Moffatt v Webb

16 CLR 120

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(Judgment by: Isaacs J.)

Moffatt v Webb

Court:

Judges: Griffith CJ
Barton J

Isaacs JGavan Duffy J

Subject References:
Taxation and revenue
Income tax
Assessment
Deduction
Outgoings
Whether incurred in production of income as a grazier
Whether Commonwealth land tax deductible

Legislative References: - Income Tax Act 1895 (Vic) No 1374

Hearing date: 28 February 1913; 3 March 1913; 11 March 1913; 12 March 1913; 13 March 1913
Judgment date: 13 March 1913

MELBOURNE

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Judgment by:
Isaacs J.

I agree that the appeal should be allowed. Apart from special provisions as to companies the Act taxes "income" as defined. The word "chosen by the legislature for describing ... the taxable subjects" (see per Lord Davey in London County Council v Attorney-General ^[F15] , at p. 45) is in Victoria "income" not "profits." It is true that, in the end, profits only bear the burden, but it is the profits as arrived at artificially, and in the mode prescribed by the Statute, and not simply profits as they would appear in a commercial balance sheet. Gross income is primarily liable (s. 8), and then by s. 9 liability is reduced to the net income only, but the net income as it appears after the statutory deductions. Sub-s. (1) of s. 9 allows as the first deduction from "the gross amount of" the "taxpayer's income," what it describes as "all losses and outgoings actually incurred in Victoria by any taxpayer in production of income." So that no outgoing can be allowed as a deduction unless it is incurred in production of the income, from the gross amount of which it is sought to be deducted. And further, even if it is so incurred, it must not fall within any of the prohibitions of sub-s. (2). The only material portion of that sub-section is paragraph (g), namely, "disbursements or expenses ... not being money wholly and exclusively laid out or expended for the purposes of such trade."

The Crown claims, and the Supreme Court has decided, that the federal land tax could not be considered as incurred in the production of income, because the taxpayer was bound to pay the tax as owner, and therefore no matter what he did with the land.

Smith v Lion Brewery Co Ltd ^[F16] is an important case upon the question. The learned Lords were equally divided, and the opinions of Lord Loreburn L.C. and Lord Shaw , when closely read, appear to me to support the view put forward by the Crown; the former saying ^[F17] , "it is only in the character of owners of a house that the Lion Brewery Company can be called upon to pay this levy at all"; and the latter observing ^[F18] , "it is not qua trader, but simply qua owner, apart from being a trader at all, that the owner makes the payment." On the other hand, Lord Halsbury and Lord Atkinson are distinct in the other direction; and so, the House being equally divided, the decision appealed from becomes, under the special rule laid down for itself by the House of Lords, the law of England, until altered by Parliament. But, apart from that, by which we are not technically bound, I am, with the most unfeigned respect to the opinions of the other learned Lords in this great divided controversy, more strongly persuaded by the views expressed by Lord Halsbury and Lord Atkinson .

I want to guard against one possible misconception. There the special case stated expressly that the property in respect of which the tax was paid was acquired and held solely for the purposes of the business, and not as an investment. Here, as was there also recognized-see per Lord Shaw ^[F19] -the decision must proceed upon the facts as set forth in the stated case. We have no power, as the Supreme Court had no power, to find further facts, directly or by way of inference-unless, of course, the law itself postulates one inference only-which is not the case here.

There is no statement in the matter before us, corresponding with that to which I have just referred, and so far as any observations of the learned Lords rest upon the facts mentioned, the judgments are irrelevant.

But, after all, it seems to me those facts only raise an a fortiori case. Lord Halsbury ^[F20] points out the purpose for which the tax was enacted is utterly immaterial. He adds that the taxpayer "must if he carries on that business or that trade pay this tax; it is the act of the legislature which makes him pay it, and it is not a thing that is open to his own will or option."

And Lord Atkinson ^[F21] reasons out the position, and shows convincingly, to my mind that, though a tax may in one sense be paid as owner or lessee, in another it is paid as trader. The instances he puts as to licences are undeniable, and I cannot distinguish them from this case.

To carry the matter further: Suppose the Federal Parliament were to lay a tax on the owners of motor cars, and carts, and guns, and dogs and sheep, so that the tax was payable whether these things were employed in trade or not; could it be doubted that the tax would be a real outgoing necessary for the production of the income of a business in which they were all used? The land is as necessary to the business as the personal property. The grass, water, and shelter of that particular land were indispensable to the production of the particular income for the year; with other land the amount would probably be different; and as the actual gross return could not be received without the use of that land, and the use of the land means the use of an instrument to which is attached by law a compulsive payment, it seems to me to follow naturally that the payment made under compulsion of law in respect of that necessary element of the business income is an outgoing made in the production of the income, and in the circumstances here it was made wholly and exclusively for the taxpayer's business.

And the fallacy of the contrary doctrine consists in this: it confuses, not so much the meaning, as the application of the word "purpose." The land tax is enacted by the legislature for its own purpose, that is, to tax the owner; and when he pays it to the Crown, he pays it as the owner, it is true, but so far, not for any purpose of his. He simply pays it because he is obliged to by law. But when he uses the property to produce an income, that is, for his business purposes, he pays the tax inseparably connected with the land also for his business purposes, namely, as an outlay necessary in the existing state of the law to obtain that income by means of that land.

In Ashton Gas Co v Attorney-General ^[F22] , at p. 12 Lord Halsbury L.C. says of the English Act, "the profit upon which the income tax is charged is what is left after you have paid all the necessary expenses to earn that profit." If a tax paid by the owner of a motor car and paid by him as owner, which would be the Commonwealth purpose, is incurred for his business purposes, then, unless the legislature prohibits it or excepts it, he may deduct it-because it is a necessary expense to earn his profit; and land can stand in no different position. Take the case of rent-which would be a conceded deduction, both on general principles, and by reason of statutory recognition. If the premises were held on a long lease entered into by the trader, years before he commenced his business, and therefore without thought of it, and, perhaps, originally for residential purposes only, it would be quite true to say of him that he paid the rent as lessee, without reference to whether he used it for business purposes or not. Nevertheless no one, I imagine, would deny its deductibility even under sub-s. 1 as an outgoing in the production of the income. Again, suppose the premises purchased years before the establishment of the business, or derived by descent or will, the annual value is an equally obvious deduction. Yet it is, as Lord Herschell says in Russell's Case ^[F23] , at p. 425, not even strictly an outgoing, but is to be treated as such, by deduction somehow, and, if so treated, is in one sense most certainly in the character of owner. No other capacity is possible. But in the material and important sense, it is in the character of trader, because the owner has, for the time being, enlisted that property with all its legal attributes in his trading service, and the Crown in taxing the income produced by it in combination with it, treats it as such.

Indeed, the trader here is owner of everything: he devotes the land to business purposes in the character of owner; he uses it as owner; he is entitled to the income of the business as owner; he is entitled to deduct the annual value of his own land as owner of the land in precisely the same sense as he pays the federal land tax in respect of the same land as owner.

We must remember that so long as he devotes his land to business purposes-his business purposes-he applies the annual value, that is, the appurtenant benefits of the land, and subject to all appurtenant liabilities of the same land, to the business; and if it is borne in mind, as I have said, that the Act in speaking of the purposes of outgoings means the taxpayer's purposes, and not the purposes of the legislature, the difficulty, as it seems to me, disappears.

For these reasons the question should, in my opinion, be answered in favour of the taxpayer.

I desire to add my appreciation of the clear and able argument on both sides.