WOOLCOMBERS (WA) PTY LTD v FC of T
Judges:Sheppard J
von Doussa J
O'Loughlin J
Court:
Full Federal Court
Sheppard, von Doussa and O'Loughlin JJ
By letter dated 6 May 1994, the respondent, the Commissioner of Taxation (``the Commissioner''), disallowed an objection that the appellant, Woolcombers (WA) Pty Ltd (``the taxpayer''), had lodged against a notice of amended assessment of income tax. In the court below the taxpayer applied to have that decision set aside. Its application having been
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dismissed, it now appeals against the order of dismissal.The taxpayer's original notice of assessment with respect to the 1986 year of income was dated 19 February 1987. The amended notice of assessment, the genesis of these proceedings, was issued over six years later on 15 October 1993. As it was agreed that the taxpayer had made full and true disclosure, the issue between the parties was whether the Commissioner was entitled, because of the provisions of subs 80G(15) of the Income Tax Assessment Act 1936 (Cth) (``the Act''), to amend the assessment at a time after the expiration of three years from the date upon which the income tax payable under the original assessment became due and payable (that being the period referred to in subs 170(3) of the Act).
Although the appeal deals primarily with the affairs of the taxpayer for the year ended 30 June 1986, it will be necessary to commence with an examination of the year of income that ended 30 June 1985 as that was the year in which an associated company of the taxpayer, G H Michell and Sons (Aust) Pty Limited (``GHMA'') incurred substantial losses.
In issuing the amended assessment, the Commissioner had disallowed as a deduction a loss that had allegedly been transferred by GHMA to the taxpayer in purported compliance with the provisions of s 80G of the Act. This provision permitted the transfer of losses from one company to another within a ``company group''. For the purposes of s 80G, a company was to be ``taken to be a group company in relation to another company in relation to a year of income'' in certain defined circumstances for example, if each company was a subsidiary of the same company (par 80G(1)(b)). For the purpose of these proceedings it was accepted that both GHMA and the taxpayer were subsidiaries of G H Michell & Sons Pty Limited and, thus, each was a ``group company'' in relation to the other for the purposes of s 80G of the Act. In respect of the 1986 year of income, GHMA was ``the loss company'' and the taxpayer was ``the income company''.
The terms of subs 80G(6), as in force for the 1986 year of income, were as follows:-
``80G(6) Subject to this section, where-
- (a) a resident company (in this section referred to as the `loss company') is deemed to have incurred a loss for the purposes of section 80 in the year of income that commenced on 1 July 1984 or in a subsequent year of income (in this section referred to as the `loss year');
- (b) a resident company (in this section referred to as the `income company') has, or would but for the operation of this section have, a taxable income in the year of income that commenced on 1 July 1984 or in a subsequent year of income (in this section referred to as the `income year');
- (c) the loss company and the income company give to the Commissioner, on or before the date of lodgment of the return of income of the income company for the income year or within such further time as the Commissioner allows, a notice in writing signed by the public officer of each of those companies stating-
- (i) that the right to an allowable deduction under sub-section 80(2), 80AAA(7) or 80AA(4), as the case requires, in respect of so much of the whole or a specified part of the loss as has not been allowed as a deduction should be transferred to the income company in the income year; and
- (ii) the year of income in which the loss was incurred by the loss company;
- (d) in a case where the loss year is the same year of income as the income year-
- (i) the loss company is a group company in relation to the income company in relation to the loss year; and
- (ii) if the loss company had incurred the loss in the year of income immediately preceding the loss year and had derived sufficient assessable income (including film income) in the loss year, the loss or that part of the loss, as the case may be, would, but for this section, be allowable as a deduction from the assessable income of the loss company in the loss year (ignoring any exempt income derived by the loss company in the loss year or in that preceding year); and
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- (e) in a case where the income year is a year of income subsequent to the loss year-
- (i) the loss company is a group company in relation to the income company in relation to the loss year and the income year and in relation to any year of income commencing after the end of the loss year and ending before the commencement of the income year; and
- (ii) if the loss company had derived sufficient assessable income (including film income) in the income year, the loss or that part of the loss, as the case may be, would, but for this section, be allowable as a deduction from the assessable income of the loss company in the income year (ignoring any exempt income derived by the loss company in the income year),
the amount of the loss or of that part of the loss, as the case may be, shall, for the purposes of the application of the provisions of this Act other than this section in relation to the income company in relation to the income year, be deemed to be a loss incurred by the income company for the purposes of section 80, 80AAA or 80AA, as the case requires, in-
- (f) a case to which paragraph (d) applies - the year of income immediately preceding the loss year; or
- (g) a case to which paragraph (e) applies - the loss year.''
