Augustus Downs Pastoral Co Ltd v Federal Commissioner of Taxation [1930] HCA 13; (1930) 44 CLR 155 (5 August 1930)

HIGH COURT OF AUSTRALIA

Augustus Downs Pastoral Company Limited Appellant; and The Federal Commissioner of Taxation Respondent.

H C of A

5 August 1930

Rich, Starke and Dixon JJ.

Maughan K.C. (with him Harper), for the appellant.

E. M. Mitchell K.C. (with him A. M. Cohen), for the respondent.

Maughan K.C., in reply.

The Court delivered the following written judgment:—

Aug. 5

Rich, Starke and Dixon JJ.

The appellant has been assessed, somewhat tardily, to war-time profits tax in respect of the year ending 30th June 1917. Its business is that of a pastoralist. This business is conducted upon a sheep station which the appellant purchased on 8th May 1914, and which it began to operate on 13th June 1914. By virtue of sec. 16 (13) of the War-time Profits Tax Assessment Act 1917-1918, the appellant has been assessed as if a new business had been commenced on 13th June 1914, with the result that its pre-war standard of profits has, pursuant to sec. 16 (6), been taken to be the statutory percentage on the average amount of capital employed in the business during the accounting period, namely, the year ending 30th June 1917.

In determining the average amount of capital it is necessary to apply the provisions of sec. 17 (1) of the Act which provides: "The amount of the capital of a business shall be taken to be the amount of its capital paid up by the owner in money or in kind, together with all accumulated trading profits invested in the business, with the addition or subtraction of balances brought forward from previous years to the credit or debit respectively of profit and loss account." As Lord Buckmaster pointed out in Merlimau Rubber Estates Ltd. v. Commissioners of Inland Revenue[1], "capital for the purpose required is not the capital sunk in the business unless it can be brought within the words of the definition," which are "complete, and exclude all that is without their compass." In the present case, the Company paid £80,000 for its station and the live-stock thereon, and of this sum, £63,800 represented the price of the live-stock. It found the money to do this from a paid-up capital of £42,000 and a loan from the bank of £40,000. £2,000 of its capital appears to have been applied in working expenses. In our opinion, so far as these assets were acquired with the Company's money, capital was paid up, by the owner, in money within the meaning of sec. 17 (1). The Commissioner acted on this view and, in doing so, he treated the whole paid-up capital of the Company, namely, £42,000, as having been expended in the acquisition of the assets. In respect of the borrowed money, in calculating the profits of the accounting period, he made the allowance prescribed by sec. 15 (15). But in calculating the profits, he applied the provisions of the War-time Profits Tax Assessment Act 1924-1926, sec. 2 (1A) and (3B), under which the taxpayer had elected to have his assessment made, so that in determining his liability to pay tax, live-stock should be taken into account at the value selected by him within the limits specified in sub-sec. 1. In so doing the Commissioner acted rightly. But the appellant contends that these provisions not only should be applied in determining the profits of the accounting period, but that they should also be given an operation in ascertaining the capital; an operation which would result in the selected values being assigned, in lieu of the actual price paid, to so much of the assets acquired as consisted of live-stock. This contention the Commissioner disallowed, and from his disallowance the appellant now appeals. In our opinion, the Commissioner's view is clearly right. In the first place sec. 2 of the War-time Profits Tax Assessment Act 1924-1926 requires the use of selected values (when the taxpayer elects to resort to them) for the purpose of taking into account live-stock not disposed of at the beginning or end of the respective periods which are required to be taken into consideration for the purpose of assessment. The expression "live-stock" is defined to this effect by sub-sec. 2. This definition confines the application of the provisions to the ascertainment of the profit and loss of an accounting period when it is necessary to take into account at a value the live-stock on hand at the beginning and at the end of the period. Such a process is quite irrelevant to the ascertainment of the capital of the business, at least in so far as it consists of the amount of its capital paid up, by the owner, in money or in kind within the meaning of sec. 17. Nor does it become any more relevant because in this case the average amount must be found of the capital employed in the business during the accounting period. In the next place, the provisions of sec. 17 are specific, and require that the capital of the business be taken to be, as the first item, the amount of its capital paid up by the owner in money or in kind. In this case, as we have already said, we think the capital was paid up in money and that there is no room for taking in assets at a value. Further, if it were otherwise, sub-sec. 4 of sec. 17 would be the appropriate provision for the purpose of valuation. When, however, the Commissioner turned to the next items prescribed by sec. 17 (1) as the measure of capital, he took the step of resorting to the provisions of sec. 2 of the War-time Profits Tax Assessment Act 1924-1926, and to this the taxpayer objects. Instead of taking the actual balances brought forward from previous years to the credit or debit of profit and loss account, he reconstructed that account by taking the selected values of live-stock in lieu of the values adopted in the appellant's commercial account. His counsel concedes, and in our opinion rightly, that in doing this the Commissioner is mistaken and departed from the true application of sec. 17 (1). As the result appears to be unfavourable to the taxpayer, and the error is covered by his objection, the assessment must be altered in this respect.

The formal order upon this special case will be: Answer to question 1—No; to question 2—By applying sec. 17 of the War-Time Profits Tax Assessment Act 1917-1918 without recourse to the provisions of sec. 2 of the War-time Profits Tax Assessment Act 1924-1926. Costs of this special case will be costs in the appeal.

Questions answered accordingly.

Solicitors for the appellant, Minter, Simpson & Co.

Solicitor for the respondent, W. H. Sharwood, Commonwealth Crown Solicitor.

[1] (1923) A.C. 283, at p. 286.