H R Sinclair & Son Pty Ltd v Federal Commissioner of Taxation [1966] HCA 39; (1966) 114 CLR 537 (2 June 1966)

HIGH COURT OF AUSTRALIA

H. R. SINCLAIR & SON PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1966] HCA 39; (1966) 114 CLR 537

Income Tax (Cth)

High Court of Australia
Taylor(1), Menzies(2) and Owen(3) JJ.

CATCHWORDS

Income Tax (Cth) - Assessable income - Deductions allowed for payments of royalties to third person - Refund of payments to taxpayer in subsequent year - Year of income - Whether assessable income in subsequent year - Whether assessments of earlier years must be amended - Dispute with third person as to amount of payments - Refund to taxpayer in settlement of dispute - Whether amounts refunded of income or capital nature - Income Tax and Social Services Contribution Assessment Act 1936-1961 (Cth), ss. 6, 26 (e), 72 (2), 74 (2), 170.

HEARING

Melbourne, 1966, May 11, 12;
Sydney, 1966, June 2. 2:6:1966
CASE STATED under s. 18 of the Judiciary Act 1903-1965 (Cth).

DECISION

June 2.
The following written judgments were delivered: -
TAYLOR J. The case stated raises the question whether the sum of 3,461 its assessable income of the income year in which it was received. (at p541)

2. The case shows that: -

(1) In the income years which ended in June 1957, 1958, 1959 and 1960 the appellant paid royalties to the Forests Commission of the State of Victoria in respect of timber removed from forest reserves in that State.

(2) Such royalties were paid at the rates specified in the "Timber Licences" held by the appellant from time to time.

(3) Royalties at the rates specified in the "Timber Licences" were legally payable and the appellant was unable to obtain supplies of timber from these sources without first paying royalties at those rates.

(4) Such royalties were claimed by the Forests Commission to have been calculated in accordance with a formula fixed by it in order, broadly, to provide differential rates to timber merchants according to the varying costs of transport from the forest to the mill.

(5) During the years 1957, 1958, 1959 and 1960 the appellant denied and continued to deny that the rates specified in its licences were calculated in accordance with the prevailing formula and maintained that, according to the formula, the rates specified in its licences should have been lower.

(6) Protracted negotiations finally resulted in an acknowledgment by the Commission that lower rates should have been specified in the appellant's licences and that if this had been done it would have resulted in a saving to the appellant in royalties of the sum 3,461 pounds 10s. 11d.

(7) On 7th November 1960 the Forests Commission refunded to the appellant the sum of 3,461 pounds 10s. 11d.

(8) In the appellant's returns of income made pursuant to the Income Tax and Social Services Contribution Assessment Act the appellant had claimed as deductions for the purpose of arriving at its taxable income in each of the four last-mentioned years the amounts which, in accordance with its licences from time to time, it had paid to the Commission for royalties and these amounts had been allowed as deductions by the respondent in the assessment of the appellant to tax in respect of each of those years. (at p542)

3. The problem in the appeal is whether in the circumstances disclosed by the case stated it was proper to take into account the receipt of the sum in question for the purpose of ascertaining the gross "proceeds" of the business conducted by the appellant during the year which ended on 30th June 1961. This question is a practical one and its answer cannot be made to depend upon what deductions were or were not allowed pursuant to the Income Tax and Social Services Contribution Assessment Act in assessing the taxable income of the appellant and, ultimately, its liability to tax in past years. This, it seems to me, is quite beside the point in considering the question under review. The character of the amount which the appellant received cannot, in the absence of some appropriate statutory provision, be thought to vary according to whether or not deductions were claimed and allowed of expenditure which includes the sum now reimbursed. Indeed, the respondent ultimately conceded that the fact that the deductions had been allowed in past years could not affect the answer to the question. (at p543)

4. However, it was contended that it would be more appropriate to treat the payment to the appellant as a diminution of its business outgoings in the earlier years rather than as assessable income for the year in question. Problems bearing some similarity to that which arises in this case have not infrequently been dealt with in this manner in England and, no doubt, it would in many cases be more equitable to reopen the earlier assessments and make the appropriate adjustments. But in England, where the relevant legislation permits this course, the matter seems to have been treated not so much as a question of business accounting as an appropriate method of adjusting the taxpayer's liability to tax. However, there is no power to adopt this course in Australia except in circumstances which do not present themselves in this case and I do not think the English cases by any means require the conclusion that, under the provisions of the Australian Act, the refund in this case was not assessable income of the appellant in the year of its receipt. Yet the appellant asserts on the strength of the English cases that the amount received by it should be regarded merely as a diminution of its business outgoings in past years and not as part of the proceeds of its business in the year of its receipt and, therefore, a receipt of moneys which does not effect its liability to tax in any year. It should be observed, however, that in the present case the royalties paid in the earlier years were legally payable and were properly taken into account for the purpose of determining the net proceeds of its business in those years. (at p543)

