Texas Company (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382 (8 April 1940)

The Texas Company (Australasia) Limited Appellant; and The Federal Commissioner of Taxation Respondent.

The Federal Commissioner of Taxation Appellant; and The Texas Company (Australasia) Limited Respondent.

The Texas Co. (Australasia) Ltd. carried on business from the year 1918 by importing from the United States of America and selling in Australia gasolene, kerosene and other petroleum products. All the shares in the Australian company were held by the Texas Corporation of New York. The Texas Corporation held ninety-nine per cent of the shares in another company—the Texas Co., incorporated in Delaware. The Texas Co., Delaware, supplied the petroleum products to the Australian company either from its own stocks or from those of the Texas company incorporated in California. Questions arise as to the assessment of the Australian company under the Commonwealth Income Tax Assessment Act 1922, as amended from time to time, in respect of income received by the Australian company during the calendar years 1929, 1930, 1931, 1932 and 1933, which were accepted by the Commissioner of Taxation as accounting periods in lieu of periods ending on 30th June in each year—See Income Tax Assessment Act, sec. 32 (3).

The commissioner assessed the company under sec. 28 of the Act and the company appealed to a board of review. Sec. 28 is as follows:—"When any business which is carried on in Australia is controlled principally by persons resident outside Australia, and it appears to the commissioner that the business produces either no taxable income or less than the ordinary taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall be assessable and chargeable with income tax on such percentage of the total receipts (whether cash or credit) of the business, as the commissioner in his judgment thinks proper." From the decisions of the board of review in relation to the several years both the company and the commissioner have appealed to this court. Rich J., acting under the Judiciary Act 1903-1939, sec. 18, directed that certain questions arising in the appeals be argued before the Full Court on admissions made by the parties.

Question 1.—This question asks whether it is proper to allow deductions claimed by the company in respect of payments of Australian money made in remitting money to New York in order to satisfy debts owed in the United States of America in dollars. In the years in question rates of exchange moved against Australia and they varied from time to time, as is shown by the following table of variations in the dollar-equivalent to the Australian pound:31st December, 1929$4.78331st December, 1930$4.45631st December, 1931$2.70431st December, 1932$2.65331st December, 1933$4.06431st December, 1934$3.914.

The company incurred debts for oil, &c., supplied at times when the exchange was near to what was regarded as normal, so that the number of Australian pounds required for the purchase of American dollars was close to par rate of exchange. The company subsequently discharged these liabilities when the rate of exchange had moved against Australia, so that a considerably larger number of Australian pounds was required to settle the American debt in dollars. The commissioner is prepared to allow as a deduction the increased amount in Australian pounds required to discharge the dollar debts if that increase is calculated by a comparison of the amount required at the time when the debt became due with the amount required when the goods in respect of which the debt was due were sold—the latter time being the time when in the ordinary course the purchase price should have been remitted to America. The company, however, did not make regular remittances as it sold the goods, but withheld payment, with the consent of the supplier company, for a period which on the average produced a two years lag between the invoicing of the oil, etc., and the payment therefor. The company claims as a deduction the whole amount of the differences so involved.

For the calendar years 1929, 1930, and 1931 the company kept its accounts in Australian pounds and in American dollars, but without any special adjustment on account of variations in exchange. The company valued its stocks in both pounds and dollars and credited itself and debited the supplier company with remittances in both pounds and dollars. After Great Britain went off the gold standard in September 1931 the company altered its system of accounting, and from 1st January 1932 a new and somewhat complicated system was introduced. The result was that balances to the credit of the trading account, so far as they represented debts due for stock-in-trade consisting of oil, etc., took into account so much of that stock as had been sold at the original f.o.b. dollar cost of that stock, but at an Australian pounds figure, not at the date of the invoice but at the date of the sale in Australia. If the stock was still unsold, the Australian pounds figure was calculated for the purpose of the trading account as at the date of the balance. The dollar debts in respect of particular consignments remained unchanged in dollar figures throughout. Remittances to America were taken into account at the actual amount of Australian pounds expended and in dollars at the dollar equivalent of the Australian pounds remitted at the date of the remittance. But (admission no. 17) "at the end of every month an adjustment of the Australian pounds so debited for remittance was made by ascertaining the difference between the total debits in Australian pounds for remittances for the month converted as aforesaid and the total of such debits in Australian pounds converted at the rate ascertained by dividing the number of dollars standing to the credit of the said account at the beginning of the month by the number of Australian pounds standing to the credit of the said account at the beginning of such month and debiting or crediting as the case might be this difference in Australian pounds to the said account. If in applying the above procedure there was for any year an excess of credits over debits for these differences then such excess of credits was claimed by the company in its income tax returns as deductions, but if there was an excess of debits then such excess of debits was returned as assessable income. These differences are hereinafter referred to as exchange." The result of the system adopted was that the accounts of the company showed over the period of years involved the actual payments made in Australian pounds from time to time for the purpose of discharging the dollar indebtedness of the company.

The commissioner assessed the company under sec. 28 of the Income Tax Assessment Act 1922 for all the years in question upon a percentage of the cash and credit receipts of the company. He therefore did not make assessments under the ordinary provisions of the Act. But now, in consequence of the decisions of the board of review, assessments are to be made under those provisions for at least the years 1929, 1930 and 1931. If assessments for each year in which there is net income are made under the ordinary provisions of the Act, it may be supposed that the return upon which the assessments will be based will show stocks at the beginning of the year, stocks purchased during the year at cost whether paid for or not, on the one hand, and, on the other hand, sales made during the year, and value of stock on hand at the end of the year, the difference between the two sides of the account being the net income on trading account for the year. If an assessment for each year is made upon this basis, namely, a credit basis as distinct from a cash account of actual receipts and actual disbursements in the year, there are difficulties in finding room for a deduction in a subsequent year of an unexpectedly increased amount which was paid in cash in that year in respect of the price of goods received in a prior year, the price for which, though not paid, had been deducted in the accounts for that prior year. If, owing to the movement of exchange, goods which in earlier years could have been paid for in dollars by an expenditure of say £1,000 Australian were in fact paid for in a subsequent year by a necessarily increased amount of £1,100 Australian, it is urged that it would be difficult to regard the additional sum of £100 as deductible in the later year if it is regarded as the price of the goods bought in the earlier year because, ex hypothesi, the full deduction of what was in the earlier year taken to be the price, namely, £1,000, had already been made. It has been suggested that a claim for the deduction of increased expenditure resulting from adverse exchange movements where the payment is made in respect of goods acquired in an earlier year cannot be deducted in a later year, because such a deduction would involve a substitution of a cash basis for a credit basis in assessing the company. In my opinion, however, the suggested difficulty disappears if the increased outlay required in a subsequent year to discharge the constant (in this case, dollar) debt is regarded not necessarily as payment of the price of the goods, but as a necessary outgoing made in the normal course of the continuance and maintenance of the business as an enterprise conducted for the purpose of profit. The Income Tax Assessment Act, sec. 23 (1) (a), permits the deduction of outgoings (subject to exceptions) actually incurred in gaining or producing the assessable income. Although assessments to income tax are made for separate years, it is established that an expenditure made in one year which does not produce its income-gaining effect till a subsequent year may nevertheless be deducted in the year in which it is made, and so also an outgoing which arises out of income-gaining activities of a prior year may be deducted in a subsequent year when it is actually made (Ward & Co. Ltd. v. Commissioner of Taxes[1]; Herald and Weekly Times Ltd. v. Federal Commissioner of Taxation[2]; Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation[3]). Thus the mere fact that the deductions claimed relate to the discharge of liabilities incurred in previous years does not in itself prevent a deduction. The cases to which I have referred show that in relation to this matter the law does not insist that when a credit system of accounts has been adopted so that an expenditure is deducted when it is incurred (whether or not the liability which it represents has actually been discharged by payment) it is thereafter impossible to make a further deduction on the same account in a subsequent year when it turns out that a larger expenditure than that anticipated must actually be made in order to discharge the liability.

Income is assessed under the Income Tax Assessment Act in terms of Australian pounds, and taxpayers are taxed in terms of Australian pounds. If a taxpayer carrying on business in Australia is to discharge a debt incurred in dollars in the United States of America he must spend a number of Australian pounds dependent upon the current rate of exchange in order to obtain control of the necessary amount of dollars in America. Such expenditure of Australian pounds is an ordinary business expenditure, and the taxpayer is entitled to claim as a deduction the actual outgoing which he makes in order to discharge his normal business debts for stock-in-trade and the like: Cf. Moreau v. Federal Commissioner of Taxation[4]. As I have already said, the fact that he has made a preliminary estimate of the amount required to discharge his foreign debts does not, in my opinion, preclude him from claiming later a deduction of any increased amount which in fact he has to pay. This deduction is claimable simply as an outgoing incurred in gaining or producing assessable income. In one sense it is true that it is not incurred in gaining or producing the assessable income of the later year in which the money is actually paid, but a business is properly regarded as a continuing enterprise, and if a business man in one year were to decline to pay his debts incurred in previous years it is obvious that his business would soon come to an end. Accordingly, the payment made in subsequent years has a real relation to the assessable income of the later year, although it is also related to, for example, the price of goods purchased in an earlier year, an estimate of which price has already appeared in his accounts and been allowed in the assessment for that year.

What has been said applies, however, only to outgoings in Australian pounds which are not outgoings of capital (sec. 23 (1) (a)). Accordingly, remittances sent by the company to America in repayment of moneys lent or in payment for plant which became part of the capital assets of the company fall outside the principles stated and no exchange in respect of such remittances should be allowed as a deduction.

Remittances were not appropriated to particular items, except that from August 1932 remittances forwarded after 1st January 1932 were appropriated for a period to liabilities accruing after 1st October 1931. This arrangement was varied in October 1933. The particulars are set out in admission no. 23 and the letters therein mentioned. Subject to these facts, the ordinary rule should be applied and payments should be appropriated towards the discharge of the debts in the order in which the latter became payable.

In the present case remittances to satisfy debts owed for stock-in-trade supplied were delayed beyond a normal period because the company was short of capital in Australia. The commissioner is prepared to allow exchange costs calculated as at the date when, it is said, apart from the necessity of the company for more capital, the remittances would have been made, that is, the commissioner says, at the time when the goods were sold. It is argued that any increased cost due to any further delay in payment must be regarded as an outgoing of capital, and therefore not allowable as a deduction, because it was really incurred by reason of the necessity of obtaining more capital for the company.

