Case W110
Members:GL McDonald DP
Tribunal:
Administrative Appeals Tribunal
G.L. McDonald (Deputy President)
The applicant is a proprietary limited company and is challenging the valuation attributed by the respondent Commissioner to trading stock held by it for the year ending 30 June 1982. The applicant in its tax return for that year valued the stock at $6,500. The respondent subsequently estimated the stock to be valued at $45,956 and issued an amended assessment accordingly. The applicant did not accept the amended figure and appealed to this Tribunal. By the time of the hearing the respondent conceded the value of the trading stock to be $25,000.
Mr A, a director of the applicant company, and the applicant's accountant, gave evidence on behalf of the applicant. A number of documents were accepted into evidence including those filed for the purposes of complying with sec. 37 of the Administrative Appeals Tribunal Act 1975.
The applicant has operated what is described in the income tax return for the year ending 30 June 1982 (ex. 1) the business of ``retail machinery merchant'' since 1965. The applicant purchases all types of machinery and parts - both new and used - which it on sells. Whilst individual items may be purchased, more often than not the applicant will purchase stock as ``job lots'' i.e. an overall price will be paid for a number of items without
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each item being separately catalogued and/or valued.Mr A nominated the following job lot purchases as constituting the basis of his stock (ex. B):
$
1. Sandover McLeans -- Oct.
1974 = 500
2. State Shipping Service --
Nov. 1974 = 12,600
3. John Court (Emeco) -- Oct.
1978 = 1,200
4. A.S.I. Verboon -- Jan. 1977 = 1,250
5. Bell's Auction-Gin Gin
June 1980 = 800
6. Sapphire Plastics -- June 1978 = 1,000
7. Norseman Mining,
Ravensthorpe -- Mar. 82 = 10,000
Removal costs = 8,000
8. Esperance power house --
July 1982 = 10,000
-------
$45,350
The purchase of item 8 falls outside the period under review but for reasons which will become apparent later in the decision it has been included.
After purchase the stock would be removed to the applicant's yard where it would be stored until sold. Many of the items were unusual and would be in demand only to specialised purchasers, e.g. the applicant gave the example of a ship's 12 ton anchor which became urgently required in view of an approaching cyclone.
Items may be sold in the condition in which they came into the applicant's yard or they may be broken down into their component parts and those parts sold separately. An example of the process involved in disassembling a large engine into its component parts is set out in ex. J.
It was Mr A's evidence, which I accept, that goods may remain in the yard for years waiting for a purchaser. When a need for the goods arose then a purchaser would often pay far more for a single item than the applicant paid for the purchase of the entire job lot in which that item was but one of many making up the total job lot purchase. Some items may never sell. The evidence suggested that items rarely, if ever, were purchased with a ready sale or market in mind. The business was very much that of an adventurer based on the notion that if redundant machinery existed then there may well be a demand for it some day, somewhere.
The whole business depends on the applicant through its agents promoting itself as a vendor of specialised and unusual machinery items. Mr A said that the applicant company was well known for the purchase and sale of such items locally, nationally and internationally.
Section 31(1) of the Income Tax Assessment Act 1936 (``the Act'') reads as follows:
``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.''
In the taxation return for the year ended 1982 the following endorsement appears under the heading ``Notes to, and forming part of, the accounts'':
``Stock... has been valued by the Directors at the price that could be obtained by immediate sale of the scrap metal market exwarehouse stock.''
The applicant has thus opted for a ``market selling value'' criterion as the method of valuing the trading stock. The applicant made no request in its return, in terms of sec. 31(3), to have the respondent determine an alternative value as provided for by sec. 31.(2).
The applicant took the price that it could get on the scrap metal market if it was to sell the stock on 30 June 1982 as being the market selling value. The applicant led evidence that the price that can be obtained for the materials' scrap metal varies, e.g. a letter to the applicant from Simsmetal dated 1 December 1983 (ex. C) shows that the price of shearable steel as at 30 June 1982 was $10 to $15 per ton as against at 30 June 1983 $30 to $35 per ton and that oversized cast iron was $30 per ton as at 30 June 1982 as against $15 per ton as at 30 June 1983. In calculating the net value of the material in the applicant's yard as at 30 June 1982 crane and cartage costs also need to be taken into account (ex. D2). Whilst the scrap
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metal value may vary depending on market forces, I accept Mr A's estimation that the net value of the sale of the material as scrap on 30 June 1982 would be $6,500.The applicant queries the market selling value attributed by the respondent to the stock. In the absence of a detailed inventory the respondent attributed a value of $45,956 to that trading stock. The figure nominated by the respondent was said to be based on a calculation of 20% of the purchases for the year ended 30 June 1982 (ex. F). However the respondent admits that the calculated figure is arbitrarily arrived at (ex. E and F) but argues in the absence of an inventory:
``the quantity of stock sighted would lead any reasonable person to the view that the stock valuation was greater than $6,500, regardless of the basis adopted.''
