Federal Commissioner of Taxation v Gordon [1930] HCA 49; (1930) 43 CLR 456 (15 April 1930)

HIGH COURT OF AUSTRALIA

H C of A

On appeal from the High Court (Dixon J.).

22 November 1929

Dixon J.

Mason, for the appellant.

E. F. McDonald, for the respondent.

Nov. 22

Dixon J. delivered the following written judgment:—

The question raised for decision in this case is whether a member's ordinary subscription to the Graziers' Association of New South Wales is an allowable deduction in ascertaining his taxable income from personal exertion in the occupation of a grazier. The body is an association of persons and companies engaged or interested in pastoral pursuits in Australia, with a "sphere of operation" restricted to territory which lies within New South Wales. [His Honor then stated the objects of the Association as set out in par. 4 of the above admissions of fact, and continued:—] The Association is managed by an elective general council which admits to membership. The council may appoint from among its own members an executive committee for purposes of administration. Members are bound in employing labour not to do so otherwise than upon terms and conditions approved by the general council and to observe its regulations and orders, and in case of a difficulty or dispute arising between the member and his employees, which they are unable to settle, to report it to the general secretary and to the council or executive, who may investigate it and deal with it as they think best. The general council is given a full power to determine the basis and conditions upon which the Association shall undertake the engagement of labour required by members. The executive committee is the committee of management for the purpose of industrial arbitration legislation. It may make industrial agreements on behalf of the Association and its members; bring industrial disputes and matters before the Courts; formulate or authorize claims, defences and proceedings; and nominate or elect delegates or representatives under the Acts. A member who owns sheep, cattle or horses must pay an annual subscription calculated at £1 a thousand sheep (cattle and horses being reckoned upon an equivalence of two sheep to the beast), unless he owns not more than one thousand, in which case he pays 10s. Upon disposing of his pastoral interests he may remain a member for three years at a subscription of £1. Persons who own pastoral properties are admitted to membership "in respect of" the property. Those who do not, but are "interested in the pastoral industry," must apply "in a form prescribed in that behalf," and, if admitted, pay an annual subscription of three guineas. The ordinary funds of the Association must be applied only in promoting its objects, but the Association may provide for the application of money to the furtherance of political objects. Payments must, however, be made out of a special fund to which members are not compelled to contribute. The council may appoint a special purposes committee to deal with political questions and matters. In fact, these powers have been exercised and a special purposes committee has been formed, of which the appellant happens to be a member. It controls a separate fund, to which the appellant also happens to have contributed. The Association is represented in the "Country Party." Its political activities are, however, kept distinct and separate from its ordinary functions. In practice the Association has been much concerned with industrial matters. It had taken part in the proceedings which in 1907, 1911, 1917, 1922 and 1926 resulted in awards of the Commonwealth Court of Conciliation and Arbitration relating to the pastoral industry, and it circulated copies of these awards among its members. It similarly dealt with State proceedings and awards. It has also provided legal aid in cases which appeared to affect its members industrially, fiscally or otherwise.

The appellant has been a member since 1911, and his subscription, based upon stock, has always exceeded £15. His assessable income from personal exertion liable to income tax for the financial year commencing 1st July 1927 consisted wholly of receipts from his pastoral business in New South Wales. The Commissioner's assessment for that financial year is expressed to be based upon his income earned during the twelve months immediately preceding, but it seems not unlikely that it was actually based on income earned in the calendar year 1926. On 10th September 1926 the appellant paid to the Association £15 17s. 8d., his annual subscription for this calendar year; and in his return he claimed to deduct £15 on this account. The Commissioner disallowed the deduction. Hence this appeal.

During the twelve months ending 30th June 1927 and during the calendar year 1926 the Association engaged in its usual activities. It was much occupied from the beginning of 1927 in industrial disputes heard before the Commonwealth Court of Conciliation and Arbitration, to which the appellant was a party. In 1926 it supplied the appellant with agreement forms for his labour, and also tally-books. An annual conference was held in April 1926, at which a large number of matters affecting the business of graziers was dealt with, including the marketing of wool.