The principle involved in the proposition submitted for the commissioner is very far-reaching. If it were adopted it would mean that whenever a trader postponed the payment of ordinary trade debts and therefore lost a discount and so was called upon to pay a larger amount than would otherwise have been the case, he would be allowed as a deduction in his assessment only the smaller amount which he would have paid if he had paid more promptly. Similarly, if a trader in the same position obtained credit and became liable to pay interest, the interest would not be allowed as a deduction. In each case the trader would have the benefit during the period of postponement of the use of a sum of money equivalent to the amount of the debt. The application of the principle in such cases would involve an inquiry as to whether the postponement of payment of debts was really due to a desire to have the use of a larger amount of money or was to be explained by some other reason. In nearly every case it would be possible to take the view that postponement was due to the former reason. Such a principle has not, so far as I am aware, ever yet been applied.

I construe the admissions of the parties as showing that payment of debts in the present case was postponed in order to provide the company with more capital in Australia and that the consequence of such postponement was that when the American dollar debts were ultimately paid more Australian pounds were required to pay them than would otherwise have been the case. But in my opinion these facts do not prevent the deduction of the exchange costs so incurred. The Income Tax Assessment Act does not include any provision which prevents the deduction of amounts paid in order to obtain the use of capital. Sec. 23 (1) (a) expressly permits the deduction of interest if an outgoing of interest is actually incurred in gaining or producing assessable income. If a liability for interest is incurred in order to introduce capital into an income-gaining business enterprise the amount of interest paid is allowable as a deduction: See Federal Commissioner of Taxation v. Munro[5].

It was further objected on behalf of the commissioner that the exchange in question was not an allowable deduction because it did not constitute a payment or any part of a payment for goods. I have already incidentally dealt with this objection. In my opinion, the payment may be described as a payment of the price of goods, but it may also be described as an ordinary outgoing not in the nature of capital, because it was an outgoing for the purpose of carrying on a business as a going concern and a necessary outgoing for that purpose. Accordingly, the amount can be deducted under sec. 23 (1) (a). Therefore, even if the view be taken that the expenditure of the moneys paid to obtain the American dollars cannot be regarded as being simply and only a payment of the price of goods, still the payment can be deducted as an outgoing under sec. 23 (1) (a).

Finally, it was objected that sec. 25 (e) of the Income Tax Assessment Act prevented the exchange in question being allowed as a deduction because the money was not wholly and exclusively laid out or expended for the production of assessable income. In so far as the money was expended in the repayment of loans and in payment for plant it was money not expended for the production of assessable income—it was simply a capital expenditure. But in so far as the money was expended to pay the dollar debts for stock-in-trade (oil, &c.) it was money wholly and exclusively expended for the production of assessable income in the ordinary trading activities of the company. Accordingly, in my opinion, question 1 should be answered, "Yes, so far as the amount was expended on remittances in payment of debts not being capital liabilities—except in the case of any year to the income of which sec. 28 of the Act is applied."

Question 2.—Question 2 is as follows:—"In ascertaining the taxable income of the company for the income year 1930 should the gross income derived by the company from carrying on its business in New Zealand be included in its assessable income and should the expenditure and other deductions referable to that income be allowed as deductions to the extent that the same are allowable deductions under the Income Tax Act 1932 as amended?" (The reference to Income Tax Act 1932 should be a reference to the Income Tax Assessment Act 1922 and I so read the question.)

In each of the years in question the company carried on business in New Zealand as well as in Australia. The company was resident in Australia and, accordingly, was bound to pay tax upon any non-exempt income derived from New Zealand as well as upon income derived from Australia (sec. 4—definition of assessable income—and sec. 13). In the year 1930 the company made a loss upon the New-Zealand business and was not charged with income tax in New Zealand. The company claims that it should be allowed to deduct that loss in its Australian assessment. If the New-Zealand income was chargeable with income tax in New Zealand it was exempt in Australia (sec. 14 (1) (q)). If it was so exempt it was not assessable in Australia and no New-Zealand outgoings or losses were deductible in Australia. Thus, in the present case, the customary attitudes of commissioner and taxpayer are reversed. The commissioner seeks to show that the New-Zealand income is exempt in Australia by showing that it is chargeable in New Zealand. If he succeeds, the New-Zealand losses cannot be deducted in Australia. The taxpayer, on the other hand, strives to show that the New-Zealand income is assessable in Australia in order to get the benefit of including New-Zealand outgoings (which exceeded New-Zealand revenue for 1930) in its Australian return.

The answer to this question depends upon the interpretation of sec. 14 (1) (q) of the Act. This section provides, so far as relevant, that: "The following incomes, revenues and funds shall be exempt from income tax:—(q) income derived from sources outside Australia—(i) by a resident of Australia to the extent to which that income is proved to the satisfaction of the commissioner—(1) to be chargeable with income tax in any country outside Australia."

In the year 1930 no income tax was in fact charged upon the New-Zealand income. The company contends that therefore such income was not "chargeable with income tax" in New Zealand and accordingly, was not exempt from Australian taxation. If this be so, the gross income would have to be brought into account and the appropriate deductions would be allowable, and as such deductions exceeded the gross income in the year in question the result would be that the company would gain an advantage in its Australian assessment.

In my opinion the contention of the company is not well founded. If it had been intended to exempt only income which was actually charged with income tax, so that some amount of tax became due and payable, it would have been very easy to say so. It may be that in a particular year no charge is actually made because the income is insufficient in amount to reach the taxing limit or because losses exceed receipts. But if the income is of such a nature that it is liable to be taxed then, in my opinion, it is income which is chargeable with income tax though not actually so charged.

The result of this view of the section is that if income is exempt from tax in a country outside Australia (under, for example, a provision such as sec. 14 in the Australian Act) then it is taxed in Australia. If, on the other hand, it is not so exempt from tax but, if sufficient in amount, is taxed, then the income is not subject to tax in Australia. The result in the present case is that as the income is ordinary business income and is liable to tax in New Zealand it is exempt in Australia and should therefore not be brought into account. Therefore, the losses connected with it should not be brought into account.

Question 3.—This question inquires whether the board of review had power to do more than uphold the objections to the assessment for the years 1929, 1930 and 1931. For these years the commissioner had assessed the company under sec. 28. The company objected that sec. 28 was not applicable. The board not only upheld this objection, but also made its own assessments.

The board gave two decisions, or, at least, made two statements on this matter. In July 1937 the board upheld the objection to the application of sec. 28 to the years mentioned and reserved for future consideration a question as to what has been called special property tax. In October, however, after hearing further argument, the board assessed the company in respect of ordinary income tax and also in respect of special property tax in respect of these years.

Sec. 44 of the Act provides that a board of review shall for the purpose of reviewing decisions of the commissioner have all the powers and functions of the commissioner in making assessments under the Act and that such assessments shall for all purposes (except for the purpose of objection and appeal to the High Court) be deemed to be assessments of the commissioner. Sec. 51 (4) provides that the board, on review, shall give a decision, and may either confirm the assessment or reduce, increase, or vary the assessment.

It is therefore plain that the general question asked must be answered in the affirmative. The board had power, inter alia, to make assessments as well as to uphold objections.

Question 4.—This question asks whether the board, having given the decision which it gave in July 1937 as to the years 1929, 1930, 1931 and 1933, had power to give the decision which it gave in October 1937 except as to special property tax, the latter being the only question specifically reserved in July for future consideration.

The objection is based upon the facts just mentioned in relation to question 3 except that in respect of the year 1933 (when there was a heavy loss) what happened was that in July the board in its decision stated that "the claim made in ground 5 of the objection is upheld." Ground 5 was an objection that sec. 28 of the Act was not applicable. In October the board "re-stated" its decision in the following terms:—"Notwithstanding that the business produced no taxable income, the board, in its judgment, does not think it proper to assess and charge tax on any percentage of the total receipts of the business—sec. 28."

As to the first three years mentioned the board, as already stated, had power to make assessments in respect of these three years. In July it did not exercise that power but said—"An assessment under the ordinary provisions of the Act to issue for each of these years in lieu of the assessment under sec. 28." It is said that this was a decision that the commissioner should issue an assessment. In my opinion it does not necessarily bear this meaning and it was still open to the board to make an assessment. There is only one assessment in respect of one year and it was impossible to make an assessment until the matter of special property tax had been dealt with. This was not done until October, and then the board gave its decision in relation to these years by actually making assessments. In my opinion these assessments were not rendered invalid by reason of the fact that the board did not make them in July, when it was really impossible to make them.

As to the year 1933, the July decision was that the claim made in ground 5 of the objection was upheld, that is, the application of sec. 28 was excluded. In October "the decision" was "re-stated" in the terms already set out. The October decision was therefore to the effect that sec. 28 was applicable to the year 1933 because the business produced no taxable income, but that the board exercised a discretion and refused to apply the section by fixing an infinitesmal percentage of cash and credit receipts under the section.

The first matter for inquiry is whether the board, having given the July decision, was entitled to do anything further in October. The July decision only upheld the objection, namely, that sec. 28 was not applicable. The board was still able to exercise any of its powers in relation to that year provided that the exercise of such powers was consistent with its decision that sec. 28 did not apply. In October the board really reversed its July decision as to the applicability of sec. 28, holding that sec. 28 was applicable, but that the board had a discretion whether or not to apply the section and decided not to apply the section by fixing a percentage of receipts as the taxable income of the company.

The importance of this question depends upon the fact that in 1933 the company made a very large loss (it is said amounting to £600,000). It is the view of the company that if the company were liable to be assessed in respect of 1933 only under the ordinary provisions of the Act, that loss could be carried forward in the four succeeding years (sec. 26 (2)) until it was exhausted. If, on the other hand, the assessment is technically made under sec. 28 by fixing a very small percentage of the cash and credit receipts of the company, then the company had an income of say £1 for that year and therefore had no losses to be carried forward. The matter is therefore of importance to the parties.

The board dealt with the appeals in respect of the five years together, but strictly each appeal should have been separately heard. The parties were entitled to a separate decision in the case of each appeal. When the board has given—see sec. 51 (4)—a decision it cannot, in my opinion, alter that decision at a later date. The decision of the board determines the rights of the parties under secs. 44 and 51. There can then be an appeal to the High Court from a decision of the board which in the opinion of the High Court involves a question of law (sec. 51 (6)). These provisions assume that a definite ascertainable decision is given at a particular time from which an appeal can be brought within the time which is allowed by the Rules of Court: See Order LIA, rule 11. In the present case the board gave a clear decision in July that sec. 28 did not apply. In my opinion the board was not at liberty upon the same material, or even upon further material, and independently of consent, to give a different decision upon the same matter in October and to determine that sec. 28 did apply and either to fix a percentage under that section or to "apply" the section but to abstain from fixing a percentage thereunder.