5. The question, therefore, resolves itself into a consideration of the character of the receipt in question. There was a suggestion that the payment was made and received not merely as a voluntary refund but by way of compromise of past and future claims. In my opinion, however, there is no substance in this suggestion; the payment represents no more than a voluntary refund of part of the royalties which had been legally exacted. The refund was made because after protracted representations and negotiations the Commission conceded that it had, from time to time, incorrectly applied the formula so far as the appellant was concerned and decided that, apparently, in common fairness it should make the refund in question. In these circumstances I can see no reason why the amount should not be regarded as properly taken into account in determining the proceeds of the appellant's business of the year in which it was paid. Its attempts - which in the end were successful - to obtain a refund of amounts which it contended had been exacted as the result of the misapplication of the formula were just as much an activity of the business as would have been an attempt to avoid an overcharge in the first instance and the amount recovered in the year ended under review must be taken to have formed part of the appellant's income for that year. (at p544)

6. Reference was made to provisions such as ss. 72 (2) and 74 (2) of the Act which provide, in effect, that refunds of amounts paid in respect of certain specified outgoings shall form part of a taxpayer's assessable income in the year of receipt. These are special provisions supplementary to the earlier provisions of those sections which allow deductions in respect of certain taxes and other specified items of expenditure. It was pointed out that these provisions do not extend to refunds of the character in question here but the appellant placed little or no reliance upon this fact. Indeed, this circumstance throws no light on the problem for it appears quite clearly that the provisions referred to operate whether or not the initial expenditure upon the specified items was, or was not, a business expense. (at p544)

7. I, therefore, answer the question raised by the case in the affirmative. (at p544)

MENZIES J. I have had the advantage of reading the other judgments. I agree that the payment in question is not excluded from the category of income as a payment indeterminate in character in settlement of a dispute relating to fees and future royalties. I also agree that, in the circumstances stated, the payment should be regarded as part of the annual proceeds of the taxpayer's timber-getting business. The taxpayer itself so treated the payment in its accounts and, in my opinion, it was correct in doing so. (at p544)

2. I agree that the question submitted to us should be answered in the affirmative. (at p544)

OWEN J. The question is whether the amount of 3,461 pounds 10s. 11d. received by the taxpayer company from the Forests Commission during the year ending 30th June 1961 was part of its assessable income for that year. There is no doubt that the amounts of the royalties paid by the company to the Forests Commission in the years preceding that year were rightly claimed by it as deductions in each of those earlier years and were rightly allowed by the Commissioner since they were calculated in accordance with the rates set out in the licences under which the company was permitted to take timber from the State forests and the company was bound to comply with the terms of its licences. But the fact that the amounts so paid were properly claimed and allowed as deductions in assessing the company to tax in those earlier years does not determine the question whether the amount refunded is to be regarded as part of the company's assessable income for the year in which the refund was received. It had without doubt made a full and true disclosure of all the material facts necessary for the assessment of its tax in the preceding years and no error in calculation or mistake of fact had been made in assessing it to tax so that the case is not one in which the Commissioner could act under s. 170 of the Income Tax and Social Services Contribution Assessment Act 1936-1961 (Cth) and amend the earlier assessments. But it does not follow that the amount refunded must therefore be regarded as part of the company's assessable income of the year in which the refund was made. I mention this because many of the arguments put to us by the counsel for the Commissioner seemed to suggest that because the earlier payments had been allowed as deductions since they had been made in gaining the company's assessable income in those years, it necessarily followed that the refund was to be treated as a receipt of income. This, I think, is not the right approach. The real question is whether the amount received by way of refund was part of the company's assessable income for the year in which it was received. (at p545)

