Case W52

Members:
CJ Bannon QC

Tribunal:
Administrative Appeals Tribunal

Decision date: 16 June 1989.

---

C.J. Bannon Q.C. (Deputy President)

These three matters were heard together, by consent of the parties, and raise the same issue under the Income Tax Assessment Act 1936 (Cth) (``the Act''. In each case, the applicant (``the taxpayer'') had made a loss in earning assessable income. In the first case, the loss was incurred in the year ended 30 June 1983. In the other two cases the loss was incurred in the year ended 30 June 1985. In none of the cases did the taxpayer claim to offset the loss, or a proportion thereof, in the succeeding tax year. Nevertheless, the respondent (``the Commissioner''), allowed in each case that part of the tax loss for the preceding year which was equal in amount to the taxable income of the taxpayer in the succeeding year. In the first taxpayer's case this had the peculiarity that, as she had earned a taxable income which was below the taxable income threshold, the allowance of an unrecouped tax loss was of scant comfort to her. However, the Commissioner perceived it to be his duty to deduct, notionally, an amount of unrecouped

---

ATC 487

tax loss incurred in the preceding year, leaving the taxpayer with a nil taxable income. This, not unnaturally, provoked an objection by the taxpayer, whose income would not have been taxable anyway.

In essence, the question which arises in each of these matters, as propounded by Mr R. Wilson of counsel on behalf of the Commissioner, is whether so much of an unrecouped tax loss incurred in the previous year as is equal to the taxable income of the next following year (whether or not such taxable income is above or below the tax threshold) is required by law to be set off against the taxable income of that year, or whether the taxpayer is permitted by the Act to set off the whole or any part of such unrecouped loss against any one or more of his subsequent years of taxable income, subject only to the limitation, imposed by sec. 80(2) of the Act, that the loss should have been incurred in one of the seven years next preceding the relevant income year.

It is convenient to the understanding of the problem to refer to some of the terms of sec. 80(1) and (2) of the Act as it stood at the end of 1982.

``80(1) For the purposes of this section, a loss shall be deemed to be incurred in any year when the allowable deductions (other than the concessional deductions and the deductions allowable under this section or section 80AAA or 80AA) from the assessable income of that year exceed the sum of that income and the net exempt income of that year, and the amount of the loss shall be deemed to be the amount of such excess.

(2) Subject to sub-section (5), (6) and (7), so much of the losses incurred by a taxpayer in any of the 7 years next preceding the year of income as has not been allowed as a deduction from his income of any of those years shall be allowable as a deduction in accordance with the following provisions:

• (a) where he has not in the year of income derived exempt income, the deduction shall be made from the assessable income;
• (b) where he has in that year derived exempt income, the deduction shall be made successively from the net exempt income and from the assessable income;
• (c) where a deduction is allowable under this section in respect of 2 or more losses, the losses shall be taken into account in the order in which they were incurred.''

Section 80 was amended by Act No. 51 of 1986 to insert subsec. (2B) to (2D) inclusive which are set out hereunder:

``(2B) The losses referred to in sub-section (2) shall not be allowable as a deduction from foreign income of a taxpayer except to the extent provided in an election under sub-section (2C).

(2C) A taxpayer who has derived foreign income in a year of income may elect that the whole or a specified part of the losses referred to in sub-section (2) shall be allowable as a deduction from the taxpayer's foreign income of that year.

(2D) An election referred to in sub-section (2C) -

• (a) shall be exercised by notice in writing to the Commissioner; and
• (b) shall be lodged with the Commissioner on or before the date of lodgment of the return of income of the taxpayer for the year of income to which the election relates or within such further period as the Commissioner allows.''

Mr Wilson's point was that sec. 80(2C) refers to an election, as regards foreign income, whereas sec. 80(2) does not otherwise give the taxpayer an election.

Proceeding further with his argument, Mr Wilson pointed to the provisions of the definitions in sec. 6 of the Act of ``taxable income'' and ``allowable deduction'' as set out hereunder:

```allowable deduction' means a deduction allowable under this Act;.''

---

ATC 488

```taxable income' means -

• (a) in a case to which paragraph (b) does not apply - the amount remaining after deduction from the assessable income all allowable deductions; and
• (b) in a case to which Subdivision B of Division 2A of Part III applies - the amount calculated in accordance with section 50C;.''

He then took me to sec. 161, 162 and 166 of the Act which, based on the 1982 edition, are set out as follows:

``161(1) Every person shall, if required by the Commissioner by notice published in the Gazette, furnish to the Commissioner in the prescribed manner, within the time specified in the notice, or such extended time as the Commissioner may allow, a return signed by him setting forth a full and complete statement of the total income (other than income upon which withholding tax is payable) derived by him during the year of income, and of any deductions claimed by him, and also setting forth such information (if any), being information that it is necessary for the Commissioner to obtain for the purposes of the administration or operation of a State income tax law, as is prescribed:

Provided that the Commissioner may, in the notice, exempt from liability to furnish returns such classes of persons not liable to pay income tax as he thinks fit, and any person so exempted need not furnish a return unless he is required by the Commissioner to do so.