The decision of the question whether the appellant's subscription should be deducted in ascertaining his taxable income depends upon sec. 23 (1) (a) and sec. 25 (e) of the Income Tax Assessment Act 1922-1927-1928. It is now established that these provisions apply in ascertaining the net "proceeds of any business carried on by the taxpayer" (see sec. 4, definition of "Income from personal exertion" ): Webster v. Deputy Federal Commissioner of Taxation[1] . Accordingly it is not permissible to determine the profits or gains of the business upon commercial principles subject to any special provisions of the Act, and then take these profits or gains into the assessable income; proceeding upon the analogy of the English cases of which the leading authority is Usher's Wiltshire Brewery Ltd. v. Bruce[2] .

Sec. 25 provides that a deduction shall not in any case be made in respect of any of the following matters: "(e) money not wholly and exclusively laid out or expended for the production of assessable income." This provision is based upon what is now rule 3 of cases I. and II. of Schedule D of the British Income Tax Act 1918; but, in applying the cases decided upon that enactment, care must be exercised because in the Commonwealth provision the words "assessable income" have been substituted for the words "the purposes of the trade, profession, employment, or vocation." At the same time, they do make it clear that the question propounded by the provision must be decided as a matter of fact in each case. (See the authorities cited by Rich J. in Maryborough Newspaper Co. v. Federal Commissioner of Taxation[3] .) They also make it clear that money expended not of necessity but voluntarily, and to secure an expedient aid to the business operations which produce the assessable income, may yet be expended wholly and exclusively for the production of assessable income (see British Insulated and Helsby Cables Ltd. v. Atherton[4] , Morley v. Lawford & Co.[5] and cases there cited; and cf. Bourne & Hollingsworth Ltd. v. Ogden[6] ).

The Graziers' Association of New South Wales performs for the appellant important work which arises in the conduct of his business, and affords him assistance in carrying it on. It also attempts to promote and protect the general interests of the business of grazier and pastoralist industrially, commercially, and financially. In doing so it extends its activity or its influence into politics, but without confusing or impairing the performance of its main functions, namely, the service of its members in their occupation where combination is effective, and the promotion of their business advantage. I think the subscription was paid to secure these advantages to the business by which assessable income was earned, and for no other purpose or reason, and that it was money wholly and exclusively expended for the production of assessable income. The deduction of the amount is, therefore, not prohibited.

The next question is whether it is authorized. This depends upon sec. 23 (1) (a), which is now cast in a form which makes applicable Alliance Assurance Co. v. Federal Commissioner of Taxation[7] . The material words of the provision are "in calculating the taxable income of a taxpayer the total assessable income derived by the taxpayer from all sources in Australia shall be taken as a basis, and from it there shall be deducted ... all losses and outgoings ... actually incurred in gaining or producing the assessable income." It is to be noticed that the loss or outgoing must be incurred in gaining or producing the assessable income, which naturally means the gross income derived during the accounting period not exempt from taxation. Some observations in Ward & Co. v. Commissioner of Taxes[8] may perhaps be relied upon to diminish the force or the effect of the word "the" in the phrase "in producing the assessable income" ; but for the purpose of my decision I find it unnecessary to deal with this question. In point of fact, I consider that the subscription, the outgoing, was incurred in producing the gross income from personal exertion derived during the calendar year 1926, and during the financial year ended 30th June 1927.