2. "Income from personal exertion" is defined by s. 6 of the Act to mean (inter alia) "income consisting of . . . the proceeds of any business carried on by the taxpayer" and "income from property" to mean "all income not being income from personal exertion" but there is no definition of "income". Counsel for the company put his submissions in two ways. In the first place he pointed out that the amount refunded was paid in settlement of a dispute between his client and the Forests Commission and this is undoubtedly the case. The compromise, he then submitted, was one which affected the future as well as the past rights and liabilities of the parties as to royalty payments and for this reason the amount in question was not a revenue receipt. It was, he said, analogous to the payments which were considered in McLaurin v. Federal Commissioner of Taxation [1961] HCA 9; (1961) 104 CLR 381 and in Allsop's Case [1965] HCA 48; (1965) 113 CLR 341 I do not agree that this is so. The compromise had no legal effect upon the future rights and liabilities of the company or of the Forests Commission. The Commission, under s. 51 of the Forests Act 1958 (Vict.) may grant licences conditioned upon the payment of such royalties as it determines and the person to whom a licence is granted is bound to comply with the conditions of his licence. It is true that the Commission had, in the course of its administration of the Forests Act, worked out a formula for use in determining the amounts of royalty to be charged to licensees and had failed to apply that formula correctly in the years 1957, 1958, 1959 and 1960 but the settlement of its dispute with the company did not bind it, as a matter of law, to continue to charge licence fees ascertained in accordance with the formula. The case cannot be treated as though the payment of the refund had been made in settlement of a variety of claims, some relating to the past and some to the future. In no way can it be said to resemble McLaurin's Case [1961] HCA 9; (1961) 104 CLR 381 or Allsop's Case [1965] HCA 48; (1965) 113 CLR 341 (at p546)

3. Counsel's second submission was that even if the compromise related only to royalties paid in past years, the amount refunded did not form part of the company's assessable income for the year in which it was received. He pointed out that there is nothing in the Act which expressly brings such a receipt into the category of assessable income although there are to be found provisions which appear to recognize that the refund of an amount which has been allowed as a deduction from the assessable income of an earlier year is not necessarily part of the assessable income in the year of receipt. Section 72 (2) is one example. It declares that where a taxpayer receives in the year of income a refund of an amount paid for rates or taxes which has earlier been allowed as a deduction, the amount refunded is assessable income, and there are other provisions to the like effect (see for instance s. 74 (2)). The refund, counsel went on to say, could not properly be described as income consisting of the proceeds of the taxpayer's business and he referred us to a passage in the judgment of Rowlatt J. in English Dairies Ltd. v. The Commissioners of Inland Revenue (1927) 11 Tax Cas 597, at p 605 In that case the taxpayer in 1920 had paid 8,236 pounds to the Food Controller who had claimed the payment in the belief that he was empowered to do so. The company debited this sum in its accounts for 1920 as being an outgoing expended for the purposes of its trade. Later the courts held that the Controller had no power to require the payment in question and in 1924 the amount was repaid to the taxpayer. The question arose whether, as the Crown claimed, the amount repaid should be taken into account as a receipt of the company's trade for the year 1920 which would involve a reopening of those accounts, or whether, as the taxpayer claimed, it was no part of the trading profits of the company for 1920 and should not be taken into account until 1924. Rowlatt J. upheld the Crown's contention and in the course of his judgment said "I quite agree that this sum by itself cannot be treated as in its nature a trade receipt. It is not a commercial operation to suffer extortion and it is not a commercial receipt to have the money handed back to you" (1927) 11 Tax Cas, at p 605 Before us counsel did not question the fact that the scheme of the Commonwealth Act differs substantially from that of the English legislation but he placed some reliance on this dictum of Rowlatt J. in support of his submission that the refund in the present case should not be regarded as bearing the character of income. He referred us also to a number of other English decisions but none of them seems to me to throw any real light on the question which arises in the present case. Nor, I think, is any assistance to be had from the decision in the New Zealand case of Cromwell Jockey Club v. Commissioner of Inland Revenue (N.Z.) (1954) 6 AITR 188 which was cited to us by counsel for the Commissioner. (at p547)

4. The conclusion to which I have come, not without doubt, is that the amount in question was properly treated by the Commissioner as part of the company's assessable income in the year ending 30th June 1961. The company's business was that of a saw-miller. It was in that capacity that it paid royalties for timber cut by it for the purposes of its business and it was in that capacity that it received the amount refunded. It was part of the proceeds of the business carried on by it and, in my opinion, properly found its place, as it did, in the company's profit and loss account for the year of its receipt and was taken into account in arriving at its net trading profit for that year although described in that account as a "non-taxable" receipt. (at p547)

5. I would therefore answer the question in the affirmative. (at p547)

ORDER

Question in case stated answered: "Yes". Costs of case stated reserved for the judge disposing of the appeal.