(ex. F)
The ``market selling value'' contemplates the sale of trading stock affected in the ordinary course of business:
Australasian Jam Co. Pty. Ltd. v. F.C. of T. (1953) 88 C.L.R. 23 (``the Australasian Jam case'') per Fullagar J. at pp. 31-32 where his Honour said:
``it is not to be supposed that the expression `market selling value' contemplates a sale on the most disadvantageous terms conceivable. It contemplates, in my opinion, a sale or sales in the ordinary course of the company's business - such sales as are in fact effected. Such expressions in such provisions must be interpreted in a common sense way with due regard to business realities, and it may well be - it is not necessary to decide the point - that, in arriving at market selling value, it is legitimate to make allowance for the fact that normal selling will take place over a period. But the supposition of a forced sale on one particular day seems to me to have no relation to business reality.''
The Commissioner contends that the applicant has valued the entirety of its stock as scrap metal and attributed the value that the stock would secure as scrap metal if sold on 30 June 1982 and that this consequently does not meet the legal requirements set out by Fullagar J. in the Australasian Jam case. The applicant contends that the unusual nature of his business including:
- the type of stock;
- the manner in which the stock is purchased;
- the uncertainty of demand and the consequential time the stock may need to be stored; and
- the fact that some items may be broken up into their component parts and those parts sold separately,
leads to the conclusion that its only real and readily ascertainable marketable value is as if it were all treated as scrap metal.
In the end I am unconvinced that the view taken by the taxpayer is correct. Since the taxpayer is not engaged in the business of selling scrap metal and consequently does not regard the trading stock as having the quality of scrap metal for the purposes of its business, it is difficult to see how the stock can assume that character for taxation purposes.
The question then arises as to what is the sec. 31(1) market selling value of the stock. Again, because of the nature of the applicant's business, particularly having regard to the uncertainty as to whether or not the sale of any particular item will ever be effected, it is, in my view, difficult, if not impossible, to attribute a market selling value to the trading stock other than on an arbitrary basis. To so value it leads, as the Commissioner has found in his attempt to value the stock, to a widely varying and therefore unsatisfactory result.
Mr A told the Tribunal that as the result of the difficulty the applicant was experiencing with respect to the valuation of stock for the purposes of the 1982 tax return, it was decided to hold a liquidation sale which was held on 30 November 1984. That sale also included items purchased post-30 June 1982. For the purposes of the sale a detailed catalogue was prepared and an analysis was carried out by the applicant and/or the applicant's accountant showing the net proceeds of the sale for that part of the trading stock held by the applicant as at 30 June 1982 was $14,662 (ex. H1). Mr A argued that since the price of scrap metal had doubled between June 1982 and November 1984 the scrap value of the items would be $7,331 which is more in accord with the valuation submitted by the applicant than it is with the respondent's estimation.
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However, the items sold in the auction were not sold as scrap metal. There is also no information (except if the goods are treated as scrap) as to what price the same goods would have brought if put to auction in 1982 rather than 1984. That would depend on what purchasers were available at the time the stock was being offered for sale and what consequential demand there was for the stock. In any event such an auction is in the manner of a fire sale and may not reflect the true market selling value of the stock as at the end of the year of income, 30 June 1982.
In the end, having regard to the nature of the applicant's business, I am of the view that it is virtually impossible to determine a market selling value given the way in which that term has been interpreted by the High Court in the Australasian Jam case. That being the case, I am of the view that special circumstances exist whereby the Commissioner should now consider exercising a discretion under the provisions of sec. 31(2) of the Act, which discretion can be exercised ``within such further time as the Commissioner allows'' (sec. 31(3)).
Does sec. 31(2) apply?