In my opinion, therefore, question 4 should be answered as to the years 1929, 1930 and 1931—"Yes," and as to the year 1933—"No."

In connection with this question it was argued for the commissioner that whenever the following conditions were satisfied sec. 28 necessarily applied:—(a) a business carried on in Australia, (b) controlled principally by persons resident outside Australia, and (c) it appeared to the commissioner that the business produced no taxable income or that it produced less than the ordinary taxable income which might be expected to arise from the business. The result would be that the person carrying on the business in Australia would necessarily be assessed for income tax upon a percentage of total receipts.

It is not disputed that the object of sec. 28 was to reach and to make amenable to taxation businesses which on account of foreign control had not produced income where normally such income would reasonably be expected to arise. Upon the contention of the commissioner the section would apply to every foreign-controlled business in Australia in every year in which a loss was made, because in such a year there would be "no taxable income." In my opinion, this is not the true view of the section. The section provides that when the specified conditions are satisfied, a person carrying on business in Australia shall be "assessable and chargeable" on a percentage of total receipts. These words, I think, mean that he may be so assessed and that he may be so charged. They do not compel the commissioner so to assess and so to charge. For these reasons, if it were necessary to decide the point, I should be of opinion that the board took a wrong view in holding that the section was necessarily applicable and in going on to hold also that, though the section was necessarily applicable, the fixing of a percentage was optional.

Question 5.—Question 5 is as follows:—"The board of review having determined that the percentage under sec. 28 of the Income Tax Assessment Act 1922 as amended fixed by the commissioner for the year 1932 was excessive did the board of review have power to do other than set aside the assessment for the said year?"

The board of review agreed with the commissioner that in respect of the year 1932 an assessment should be made under sec. 28. But, after consideration of the evidence, the board fixed the percentage of receipts upon which the company should be assessed and charged with income tax at 9.5 per cent and substituted that percentage for the percentage of 20 per cent fixed by the commissioner. In July the board fixed the total receipts of the business at £2,446.671 and said that the percentage on which the company should be taxed should be 9.5 per cent. In October the board made a calculation of the 9.5 percentage and declared that the company was assessed under sec. 28 on £232,434, being 9.5 per cent of the said total receipts. At the same time the board declared that the company should be assessed to further tax (special property tax) upon an amount of £19,906.

The reasons which I have given in relation to question 3 lead me to reply to question 5 in the affirmative, that is, the board of review did have power to do more than set aside the assessment of the commissioner for that year. The board had power to make an assessment itself and that assessment could only be made in October when an assessment to further tax as well as to ordinary income tax or to tax under sec. 28 could be made.

Question 6.—Question 6 is as follows:—"Were the assessments of the board of review dated 18th October 1937 of taxable income for the income years 1929, 1930, 1931 and 1932 valid assessments?"

The objection to these assessments is that they were made in October after the July decision. As to the years 1929, 1930 and 1931 I have really answered this question under question 4, and as to 1932, under question 5.

In my opinion, the answer should be in the affirmative in the case of each year. This answer does not mean more than that they were valid as assessments under the Act. It does not mean that they were justifiable in all respects. They may be altered upon appeal.

Question 7.—This question relates to the year 1932 in respect of which sec. 28 was applied by the board as well as by the commissioner. It inquires whether the board when considering whether to apply sec. 28 for that year or in ascertaining a percentage of gross receipts, should have taken into account losses in previous years.

Sec. 28 contains no guidance as to the principles which are to be applied in determining a percentage in a case where a taxpayer is taxed upon an assumed income for the reason that a business has not produced such an income as would normally be expected. In considering whether the section should be applied the commissioner (or the board upon review) is, in my opinion, at liberty to take into account losses in previous years, though not bound to do so. It is, in my opinion, quite impossible to lay down any rule as to the weight to be given to the circumstance that such losses have been incurred. But the fact that losses have actually and bona fide occurred in previous years may lead to the view that sec. 28 should not be applied in relation to a subsequent year. Similarly, real losses in previous years might help the commissioner in fixing a percentage of receipts as a fair assessed income of the company.

In question 7 the court is also asked to declare whether, if such losses are to be taken into account, they are to be arrived at by applying the ordinary provisions of the Act or by applying some formula which the commissioner may have used for the purpose of fixing a percentage under sec. 28. No question can actually arise as to this matter unless the result of allowing deductions for exchange losses before 1932 brings about the result that there are losses in those years. As the question is therefore entirely hypothetical it should strictly not be answered. If it were answered I should express my opinion that there can be no ground whatever for utilizing any such formula in relation to any estimate of either income or losses in relation to any year in respect of which sec. 28 has not been applied.

Question 8.—Question 8 is as follows:—"Was any business carried on by the company in Australia during the relevant period within the meaning of sec. 28 of the said Act?"

The point sought to be raised by this question depends upon the fact that the company carried on business both in Australia and New Zealand during the relevant period. It is urged that sec. 28 applies only to a case where a business is carried on solely in Australia and not where one and the same business, that is, a business under the same control, is carried on in Australia and in another country. Sec. 28 is introduced by the words—"When any business which is carried on in Australia is controlled principally by persons outside Australia ..." It is contended that these words relate only to a business the whole of which is carried on in Australia. In my opinion the section should not be so construed. If a business is carried on in Australia then it is none the less carried on in Australia because it is also carried on outside Australia or because the persons who control the business have another business outside Australia.

Question 9.—Question 9 is as follows:—"Was the company assessable or chargeable with tax on a percentage of the total receipts of the business in respect to the year 1932?"

It is suggested that, for some reason not very clearly stated, sec. 28 cannot be applied after a series of years to which the ordinary provisions of the Act have been applied. In my opinion there is no substance in this contention.

The company carried on a business in Australia. That business was controlled principally by persons resident outside Australia. It appeared first to the commissioner and then to the board that the business in respect of the year 1932 produced less income than the ordinary taxable income which might be expected to arise from that business. Accordingly, the company was assessable and chargeable with tax under sec. 28 on the percentage of the total receipts of the business. The question should therefore be answered in the affirmative.

Question 9a.—This question was added upon the argument before the Full Court. It is as follows:—"Upon the facts admitted and upon the proper construction of sec. 28, had the board of review authority to refuse to fix any percentage of the total receipts of the business?" This question is limited to the year 1933.

In my opinion, for reasons which I have stated in dealing with question 4, the board of review was entitled to decline to apply sec. 28, that is, the board was not bound to apply sec. 28. It followed that the board was not bound to fix under sec. 28 any percentage of the total receipts of the business as the taxable income of the company. Further, for reasons which I have already stated, I am of opinion that, in view of the decision given in July that sec. 28 was not applicable at all, the board had no authority to reverse its decision in October so as to hold that the section was applicable but then to elect to refuse to fix the percentage. Accordingly, in my opinion, the question should be answered by declaring that as the board decided in July that sec. 28 was not applicable to the company in respect of the year 1932 the question of fixing the percentage of the total receipts of the business did not arise for any purposes of the Act in relation to that year.

Questions 10, 11 and 12 relate to what is referred to in the proceedings as special property tax. This is a further income tax imposed first under sec. 7A of the Income Tax Act 1930 and subsequently under sec. 5 of subsequent relevant Income Tax Acts. All the sections are in the same terms, which are as follows:—"7a (1) In addition to any tax (including additional tax, super-tax and further tax) payable under the preceding provisions of this Act, there shall be payable upon the taxable income derived by any person—(a) from property; (b) by way of interest, dividends, rents or royalties, whether derived from personal exertion or from property; and (c) in the course of carrying on a business, where the income is of such a class that, if derived otherwise than in the course of carrying on a business, it would be income from property, a further tax of seven and one-half per centum of the amount of that taxable income."

It will be observed that the further tax imposed under these provisions is payable upon what is described as "the taxable income" derived by a person from certain sources mentioned. One question which arises is whether the taxable income is to be ascertained by taking the taxable income assessed under the ordinary provisions of the Act and imposing the further tax upon such part of that total income as, upon some proportional basis, can be attributed to the sources mentioned in the section, or whether, on the other hand, the taxable income is to be ascertained by taking the income actually derived from the three sources a, b and c and making appropriate deductions therefrom.

A further question which arises is whether if the second method is adopted the deductions appropriate to items in a are to be made from the income of a and so in the case of b and c, or whether, on the other hand, the income is to be aggregated and all the deductions are then to be aggregated and are then to be made from the total aggregated income, thus reaching the total net taxable income derived from the three sources mentioned.

Question 11 deals with another question which arises in relation to the further tax, namely, the possibility of applying in one and the same year the provisions of sec. 28 (which depend upon a disregard of the real income and an attribution to the company of an income on a basis of percentage of total receipts) together with the provisions of sec. 7A and sec. 5, which depend upon ascertaining the actual sources of income of the taxpayer. It is urged that where a percentage basis is taken it is simply impossible to allocate any proportion of the income so estimated to any one or more of the sources a, b and c specified in sec. 7A.

Before considering these questions it is desirable to set out the facts in relation to which they arise. The income of the company in relation to which the question of the application of sec. 7A arises was derived from three sources—rent, interest and pump rents. Rent varied from £13 to £35 in the five years in question. Interest varied from £528 to over £24,000, and pump rents varied from £543 to £2,226. Except for administration expenses, which were allowed by the commissioner to the extent of two and one-half per cent on taxable interest, and five per cent on pump and other rents, all the deductions claimed related to petrol pumps. The deductions reached as high a figure as £37,000. When the deductions were made from the total income in question, there was a debit balance in each year, that is, the deductions exceeded the total revenue. The company therefore claims that no income was taxable in any of the years in question under the provisions of sec. 7A (or sec. 5 in later years).

Before 1928 most petrol was sold in tins or drums, but from that time onwards it became customary and, indeed, necessary from a business point of view, to sell petrol through pumps placed at garages. Accordingly, the company in the years which are in question in this appeal sold most of its petrol through pumps. Some of these pumps were leased at an annual rental of ten shillings per year. Others were owned by customers of the company. The installation of a pump costs from £75 to £80 and the company maintained all the pumps from time to time and painted them in a manner designed to attract trade. The moneys received from persons who utilize pumps owned by the company were called pump rents, although the company did not own the ground upon which the pump stood—many, indeed, being placed upon the public highways. It is not pretended that the object of installing and maintaining the pumps was to earn ten shillings per annum in respect of each pump. One year may be taken as an example. In the year 1930 the income from pump rents was £867. The deductions claimed in respect of that year were: depreciation on petrol pumps £6,070, repairs to petrol pumps £8,207, licence fees paid in respect of petrol pumps £991, and further depreciation £1,436, and some relatively small administration expenses. Only the administration expenses were allowed as a deduction by the commissioner and by the board.

