Henty House Pty Ltd (In Voluntary Liquidation) v Federal Commissioner of Taxation

88 CLR 141

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(Judgment by: Williams ACJ, Webb, Kitto and Taylor JJ)

Henty House Pty Ltd (In Voluntary Liquidation)
v Federal Commissioner of Taxation

Court:

Judges:
Williams ACJ, Webb J, Kitto J and Taylor JFullagar J

Subject References:
Taxation and revenue
Income tax
Assessable income
Disposal of assets
Compulsory acquisition of assets
Compensation
Lump sum payment

Legislative References:
Income Tax Assessment Act 1936 No 27 - s 59

Hearing date: MELBOURNE 5 June 1953; 8 June 1953; 9 June 1953;
Judgment date: 9 September 1953;

SYDNEY

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Judgment by:
Williams ACJ, Webb, Kitto and Taylor JJ

WILLIAMS A.C.J., WEBB, KITTO AND TAYLOR JJ. The questions we are called upon to decide come before us on a case stated by Fullagar J. in an appeal to this Court concerning the income tax payable by the appellant company in respect of income derived by it in the year ended 30th June 1948 under the provisions of the Income Tax Assessment Act 1936-1948.

The questions depend upon the true construction of s. 59 of the Act. That section is one of a group of sections comprising ss. 54 to 62 both inclusive, which deal with the topic of depreciation. Sections 54 to 58 are directed to making depreciation, at rates provided for, an allowable deduction in respect of property being "plant" (an expression defined to include certain items of property described by reference to their use in relation to a purpose of producing assessable income), or being articles owned by a taxpayer and used by him during the year of income for the purpose of producing assessable income. As a corollary, s. 59 deals with the situation which arises where at any time in a year of income property in respect of which depreciation has been allowed or is allowable is disposed of, lost or destroyed. The section requires a comparison to be made between the depreciated value of such property (in effect, as s. 62 provides, its cost to the taxpayer less the total amount of depreciation allowed or allowable to the taxpayer in respect of it for any anterior period), and any consideration receivable in respect of the disposal, loss or destruction.

If the consideration receivable is less than the depreciated value, the deficiency is made, by sub-s. (1) of s. 59, an allowable deduction. If, on the other hand, the consideration receivable exceeds the depreciated value, the excess, to the extent of the sum of the amounts allowed or allowable in assessments for income tax in respect of depreciation, is included, by sub-s. (2), in the taxpayer's assessable income. For the purposes of these provisions, sub-s. (3) enacts a definition of the expression "the consideration receivable in respect of the disposal, loss or destruction". It means-(a) in the case of a sale of the property-the sale price less the expenses of the sale of the property; (b) in the case of loss or destruction of the property-the amount or value received or receivable under a policy of insurance or otherwise in respect of the loss or destruction; (c) in the case where the property is sold with other assets and no separate value is allocated to the property-the amount determined by the commissioner; (d) in the case where property is disposed of otherwise than by sale-the value, if any, of the property at the date of disposal.

The facts in relation to which it is necessary to construe the section are, briefly, as follows. For a number of years, until 16th October 1947, the appellant owned certain land in Melbourne and a building known as "Henty House" erected thereon. Installed in the building were certain lifts, rubber flooring, gas heating installations and other fixtures and fittings, which may be called for convenience the fixtures. These being articles owned by the appellant and used by it for the purpose of producing assessable income, depreciation in respect of them was an allowable deduction, by virtue of s. 54 of the Act, in the assessment of the appellant's income tax. Accordingly depreciation was from time to time claimed by the appellant and allowed by the commissioner.

On 16th October 1947, pursuant to s. 15 (2) of the Lands Acquisition Act 1906-1936 the Governor-General declared by notification published on that day in the Gazette that the land upon which "Henty House" was erected had been acquired under the Act for a public purpose referred to in the notification. Thereupon, by virtue of s. 16 of the Act the land, and of course Henty House and the fixtures with it, became vested in the Commonwealth, and by virtue of s. 17 the estate and interest of the appellant was converted into a claim for compensation. After an action for compensation for the property acquired had been commenced by the appellant in the Supreme Court of Victoria and protracted negotiations had taken place, the compensation payable by the Commonwealth was agreed at the lump sum of PD167,500, which was paid to the appellant on 11th May 1949. There was no agreement as to the manner of computation of this sum, or, in particular, as to any amount allowed in the computation in respect of the fixtures.

