Northern Engineering Pty Ltd v Federal Commissioner of Taxation [1979] FCA 79; (1979) 42 FLR 301 (15 November 1979)

FEDERAL COURT OF AUSTRALIA

NORTHERN ENGINEERING PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION (1979) 42
FLR 301
Income Tax

COURT

FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
Brennan(1), Deane(2) and Toohey(3) JJ.

CATCHWORDS

Income Tax - Allowable deductions - Deductibility of losses incurred in previous years - Change in beneficial ownership of more than ninety per cent of issued capital - Same business test - Company not continuing to carry on business at all times during year of income - What constitutes carrying on business - Income Tax Assessment Act 1936 (Cth), s. 80E. In its return for the year ended 30th June, 1967, the appellant claimed to deduct losses incurred by it in earlier years, and the Commissioner disallowed the deduction. The appellant was a wholly-owned subsidiary of A. Ltd.; and in April 1967 more than ninety per cent of the issued capital of A. Ltd. was acquired by another company. Accordingly, for the appellant to be entitled to deduct its past losses, it had to show that it had carried on at all times during the year of income the same business as it carried on immediately before the change in the beneficial ownership of the shares took place, pursuant to s. 80E(1) (c) of the Income Tax Assessment Act.

The appellant was one of a group of companies of which A. Ltd. was the holding company; and it had carried on the business of buying and selling earthmoving equipment, dealing mostly but not exclusively with other members of the group. During 1967 the appellant's business was wound down: it sold the remainder of its trading stock, and purchased no more. It received the last payment from the sale of its trading stock in May 1967, and had no intention of resuming such trading.

After all its liabilities were discharged the appellant was left with one asset, a debt of some $800,000 owed to it by A. Ltd. On 30th June, 1967, A. Ltd. credited $28,105 to the appellant as a payment of interest. The appellant had in the past lent and borrowed money within the group; and had once or twice received interest, although not within the past five years.

Held: Per curiam - (1) The appellant did not carry on at all times during the year of income the same business as it carried on immediately before the change in beneficial ownership of the issued capital of its parent company.

(2) After it received the last payment from the sale of its trading stock, the appellant did not thereafter continue to carry on any business at all.

(3) Once the appellant's activities of a trading or profit-making nature had ended, in the circumstances its actions in leaving its surplus money as a loan owed to it by its sole shareholder were not indicative of the continuation of, nor even the orderly winding up of, its business.

Theophile v. Solicitor-General, (1950) AC 186, distinguished.

(4) Decision of Jenkinson J. affirmed.

HEARING

Melbourne, 1979, November 14-15. 15:11:1979
APPEAL.

The facts appear from the judgment.

C.A. Sweeney, for the appellant.

A.J. Myers, for the respondent.

Solicitors for the appellant: Ford & Co.

Solicitor for the respondent: B. J. O'Donovan (Commonwealth Crown Solicitor).

R. R. BOADEN

DECISION

November 15.

The following oral judgments were delivered.
BRENNAN J. This is an appeal from a judgment of Jenkinson J. dismissing an

appeal to the Supreme Court of Victoria from an amended assessment to tax of the appellant. (at p302)

2. In its return of income for the financial year ended 30th June, 1967, the appellant sought to deduct losses incurred in the years ended respectively 30th June, 1960, 1962, 1965 and 1966. The respondent by an amended notice of assessment allowed the deduction for the losses incurred in the respective years ended 30th June, 1965 and 1966 and the present appeal relates to the deductibility of the losses incurred in the respective income years ended 30th June, 1960 and 1962. (at p302)

3. The taxpayer was, at all relevant times, a wholly-owned subsidiary of Automotive and General Industries Ltd. On 25th April, 1967, the legal and beneficial ownership of more than ninety per cent of the issued capital of Automotive and General Industries Ltd. was acquired by another company, J.F.N. Investments Pty. Ltd. The result of the change of beneficial ownership of shares in Automotive and General Industries Ltd. was that the taxpayer was not, apart from the provisions of s. 80E of the Act in its relevant form, entitled to claim the benefit of a deduction of the losses of the relevant two prior years. (at p303)