As to the first question which I have mentioned, I am of opinion that sec. 7A (and sec. 5 of the later Acts) contemplates actual assessment of taxable income derived by the company from the three sources mentioned. It involves calculations quite separate from those which are made in the ordinary assessment. It does not involve a calculation of some proportion of taxable income as ascertained under an ordinary assessment. There is no reason why the latter construction should be given to the section and there is a very sound reason why it should not be given, namely, that the section is plainly intended to tax moneys which are in fact derived from the sources mentioned. In my opinion the object is not to impose tax upon a sum of money which is reached by taking into account considerations which have no relevance whatever to the provisions of the section, such as volume of income from all sources including sources other than those mentioned in the section together with and subject to deductions attributable to the whole of that income and allowing such deductions to produce an effect upon the amount taxable under the section. If a contrary view to that which I suggest were adopted, then it would be possible for a taxpayer to have a very large net income from the sources a, b and c mentioned in the section and yet to escape tax thereunder. He might be entitled to so many deductions applicable to income derived from other sources that his total taxable income under the general provisions of the Act would be very small. For example, his net income from the sources a, b and c might be £10,000, and yet his taxable income from all sources, including a, b and c, might be only £10. Upon the view contrary to that which I have suggested he would be taxed under sec. 7A only upon some proportion of the £10. In my opinion there is no reason for reading the words of the section so as to bring about this result.

In order to apply the section it is necessary first to ascertain all the income of the taxpayer derived from a, b and c. It is then necessary to ascertain how much of that gross income is taxable. (The section expressly applies only to "taxable income.") This can be done only by making appropriate deductions. These deductions can be ascertained by applying the ordinary provisions of the Act so far as they are applicable to income derived from the sources specified in the section. There is nothing to exclude, for example, the application of sec. 23 when an assessment is being made which includes the application of sec. 7A. Sec. 23 provides that in calculating the taxable income of a taxpayer the total assessable income derived by the taxpayer shall be taken as a basis and that from it certain deductions shall be made. The provisions of sec. 23, so far as applicable, should be applied in ascertaining taxable income for the purpose of sec. 7A. Thus, for example, there should be deducted all losses and outgoings (excluding capital losses and outgoings) which are actually incurred in gaining or producing the income which is being assessed (sec. 23 (1) (a)). In determining what deductions should be allowed under the general provisions of the Act, the provisions of sec. 23 (2) are applied and deductions are accordingly made from the class of income to which in the opinion of the commissioner the deduction relates. So in applying sec. 7A the gross income under a, b and c should be ascertained and then deductions should be allowed if in the opinion of the commissioner (or the board upon appeal) they represent outgoings actually wholly and exclusively incurred in gaining or producing that gross income.

The next question is whether the income from a, b and c should be added together and all the deductions applicable to a, b and c deducted from the total or whether the deductions appropriate to a should be deducted from the gross income under a and so also severally for b and c.

In my opinion the former is the correct procedure. Sec. 7A treats the sum to be ascertained for the purpose of levying the further tax of seven and one-half per cent as "the amount of that taxable income" (see the concluding words of sub-sec. (1)). The tax, in other words, is imposed upon one amount and not upon three amounts. I am therefore of opinion that all the deductions relevant to a, b and c should be deducted from the total of the gross income derived under heads a, b and c.

The next question is whether the expenses associated with the pumps, which the company claims as deductions, were properly so allowable. The amount of pump rents received was relatively small and it is contended for the commissioner that the real object of the expenditure was not to obtain the pump rents but to promote the general business of the company.

I am of opinion that the receipts from pump rents were income of the company. They represent moneys which were in fact received by the company from other persons. They were not capital receipts. They must, in my opinion, be regarded as income.

But, in order to bring the income within par. c of the section, it must be of such a class that if derived otherwise than in the course of carrying on a business it would be income from property. Pump rents might be derived by a person who owned and let out pumps without selling petrol and without being engaged in a business of letting out pumps. In such a case the receipts would be income from property. Thus, in my opinion, the pump rents do come within par. c of the section.

But any deductions claimed must be outgoings, etc., actually incurred in gaining or producing the assessable income (Income Tax Assessment Act, sec. 23 (a)). Whether they were so incurred is a question of fact for determination upon the appeals. Further, sec. 25 (e) prohibits the deduction of any amounts which were not wholly and exclusively laid out or expended for the production of assessable income, that is, in this connection, the income assessable under sec. 7A (or sec. 5). Whether the amounts claimed as deductions were or were not so laid out or expended is also a question of fact to be determined upon the appeals. The question should, in my opinion, be answered accordingly.

Question 11.—This question asks whether, the board of review having decided to tax the company under sec. 28 for the year 1932 and having accordingly fixed a percentage of total business receipts as the income of the company for the purpose of applying that section, the company was liable for any further tax under sec. 5 of the Income Tax Act 1933. In other words, can sec. 28 of the principal Act and sec. 5 imposing further tax be applied in the case of the same taxpayer in the same year? The contention for the company is that the assessment under sec. 28 fixes the income of the company for all income tax purposes and that, the income being a percentage of business receipts, it is quite impossible to identify within that income any income that possesses the characteristics mentioned in pars. >a, b and c of sec. 5. In my opinion this contention cannot be sustained. Sec. 28 results in the company being taxed at ordinary rates of ordinary income tax on a percentage of its total business receipts. Sec. 5 simply adds a further tax upon a different basis. If in any year the company in fact has income which falls within sec. 5, then sec. 5 operates by force of its own terms without being subject to any impediments created by sec. 28. Therefore, in my opinion, question 11 should be answered in the affirmative.

Question 12 is as follows:—"If yes to question 11, should the amount of taxable income of the company referred to in the said sec. 5 have been ascertained for the said year by applying the percentage determined as aforesaid to the gross amount of the income so referred to or should the amount of such taxable income have been ascertained under the general provisions of the Income Tax Assessment Act 1922 as amended?"

This question is based upon the suggestion that a percentage ascertained and applied under sec. 28 should be applied to income taxable under the "further tax" provisions. In my opinion there is no basis for this suggestion. Sec. 28 takes a percentage of business receipts as the taxable income of the company for ordinary purposes and, as already stated, sec. 5 simply imposes another tax upon certain income of the company which is described as taxable income and which, as I have already stated, is to be ascertained by identifying the gross income derived from sources a, b and c and then making the appropriate deductions.

I am therefore of opinion that question 12 should be answered by saying that the amount of the taxable income should be ascertained under the general provisions of the Income Tax Assessment Act 1922 as amended.

These appeals from the board of review were brought before the Full Court in April 1938 upon material which had been laid before the board of review and without any evidence taken before this court. This procedure might not have been open to any objection of a substantial nature if, as soon as the argument had been fairly opened, it had not appeared that the parties were in hopeless disagreement upon all the crucial facts. In the circumstances the Full Court took the only possible course of remitting the appeals to a single justice. The appeals were accordingly brought before me in that capacity. The discussion before the Full Court had made it plain that, unless a commission were issued to take evidence abroad, the appellant could not proceed very far in the strict proof of the facts, the burden of proving which fell upon it, at all events by admissible evidence. Such a commission would not have been returned, if at all, except after the lapse of some years, and the parties seemed to have been sufficiently chastened by the unfortunate course their proceedings had so far followed to listen to the voice of reason and endeavour to agree upon the facts, which, after all, there was not much reason to doubt. The not unnatural reluctance of the commissioner to admit facts which were outside his knowledge, and the great difficulty of reducing the details of complicated transactions to a compendious yet accurate statement, proved the source of much delay and many embarrassments in arriving at an agreement. The parties, however, brought before me a lengthy statement of facts and a catechism of questions upon both of which they agreed. Although I was not myself perfectly satisfied with the form of the questions or the sufficiency and clarity of the facts I was loath to take any steps to disturb a harmony achieved at the expense of surmounting so many obstacles and of so much labour, and I accordingly adopted what the parties had agreed upon and referred the matter to the Full Court. In dealing as a member of the Full Court with the reference I have to remember that the matter must again come before me to be disposed of finally. I think I shall cause myself and the parties less embarrassment by refraining from entering upon a disquisition concerning the matters of law and questions of mixed fact and law which arise under the questions. I have had the advantage already of reading the judgments prepared by the Chief Justice and by Dixon J., which cover the ground of all thirteen questions put to the Full Court and adopt substantially the same view of the greater number of those questions. As to the first five questions those judgments agree except in the form of the answer, and it is unnecessary for me to do more than say that I am substantially of the same opinion. As to the seventh question I agree on the whole that it would be safer and better to leave it unanswered. Questions 8 and 9 and 9a are answered by the two judgments to which I have referred substantially to the same effect and I concur in the result. The tenth question causes more difficulty. From the taxpayer's point of view its importance lies in the taxpayer's contention that the pump rents are to come into the account for the purpose of special property tax as an item of gross income so that on the other side of the account—the expenditure side—the very great cost connected with the maintenance of the pumps shall be brought in and thereby reduce or extinguish the large revenue items of interest, etc. I cannot think this is right. The pump rents are at best insignificant items of receipts arising in the course of a business activity concerned only with the sale of petrol, i.e., the establishment and maintenance of petrol pumps for the retail sale of the petrol from which the company derives its business income. To include the pump rents in the account of property income and under colour of doing so to bring in this large business expenditure on the other side is, to use a homely phrase, to make the tail wag the dog. The answer may be that rents of this description cannot be conceived of as income arising independently of the business activity of supplying petrol. In the practical world rents from petrol pumps are unknown except to the distributor of petrol. But quacunque via I think that the company's contention should fail. The purpose of the expenditure is not to obtain pump rents but to advertise the company and its wares and sell petrol. For these reasons I think the board of review was not wrong but was right in refusing to allow the company to deduct the amounts in question. As to question 11 I agree with the view which both judgments I have mentioned adopt that the company is liable to the further income tax or special property tax imposed by the taxing Act notwithstanding that sec. 28 of the Income Tax Assessment Act is applied for the purpose of ascertaining the company's taxable income for ordinary income tax. I agree also in the view those judgments take of the twelfth question, viz., that in ascertaining the further income tax or special property tax sec. 28 has no application and an account is to be made up to ascertain the taxable income subject to the tax entirely independently of sec. 28.