The Commissioner of Taxation took the view that the fixtures had been disposed of or lost, within the meaning of s. 59, in the year ended 30th June 1948, He took the values which the Department of the Interior had assigned to the fixtures, and he treated those values as constituting, within the meaning of the section, the consideration receivable in respect of the disposal or loss. These values exceeded the depreciated value in each case. The total amount of the excess, to the extent of the sum of the amounts allowed or allowable for depreciation, (that is to say, disregarding the amounts by which, in some instances, the excess was greater than the sum of the amounts which had been allowed or were allowable for depreciation) was PD11,916. The total depreciated value was PD3,950. The difference between these two amounts, namely PD7,966, the commissioner included in the appellant's assessable income in reliance upon the provisions of sub-ss. (2) and (3) of s. 59. The result was to increase the amount assessed against the appellant both for ordinary income tax and, since the appellant is a private company within the meaning of Div. 7 of Pt. III of the Act, for additional tax under that Division.

The main argument submitted for the appellant was that not only is the word "lost" as inappropriate to a case of compulsory acquisition by a public authority as is the word "destroyed", but "disposed of" is also inapplicable, because it refers only to a voluntary disposition by the taxpayer. To place so narrow a construction upon "disposed of" would take out of the operation of s. 59 a deprivation of property by any mode of involuntary alienation. A sale, for example, by a sheriff under a writ of fieri facias, or by a liquidator in a winding-up by the court, or by a receiver appointed by the court, would be outside the purview of the section. The suggested distinction would rest upon no logical foundation, for the rationale of the section applies as much to dispositions of the kinds just mentioned as it does to dispositions made voluntarily by or by the authority of the taxpayer himself. The apparent object of the section is clear. It is, first, that in the case of property depreciation of which is made by the Act an allowable deduction because of the relation of the property in the taxpayer's hands to the production of his assessable income, the whole of that portion of the cost of the property which the taxpayer fails to recover when the property becomes no longer available to him for the production of assessable income shall be deductible in the assessment of his taxable income; and that to that end, in so far as it is not covered by deductions for depreciation under ss. 54 to 58, it shall be the subject of a deduction under s. 59 (1).

And, secondly, the section provides for the converse case: if it turns out, when the property ceases to be available to the taxpayer for the production of assessable income, that his deductions for depreciation have been greater in total than that portion of the cost which he has failed to recover, then the excess amount shall be brought back into assessable income under sub-s. (2). (In the case of a gift, the value of the property is treated as if it had been recovered by the donor.) No distinction in any way material to these purposes can be drawn between a sale by the taxpayer in the market, or an exchange or a gift made by him, and a transfer of the title effected by the act of another to whom the law gives the requisite authority. There is as little reason for attempting such a distinction as there would be for distinguishing between a loss due to the carelessness of the taxpayer and a loss due to theft, or between a destruction by the intentional act of the taxpayer and a destruction by act of God. Nothing but quite intractable language could justify us in placing upon provisions of the character which s. 59 exhibits a construction producing so capricious a result as its inapplicability to cases of involuntary alienation.

But the language used is by no means intractable. No doubt the notion primarily conveyed by the words "disposed of" is the notion of a disposition by the taxpayer; but it is not necessarily so confined, and the use of the passive voice, without specific words of restriction referring to the person by whose act the disposal takes place, leaves ample room for a construction in keeping with the general tenour of the section, and with its place in the scheme which ss. 54 to 62 provide. The entire expression "disposed of, lost or destroyed" is apt to embrace every event by which property ceases to be available to the taxpayer for use for the purpose of producing assessable income, either because it ceases to be his, or because it ceases to be physically accessible to him, or because it ceases to exist. In the context of s. 59 there is ample reason for rejecting a narrower construction. In particular, the words "is disposed of" are wide enough to cover all forms of alienation, as Dixon and Fullagar JJ. remarked in Federal Commissioner of Taxation v Wade ^[F1] , at p. 110, and they should be understood as meaning no less than "becomes alienated from the taxpayer", whether it is by him or by another that the act of alienation is done. Neither the words themselves nor the setting in which they appear afford any support for the view that cases of involuntary alienation fall outside their meaning.