It is of value to mention a few of the more important features of this subsection which applied, for the first time, to the 1985 year of income. A loss in that year, or in a subsequent year of income, could be transferred within the group, from the company that had suffered the loss to another company that had, or but for the transfer would have had, a taxable income. The loss year of the transferring company could be, but did not have to be, the same as the income year of the transferee company. In this appeal, as GHMA's loss year was the 1985 year and the taxpayer's income year was the 1986 year, pars (e) and (g) of subs 80G(6) applied to the taxation affairs of GHMA and the taxpayer. They had the effect of providing that the transferred loss was deemed to be a loss incurred by the income company (ie the taxpayer) for the purposes of s 80 in the loss year. The amount of the transferred loss could be a part of the available loss and there was nothing in the legislation that prevented a loss company from transferring parts of its losses to two or more companies within the group.
Before proceeding to consider the facts of this case, it is necessary to make reference to certain of the provisions of s 80 of the Act. Section 80 was and remains the provision that sets out circumstances whereby a taxpayer can claim a deduction for past years' losses. So far as this appeal is concerned, the relevant subsections are (1) and (2). They provide as follows:-
``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.
80(1A) ...
80(2) Subject to subsections (2B), (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 deductions 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.''
It is now appropriate to turn to the facts of this case. The following summary has been extracted from the judgment of the learned trial Judge.
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The income tax return for the loss company, GHMA, for the year of income ended 30 June 1985 (``the 1985 year'') showed a tax loss of $3,303,856. In arriving at that loss, an amount of $24,876 had been claimed as a deduction; the significance of this sum will become apparent shortly. Notices were given to the Commissioner pursuant to par 80G(6)(c) of the Act stating that the right to allowable deductions under subs 80(2) in respect of various amounts totalling $228,358 should be transferred to various companies within the group. The available tax losses of the loss company were therefore reduced by $228,358 from $3,303,856 to $3,075,498. Those transfers have not been attacked and, save for the figure of $24,876, and the consequences flowing from its subsequent disallowance, this information may be treated as introductory detail.
In the 1986 year of income the loss company had a taxable income of $2,284,020. Having regard to the language of subs 80(1) however, no loss was ``deemed to be incurred''in that year because deductions that were allowable under s 80 were not to be taken into account in determining whether a loss was deemed to have been incurred. However, the carried forward loss of $3,075,498 still remained available as a deduction for the loss company and, to the extent to which the loss was not wholly utilised by the loss company, for transfer to associated companies within the group. In arriving at its taxable income of $2,284,020 for the 1986 year, the loss company had claimed a deduction of $559,000. The significance of this claim will also shortly become apparent.
Notices were given to the Commissioner pursuant to par 80G(6)(c) in respect of the 1986 year by the loss company on the one hand and by five other companies within the group (one of whom was the taxpayer) on the other hand. The total of the transferred losses was said to be $821,000 and the specific amount allegedly transferred from the loss company to the taxpayer was $250,000. A summary of the position at that stage was as follows:-
Losses of loss company, GHMA, for the
1985 year $3,303,856
Less:
par 80G(6)(c) transfers in respect of the
1985 year $ 228,358
----------
Balance of losses at commencement
of the 1986 year $3,075,498
Deduct:
taxable income of loss company for
the 1986 year $2,284,020
----------
Losses available for transfer to group
companies $ 791,478
Less:
par 80G(6)(c) transfers in respect of the
1986 year $ 821,000
Amount by which transferred tax losses
exceeded losses purportedly available for
transfer ($ 29,522)
==========
Despite the error by the loss company that was caused by it transferring amounts that totalled in excess of its available tax losses, an assessment of income tax issued to the taxpayer on 19 February 1987 on the basis that a deduction of $250,000 was available to it by virtue of the transfer provisions in s 80G of the Act.
