WOOLCOMBERS (WA) PTY LTD v FC of T

Judges:
Branson J

Court:
Federal Court

Judgment date: Judgment handed down 28 June 1995

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Branson J

Background

In this case the applicant appeals to the Court against an appealable objection decision (see Taxation Administration Act 1953 s 14ZQ), namely a decision of the respondent notified to the applicant by letter dated 6 May 1994. By this decision the respondent disallowed the applicant's objection against a notice of amended assessment issued on 15 October 1993 with respect to the year of income which ended on 30 June 1986 (``the 1986 year''). The original Notice of Assessment with respect to that year of income is dated 19 February 1987. The applicant's objection was against a disallowance of a loss purportedly transferred to the applicant pursuant to s 80G(6) of the Income Tax Assessment Act 1936 (``the Act'').

The issue between the parties is whether the respondent was entitled to amend the assessment at a time after the expiration of three years from the date upon which the tax payable under the original assessment became due and payable.

Facts

The companies G.H. Michell & Sons (Aust.) Pty Limited (``GHMA'') and the applicant have each at all relevant times been a ``group company'' in relation to the other within the meaning of s 80G of the Act. It is not disputed that each of these two companies is, and has at all relevant times been a wholly owned subsidiary of G.H. Michell & Sons Pty Ltd.

The Income Tax Return filed by GHMA for the year of income ended 30 June 1985 (``the 1985 year'') showed a tax loss of $3,303,856. Such loss was calculated by including a deduction of $24,786. Notices were given to the respondent pursuant to s 80G(6)(c) having the effect that the right to an allowable deduction under s 80(2) of the Act in respect of a specified part of the above loss was to be transferred to certain other subsidiaries of G.H. Michell & Sons Pty Ltd. The total amount of the loss in respect of which notices were given was $228,358.

There is some inconsistency between the Income Tax Return filed by GHMA for the 1986 year and Schedule 8 thereto relating to deductible losses. I understand it to be agreed, however, that the Income Tax Return is to be understood as showing that in that year of income GHMA had a taxable income, before deduction of losses carried forward of $3,075,498, of $2,284,020. On that basis, no loss is deemed to have been incurred by GHMA within the meaning of s 80(1) of the Act in the 1986 year. The terms of s 80(1) are set out below. I further understand it to be agreed that after losses carried forward were deducted, GHMA claimed a tax loss for the 1986 year of $791,478. Such loss was calculated by including a deduction for $559,000.

A notice pursuant to s 80G(6)(c) of the Act dated 2 March 1987 signed by the respective public officers of GHMA and the applicant was given to the respondent in respect of the 1986

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year. It purported to give notice that the right to an allowable deduction under s 80(2) of the Act in respect of $250,000 of the tax loss of GHMA should be transferred to the applicant. It stated that the income year in which the loss was incurred was the 1986 year. Within the meaning of ss 80 and 80G(6) of the Act this was inaccurate: within the meaning of these sections GHMA had suffered such loss in the 1985 year. This issue is discussed further below.

Further notices pursuant to s 80G(6)(c) given to the respondent in respect of the 1986 year purported to transfer to other subsidiaries of G.H. Michell & Sons Pty Ltd the right to allowable deductions in respect of the tax loss of GHMA.

The names of transferee companies and the amount of allowable deductions purportedly transferred are as follows:

  Michelides Pty Ltd             $ 61,000
  Nulabor Pty Ltd                $ 50,000
  South Benerembah Pty Ltd       $ 90,000
  F.W. Hughes Pty Ltd            $370,000
  Woolcombers (W.A.) Pty Ltd     $250,000
                                 --------
                                 $821,000
                                 --------
      

That is, notices pursuant to s 80G(6)(c) were given which together purported to transfer rights to allowable deductions in excess of the claimed tax loss of GHMA for the 1986 year. The excess amounted to $29,522.

On 19 February 1987 an assessment was issued to the applicant on the basis that a deduction of $250,000 under s 80G was allowable to it.