A series of questions have arisen in appeals to this court in connection with the assessment of the Texas Co. (Australasia) Ltd. to income tax in respect of the income years 1929, 1930, 1931, 1932 and 1933. My brother Rich has directed that they be argued before the Full Court upon facts admitted between the parties.

The main topics raised by the questions may be examined without a minute statement of the facts, and a foundation laid for categorical answers to the questions.

Exchange.—The taxpayer was a company incorporated in the State of New South Wales. Its main business was the purchase and sale of petroleum products in Australia and New Zealand. It purchased those products from a company or a group of companies in America, which may be referred to as "the supplier." The goods were shipped in America to the taxpayer and invoices delivered covering the price f.o.b. and also freight and insurance which was payable by the taxpayer in American dollars. The supplier also provided the taxpayer with plant, equipment, and other capital items and also made advances to it, all on a dollar basis. The products were sold in Australia and New Zealand.

Until the end of 1930, there was comparatively little fluctuation in the rate of exchange between America and Australia, but then it moved against Australia, especially so in the years 1931, 1932 and 1933. It was quite obvious, as the taxpayer's American office stated, that with the Australian pound depreciated so heavily the taxpayer could not pay its current liabilities in United-States dollars without suffering tremendous exchange losses. The American creditors deferred some payments, but still considerable adjustments had to be made for exchange differences which the taxpayer claimed as deductions in its return for the purpose of assessment to income tax. Nothing, I think, really turns upon the method of accountancy whereby these adjustments were made. The commissioner does not challenge the accuracy of the method. But it is desirable that the question which is set this court should be clearly understood and disentangled from the complicated method of accountancy which was necessarily adopted to make adjustments in the accounts of the taxpayer. It incurred an obligation in American dollars for goods supplied and during the periods material to these appeals entered the amount of that obligation in its books in dollars and also the corresponding liability in Australian currency at the rate of exchange then current. But when the taxpayer came to pay for the goods, intervening exchange movements required it to provide more in Australian currency to pay or provide for the goods and discharge the dollar obligation than the sum originally calculated as the equivalent in Australian currency of the dollar obligation. The taxpayer had also to provide the cost of remittances to its supplier.

The taxpayer claims these additional sums, paid or provided in any of the years in question here, as deductions from its income assessable to income tax. It claims them as losses or outgoings actually incurred in gaining or producing its assessable income (Income Tax Assessment Act 1922-1934, sec. 23 (1) (a)). The commissioner did not, as I understand the argument, dispute the general proposition that such losses or outgoings might, in circumstances other than exist in the present case, be legitimately claimed as deductions under and by virtue of the Income Tax Assessment Act 1922-1934.

But the commissioner contends that the deductions claimed in these appeals should not be allowed for several reasons.

Because they were losses or outgoings of a capital nature (Act, sec. 23 (1) (a)). It appears that the supplier allowed payment of the sums due to it to stand over for considerable periods of time. And moneys realized from the sale of goods were used, during those periods, in the business of the taxpayer or, as the commissioner suggests, in providing working capital for the business. Certainly the share capital of the company was insufficient to cover the capital expenditure of the taxpayer in Australia. But the delay in payment of the moneys owing to the supplier was not wholly because working capital was required in the taxpayer's business, for about August 1932 the supplier apparently permitted the taxpayer to defer payments of the indebtedness incurred prior to September 1931 until business conditions improved, which it was considered would be accompanied by a rise in the exchange rate and relieve the difficulties of the situation.

If, however, the main purpose of the delay in the payments was to provide working capital for the taxpayer, how does that delay make the payments outgoings of a capital nature? They were, nevertheless, though deferred, outgoings incurred in connection with the trading operations of the taxpayer: the purchase of the stock in which it traded. They may be placed, I think, in much the same category as the interest payments in respect of borrowed money, which were allowed in Farmer v. Scottish North American Trust Ltd.[6]. The amounts fluctuated from time to time and payments were delayed temporarily and for uncertain periods[7]. They were outgoings by means of which the taxpayer procured funds by which it made a profit "and, like any similar outgoing, should be deducted from the receipts to ascertain" the taxable income of the taxpayer[8].

Because the payments were not losses or outgoings actually incurred in gaining or producing the assessable income (Act, sec. 23 (1) (a)). The Act in sec. 25 (e) also provides that a deduction shall not be made in respect of money not wholly and exclusively laid out or expended for the production of assessable income. The supplier, as already stated, provided the taxpayer not only with petroleum products but also with plant and other capital items and also made advances to it. The account of the supplier with the taxpayer was a running account and a balance was struck monthly. Remittances, when made, were entered in such account as at the date of remittance and were generally for lump sums in Australian currency. But they were not appropriated against any particular item that had been entered on the credit side of the account nor were any of them allocated so as to satisfy particular items for goods or stock, capital items, or advances. The question whether these remittances were losses or outgoings incurred in gaining or producing the assessable income and were wholly or exclusively so laid out or expended is mainly a question of fact (Usher's Wiltshire Brewery Ltd. v. Bruce[9]; New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation[10]). It has been recognized, however, almost as a business necessity, that taxpayers with continuing businesses must be allowed to deduct expenditure in the year of assessment (which is not a capital outlay) incidental to or connected with the operations or activities regularly carried on for the production of income. It is not necessary that each item of expenditure should be traced to definite items of income (Ward & Co. Ltd. v. Commissioner of Taxes[11]; Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation[12]; W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation[13]). The commissioner, whilst accepting these decisions, submits: (a) That it does not appear on the admitted facts that remittances were made to the supplier and that it is consistent with the facts stated that the remittances were to the taxpayer's own office in New York; (b) That it does not appear on the admitted facts that the deductions claimed were appropriate to the years in which they were claimed; (c) That the remittances were not wholly or exclusively laid out or expended for the production of the assessable income. In my opinion the submissions numbered a and b are questions of fact for the justice who hears these appeals. They involve a detailed examination of the facts and the taxpayer's accounts and cannot be satisfactorily dealt with on the materials before this court. Submission c is based on the undoubted fact that the remittances covered expenditure both of a revenue and a capital nature. The remittances were not only for goods or stock supplied but also for plant and other capital items and advances. But whether these outgoings can be disentangled and treated in part as of a revenue nature and in part as of a capital nature is essentially a question of fact for the justice who hears these appeals. It may be that the application of the rule in Clayton's Case[14] will solve the problem, though I should doubt it on the form of such of the accounts as have been submitted to this court; or some percentage allowance or some other method or evidence. But if it be true, as the taxpayer asserts, that it can demonstrate beyond all doubt that the deductions claimed by it were wholly and exclusively laid out or expended in the sense already indicated, for the production of the assessable income for the years in question in these appeals, then it would be entitled to the deductions claimed.

New Zealand losses.—In 1930 the taxpayer derived income from its business carried on in New Zealand, but the deductions and exemptions from that income allowed by the New-Zealand law were greater than the amount of the income, so that no income tax was payable in New Zealand in respect of the income of that year. The taxpayer nevertheless claims to deduct this loss in assessing its taxable income under the Income Tax Assessment Act 1922-1934. Income tax is payable under the Acts for each financial year upon the taxable income derived directly or indirectly by every resident, which includes the taxpayer, from all sources whether in Australia or elsewhere, and in calculating the taxable income the total assessable income derived by the taxpayer is taken as a basis and from it various deductions are allowed: See Act, secs. 13, 4, and 23. But the commissioner points out that assessable income means the gross income which is not exempt from income tax under the provisions of the Act. And sec. 14 (1) (q) of the Act 1922-1934 (Act 1930 No. 50, sec. 5) exempts from income tax income derived from sources outside Australia by a resident of Australia to the extent to which that income is proved to the satisfaction of the commissioner to be chargeable with income tax in any country outside Australia.

The taxpayer argues however that its income in New Zealand was not chargeable with income tax in New Zealand because the deductions and exemptions there allowed exceeded the amount of the income. This contention cannot be sustained. The commissioner must be satisfied that the income is chargeable; that is that the income is of such a nature that it is liable to and may be brought to charge under the New-Zealand law, whether it is actually charged or not. If it be so chargeable, then it is exempt from income tax under the Commonwealth Acts and both that income and deductions from it disappear from assessments under the Income Tax Assessment Act 1922-1934. The commissioner was satisfied, and indeed it is clear, that the New-Zealand law brought to charge income derived by the taxpayer from sources in New Zealand.

Assessments under sec. 28 of the Act.—The commissioner assessed the taxpayer to income tax under sec. 28 of the Income Tax Assessment Act 1922-1934 for the income years 1929, 1930, 1931, 1932 and 1933, but the board of review disallowed this assessment as to the years 1929, 1930 and 1931 and directed assessments under the ordinary provisions of the Act.

The provisions of sec. 28 were adopted by the board as to the year 1932 and it purported to adopt these provisions as to the year 1933 and thus expressed its decision:—"Notwithstanding that the business produced no taxable income, the board in its judgment does not think it proper to assess and charge tax on any percentage of the total receipts of the business."

Sec. 28 enacts, so far as material: "When any business which is carried on in Australia is controlled principally by persons resident outside Australia, and it appears to the commissioner that the business produces either no taxable income or less than the ordinary taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall be assessable and chargeable with income tax on such percentage of the total receipts (whether cash or credit) of the business, as the commissioner in his judgment thinks proper."

The board of review, for the purpose of reviewing the decisions of the commissioner, has under sec. 44 all the powers and functions of the commissioner in making assessments. The taxpayer contends that the section applies only to the case of a business carried on wholly within Australia. The contention is untenable: a business is carried on in Australia although it is also carried on elsewhere. All the Act requires is that business is carried on in Australia: it is explicit in its terms and effect must be given to it. It is not disputed that the taxpayer's business was controlled principally by persons resident outside Australia.

But both parties complained of the decision that the board of review gave as to the year 1933. The power conferred by sec. 28 is discretionary in its nature: that is to say that neither the commissioner nor the board is bound to exercise it though the conditions mentioned in the section actually exist. But the form of the board's decision suggests that though the business produced no taxable income of any sort still the powers conferred by sec. 28 must be exercised. Such an application of the section would not accord with its language. It must, as I think, appear to the commissioner or the board that there is no taxable income, measured by the ordinary standards of the Act, or less than the ordinary taxable income which might be expected to arise from that business (British Imperial Oil Co. Ltd. v. Federal Commissioner of Taxation[15]). But in my opinion the decision of these matters of fact is entirely within the authority of the commissioner or the board if they are approached from a right understanding of the meaning of the Act.