For sec. 31(2) to apply sec. 31(3) requires written notice signed by or on behalf of the taxpayer to be lodged with the Commissioner on or by the last day for the furnishing of the income tax return for the year under review. Here no written notice was lodged until the lodgment of the notice of objection dated 13 November 1984 (ex. K) pursuant to sec. 185. That notice sets out the grounds of objection which the applicant relies on comprising, inter alia, the following:
``stock has been valued in accordance with sec. 31(1) or alternatively sec. 31(2), (3) of the Income Tax Assessment Act.''
The way in which the objection is framed suggests the taxpayer has always regarded it as a possibility that sec. 31(2) was open for consideration by the Commissioner. Given the options granted under sec. 31(1) it would seem that the purpose of sec. 31(2) is to give the taxpayer the further option of making application to have stock valued in a different way to those set out in sec. 31(1). Here it is evident that the taxpayer, at least by the time the notice of objection was lodged, felt that it should be open to the Commissioner to exercise his discretion under sec. 31(2).
The only impediment standing in the way of the Commissioner exercising his discretion under sec. 31(2) is the lack of written notice which is required to be lodged by the last day for the filing of the income tax return. The Commissioner has the discretion to allow further time for the lodging of such a notice. This Tribunal standing in the shoes of the Commissioner is vested with his powers to extend time for the purpose of arriving at the assessment of taxable income.
In view of the above finding as to the inappropriateness of adopting market selling value as the criterion for determining the value of the trading stock and having regard to the context of the taxpayer's ground of objection, I am of the view that the time for lodging of such notice should be extended and that the notice of objection should be regarded as an application for the purposes of sec. 31(3) and time for lodging the sec. 31(2) application should be extended to the date that the notice of objection was lodged.
Applying sec. 31(2)
The Commissioner must assess the ``fair and reasonable value'' of the trading stock having regard to the criteria set out in sec. 31(2) which are as follows:
``(a) the quantity of the trading stock on hand at the end of the year of income;
(b) the quantity of the trading stock sold, exchanged or used in manufacture by the taxpayer after the end of the year of income and the prospects of sale, exchange or use in manufacture of further quantities of that trading stock;
(c) the quantity of trading stock of the same kind sold, exchanged or used in manufacture by the taxpayer during the year of income and preceding years of income; and
(d) such other matters as the Commissioner considers relevant.''
There was a considerable quantity of diversified trading stock on hand at the end of the year of income of which no specific item had a ready and regular saleable market as contemplated by the term ``market selling value'' used in sec. 31(1). The applicant told
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the Tribunal that sales to the public of small items contained within the applicant's yard were decreasing (see also ex. A, p. 10 [not reproduced]). The prospect of sale of that trading stock is as determined earlier in this decision. The irregularity of the sale and indeed replacement of the trading stock and the quantities which remain in the applicant's yard from year to year unsold suggest that much of it may have no value other than as scrap metal. Whilst I have rejected the value of the items as scrap metal as being the appropriate market selling value of the stock I accept that, in the absence of any other means of valuation, that its value as scrap is appropriate for the purposes of applying sec. 31(2).The purpose of allowing the taxpayer an option - which may be varied from year to year and even from item to item but which must be applied consistently in any one income tax year - is to let the taxpayer choose the method of valuing each item of trading stock which will best suit his business at the time. At the end of the day the taxable income, or loss, still reflects the profit or loss (i.e. sale price less cost price, or sec. 31(1) carrying value of goods sold and expenses) so that even if an artificial value (as here if one applies scrap metal value) is applied and the items are sold in a subsequent year at a price not reflected in that opening valuation then the taxable income may be higher or lower than if another method of valuation (e.g. replacement value) was to be adopted.
Conclusion
For the reasons expressed above, the ``market selling'' valuation attributed by the Commissioner to the applicant's trading stock for the year ended 30 June 1982 be set aside, and this matter be remitted to the Commissioner with the directions that:
- (1) the time for lodging of an application under the provisions of sec. 31(3) be extended to the date that the applicant filed notice of objection to the Commissioner's assessment, 13 November 1984 (ex. K T6); and
- (2) having regard to the special circumstances in respect of the applicant's trading stock the Commissioner exercise a discretion under the provisions of sec. 31(2) of the Act to value the applicant's stock in the sum of $6,500.
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