It was suggested on behalf of the Crown that an investigation should be made to ascertain how much of the subscription had been applied in the hands of the Association to purposes conducive to the production of the appellant's assessable income, and Lochgelly Iron and Coal Co. v. Crawford[9] and Grahamstown Iron Co. v. Crawford[10] were cited. These cases appear to be considered authority for the position that upon a claim to deduct a subscription to a trade society so much, and so much only, is allowable as is proportionate to the expenditure which the society has actually made towards increasing the taxpayer's profits. (See Konstam on the Law of Income Tax, 4th ed., p. 146.) Probably the course which the first of these cases took was due entirely to the footing upon which it was conducted by counsel. The second, in the result, decides no more than that, before the deduction is allowed, the subjects upon which the society expends its funds should be known. Some of the observations made by Lord Strathclyde and Lord Johnston do suggest that they considered a dissection of the societies' expenditure might be proper in order to determine what portion of the subscription was allowable. I should have thought that the subscription was an entire sum which either was or was not wholly and exclusively laid out and expended by the taxpayer for the purpose of his trade or for the production of income, and that why the manner in which the society expended its funds was relevant to this question was because it showed or tended to show the purposes for which the taxpayer laid out his money in paying the subscription. However this may be, it is enough in this case for me to say that, in my opinion, the expenditure by the taxpayer was altogether made in gaining or producing his assessable income and for the production of his assessable income, and that the objects to which the society confined the expenditure of its general funds, to which the subscription went, do not extend beyond purposes calculated to aid the taxpayer in the production of income.

The appeal will be allowed with costs, and the assessed taxable income from personal exertion will be reduced by £15.

From this decision the Commissioner of Taxation now appealed to the Full Court.

Appeal dismissed with costs.

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

Solicitors for the respondent, McLachlan, Westgarth & Co.

H C of A

On appeal from the High Court (Dixon J.).

15 April 1930

Isaacs C.J., Rich and Starke JJ.

Mason, for the appellant.

E. F. McDonald, for the respondent.

Nov. 22

Dixon J

. delivered the following written judgment:—

The question raised for decision in this case is whether a member's ordinary subscription to the Graziers' Association of New South Wales is an allowable deduction in ascertaining his taxable income from personal exertion in the occupation of a grazier. The body is an association of persons and companies engaged or interested in pastoral pursuits in Australia, with a "sphere of operation" restricted to territory which lies within New South Wales. [His Honor then stated the objects of the Association as set out in par. 4 of the above admissions of fact, and continued:—] The Association is managed by an elective general council which admits to membership. The council may appoint from among its own members an executive committee for purposes of administration. Members are bound in employing labour not to do so otherwise than upon terms and conditions approved by the general council and to observe its regulations and orders, and in case of a difficulty or dispute arising between the member and his employees, which they are unable to settle, to report it to the general secretary and to the council or executive, who may investigate it and deal with it as they think best. The general council is given a full power to determine the basis and conditions upon which the Association shall undertake the engagement of labour required by members. The executive committee is the committee of management for the purpose of industrial arbitration legislation. It may make industrial agreements on behalf of the Association and its members; bring industrial disputes and matters before the Courts; formulate or authorize claims, defences and proceedings; and nominate or elect delegates or representatives under the Acts. A member who owns sheep, cattle or horses must pay an annual subscription calculated at £1 a thousand sheep (cattle and horses being reckoned upon an equivalence of two sheep to the beast), unless he owns not more than one thousand, in which case he pays 10s. Upon disposing of his pastoral interests he may remain a member for three years at a subscription of £1. Persons who own pastoral properties are admitted to membership "in respect of" the property. Those who do not, but are "interested in the pastoral industry," must apply "in a form prescribed in that behalf," and, if admitted, pay an annual subscription of three guineas. The ordinary funds of the Association must be applied only in promoting its objects, but the Association may provide for the application of money to the furtherance of political objects. Payments must, however, be made out of a special fund to which members are not compelled to contribute. The council may appoint a special purposes committee to deal with political questions and matters. In fact, these powers have been exercised and a special purposes committee has been formed, of which the appellant happens to be a member. It controls a separate fund, to which the appellant also happens to have contributed. The Association is represented in the "Country Party." Its political activities are, however, kept distinct and separate from its ordinary functions. In practice the Association has been much concerned with industrial matters. It had taken part in the proceedings which in 1907, 1911, 1917, 1922 and 1926 resulted in awards of the Commonwealth Court of Conciliation and Arbitration relating to the pastoral industry, and it circulated copies of these awards among its members. It similarly dealt with State proceedings and awards. It has also provided legal aid in cases which appeared to affect its members industrially, fiscally or otherwise.