Further tax on income from property or special property tax, as it is commonly called. The tax was originally imposed in 1930 by the Act 1930, No. 61, sec. 7A, and may be found substantially re-enacted in the Act 1934 No. 31, sec. 5—"In addition to any income tax payable under the preceding provisions of this Act, there shall be payable upon the taxable income derived by any person—(a) from property; (b) by way of interest, dividends, rents or royalties, whether derived from personal exertion or from property; and (c) in the course of carrying on a business, where the income is of such a class that, if derived otherwise than in the course of carrying on a business, it would be income from property, a further income tax of" a certain percentage "of that taxable income."

The taxpayer contended that in respect of the income years in which the powers given by sec. 28 of the Act were exercised then the further tax on income from property was superseded. This contention cannot be sustained in the face of the explicit terms of the tax Act. It is a tax additional to any other income tax and upon a special class of income. The provisions of sec. 28 relate to taxation of a business carried on in Australia but controlled abroad and are wholly inapplicable to the further tax.

Other questions also arise in connection with this further tax. One the manner of its assessment. The main consideration is that the tax is a further tax on income derived from particular sources. Prima facie, therefore, the general method of assessment under the Income Tax Assessment Act 1922-1934 should be followed. The total assessable income derived from the sources mentioned in the section should be taken as the basis and from it should be deducted all deductions that are allowed under the Act for that class of income. The taxable income mentioned in the section will then be ascertained.

Another, the deductions that may be allowed to the taxpayer in respect of income assessable to tax under the section. The taxpayer received "pump rents," as they are called, or in other words amounts received by way of rent or hire for petrol pumps owned by the taxpayer and let to retailers under hiring agreements and used by the retailers for distributing petrol to consumers. Such rents are comparatively small in amount, but the taxpayer claimed very considerable deductions in respect of repairs to and depreciation of such petrol pumps, municipal taxes and licences on such petrol pumps, losses on sale or retirement of such petrol pumps and administration expenses in connection with such petrol pumps. In my opinion the "pump rents" are income derived by the taxpayer in the course of carrying on its business and are of a nature that if derived otherwise than in the course of carrying on a business would be income from property. They are received by the taxpayer in the course of its business. But if the rents had been derived otherwise than in the course of carrying on the business they could not have been described as income from personal exertion and must have fallen within the definitions of income from property which means all income not derived from personal exertion (Income Tax Assessment Act 1922-1934, sec. 4). The assertion that the "pump rents" are not income within the meaning of the Act appears to me untenable. They come in and increase the revenue of the taxpayer, though in a small degree. But the deductions claimed by the taxpayer in respect of this income must, I apprehend, be a loss or outgoing actually incurred in gaining or producing the income in the sense already indicated—Cf. Act, sec. 23 (1) (a)—and I would go further and apply the prohibition of sec. 25 (e) and say that no deduction should be allowed in respect of any money not wholly and exclusively laid out or expended for the production of that income.

In my opinion, the question whether the deductions claimed were so incurred and expended is mainly a question of fact. The board of review allowed a deduction in respect of administration expenses but otherwise rejected the deductions. The company admittedly did not instal the pumps for the purpose of earning the pump rent of ten shillings per pump per year. They were installed and maintained to enable retailers to sell the taxpayer's products to the public. As the board said, the "pump rents" constitute only a small fraction of the total receipts of the taxpayer and even if the taxpayer found it impossible to obtain pump rents still the nature of its business requires that it should instal and maintain petrol pumps. These reasons impress me, but the final determination of the question and how far it is open in these appeals is for the justice who hears these appeals.

The functions and powers of the board of review.—The board of review is an administrative and not a judicial body, though it must of course exercise its powers and authorities according to the provisions of the law and not arbitrarily and capriciously (Shell Co. of Australia Ltd. v. Federal Commissioner of Taxation[16])—and cf. British Imperial Oil Co. Ltd. v. Federal Commissioner of Taxation[17]. A taxpayer who is dissatisfied with an assessment made by the commissioner under the Act may lodge an objection in writing against the assessment stating the grounds upon which he relies. The commissioner must consider the objection and may either disallow or allow it wholly or in part and give notice of his decision to the taxpayer. A taxpayer who is dissatisfied with the decision of the commissioner may in writing request the commissioner to refer the decision to a board of review for review or to treat his objection as appeal and forward it either to this court or to the Supreme Court of a State (Act, sec. 50). The board of review, if a decision be referred to it, is required to give a decision in writing and it may either confirm the assessment or reduce, increase, or vary the assessment (sec. 51). And for the purpose of reviewing a decision of the commissioner, the board of review has all the powers or functions of the commissioner in making assessments, determinations and decisions under the Act and such assessments, determinations and decisions are deemed to be assessments, determinations, or decisions of the commissioner (Act, sec. 44).

The taxpayer had been assessed by the commissioner to income tax for the years already mentioned, but it was dissatisfied with the assessments and lodged objections which were disallowed by the commissioner. The taxpayer then requested the commissioner to refer his decision in each of the years mentioned to the board of review, which he did. And the board thus became seised of each of those decisions for the purpose of review.

The commissioner had assessed the taxpayer to income tax for each of the years 1929, 1930 and 1931 under and in pursuance of the provisions of sec. 28 of the Act, but the board upheld an objection to these assessments and determined that assessments should be made under the ordinary provisions of the Act and that such assessments should issue in respect of each of those years in lieu of an assessment under the provisions of sec. 28. But this was subject to a reopening of the case in connection with the assessment of the taxpayer to further tax on income from property. The board re-opened the case and in October 1937 assessed the taxable income of the taxpayer in each of the years mentioned and also the further tax on income from property.

The board did not exceed its powers, authorities and functions in so doing. The board was seised of decisions of the commissioner for the purpose of review and until its functions were completely discharged the decision remained within its power and jurisdiction for the purpose of review. The board did not, as a matter of fact, alter its decision, but carried it to completion. Even if the board had reached the conclusion that its former pronouncement was wrong, I see no reason why it should not have corrected any mistake that it had made and promulgated a proper decision so long as it was seised of the matter for the purpose of review. A superior court of justice, it may be remarked, has full power to rehear or review a case until judgment is drawn up, passed, and entered: See In re Suffield & Watts; Ex parte Brown[18]; In re the Lyric Syndicate (Ltd.)[19]; The Turret Court[20]. The authority of administrative bodies is not so confined and must necessarily be more flexible.

In July 1937 the board, as to the year 1932, directed that an amended assessment be issued under sec. 28 of the Income Tax Assessment Act 1922-1930 and determined the total receipts and the percentage on which the taxpayer should be assessable and as to the year 1933 held that sec. 28 was inapplicable. But these decisions were also subject to reopening of the case in connection with the assessment of the taxpayer to further tax on income from property. In October of 1937 the board, as to the year 1932, assessed the taxpayer to income tax under and in pursuance of the provisions of sec. 28 of the Act and also to further tax on income from property and as to the year 1933 the board restated its decision in these terms:—"Notwithstanding that the business produced no taxable income, the board in its judgment does not think it proper to assess and charge tax on any percentage of the total receipts of the business—sec. 28."

These determinations of the board may be erroneous either wholly or in part and subject to review by this court but they were not in my opinion beyond its authority and jurisdiction. The board was still seised of the decisions of the commissioner for the purpose of review. The question of the further tax was still open and so indeed was the question whether the taxpayer should be assessed for 1933 and how it should be assessed. The board had determined that the provisions of sec. 28 were inapplicable but that did not completely discharge its function. Even if the determination of the board of October 1937 as to the year 1933 reverses or departs from that of July 1937, the board in my opinion nevertheless acted within its authority and jurisdiction in the determination of October 1937 for it was still seised of the decision of the commissioner for the purpose of review and had not exhausted its function. So long as the board retained seisin of the decision of the commissioner for the purpose of review it had authority to review its determinations and give effect to its conclusions reached upon such review. Moreover, it must not be assumed that I assent to the proposition that sec. 44 of the Act, coupled with sec. 37, would not justify the board's determination of October 1937, but it is not necessary to express any concluded opinion on the effect of these sections.

All that remains is to answer the specific questions directed to be argued before this court under the order of my brother Rich.

Question 1. So much of the amount of the exchange referred to in par. 17 of the mutual admissions of fact as is found to be referable to expenditure incurred in and for the purpose of discharging liabilities on revenue or income account is allowable as a deduction in ascertaining (otherwise than under sec. 28 of the Income Tax Assessment Act 1922-1934) the taxable income of the company in the year in which the payments were made as set forth in the mutual admissions.

Question 10. So much of the deductions as are found to be actually incurred in gaining or producing the income assessed to the further tax upon income from property is allowable as a deduction in ascertaining the taxable income of the taxpayer from that source. The question is substantially a question of fact for determination by the justice who hears the appeals.

Question 12. The amount of the taxable income should be ascertained according to the method prescribed for ascertaining taxable income under the general provisions of the Income Tax Assessment Act 1922-1934 having regard however to the limited class of income assessable pursuant to sec. 5 or its corresponding provision in other Acts.

The taxpayer is a company incorporated in New South Wales and throughout Australia it carries on a business of supplying petrol and petroleum products. It was formed in 1918 by a body or bodies incorporated in the United States of America, whose business it is to produce and distribute gasolene and other products of petroleum. The taxpayer remains under the control of this group of corporations or one of them and its business is therefore "controlled principally by persons resident outside Australia" within the meaning of sec. 28 of the Income Tax Assessment Act 1922-1934. That section provides that when a business carried on in Australia is so controlled and it appears to the Commissioner of Taxation that the business produces no taxable income or less than the ordinary taxable income which might be expected to arise from the business, the person carrying on the business in Australia shall be assessable and chargeable with income tax on such percentage of the total receipts (whether cash or credit) of the business, as the commissioner in his judgment thinks proper.

For the five financial years beginning 1st July 1930 and ending 30th June 1935 the commissioner assessed the taxpayer company under this provision. The accounting period of the taxpayer is the calendar year and the assessments therefore took a percentage of the gross receipts for each of the years of income 1929, 1930, 1931, 1932 and 1933. The taxpayer carried in objections to the application of sec. 28 to its business and requested the commissioner to refer his decisions to the board of review. That tribunal reached the conclusion that in one year only should the taxpayer company be assessed under sec. 28, viz., the income year 1932. The board, having announced this conclusion, proceeded at a later date to ascertain upon ordinary principles the company's taxable income for the three preceding years. In the fifth year, 1933, it was not disputed that the company's trading had resulted in a heavy loss.