4. The primary question which arises, and it arises under s. 80E (1) (c), is whether for the purposes of that section the taxpayer "carried on at all times during the year of income the same business as it carried on immediately before the change" in the beneficial ownership of the shares "took place". The appellant contends, and the respondent denies, that the conditions expressed in those paragraphs were satisfied. Jenkinson J. was not persuaded that the requirements of par. (c) were satisfied in relation to the year of income ended 30th June, 1967, for the reason that he was "not persuaded by the evidence that in June 1967 the taxpayer carried on any business". (at p303)

5. The appellant was at all material times a member of a group of companies of which Automotive and General Industries Ltd. was the holding company. It carried on the business of buying and selling by wholesale earthmoving and material-handling equipment. Its customers were for the most part members of the group, though there were some sales to outside customers. During the income year ended 30th June, 1967, the business was wound down. At the commencement of the income year trading stock to the value of $11,977.80 was on hand, but that stock was sold off during the year and the last payment for the last sale of that stock was received in May 1967. There was no evidence of the purchase of stock during the income year. (at p303)

6. Once that payment was received no further buying or selling took place and no further sales proceeds were received, nor did the appellant intend again to engage in those activities. Those activities were at an end. The appellant was left with substantial assets of the order of $800,000. Before the end of the income year it had discharged all its liabilities. Its assets then consisted of a debt owing by its holding company. The amount so owing had been increased from time to time, and on 30th June, 1967, it was augmented by an amount of $28,105 credited as interest on the sums which had been owing by the holding company during the income year. At 30th June, 1967, the balance standing to the credit of the appellant was $827,829. (at p303)

7. The appellant had, during a long period, lent moneys to or borrowed moneys from companies within the group, including its holding company, and it may be accepted that it had received interest on one or perhaps two occasions in earlier years. However, it had received no interest on moneys lent by it within the group during the five years antecedent to the relevant income year. There was no agreement between the companies that interest should be paid nor, as his Honour found, any hope or expectation on the part of those concerned in the control or management of the appellant, that interest would be paid. It was nevertheless a possibility that an amount would be credited to the appellant and debited to the holding company; a possibility which eventuated. (at p304)

8. The question is whether after the last payment of the price of trading stock was received the appellant continued to carry on until 30th June, 1967, a business which it had carried on at the time specified in s. 80E (1) (c). In my judgment the question must be answered in the negative for the reason that no business was carried on after the appellant's trading credits were paid and its trading liabilities discharged. When a company's business is closing down there comes a time when the activity of a trading or profit-making nature comes to an end. The business of the company is not carried on merely by managing or disposing of the company's assets otherwise than in a business. There was, as it seems to me, no element of business in the circumstances of the case here appearing in the movement of funds between the appellant and the other companies in the group. It was not shown that the movement of those funds was for the purpose of deriving any commercial benefit for the appellant and the mere existence of a debt owing by the holding company during the income year had no element of a business about it, nor was it in any relevant sense an incident of the trading business in which the appellant had been engaged. (at p304)

9. The depositing or leaving of the appellant's funds with the holding company appears merely to have been a mode of keeping, not of employing, its assets. Merely to preserve assets is not, at least in the circumstances of this case, to carry on a business. There is nothing to show that the activities of the appellant went beyond the keeping of the net assets with which it was left when its only business, the wholesale trading business, came to an end. (at p304)

10. Jenkinson J. was right to find that during a part of the income year the appellant did not carry on any business. It follows that the appeal should be dismissed with costs. (at p304)