(2) If the taxpayer is absent from Australia, or is unable from physical or mental infirmity to make such return, the return may be signed and delivered by some person duly authorized.

162(1) Every person shall, if required by the Commissioner, whether before or after the expiration of the year of income, furnish to the Commissioner, in the manner and within the time required by him, a return, or a further or fuller return, of the income or any part of the income derived by him in any year, whether on his own behalf or as agent or trustee, and whether a return has or has not previously been furnished by him for the same period.

(2) If no income has been so derived by the person so required to furnish a return, he shall nevertheless furnish a return stating that fact.

...

166 From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon.''

According to Mr Wilson's argument, if the Commissioner knows of an available deduction, such as an unrecouped tax loss, it is his duty pursuant to the definition of ``taxable income'' in sec. 6 and the provisions of sec. 166 of the Act, to make an assessment, deducting the available unrecouped tax loss whether it is claimed as a deduction or not. On the other hand, the taxpayers' representative, Mr C.M. Turner, submitted that it was the taxpayer's choice to claim the unrecouped tax loss against the income of any one or more of the available seven years, as the taxpayer thought fit. Both parties informed me that there was no decision in Australia in point, although reference was made to the case of
Ravenshoe Tin Dredging Limited v. F.C. of T. (1966) 40 A.L.J.R. 76.

As to the argument based upon the interpolation of sec. 80(2C) into sec. 80, I do not consider that the use of the word ``election'' in that subsection necessarily indicates that an election was not available to the taxpayer under sec. 80(2) of the Act. The word may have been used not by way of contrast, but simply in clarification of an existing meaning derived from sec. 80(2). The limited value of subsequent amendments in construing statutes was explained by Lord Reid in
Kirkness v. John Hudson & Co. Ltd. (1955) A.C. 696 at p. 735.

The argument based upon sec. 166 of the Act, coupled with the definition of ``taxable income'' in sec. 6, may create some difficulties if applied to deductions allowable under sec. 51 of the Act. This would appear to require the Commissioner, if he learns from some source other than the taxpayer's return, of losses incurred by the taxpayer in carrying on a business, to allow such deductions even though they are not claimed in the taxpayer's return. It is to be noted that sec. 161 of the Act casts an obligation upon the taxpayer to provide an annual return of the total income derived during the year of income ``and of any deductions or losses, being losses of a capital nature, claimed by him''. In my opinion, the effect of sec. 166 in Pt VI of the Act, relating to returns, is correctly described as imposing on the Commissioner an obligation to allow deductions which have not been claimed in

---

ATC 489

returns of income lodged pursuant to sec. 161 of the Act, if they come to his knowledge.

In
George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 203, the Full Court of the High Court said:

``Clearly enough under sec. 166 the Commissioner can make an assessment which does not adhere to the income returned and yet to do so must involve some want of satisfaction with the return.''

In
Bailey v. F.C. of T. 77 ATC 4096 at p. 4097; (1977) 136 C.L.R. 214 at p. 216, Barwick C.J. said:

``The assessment of income tax is the process of applying the Act to a state of fact. The duty of the Commissioner is to assess the tax upon the material contained in the return or otherwise in the possession of the Commissioner (sec. 166), there being provision in sec. 167 for the Commissioner himself to determine in the given circumstances the assessable income of the taxpayer.''

Those observations were applied by Sheppard J. in
Briggs v. D.F.C. of T. (W.A.) & Ors 87 ATC 4278 at pp. 4288-4289; (1987) 72 A.L.R. 365 at p. 379. At ATC p. 4291; A.L.R. p. 382, Sheppard J. said, having discussed sec. 167:

``In contrast the relevant words of sec. 166 are, `... the Commissioner shall make an assessment of the amount of the taxable income of any taxpayer...' Those words take him directly back to sec. 17 and the relevant definitions in subsec. 6(1).''

In my opinion, sec. 80(2) does not subtend an election by the taxpayer as to the year or years in which to offset previous losses. Rather, it envisages an order of application of losses, the phrase ``in any of the 7 years next preceding the year of income'' being in the nature of a limitation period, but not an invitation to elect.

In the United Kingdom, analogous provisions for dealing with losses were contained in sec. 341 of the Income Tax Act 1952 (U.K.). Subsection (3) of that section provided:

``Any relief under this section shall be given as far as possible from the first subsequent assessment for any year within the said six following years, and so far as it cannot be given, then from the next such assessment.''

The predecessor of the provision was to be found in sec. 33 of the Finance Act 1926 (U.K.) and was referred to in the Court of Session, Scotland (First Division) in
I.R. Commrs v. Scott Adamson (1932) 17 T.C. 679. The provision is also mentioned in
Westward Television Ltd. v. Hart (1969) 1 Ch. 201 at p. 217 by Danckwerts L.J.

It is perhaps unfortunate that sec. 80 of the Act does not contain a clarifying provision similar to sec. 341(3) of the Income Tax Act 1952 (U.K.). Nevertheless, I am of the opinion that the effect of sec. 166, coupled with sec. 80(2), is the same.

Exhibit 1 is an agreed statement of the incidence of recoupment of tax losses under sec. 80(2), in each of the three cases, if the views I have accepted be correct.

Each of the objection decisions under review is affirmed.