (including the Irymple Packing Co. Ltd.) and of selling agents (including the Co-operative Dried Fruits Sales Pty. Ltd.). The packing houses are bound not to purchase fruit from growers without the permission of a board constituted under the rules. No such permission was shown to have been given in the present case, and it is therefore difficult to hold that the packing house bought the fruit and became the owner of it as a purchaser. The growers agree that they will sell their dried fruits through one or more of the selling agents appointed under the rules. The rules provide that the control of fruit until it reaches retailers shall be held by growers. They also provide that progress payments are to be made from time to time, that differential payments according to grade shall be made not later than 30th June each year, and that final account sales shall be rendered to growers showing the grower's share of the pool proceeds. The total price to be paid to each grower is determined by a rule which is in the following terms: -

"The pool proceeds shall be loaded by the variations fixed by the Board of Management, and the net result, after loading, divided by the total tonnage which will give the price for the basic grade, to which shall be added or subtracted the variation fixed and the price for each grade or sub-grade thus be ascertained." (at p511)

The terms upon which the plaintiff delivered her fruit to the Irymple Packing Co. were stated in a delivery docket which showed the number of sweat boxes, fruit received, the type and grade of each kind of fruit, and the net weight. The delivery docket contained the following memorandum: -

"For packing and re-classification (if necessary) under Commonwealth and State Government Regulations and for sale subject to all A.D.F.A. terms and conditions in conjunction with the fruit of Sarnia Packing Pty. Ltd., Media Irrigation Pty. Ltd., Loxton, South Aust., J. Thwaites, Nyah, and J. and K. McAlphine Pty. Ltd., Nyah. Under no circumstances is the grower entitled to withdraw such fruit from A.D.F.A. control. The Company is hereby instructed as Agent for the grower to insure the above fruit against loss by fire, and to debit cost to the relative pool account." (at p512)

The fruit processed by the Irymple Packing Co. in 1943 was sold by Co-operative Dried Fruits Sales Pty. Ltd. as agent for the growers. Until sold it was owned by those who had contributed fruit to the pool and it should be held, I think, that it was owned by them in proportion to the quantities respectively supplied. The growers did not, in my opinion, lose their property in the fruit because it was mixed together and disposed of in instalments. Where goods of different owners are mixed and later sold by instalments on behalf of all of them, an unsold balance is owned by the original owners in the proportion in which they contributed to the mass, whether or not any of their goods are identifiable in the unsold balance. In the present case the agents for sale are bound by the terms of their contract with the growers to distribute the proceeds of sale in accordance with the quality as well as the quantity of fruit contributed. The contractual arrangement evidenced by the delivery docket prevents any grower from withdrawing his contribution to the pool, but in my opinion it does not prevent him from continuing to be a co-owner of the unsold fruit. (at p512)

If it were known how much of the contributed fruit was unsold at the end of a year, and if it could be shown that a particular quantity of that fruit was contributed by a particular grower, it could perhaps be argued that the grower had that quantity of fruit on hand at the end of the year for the purposes of s. 28. But there is no evidence in the present case even of the total amount of fruit on hand at the end of the relevant income year and no evidence showing that any of the appellant's fruit was then unsold. Therefore the assessment cannot be supported on the basis that the appellant had 648 pounds worth of fruit on hand on 30th June 1943. (at p512)

But the majority of the Board held that the amount of 648 pounds was an estimate of the market-selling value of the fruit of the appellant as at 30th June 1943 because the packing company, with the authority of the appellant, so informed the commissioner. On this point I agree with the opinion of the Chairman of the Board. The amount of 648 pounds was not an estimate of the value of any fruit owned by the taxpayer which was then on hand. It was an estimate of what she would probably receive after 30th June 1943 so as to pay her on a pooling basis the total amount which she would be entitled to receive for all her fruit from the total proceeds of all pooled fruit. The amount of 648 pounds was an estimate of probable future income. (at p512)

Each grower had on 30th June 1943 a right to receive further progress payments and a final payment, but that right was not stock in trade. It was not something produced for the purpose of being sold. Nor was the separate interest of each grower in the mass of pooled fruit something produced for the purpose of being sold. These separate interests did not become the subject of sale. Such interests are not "articles" within s. 31. What was sold by the Co-operative Dried Fruits Sales Pty. Ltd. was the fruit - the owners of the fruit all having authorized the sale. (at p513)