In February 1988 a dispute between GHMA and the respondent as to certain deductions claimed by GHMA for the years of income ended 30 June 1977 to 30 June 1984 was settled. Consistently with the terms of such settlement the deductions of $24,786 and $559,000 respectively claimed by GHMA in the 1985 and 1986 years were disallowed. It is to be accepted in these proceedings that on a proper construction of the Act such deductions were not allowable. On that basis notices pursuant to s 80G(6)(c) with respect to the tax loss of GHMA for the 1986 year were given which together purported to transfer rights to allowable deductions which exceeded the actual tax loss of GHMA by:-

   (i) excess over the loss shown on
     the Income Tax Return              $ 29,522

  (ii) the amount of deductions
     disallowed                         $583,876
                                        --------
                                        $613,398
                                        --------
      

On 15 October 1993 a notice of amended assessment was issued to the applicant disallowing the $250,000 deduction claimed as a consequence of the purported transfer from GHMA of the right to an allowable deduction in that amount. The applicant objected against this amended assessment. Its objection was disallowed in full. This appeal arises out of such disallowance.

It is agreed that there has been full and true disclosure by the applicant of all the material facts necessary for its assessment within the meaning of s 170 of the Act.

It is further agreed that if the respondent was entitled to amend the assessment at the time that he issued the notice of amended assessment the amount of such amended assessment is not open to challenge.

Statutory framework

This case was argued on the basis that the applicable law is that in force in respect of the 1986 year. The legislative provisions here set out are those in force at that time.

The relevant general principles concerning the calculation of taxable income are contained in ss 48 and 51 of the Act. Section 48 provides that:-

``In calculating the taxable income of a taxpayer, the total assessable income derived by him during the year of income shall be taken as a basis, and from it there shall be deducted all allowable deductions.''

Section 51(1) deals with deductions for losses and outgoings. It provides that:-

``All losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

Domestic losses of pre-1990 years of income are dealt with by s 80 of the Act. Section 80(1)

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defines a loss in respect of an income year. It provides, so far as is here relevant, as follows:-

``For the purposes of this section, a loss shall be deemed to be incurred in any year when the allowable deductions... from the assessable income of that year exceed the sum of that income... and the amount of the loss shall be deemed to be the amount of such excess.''

Section 80(2) of the Act provides, so far as is here relevant, as follows:-

``... 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)... the deduction shall be made from assessable income;
• (b) [not here relevant];
• (c) [not here relevant].''

The mechanism for, and the effect of, transfers of allowable deductions for loss between group companies are contained in s 80G(6) of the Act. It provides, so far as is here relevant, as follows:-

``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)... 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... 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...; and
• (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... 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...,

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

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income year, be deemed to be a loss incurred by the income company for the purposes of section 80... 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.''

Section 80G(10) of the Act is concerned with the amount of loss in an income year in respect of which a company may transfer an allowable deduction. It provides, so far as is here relevant, as follows:-

``Where the sum of the assessable income of the loss company of the income year... exceeds the allowable deductions, other than-

• (a) deductions from that assessable income under section 80...
• (b) [not here relevant]; or
• (c) [not here relevant],

sub-section (6) applies in relation to so much (if any) of the amount of a loss that is deemed to have been incurred by the loss company for the purposes of section 80 as is not allowable as a deduction from that assessable income under sub-section 80(2)...''

The general powers of the respondent to amend assessments are contained in s 170 of the Act. Section 170(1) provides that:-

``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.''

The following subsections of s 170 place severe limitations upon this general power in the Commissioner to amend assessments at any time. The applicant here places reliance on the restriction upon such power contained in s 170(3) which is in the following terms:-

``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.''

As mentioned above, it is agreed in this case that the applicant made full and true disclosure of all the material facts necessary for his assessment.

The respondent contends that the limitation imposed by s 170(3) is, in the circumstances of this case, overridden by the particular provision as to amendment of assessments contained within s 80G of the Act. Section 80G(15) provides as follows:-

``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 sub-section (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).''

Argument of the applicant

It was argued on behalf of the applicant that the time limits set out in s 170 of the Act establish the general rules as to the times within which assessments may be amended. Consequently it was argued that the unlimited time allowed by s 80G(15) is to be seen as an exceptional authority intended to cover exceptional circumstances. On this basis it was contended that s 80G(15) should be strictly construed so as to limit its ambit.