The view for which the appellant contends is really answered by this Court's decision in Smith v Federal Commissioner of Taxation ^[F2] . The expression there in question was narrower than that with which we are now concerned. It was the expression "the sale of assets", as used in s. 16 (b) (i) of the Income Tax Assessment Act 1922-1927; and the decision was that it included a compulsory acquisition by a public body under statutory authority, and that an inference to the contrary ought not to be drawn from the fact that a subsequent amending Act of 1930 had added "or compulsory resumption for public purposes" after "the sale". Rich J. said: "Sale is not a word of precise technical import. In many contexts the essential idea it conveys is an agreement to transfer property for a valuable consideration. Often the valuable consideration intended is restricted to money. In other contexts agreement is not of the essence of the conception but the conversion of property into money or its realization is the notion sought to be expressed. Ever since the Lands Clauses Consolidation Act 1845 the alienation of property accomplished under its provisions has been regarded as an instance of sale. The very title under which the subject is discussed in legal compilations is compulsory purchase" ^[F3] . His Honour proceeded to discuss a number of English authorities, and said: "Perhaps in England the procedure by notice to treat produced a greater similarity in conveyancing practice to the completion of a voluntary sale, but the difference is not material in considering whether agreement is an essential element in the connotation of the word `sale,' or whether it is capable of including alienation of property for a money sum, when the alienee alone possesses freedom of action; see per Lord Macnaghten in Williams v Permanent Trustee Co of New South Wales <sup>[F4]</sup> , at p. 252, where he says: `It is a compulsory purchase just as much in the one case as in the other' " ^[F5] .

The same view was expressed in the joint judgment of Starke, Dixon and McTiernan JJ. ^[F6] . They described the compulsory process as "an exchange of land, made under legislative enactment, for money", adding that "Substantially the Act has provided the price at which the land is to be taken or resumed". It is obvious that the case for a construction of the expression "disposed of" as extending to compulsory acquisition is even stronger. The words "disposed of" are not technical words. They mean disposed of in a commercial sense. Similar words in other Acts have been given a very wide meaning in suitable contexts. The Port of London Act, 1908 (Imp.) (8 Edw. 7. c. 68), s. 3 (1), provided that as from the appointed day the undertakings of three dock companies should be transferred to and vested in the Port of London Authority and the Port Authority should issue to those companies, or as they might direct, as consideration for their undertakings, certain amounts of port stock created by the Act for distribution by the dock companies amongst their shareholders. In Inland Revenue Commissioners v Port of London Authority ^[F7] , the House of Lords held that the acquisition of the undertakings of the dock companies by the Port of London Authority was a purchase of an asset for a consideration other than cash within the meaning of r. 3 of Pt. III of Schedule IV of the Finance (No. 2) Act 1915 (Imp.) (5 & 6 Geo. 5. c. 89).

There is also the long line of cases in which the equitable rule that a purchaser should be charged with interest on his purchase money from the date when he took or might safely have taken possession of the land has been extended to compulsory purchases. In Swift & Co v Board of Trade ^[F8] , Viscount Cave L.C. said that: "the rule has been extended to cases of compulsory purchase under the Lands Clauses Consolidation Act, 1845: In re Pigott & Great Western Railway Co ^[F9] ; Fletcher v Lancashire & Yorkshire Railway Co ^[F10] ; but this is because the notice to treat under the statute is treated in equity as creating the relation of vendor and purchaser" ^[F11] . The rule has also been extended to cases where there is no notice to treat and the statute simply provides for expropriation of the owner and for conversion of his ownership into a claim for compensation: Inglewood Pulp & Paper Co v New Brunswick Electric Power Commission ^[F12] , at p. 498; International Railway Co v Niagara Parks Commission ^[F13] . Referring to such cases in The Commonwealth v Huon Transport Pty Ltd ^[F14] , the present Chief Justice said "The rule springs from the doctrine that a notice of acquisition, or a notice to treat, establishes the relation of vendor and purchaser and it rests upon the view that `The right to receive interest takes the place of the right to retain possession' ^[F15] " ^[F16] .