The appellant has been a member since 1911, and his subscription, based upon stock, has always exceeded £15. His assessable income from personal exertion liable to income tax for the financial year commencing 1st July 1927 consisted wholly of receipts from his pastoral business in New South Wales. The Commissioner's assessment for that financial year is expressed to be based upon his income earned during the twelve months immediately preceding, but it seems not unlikely that it was actually based on income earned in the calendar year 1926. On 10th September 1926 the appellant paid to the Association £15 17s. 8d., his annual subscription for this calendar year; and in his return he claimed to deduct £15 on this account. The Commissioner disallowed the deduction. Hence this appeal.

During the twelve months ending 30th June 1927 and during the calendar year 1926 the Association engaged in its usual activities. It was much occupied from the beginning of 1927 in industrial disputes heard before the Commonwealth Court of Conciliation and Arbitration, to which the appellant was a party. In 1926 it supplied the appellant with agreement forms for his labour, and also tally-books. An annual conference was held in April 1926, at which a large number of matters affecting the business of graziers was dealt with, including the marketing of wool.

The decision of the question whether the appellant's subscription should be deducted in ascertaining his taxable income depends upon sec. 23 (1) (a) and sec. 25 (e) of the Income Tax Assessment Act 1922-1927-1928. It is now established that these provisions apply in ascertaining the net "proceeds of any business carried on by the taxpayer" (see sec. 4, definition of "Income from personal exertion" ): Webster v. Deputy Federal Commissioner of Taxation[11] . Accordingly it is not permissible to determine the profits or gains of the business upon commercial principles subject to any special provisions of the Act, and then take these profits or gains into the assessable income; proceeding upon the analogy of the English cases of which the leading authority is Usher's Wiltshire Brewery Ltd. v. Bruce[12] .

Sec. 25 provides that a deduction shall not in any case be made in respect of any of the following matters: "(e) money not wholly and exclusively laid out or expended for the production of assessable income." This provision is based upon what is now rule 3 of cases I. and II. of Schedule D of the British Income Tax Act 1918; but, in applying the cases decided upon that enactment, care must be exercised because in the Commonwealth provision the words "assessable income" have been substituted for the words "the purposes of the trade, profession, employment, or vocation." At the same time, they do make it clear that the question propounded by the provision must be decided as a matter of fact in each case. (See the authorities cited by Rich J. in Maryborough Newspaper Co. v. Federal Commissioner of Taxation[13] .) They also make it clear that money expended not of necessity but voluntarily, and to secure an expedient aid to the business operations which produce the assessable income, may yet be expended wholly and exclusively for the production of assessable income (see British Insulated and Helsby Cables Ltd. v. Atherton[14] , Morley v. Lawford & Co.[15] and cases there cited; and cf. Bourne & Hollingsworth Ltd. v. Ogden[16] ).

The Graziers' Association of New South Wales performs for the appellant important work which arises in the conduct of his business, and affords him assistance in carrying it on. It also attempts to promote and protect the general interests of the business of grazier and pastoralist industrially, commercially, and financially. In doing so it extends its activity or its influence into politics, but without confusing or impairing the performance of its main functions, namely, the service of its members in their occupation where combination is effective, and the promotion of their business advantage. I think the subscription was paid to secure these advantages to the business by which assessable income was earned, and for no other purpose or reason, and that it was money wholly and exclusively expended for the production of assessable income. The deduction of the amount is, therefore, not prohibited.