DEANE J. The context in which this appeal from the Supreme Court of Victoria (Jenkinson J.) falls to be determined has been described by my brother Brennan in the course of the judgment which he has just delivered. At issue is the entitlement of Northern Engineering Pty. Ltd. ("the taxpayer") to the benefit of a deduction in respect of losses of previous tax years, in the assessment of income tax for the tax year ended 30th June, 1967, ("the tax year"). The past losses in question were incurred in the tax years ended 30th June, 1960, ($19,950) and 30th June, 1962, ($4,630). (at p305)

2. It is common ground between the parties that the taxpayer is only entitled to the benefit of the deduction in issue if the provisions of s. 80E of the Income Tax Assessment Act 1936 (Cth) in the form applicable to the tax year were satisfied. The primary question which arises is whether, for the purposes of that section, the taxpayer "carried on at all times during the year of income the same business as it carried on immediately before" 25th April, 1967, when a change took place in the beneficial ownership of more than ninety per cent of the issued capital of its parent company. (at p305)

3. Mr. Sweeney, for the appellant taxpayer, has submitted, in the course of a very able argument, that at all times during the year of income the taxpayer carried on a business of a wholesaler of material-handling and earthmoving equipment. He does not dispute that the taxpayer had disposed of all equipment prior to the commencement of June 1967. The submission which he advances on behalf of the taxpayer is that the business of the taxpayer did not come to an abrupt halt with the sale of all its equipment but that the business continued throughout the whole of the tax year even though, in the final stages, it may have been in the process of being finalized or wound up. For the purposes of testing that submission attention should be focused on the month of June 1967 which was the period in relation to which Jenkinson J. was not satisfied that the taxpayer carried on any business at all. (at p305)

4. By the commencement of June 1967, as has been mentioned, the taxpayer had disposed of all its equipment. The last sale of equipment was in April 1967. The last payment received for equipment was in May 1967. The taxpayer's only asset of substance was the inter-company debt owing to it by its holding company upon which interest was subsequently to be credited. The simple point in the case, as I see it, is whether, as at June 1967, the effect of this outstanding debt owing to the taxpayer was that the taxpayer was still in the process of carrying on its former business albeit for the purpose of winding it up. In my view, the outstanding debt did not have that effect. (at p305)

5. There is nothing in the evidence to indicate that, during the month of June 1967, the taxpayer sought to have the outstanding debt owed to it by its parent company paid to it. There is nothing in the evidence to indicate that, during the month of June 1967, the fact of the outstanding debt involved any business activity at all or that that debt represented an outstanding or uncompleted item in the orderly winding up of the business previously carried on by the taxpayer or constituted a basis for saying that the taxpayer continued to carry on that or any other business. On the contrary, it would appear to be a reasonable inference from the evidence that the taxpayer, being the creature of its holding company and those who controlled its holding company, was content that the monetary surplus remaining after the winding up of its former business should be in the form of a loan owing to it by its sole shareholder. The amount of that loan represented the taxpayer's financial surplus after it had brought its previous business to an end. The evidence indicates that the loan moneys were not in fact ever paid. The loan was apparently released by an assignment of the taxpayer's assets to the holding company. (at p306)

6. The fact that on 30th June, 1967, interest was credited to the taxpayer in respect of the debt owing to it by its parent company does not, in itself, indicate any continuation or extension of the business of a wholesale dealer in the relevant equipment or in itself establish that the taxpayer, during June 1967, was carrying on an independent business of investing money. The evidence does not indicate that there were any discussions or negotiations during June 1967 leading to the crediting of that interest. The taxpayer did not dispute the learned trial judge's finding that he was not persuaded that, during the tax year up until late June, any person concerned in the management or control or service of the taxpayer had any expectation or hope that the taxpayer would derive income by way of interest on the funds owing to it. The evidence is quite consistent with the interest only being credited at the end of June 1967 as part of overall group financial and taxation planning without any active involvement of the taxpayer in any independent negotiation or, indeed, in any activity at all prior to the actual decision that the credit should be raised. (at p306)