Meanwhile, a dispute had arisen between the loss company, GHMA, and the Commissioner with respect to aspects of its income tax returns over a period of several years. This dispute was ultimately settled in February 1988 upon terms that included the disallowance, as deductions, of the aforementioned sums of $24,876 and $559,000 (a total of $583,876). This had the effect of reducing the amount of the loss company's tax losses that would have been available for transfer from $791,478 by a further $583,876 to $207,602. In other words, the purported transfers of rights to allowable deductions now exceeded the actual available tax losses of the loss company by $613,398 calculated as follows:-
previous excess $ 29,522
Add:
(i) Disallowance of 1985 deduction $ 24,786
(ii) Disallowance of 1986 deduction $559,000 $583,876
-------- --------
$613,398
========
The effect of the terms of the settlement between the loss company and the Commissioner meant that the taxpayer had claimed, and had been allowed, a deduction of
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$250,000 to which it would not otherwise have been entitled. These were the circumstances that led to the Commissioner issuing to the taxpayer, on 15 October 1993, a notice of amended assessment for the 1986 year of income disallowing the transferred loss of $250,000 as a deduction. At the same time the Commissioner also issued an amended assessment to F W Hughes Pty Ltd, another company in the group, disallowing it a deduction of $363,398 (that being the balance of the excess of $613,398). The amount of $363,398 was a portion of the amount of the loss that had been transferred to it by the loss company in respect of the 1986 year of income. The parties have informed the court that the Commissioner's disallowance of that deduction awaits the outcome of this appeal.The power of the Commissioner to amend an assessment of income tax was then, and is now, set out in s 170 of the Act. For the purpose of considering the issues that have arisen in this appeal, it will be sufficient to reproduce subs (1), (2) and (3) of s 170 and to compare them with the contents of subs 80G(15).
``170(1) The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment.
170(2) Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may-
- (a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and
- (b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment,
amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct the assessment.
170(3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made after the expiration of 3 years from the date upon which the tax became due and payable under that assessment.''
In this case, as has already been stated, it is agreed that the taxpayer made full and true disclosure of all material facts necessary for its assessment for income tax for the 1986 year of income. Subsection 170(2) therefore had no application and, prima facie, subs 170(3) operated to restrict the Commissioner to the period of three years that is referred to in that subsection.
However, subs 80G(15) provided that in certain circumstances s 170 would not prevent the amendment of an assessment. It stated:-
``80G(15) Where:
- (a) the right to an allowable deduction in respect of a loss or a part of a loss incurred by the loss company is transferred to the income company pursuant to subsection (6); and
- (b) that loss or a part of that loss was not deemed to have been incurred by the loss company,
nothing in section 170 prevents the amendment of an assessment of the income of the income company to disallow the whole or a part of the deduction referred to in paragraph (a).''
There are two conditions that must be satisfied before the Commissioner can invoke the provisions of subs 80G(15). As to the first, being that found in par (a), the learned trial Judge found, and we respectfully agree, that par (a) is to be interpreted as referring to a ``purported right'' to an allowable deduction that has been ``purportedly transferred''. There has not been any contest about that issue. It may be accepted that the notices that were given to the Commissioner pursuant to par 80G(6)(c) in respect of the 1986 year included a notice that claimed to transfer to the taxpayer the right to an allowable deduction in the sum of $250,000. The first of the conditions that must exist before the Commissioner can apply subs 80G(15) was therefore satisfied.
As to the meaning and existence of the second condition the learned trial Judge said:-
``... s 80G(15)(b) is concerned to identify the loss of the loss company in respect of which a notice or notices pursuant to s 80G(6) of the Act could validly have been given. That is, in my view, s 80G(15) is intended to lift any applicable s 170 restriction upon the
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power of the respondent to amend an assessment of an income company in the following circumstance. That is, where a purported right to an allowable deduction in respect of a loss, or part of a loss, of a loss company is purportedly transferred to such income company at a time when that loss or a part of that loss, is no longer to be treated for the purposes of the Act as a loss of the loss company.''
Her Honour was saying, in effect, that as a result of a combination of events, namely, the 1985 transfer of tax losses of $228,358, the loss company's 1986 taxable income of $2,284,020 and the disallowance of the deductions of $24,876 and $559,000 there were no available tax losses to permit the transfer of a deduction of $250,000 to the taxpayer. Undoubtedly, that was correct and if the Commissioner had known all the relevant facts at the time of the 1986 assessment the deduction would not have been permitted.
This led her Honour to conclude that, as at the date of the purported transfer of the right to an allowable deduction of $250,000 to the taxpayer, the loss ``was not deemed to have been incurred by the loss company''.