The commissioner, relying upon the decision of this Court in Perpetual Executors Trustees Association of Australia Ltd. v. The Commission of Taxation (1948) 77 CLR 1 , submitted further alternative contentions. In the first place, it was argued that the taxpayer is a trader, and therefore must necessarily be taxed on an earnings basis, and not on receipts, and that upon any view the amount of 648 pounds had been earned by the taxpayer and should be treated as income apart altogether from the provisions of s. 28. Reference was made to the case of The Commissioner of Taxes (S.A.) v. The Executor Trustee and Agency Co. of S.A. Ltd. (1940) 63 CLR 108 where Dixon J. (1940) 63 CLR, at p 155 quoted with approval the following statement: -

"'There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains.' (Houldsworth Shaw and Baker in Law of Income Tax, p.111)."

In the report of the same case I said (p. 123): -

"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."

These statements refer to debts owed to a taxpayer continuously carrying on a trading business which upon any system of accounting would be regarded as book debts. The amount of such debts would naturally be taken into account in determining his profits or gains for the year to which the accounts related. But the amount of 648 pounds in the present case was not a debt owed by any person to the taxpayer. It represented only an estimate of what the taxpayer would probably be paid if the mass of fruit were all sold and paid for. Accordingly, in my opinion, this amount should not be included as if it were a debt owed to the taxpayer. (at p.513)

Finally, it was argued for the commissioner that s. 36 of the Income Tax Assessment Act 1936-1943 should be applied to this case. Section 36 provides for the case of the disposal of "the assets of a business." It provides that: -

"(1) Subject to this section, where the whole or any part of the assets of a business carried on by a taxpayer is disposed of by sale or otherwise howsoever, whether for the purpose of putting an end to the business or any part thereof or not, and the assets disposed of include any property being trading stock, standing or growing crops or crop-stools, or trees which have been planted and tended for the purpose of sale the value of that property shall be included in his assessable income, and any person acquiring that property shall be deemed to have purchased it at the amount of that value." (at p514)

It is contended that the taxpayer's fruit was an asset of her business and that she disposed of it. It consisted of trading stock and therefore (it is said) the value of the fruit should be included in the assessable income, the value being fixed under s. 36 (3) at market value on the day of disposal or, if in the opinion of the commissioner there is insufficient evidence of the market value of that day, at the value which in his opinion is fair and reasonable. The commissioner should then (it is argued) be regarded as having determined that the fair and reasonable value of assets which she disposed of and for which she had not been paid was 648 pounds. Section 36 relates to the disposal of the assets of a business, including, inter alia, trading stock. The terms of the section show that it was intended to be applied to a case where there was a disposal of the assets of a business as such whether in whole or in part, and whether or not the assets were disposed of because the seller was going out of business or because the business was sold to another person. The section is intended to deal with a walk-in walk-out sale, with a clearing sale, and with a transaction which represents, not an ordinary sale of goods in the course of carrying on a business, but a disposal of the assets of the business so that the business is no longer being carried on by the person who has disposed of it. What the fruit-growers did in delivering their fruit to the packing house cannot fairly be described as a disposal of the assets of their respective businesses. Accordingly, in my opinion, s. 36 has no application to this case. (at p514)

The questions asked in the case stated are as follow: -

"(a)

Whether the share or interest of the Appellant as at the Thirtieth June 1943 in the dried fruits so delivered by the Appellant and other growers to the Irymple Packing Pty. Ltd. as aforesaid was trading stock on hand at the end of that year within the meaning of Section 28 of the Income Tax Assessment Act 1936-43?

(b)

Whether the sum of Six hundred and forty-eight pounds was the value ascertained under Subdivision B of Division 2 of the said Act of trading stock on hand at the end of the year of income?

(c)

Whether the said sum of 648 pounds, or any other and what sum should have been included as part of the assessable income of the taxpayer for the said year." (at p515)

The questions should all be answered "No." (at p515)