The case for the applicant is that s 80G(15) has an operation when the Commissioner concludes that the company's loss is not an allowable deduction pursuant to s 80(2) of the Act: in the words of Mr Robertson QC who appeared with Mr Manetta for the applicant, s 80G(15) has an operation ``where you are dealing with the conceptual basis of a loss''. That is, as understand him, where there is an argument as to whether there exists a s 80(1) loss which is an allowable deduction within the meaning of s 80(2) the benefit of which may under the Act be transferred. Mr Robertson contended that s 80G(15) has no operation in circumstances where the loss was not

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transferable because of some defect in the s 80G process such as, as I understand the argument, where an amount of loss has purportedly been transferred that was not available for transfer by reason of the operation of s 80G(10) of the Act.

Section 80G(15) of the Act

Section 80G(15) is set out above. Counsel were not able to refer me to any authorities directly relevant to its construction. My own researches have not identified any. Real difficulties attend its proper construction.

In my view, it is plain that ss 80G(15) and 170 reflect a compromise intended to balance the competing interests of finality in tax matters, the encouragement of frank disclosure by taxpayers to the respondent and the proper protection of the public purse. I do not consider that it would be appropriate for the balance so set to be distorted by the application of different approaches to the construction of its constituent elements (see
Minister for Immigration and Ethnic Affairs v TEO unreported decision of the Full Federal Court of 13 April 1995). In my view it is appropriate for s 80G(15) to be construed having regard to its terms and the context in which it is found and without any predisposition to construe it in a way which would limit its operation.

The section provides, in effect, that nothing in s 170 of the Act prevents the amendment of an assessment of the income of an income company (see the definition of ``income company'' in s 80G(6)(b)) to disallow the whole or part of a deduction provided that two conditions are satisfied. It is the construction of the conditions that gives rise to difficulties.

The first condition is that ``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 [ s 80G(6)].'' In the context in which it appears, and in particular having regard to the terms of paragraph (b) of s 80G(15), I conclude that this condition is to be read in the sense of a purported right to an allowable deduction purportedly transferred. If the loss transferred was not in fact deemed to have been incurred by the loss company it would not be available for effective transfer to the income company (see s 80G(6) of the Act). Understood in this sense the first condition of s 80G(15) is in this case satisfied. By the notice dated 2 March 1987 a purported right to an allowable deduction in respect of part of a loss incurred by GHMA was purportedly transferred to the applicant.

The second condition required by s 80G(15) to be satisfied before the restrictions imposed by s 170 upon the amendment of assessments become inapplicable is that ``that loss or a part of that loss was not deemed to have been incurred by the loss company''. It is contended on behalf of the applicant that the language of this second condition (i.e. s 80G(15)(b)) deliberately reflects the language of s 80(1) of the Act. The result said to flow from this is that since GHMA is deemed by s 80(1) to have incurred in the 1985 year the loss in respect of which an allowable deduction was purportedly transferred to the applicant, the second condition for the operation of s 80G(15) is not here satisfied.

Plainly a loss was deemed for the purposes of s 80 of the Act to have been incurred by GHMA in the 1985 year. The effective operation of s 80 of the Act requires that losses are able to be identified by reference to a year in which they may be treated as having been incurred (see in particular s 80(2)). The effective operation of s 80G(6) similarly requires that a loss can be identified with an income year. Section 80(1) effects the identification of a tax loss with a particular income year, and further provides how such loss is to be calculated. Section 80G(6)(a) expressly picks up the provisions of s 80(1).

It is to be remembered that tax losses and income years are themselves artificial constructs. Accounting conventions, including accounting conventions as to the times at which losses are to be recognised, are similarly artificial constructs. It may be for these reasons that s 80 speaks of a loss deemed to be incurred in a particular year and of the amount of such loss being deemed to be a particular amount.

Having noted that the concerns of s 80(1) of the Act are to identify company tax losses with particular income years, and to allow for their calculation, it is to be observed that s 80G(15) neither invokes s 80 nor refers to a loss of any particular income year or a loss calculated in any particular way. In this regard it may be contrasted with s 80G(6). It does not seem to me that s 80G(15) and in particular paragraph (b) thereof, is intended to incorporate the s 80(1) concept of a loss deemed to be incurred in a particular year.