In all five years both the commissioner and the taxpayer appealed to this court from the decisions of the board of review on one ground or another. The appeals are of course to the original jurisdiction of this court. They came before Rich J., who at the request of the parties made an order which, as amended at the hearing, directed that some thirteen questions, formulated by them as arising in the appeals, should be argued before the Full Court. It is these questions that we are now called upon to decide.

The appeals themselves involve many complications and difficulties which our answers to the questions will not necessarily remove. The attempt on the part of the parties to isolate specific questions and extract them from the matters in general controversy is to be commended as an effort to lighten the burden of a heavy case, but it means that the Full Court cannot determine the appeals finally and must confine itself to giving in general terms answers to questions, some of which are of rather an abstract nature, leaving the application of the answers to the agreement of the parties or, failing their agreement, to a justice. The nature of the questions makes it unnecessary to discuss the facts of the case. Each question depends upon a particular set of facts or phase of the case and it is better to deal with the questions in order, stating under each of them such of the facts as are material to the answer.

Question 1 relates to deductions which the taxpayer claims to make because remittances to the United States of dollars cost more in Australian pounds than the amount in Australian currency at which its dollar liabilities were expressed in its books of accounts. The claim assumes, of course, that the income of the taxpayer will be assessed, as in the three earliest years the board has assessed it, upon ordinary principles, and has no direct concern with the company's assessment in any year to which sec. 28 is ultimately applied.

From 1929 the Australian pound fell heavily in terms of dollars. At the end of that year it stood at $4.78 and by a fall steadily gaining in acceleration it reached by November 1932 a level of about $2.50. From that it rose in a fluctuating manner but at the end of the period with which we are concerned it was under four dollars. During this time the taxpayer carried a very large dollar liability to the New-York house, notwithstanding the remittances which are the foundation of its present claim to deductions on account of increased expenditure for exchange. The reason for carrying so large a dollar indebtedness lies in the company's relationship with the group of corporations in the United States which included alike the source of its finances and the source of its supplies of trading stock and plant.

The share capital with which the taxpayer was constituted proved by no means sufficient to meet its requirements for working capital. In order therefore to provide it with funds large enough for its needs, the company was allowed to delay payments for the trading stock and plant supplied from the United States. Thus a dollar liability grew while a working capital accumulated. Further large amounts were written off the liability in each successive year to represent a reduction in the price of gasolene and petroleum products allowed by the supplier. As from the end of September 1931, the time approximately when Britain left the gold standard, the company's account with the American Texas Co. or group whence it obtained its supplies was divided into two. The debt up to that date was, so to speak, funded for the time being and all remittances going forward after a period fixed somewhat arbitrarily as three months from that time, that is after 31st December 1931, were to be regarded as payments for new supplies. But the taxpayer company had by this time accumulated a fund much in excess of its requirements because, owing to the adverse exchange, it had accumulated and invested moneys which otherwise it would have remitted. When this fact was understood in New York, fresh directions were given and in the end remittances were made out of such surplus accumulations. They were appropriated in the Australian books as payments on account of the old indebtedness.

Subject to the two special matters to which I have referred, viz., the reductions in price and the directions as to the division of the accounts as from 30th September 1931, the taxpayer company kept the account of its dealings with the New-York house responsible for its supplies without appropriating payments or other debits to the account against any items on the credit side.

On the credit side of the account were entered the invoice price, including freight and insurance, of supplies of stock-in-trade and of items of plant and of certain cash advances made in 1929 and the early part of 1930. On the debit side were entered disbursements of a casual nature made to the use of the American house and the remittances. The price of the goods was expressed in dollars and the liability was one to be discharged in United States currency by payments in New York. Accordingly, the remittances were made by purchasing American exchange. The account was kept in dual currency, but until 1932 it seems to have been regarded as unnecessary to keep the merchandise and trading accounts of the taxpayer company in dollars as well as in Australian currency. In 1929 and in 1930 the changes in the value of the Australian pound in terms of dollars were not such as to bring into the company's return for taxation any important item under the head of exchange. Indeed, it appears that the expenditure took its place in the trading account and represented cost of transfer as much as increase in the cost of procuring dollars. But in 1931 it is a different story and large amounts are claimed as deductions on account of the very much greater cost of remittances in dollars. The movement of exchange against Australia was reflected in the company's accounts in more ways than one, at all events after the adoption of bi-monetary accounting for its internal accounts as well as for the purpose of its account with the New-York house.

In the merchandise account the invoice cost of goods was debited in dollars and converted into Australian pounds at the rate of exchange prevailing at the date of the invoice. But this rate of conversion was adjusted every month. The adjustment or revaluation was effected by a process which it is unnecessary to describe in detail; it is enough to say that it had the effect of converting the dollar value of the goods on hand at the end of the month into pounds at the rate prevailing on that day and of providing for the variation in the exchange when applied to the dollar value of goods sold during the month. Thus the Australian currency equivalent of the dollar value of goods on hand was brought up to date month by month and in the case of goods sold the difference between the Australian equivalent at the old and at the new rate of conversion was brought into the merchandise account. The adjusted values in pounds were reflected in the trading account, whence they found a place in the income tax returns. So far the commissioner, apart from his resort to sec. 28, does not challenge the company's method of taking into account, in relation to its assessment of its income, the effect upon its trading of the variation in the rate of exchange. Nor does he contest the company's next step, which indeed operates, during a movement against Australia, to reduce, not to increase, the claim of the taxpayer which he does contest. That step concerns the difference between the Australian currency equivalent of the dollar value of the goods on hand at the end of the month as appearing from the balance of pounds and dollars shown in the account and the equivalent of those dollars at the rate of exchange prevailing at the end of the month. This difference, being for the period in question an excess of the latter over the former, is carried to the credit of the account with the New-York supplying house, an account which, generally speaking, does not affect the income-tax return. This account also is balanced monthly. Goods received during the month are credited at the invoice dollar value converted into pounds at the rate prevailing at the date of the invoice. Remittances are debited in dollars and in pounds converted at the rate at the date of the remittance, that is to say, the pounds equivalent of the company's actual outlay in effecting the remittance. At the end of the month the balance in dollars represents the balance due to the American house, but the balance in pounds is, during a decline of the pound, less by the increase in the cost of purchasing the exchange for the remittances than the Australian currency equivalent of the same goods as contained in the opening figure for the month, that is, the balance from the previous month. This deficiency is made up to some extent by the credit from the merchandise account of the exchange adjustment therein, already mentioned. But the rest of it forms a balancing figure representing what is described variously as a loss on exchange or an increase in the outlay to remit dollars. It is this item that the taxpayer company claims to bring into its assessment as a deduction, a claim which the commissioner has successfully resisted before the board of review.

It is important to see what such an item represents. It forms in the first instance portion of the excess in pounds required to remit a given number of dollars at the time of the remittance over the number of pounds standing in the account as equivalent to the same number of dollars at the credit side of the account, that is, on the side of the account which stated the dollar liability of the taxpayer to the New-York house and its equivalent in Australian currency as at the end of the previous month. The remaining portion, having gone into the trading account, cannot be taken into consideration a second time. The total excess pounds required for actual remittances over the previous equivalent in pounds of the same sum in dollars as was remitted on each occasion during a year of income represents a cash outlay during that year, unexpectedly found necessary to discharge liabilities which, for the purpose of profit and loss and of assessment of taxable income, have been taken into account at lower amounts in pounds. In the present case the liabilities which the taxpayer says are discharged by the remittances are found always to be more than a year old and therefore they must have been taken into account in a previous accounting period or year of income. Commercial accounts are not kept on a receipts and disbursements basis but on a valuation and credit basis. Purchases of stock-in-trade go into the account quite independently of actual payment. The cost of the purchase is taken in as at the time when the purchases are made, not when the cost is paid, and the disbursement involved in payment does not form an item of the account of the year when the purchase is made, still less of the subsequent year. We are therefore concerned with the difference between, on the one hand, the pounds in which a dollar liability taken into a prior accounting period is expressed or valued for the purpose of accounting or assessment, and, on the other, the actual amount in pounds found in the subsequent accounting period to be required to discharge it.

In considering the validity of a claim to deduct such an item from assessable income in the year of actual expenditure, the first question to be answered is whether any part of the actual expenditure made in discharging liabilities which have already gone into account as and when incurred should find any place in the estimate of income. The fact that to discharge the liability more is required than the sum at which it was expressed or valued might perhaps be regarded as no more than a falsification of a prior estimate, justifying a revision of the estimate, if that course be still open, but not warranting a deduction from current profit.

But this, I think, is not the true way to look at the matter. During any given accounting period the profit or loss made by the taxpayer's operations must be ascertained by a comparison between its position at the beginning and at the end, based upon estimates of value and upon the accrual of debits and credits. But discrepancies between the liabilities carried into the period and the cost of defraying them must come into the comparison as an actual reduction or increase of the profit or loss otherwise produced by the comparison, provided always that the liability is one belonging to an income account and that the loss ought not for other reasons to be referred to capital. For where liabilities are not fixed in their monetary expression, whether because of contingencies or because they are payable in foreign currency, a difference between the estimate and the actual payment must be borne as a business expense, and where the continuous course of a business is divided for accounting purposes into closed periods it is a reduction of the net profit, which otherwise would be calculated for the period.

But in the present case the commissioner denies that any liability of an income nature is discharged by the remittances in making which the excess expenditure was incurred. The remittances were made without specific appropriation and in respect of a running account which included items for plant and other things of a capital nature. Reliance is placed upon sec. 25 (e) of the Income Tax Assessment Act 1922-1934, which forbids the deduction of money not wholly and exclusively laid out or expended for the production of assessable income. It is, however, a mistake, I think, to treat this provision as concerned with the distinction between expenditure of a capital and of a revenue nature. Expenditure on plant looks to the production of assessable income, whether the expenditure be upon recurrent repairs and therefore of an income nature or upon new plant and therefore of a capital nature.