We find ourselves, with respect, unable to agree with her Honour's conclusion. In our opinion, her observation in the passage from her judgment just quoted, identifies the purported act of transfer of the loss as the event of significance. But par 80G(15)(b) is not concerned with that event. It questions whether the relevant part of the loss was deemed to have been incurred. If that question is answered in the negative - if one can say that the loss was not deemed to have been incurred by the loss company - then the second condition has been fulfilled and the Commissioner has an unrestricted right to amend. However, there is no doubt that the loss company, GHMA, did incur a loss in the 1985 year, that being the relevant ``loss year'', and so the right to amend was restricted to 3 years in accordance with s 170.
In our opinion, there is a logical sequence that can be traced through the legislation from s 80, through subs 80G(6) to subs 80G(15). First, subs 80(1) refers to a loss which ``shall be deemed to be incurred'' in the circumstances there set out; it does not state that ``... a loss is (or will be) incurred...''. Subsection 80(2) then explains how and when such a loss can be claimed as a deduction. Secondly, subs 80G(6) likewise refers to a deemed loss ``for the purposes of s 80''. That is the particular subsection that addresses how a loss company can transfer its loss, or a part of its loss, incurred in a loss year to an income company. As part of the concept of transferring the loss, the subsection also adds that the relevant loss shall ``be deemed to be a loss incurred by the income company for the purposes of s 80...'' in one or other of the years of income that are referred to in pars (f) and (g). Finally, there are the provisions of subs 80G(15). Although this subsection does not make specific mention of s 80, it does refer to subs 80G(6) (which in turn has referred to s 80). Furthermore, par 80G(15)(b) is not concerned with ``an allowable deduction'' (as is par (a) of that subsection); it is concerned with a loss or a part of a loss and like s 80 and subs 80G(6), it refers to a deemed loss.
In our opinion, subs 80G(15) is more easily understood if the word ``and'' appearing at the end of par (a) is read in the sense of meaning ``but''. The effect of the subsection can then be summarised by saying that where there is an attempted transfer of a loss but the loss was not deemed to have been incurred by the loss company, the Commissioner is entitled to ignore s 170. On the other hand, where there is a transfer of a loss and that loss was deemed to have been incurred by the loss company, as is the case here, the Commissioner is not entitled to ignore s 170. Subsection 80G(15) is intended to apply when the Commissioner claims that the loss company had not incurred the losses or a relevant part of them in the loss year. That is not the situation here. It had been accepted that the loss company had incurred losses in the loss year. The Commissioner's complaint was that all those losses had been used up as deductions.
The Explanatory Memorandum and its treatment of subs 80G(15) points to how this dispute has arisen. Alluding to the circumstances when the power of amendment under subsection 80G(15) would be available to the Commissioner, the Memorandum states:-
``Those circumstances are that-
- • although procedures had been followed for the right to an allowable deduction in respect of the loss or part of the loss to be transferred to the income company under sub-section 80G(6) - paragraph (a);
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- • the loss or part of the loss had not, in fact, been incurred by the loss company and, for that reason, a deduction was not available to be transferred to the income company - paragraph (b).''
The first part of the second condition points to where her Honour, in our opinion, fell into error; it correctly states that because a loss or part of a loss has not been incurred, a deduction is not therefore available for transfer. But the facts in this case have revealed that a loss had been incurred. If the taxpayer had been correctly assessed in respect of the 1986 year, it would have been denied a deduction of the transferred loss - not because losses had not been incurred, but because the assessable income of the loss company in the 1986 year, combined with other transferred losses to other income companies within the group, had exhausted the amount of the carried forward losses. A mistake has been made; the taxpayer has acknowledged that fact. But, nevertheless, it claims that it is entitled to the benefit of the legislation.
The case for the taxpayer was advanced upon this two-fold premise: where the issue is whether or not the loss company was deemed to have incurred a loss, subs 80G(15) applied and the Commissioner was under no time constraints in issuing an amended assessment. Where, however, it is proved or agreed that the loss company had incurred a loss and an issue arises as to whether the loss or some part of it is available for transfer, then the ordinary power to amend, as contained in s 170, applies and the Commissioner must operate within the time constraints that are found in that section. Section 170 is intended to afford a taxpayer ``a large immunity from amendments increasing his liability'':
McAndrew v FC of T (1956) 11 ATD 131 at 138; (1956) 98 CLR 263 at 278 per Kitto J.
In our opinion, the appeal should be allowed, the amended assessment should be set aside and the Commissioner should pay the taxpayer's costs here and in the court below.
THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The amended assessment be set aside.
3. The respondent pay the appellant's costs of the appeal and in the court below.
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