The next question is whether it is authorized. This depends upon sec. 23 (1) (a), which is now cast in a form which makes applicable Alliance Assurance Co. v. Federal Commissioner of Taxation[17] . The material words of the provision are "in calculating the taxable income of a taxpayer the total assessable income derived by the taxpayer from all sources in Australia shall be taken as a basis, and from it there shall be deducted ... all losses and outgoings ... actually incurred in gaining or producing the assessable income." It is to be noticed that the loss or outgoing must be incurred in gaining or producing the assessable income, which naturally means the gross income derived during the accounting period not exempt from taxation. Some observations in Ward & Co. v. Commissioner of Taxes[18] may perhaps be relied upon to diminish the force or the effect of the word "the" in the phrase "in producing the assessable income" ; but for the purpose of my decision I find it unnecessary to deal with this question. In point of fact, I consider that the subscription, the outgoing, was incurred in producing the gross income from personal exertion derived during the calendar year 1926, and during the financial year ended 30th June 1927.

It was suggested on behalf of the Crown that an investigation should be made to ascertain how much of the subscription had been applied in the hands of the Association to purposes conducive to the production of the appellant's assessable income, and Lochgelly Iron and Coal Co. v. Crawford[19] and Grahamstown Iron Co. v. Crawford[20] were cited. These cases appear to be considered authority for the position that upon a claim to deduct a subscription to a trade society so much, and so much only, is allowable as is proportionate to the expenditure which the society has actually made towards increasing the taxpayer's profits. (See Konstam on the Law of Income Tax, 4th ed., p. 146.) Probably the course which the first of these cases took was due entirely to the footing upon which it was conducted by counsel. The second, in the result, decides no more than that, before the deduction is allowed, the subjects upon which the society expends its funds should be known. Some of the observations made by Lord Strathclyde and Lord Johnston do suggest that they considered a dissection of the societies' expenditure might be proper in order to determine what portion of the subscription was allowable. I should have thought that the subscription was an entire sum which either was or was not wholly and exclusively laid out and expended by the taxpayer for the purpose of his trade or for the production of income, and that why the manner in which the society expended its funds was relevant to this question was because it showed or tended to show the purposes for which the taxpayer laid out his money in paying the subscription. However this may be, it is enough in this case for me to say that, in my opinion, the expenditure by the taxpayer was altogether made in gaining or producing his assessable income and for the production of his assessable income, and that the objects to which the society confined the expenditure of its general funds, to which the subscription went, do not extend beyond purposes calculated to aid the taxpayer in the production of income.

The appeal will be allowed with costs, and the assessed taxable income from personal exertion will be reduced by £15.

From this decision the Commissioner of Taxation now appealed to the Full Court.

Appeal dismissed with costs.

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

Solicitors for the respondent, McLachlan, Westgarth & Co.

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1. [1926] HCA 52; (1926) 39 C.L.R. 130.

2. (1915) A.C. 433.

3. Ante, p. 450.

4. (1926) A.C. 205, particularly at p. 212.

5. (1928) 140 L.T. 125.

6. (1929) 45 T.L.R. 222.

7. [1921] HCA 36; (1921) 29 C.L.R. 424.

8. (1923) A.C. 145, at p. 148.

9. (1913) S.C. 810; 50 Sc.L.R. 597; 6 Tax Cas. 267.

10. (1915) S.C. 536; 52 Sc.L.R. 385; 7 Tax Cas. 25.

11. [1926] HCA 52; (1926) 39 C.L.R. 130.

12. (1915) A.C. 433.

13. Ante, p. 450.

14. (1926) A.C. 205, particularly at p. 212.

15. (1928) 140 L.T. 125.

16. (1929) 45 T.L.R. 222.

17. [1921] HCA 36; (1921) 29 C.L.R. 424.

18. (1923) A.C. 145, at p. 148.

19. (1913) S.C. 810; 50 Sc.L.R. 597; 6 Tax Cas. 267.

20. (1915) S.C. 536; 52 Sc.L.R. 385; 7 Tax Cas. 25.