7. In these circumstances, the conclusion which the learned trial judge reached that he was not persuaded that the taxpayer carried on any business at all during June 1967 was not only warranted by the evidence, it was, in my view, plainly correct. (at p306)

8. Mr. Sweeney relied upon the decision of the House of Lords in Theophile v. Solicitor-General (1950) AC 186 to support a general proposition that a taxpayer does not cease to carry on business for the purposes of s. 80E in its relevant form while any debts remain outstanding either to, or by, him. Theophile's case was concerned with the bankruptcy law and was based on cases in that field. In my view, it cannot be taken as authority for the proposition that a taxpayer is for the purposes of s. 80E of the Income Tax Assessment Act 1936 (in the form applicable to the tax year) carrying on business while so ever any debt owing to him remains uncollected or unpaid. (at p307)

9. A final submission which was made on behalf of the taxpayer related to the fact that the present proceedings will resolve entitlement to money paid into court by or on behalf of the taxpayer in proceedings instituted by the Commissioner in the Supreme Court of Victoria for recovery of the tax assessed. These proceedings for recovery of the tax were instituted in the Supreme Court some considerable period of time after the end of the tax year. In my view, particularly in view of the evidence that, after the tax year, all the taxpayer's assets and liabilities "were assigned to the holding company", there is no substance in the submission that either the subsequent involvement in the proceedings concerning the tax or the payment of the relevant money into court and subsequent dispute as to entitlement to recover it have the retrospective operation of producing the consequence that the taxpayer was, in June 1967, carrying on the business of a wholesaler of material-handling and earthmoving equipment. (at p307)

10. In the result, the taxpayer did not establish its entitlement to the benefit of the relevant deduction. (at p307)

11. I agree with the orders proposed by Brennan J. (at p307)

TOOHEY J. In my view, this appeal should be dismissed. I agree with the reasons for decision delivered by the other members of the court and would just add this: The issue is very much one of fact and in that regard the conclusion reached by his Honour, Jenkinson J. that the taxpayer did not at all times carry on business during the year of income, was not only open to his Honour but was the correct conclusion. (at p307)

2. It is unnecessary to consider whether the expression "at all times" in s. 80E (1) (c), as it stood at the relevant time, required day by day activity in the carrying on of a business. That may well depend upon the nature of the business being conducted. (at p307)

3. The fact is that in the present case the taxpayer, in the process of winding down, had by April 1967 disposed of all its trading stock in a business which his Honour, in Northern Engineering Pty. Ltd. v. Federal Commissioner of Taxation (1979) ATC 4238 , described as: "the business of purchasing vehicles used in handling materials such as forklift trucks, and of purchasing other equipment in which the group of companies controlled by Automotive and General Industries Ltd. was trading and of selling by wholesale what was purchased to companies within the group and to others" (1979) ATC, at p 4240 . (at p308)

4. Furthermore, it had, as his Honour found, divested itself of all its assets except a debt of some $800,000 owed to it by its parent company, Autogen. On or about 30th June, 1967, interest of $28,105 was raised in respect of that debt. The circumstances in which it was raised did not emerge with any clarity, nor did it appear whether it was pursuant to some earlier agreement. (at p308)

5. The taxpayer disavowed the notion that it carried on the business of earning interest on loans. In my opinion it failed to demonstrate on the facts of this case that the raising of an interest charge in respect of money transferred to its parent company constituted the carrying on of any part of its business. (at p308)

6. I agree that there is no substance in the notion that the taxpayer's conduct in connexion with action taken by the Commissioner of Taxation for the recovery of the tax in issue and the payment of that money into court was the carrying on of its business. (at p308)

7. It follows then that the taxpayer failed to make good the proposition that at all times during the year of income it carried on business. This makes it unnecessary to consider any of the other elements of s. 80E. The appeal should be dismissed. (at p308)

ORDER

ORDER: 1. The appeal be dismissed. 2. The appellant pay to the respondent his costs of this appeal.

Appeal dismissed with costs.