It was further submitted on behalf of the appellant that if a compulsory acquisition is to be considered a disposal, the appeal should nevertheless succeed because no consideration can be held to have been "receivable in respect of the disposal", having regard to the exclusive definition of those words provided by s. 59 (3). The argument is that par. (a) does not apply, because no part of the compensation payable for the entirety of the property acquired by the Commonwealth can be specifically described as the sale price of the fixtures; par. (b) does not apply, because the case is not one of loss or destruction; par. (c) does not apply, because it is expressed in terms appropriate only to a sale by agreement, the allocation referred to being a consensual allocation made in the sale transaction; and par. (d) does not apply, because the considerations which bring the case within s. 59 are inconsistent with the description of the case as one in which property is disposed of otherwise than by sale. And a final argument is added, to the effect that if this be wrong, then the case is within par. (d), and the commissioner was in error in not ascertaining and bringing into the assessable income the value of the fixtures at the date of the disposal. The answer to these contentions is that par. (c) covers the case.

It may be true that there cannot be an allocation of values within the meaning of that paragraph except by agreement of the parties, but, even so, it does not follow that the only cases of sale which are governed by the paragraph are those of sale by agreement. There was in the present case a sale in the relevant sense, an exchange of the fixtures together with other assets for a total sum; and, as the taxpayer and the Commonwealth did not agree upon any separate figure in respect of the fixtures as an ingredient in the total compensation to be paid, it cannot be said that there was a separate value allocated to the fixtures. The commissioner was therefore authorized by par. (c) to determine for himself what amount should be treated as the consideration receivable in respect of the disposal of the fixtures; and it is not denied that if he was so authorized he acted within the scope of his authority in adopting for the purpose the values which the Department of the Interior had assigned to the fixtures in the course of dealing with the question of compensation.

It may be observed that in John Hudson & Co Ltd v Kirkness ^[F17] , an acquisition of railway wagons, effected by the operation of a statute, was held by Upjohn J. not to be a sale within the meaning of a section (s. 17) of the Income Tax Act 1945-1950 (Imp.) (8 & 9 Geo. 6. c. 32-14 Geo. 6. c. 15), which in some respects resembles s. 59 of the Commonwealth Act. His Lordship recognized that the absence, in a compulsory acquisition, of the element of mutual assent which the common law required for a sale did not necessarily determine the question whether such an acquisition was a sale within the meaning of the Income Tax Act. Pointing out that the compensation payable for wagons under the acquiring Act was a sum fixed according to the age and type of wagon and had no relation to the actual worth of the wagon, the learned judge said that to describe such a transaction as a compulsory purchase was not a proper use of legal language. The implication of the judgment is that a compulsory acquisition which can properly be described as a compulsory purchase may be a sale within the meaning of a particular statute. The case is therefore consistent with the decision of this Court in Smith v Federal Commissioner of Taxation ^[F18] .

The appellant's objections raise the further question whether the commissioner was right in treating the consideration receivable in respect of the disposal as assessable income of the appellant in the year ended 30th June 1948, in view of the fact that the amount to be paid by the Commonwealth as compensation was not agreed upon until February 1949. The point has special significance in relation to the assessment of additional tax under Div. 7, because the appellant company, in order to escape liability for such tax would have had to make a sufficient distribution of its income of the year ended 30th June 1948 (including in that income any amount brought into assessable income under s. 59) before 31st December 1948, at which date the amount of the compensation was still unknown. But it is clearly the assessable income of the year in which the disposal occurs that s. 59 (2) operates to increase, and the disposal occurs when the Governor-General's notification is published in the Gazette. It is at that point of time that the estate and interest of the owner is converted into a claim for compensation. Uncertainty may exist at that time, and may continue until more than six months after the end of the current income year, as to the amount which has to be included in assessable income under s. 59 (2).

Uncertainty may be due, in the case of an ordinary sale of depreciated property, to the fact that the price has still to be fixed by arbitration or otherwise by reason of the terms of the sale contract; or it may be due, in the case of loss or destruction, to the fact that an assessment has to be made under a policy of insurance; or it may be due, in the case of a sale of depreciated property together with other property, to the fact that the commissioner has not yet determined an amount under sub-s. (3) (c); or it may be due, in the case of a disposal otherwise than by sale, to the fact that the value of the property is undetermined. But the existence of the uncertainty, for whatever cause, and the consequential difficulty in knowing within the six months what is the amount of the income which must be distributed within that time if Div. 7 tax is not to be payable, afford no ground for denying to s. 59 the construction which its precise terms require. Those terms leave no room for any other conclusion in the present case than that the relevant year of income is the year ended 30th June 1948.

The questions should accordingly be answered as follows:

(a)

Yes.

(b)

(i) Yes. (ii) An amount determined by the commissioner.

(c)

Yes.

(d)

Yes.