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As Mr Robertson acknowledged when dealing with the erroneous identification in the s 80G(6)(c) notice given in this case of the year of income in which the loss was deemed to be incurred by GHMA within the meaning of s 80(1), ordinary accounting practice, which is in this regard reflected in the Act, allows the carrying forward of a loss brought to account in one year into the accounts of later years. The Act allows such a loss, when it is a tax loss, to be deducted from the assessable income of later years (s 80(2)). Such loss, to the extent that it is so deducted, has no continuing relevance under the Act. Section 80G of the Act allows, in certain circumstances, the transfer of the right to an allowable deduction in respect of a tax loss, or a part thereof, to other members of a company group. Once so transferred the loss, or the relevant part thereof, is deemed to be a loss incurred by the transferee company (s 80G(6)). It is no longer treated for the purposes of the Act as a loss of the transferor company.

It is against this background, in my view, that the words ``loss or a part of that loss was not deemed to have been incurred by the loss company'' appearing in s 80G(15) are to be understood. For the purposes of the 1986 year that part of the loss of GHMA deemed for the purposes of s 80 to be a 1985 loss, and in respect of which the right to an allowable deduction had not been transferred for the purposes of the 1985 year to other group companies, was an allowable deduction from the assessable income of GHMA (s 80(2)). To the extent to which it was an allowable deduction to GHMA it was not available to be transferred to any other company (s 80G(6)). Moreover, to that extent, in my view, it was not, in accordance with ordinary understanding, a current loss of GHMA of the 1986 year: it was, or ought to have been in accordance with the terms of the Act, off-set against the assessable income of GHMA of that year.

In my view, understood in the context in which it is found, 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 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. The sense behind the provision as so construed, in my view, is that the respondent may be expected to pay less attention to the financial records of companies apparently free of any obligations to pay income tax than he or she might pay to an income company. Some years might pass before it becomes apparent to the respondent that a purported right to an allowable deduction in respect of a loss, or part of a loss, has purportedly been transferred under s 80G(6) in circumstances in which such purported right was not available to the loss company to transfer.

The date of the notice of transfer in this case was 2 March 1987. The income year in respect of which the notice of transfer was given was 1986. In that year the sum of the assessable income of GHMA exceeded its allowable deductions other than deductions under s 80. Consequently s 80G(10) of the Act limited the amount of the loss deemed to have been incurred by it for the purposes of s 80 which was available for the purposes of s 80G(6). Only the amount of such loss not allowable as a deduction to GHMA itself under s 80(2) was available for the purposes of s 80G(6). This had the result that the right to an allowable deduction in respect of the part of the GHMA loss purportedly transferred to the applicant no longer existed as at the date of the purported transfer: such deduction was an allowable deduction to GHMA itself in the 1986 year. The loss which gave rise to the allowable deduction of GHMA was not, in my view, at the date of the notice of transfer, a loss deemed to have been incurred by GHMA within the meaning of s 80G(15)(b): it had for the purposes of the Act been off-set as an allowable deduction against the assessable income of GHMA. The fact that GHMA had not itself claimed such deduction in its income tax return for the 1986 year is, in my view, immaterial.

I conclude that as at the date of the purported transfer to the applicant of the right to an allowable deduction in respect of part of a loss of GHMA, namely a part loss in the amount of $250,000, that part loss was not deemed to have been incurred by GHMA within the meaning of s 80G(15).

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Consequently, in my view, nothing in s 170 of the Act prevented the amendment of the assessment of the income of the applicant to disallow the deduction claimed by the applicant in reliance on the notice given to the Commissioner pursuant to s 80G(6)(c). The right to amend provided for by s 170(1), in my view, prevailed.

For the above reasons I would dismiss the applicant's appeal in this matter with costs. It is therefore not necessary for me to consider the submission, but perhaps surprisingly on behalf of the respondent in view of the agreement that the applicant had made full and true disclosure to the respondent, that the erroneous description in the s 80G(6)(c) notice of the relevant loss as a 1986 loss was fatal to the applicant's appeal.

THE COURT ORDERS THAT:

1. The application be dismissed.

2. The applicant pay the respondent's costs of the application.