The operation of sec. 25 (e) is to disallow claims to deduct expenditure made in order to effect some purpose other than the production of assessable income, and to do so even if the latter purpose was also to some extent present as a secondary object. It is not this provision but the excepting words in sec. 23 (1) (a), "not being in the nature of losses and outgoings of capital," that exclude the deduction of items referable to capital. They are excluded though, as the form of the section recognizes, they may be actually incurred in gaining or producing the assessable income. No less may they be money wholly and exclusively expended for the production of assessable income. There is I think nothing which prevents the division or apportionment between capital and income of an outgoing which is in part of a capital nature and in part of a revenue nature. But the outgoing must be of such a kind that it is capable of distribution. The point arises in reference to the nature of the liabilities which the remittances discharged. As I have stated, they were made without specific appropriation, and debited to a running account which included items for the supply of plant, some comparatively small items for advances, and some other items of a capital nature. Is it possible to trace the liabilities which the remittances during a year have operated to discharge, and, by apportionment or otherwise, to attribute a proper part to liabilities incurred on account of revenue, that is, of an income nature? The question is I think almost entirely one of fact. Before the board of review an attempt was made by the taxpayer to show that it could be done, indeed actually to do it. But in the view taken by the board it was not necessary for that tribunal to express any opinion as to the success of the attempt. The mode in which the accounts have been kept makes the task difficult, but it does not appear to me to be impossible. I see no reason why the remittances to the debit of the account should not be taken as discharging the items on the credit side of the account in the order in which they are entered, that is to say, why the rule or presumption should not be applied that payments satisfy the earlier liabilities. Further than this I do not think we are in a position to go upon this reference to the Full Court.

But it is not enough that liabilities of an income nature may have been discharged by the remittances involving the increased outlay of pounds in purchasing dollars. Consistently with that fact, the increased outlay may still be of a capital nature. And the commissioner maintains that it is of a capital nature because it was brought about by the company's using as its working capital the moneys out of which the liabilities should have been discharged before the fall of the pound. His contention fastens upon the cause of the delay in remitting moneys to discharge the earlier liabilities of the taxpayer company for stock-in-trade and supplies. Because remittances were withheld in order to provide the company with the equivalent of a working capital the commissioner says that the increase in the cost of the dollar ultimately purchased to discharge the earlier liabilities should be borne by the capital account. In other words, the need for capital accounts for the additional expenditure incurred in purchasing the dollars at the higher cost prevailing at the later date. It might at first sight appear that as remitting in dollars is a regular part of the taxpayer company's outlay in the ordinary routine of its business, it could not be of any importance how the expenditure for that purpose in any given year was appropriated to satisfy liabilities. That is to say, it is a recurrent expenditure, and why should it not be charged against current receipts? But it must be remembered that the accounting is not upon a cash but upon a credit basis, not upon a basis of actual receipts or disbursements, but by valuation and taking and giving credit: See Executor, Trustee and Agency Co. of S.A. Ltd. v. Deputy Federal Commissioner of Taxes (S.A.)[21]. Current purchases, in other words, are taken into the account against current sales independently of payment by or to the taxpayer. Thus the true nature of the deduction claimed is for the increase in the cost of discharging a past liability for which provision in the accounts was made at a lower figure.

But notwithstanding that so much must be conceded to the contention of the commissioner, I think that the outgoing is not wholly of a capital nature and to the extent to which it is attributable to the discharge of liabilities incurred on revenue account ought to be allowed. From the fact that the increase in the expenditure arose from a delay in payment designed to create a fund for working capital, it by no means follows that it is a capital outgoing. The variations in the cost of exchange for discharging liabilities in foreign currency are continual sources of credits and debits in accounts into which the liabilities have already been taken. It is true that the credits and debits do not, or at all events may not, record actual losses and gains incurred or obtained independently of the previous expression of the liability in the accounts. But they are continually recurring variations in the position of the business in its course of profit earning. Whether the variations are on account of capital or revenue cannot depend on the purpose of the business policy or measures to which as a matter of causation the size or direction of the variation may be traceable. Some kinds of recurrent expenditure made to secure capital or working capital are clearly deductible. Under the Australian system interest on money borrowed for the purpose forms a deduction. So does the rent of premises and the hire of plant. No doubt the difficulty of assigning an outgoing to capital or income is often very great. This court has dealt with aspects of the problem in Egerton-Warburton v. Deputy Federal Commissioner of Taxation[22], Ash v. Federal Commissioner of Taxation[23] and Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation[24]. Here I think that there are factors which place the expenditure in the category of an outgoing on account of revenue, so far as it is not referable to capital liabilities. First among these factors is that the circumstances that the liability discharged is ex hypothesi of an income nature. Next the chance of loss or gain in the expenditure required to discharge it, owing to variations in exchange, is a matter attendant upon the use of funds transferable from one country to another, which is continual, recurrent and not independent of judgment and policy on the part of those managing a business of which such funds form a part. It is a loss or gain ordinarily regarded in business as detachable from the fund, and susceptible of treatment as a trading profit or loss.

The delay increased the chances of a loss expressed in pounds, but the fact that the reason for the delay related to capital does not make the outgoing a capital loss. It is rather a standing contingency representing the recurrent expenditure which must be incurred to obtain the use of the money and is much more like annual outgoings to obtain the use of capital assets, such as rent, hire or interest.

There remains a further point. The commissioner challenged the reality of the expenditure claimed as a deduction. He challenged it on two independent grounds. He said in the first place that it represented a mere book-keeping expense, the reality of which could never be determined until the account was closed off; that exchange continually varied, that the fact that in a given period the amount at which the liabilities stood was found to be exceeded by the outlay in discharging them told you nothing of the true result of the whole account. This contention, I think, leaves out of view the fact that it is necessary to find profit and loss over yearly accounting periods and that to do so comparisons must be instituted between credits, debits and values over the period. To arrive at a conclusion as to the profits of a period, casual recurrent expenditure on account of outgoings allowed for in anticipation must in appropriate cases be compared with the provision made. Otherwise the true result of the trading would not appear.

The second ground of the challenge depends on the facts of the case as appearing from the admissions between the parties. The identity of the corporation or group to which I have so far referred as the New-York house is not stated or at all events clearly established. The commissioner says that it may be that it is only a branch of the taxpayer company itself and therefore that a remittance at a particular date throws no light on the actual discharge of the liability. There is I think good ground for excluding the hypothesis suggested. For the form and contents of the documents as well as the account of the organization of the corporations raises a presumption that the remittances went to the supplier. But as will appear from a consideration of what I have said above I do not attach so much importance to the date at which the liability was actually discharged as to the fact that the remittance was for the purpose of providing for the liabilities, and of the latter I think there can be no doubt.

For the reasons given I think that it cannot be said that the deductions claimed for "exchange" should be disallowed.

The first question should in my opinion be answered as follows:—So much of the amount of the exchange referred to in par. 17 of the mutual admissions as is found to be referable to expenditure incurred in or for the purpose of discharging or providing for liabilities on revenue or income account is allowable as a deduction in ascertaining (otherwise than under sec. 28 of the Income Tax Assessment Act) the taxable income of the company in the year in which payments were made as set forth in the mutual admissions.

The second question relates to a loss sustained by the taxpayer company in the year 1930 in its trading operations in New Zealand. It claims to deduct this New-Zealand loss in the ascertainment of its taxable income. As the taxpayer is incorporated in Australia it falls within the statutory definition of "resident" (sec. 4 of the Income Tax Assessment Act 1922-1930). A resident is liable to taxation upon his income derived from all sources whether in Australia or elsewhere. The claim for deduction is based alternatively upon the provisions of sec. 23 (1) (a) and upon those of sec. 26. The material part of sec. 23 (1) (a) provides that in calculating the taxable income the total assessable income derived by the taxpayer 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.

The contention on the part of the taxpayer is that its assessable income from all sources including New Zealand should be aggregated and from it there should be deducted the outgoings everywhere that were incurred in its production. Thus the New-Zealand outgoings, which exceeded the New-Zealand assessable income, would be thrown against the mass, so that the New-Zealand deficiency would operate to reduce the Australian income.

To qualify for this inclusion among the deductions, the New-Zealand expenditure or outgoings must have been incurred in the gaining or producing the assessable income and sec. 25 (e) goes further and forbids deductions in respect of money not wholly and exclusively laid out or expended for the production of assessable income. If it were true that New-Zealand revenue formed part of the taxpayer's assessable income, it would be hard to deny that the New-Zealand expenditure fulfilled the required condition. But "assessable income" is defined to mean, in the case of a resident, the gross income derived from all sources which is not exempt from income tax under the provisions of the Income Tax Assessment Act 1922-1930: See sec. 4. And the commissioner contends that the New-Zealand income is exempt from taxation. The exemption, it is said, is given by sec. 14 (1) (q) (i) (1), which provides that there shall be exempt from income tax income derived from sources outside Australia by a resident of Australia to the extent to which that income is proved to the satisfaction of the commissioner to be chargeable with income tax in any country outside Australia.

In New Zealand the net income of the taxpayer company derived from that country would be liable to income tax. In 1930 there was of course no net income; outgoings overtopped revenue. But if the balance had been the other way and there had been an excess of receipts in New Zealand over expenditure and outgoings, the excess would have been taxable income liable to New-Zealand income tax. In these circumstances the question is whether it can be said that the New-Zealand outgoings were incurred in gaining assessable income, inasmuch as if any net income had arisen in New Zealand it would have been exempt from Australian tax under sec. 14 (1) (q) (i) (1). In my opinion it cannot properly be said that the New-Zealand outgoings were incurred in producing assessable income as defined. The reason is that the New-Zealand receipts are exempt under sec. 14 (1) (q) (i) (1) and therefore fall outside the definition in sec. 4 of assessable income. They are exempt from tax in Australia, that is from inclusion in an assessment, because they are liable to be charged with tax in New Zealand, if there is a balance remaining after the deductions allowed by New Zealand law have been made.

I think that sec. 14 (1) (q) (i) exempts gross receipts or what would otherwise form an item or items of assessable income. The word "chargeable" is a wide one and I think it includes the case of New-Zealand or foreign assessable income which is liable to taxation only after deductions of outgoings and other allowances and includes that case whether the deductions exceed the assessable income so that no New Zealand or foreign tax is in fact payable. It does not mean to bring into the Australian assessment foreign gross income where there is a foreign tax payable on the net amount, simply because the deductions wipe out the whole and leave no net figure. Accordingly I am of opinion that the taxpayer is not entitled under sec. 23 (1) (a) to deduct New-Zealand losses in his Australian assessment.

The taxpayer's reliance upon sec. 26 is also answered by the interpretation I have placed upon sec. 14 (1) (q) (i) (1). The material part of sec. 26 is sub-sec. (1) (b), which provides that where a loss is made in any year by any person, if he is a resident, in carrying on a business the proceeds of which (if any) derived from sources outside Australia would not be wholly exempt from income tax under the provisions of sec. 14 (1) (q) (i), that person shall be entitled to a deduction of that loss from the net assessable income (if any) derived by him in that year.

Sec. 26 contains many difficulties but it is sufficient to say in the present case that it cannot apply because according to the construction I have put upon sec. 14 (1) (q) (i) (1), the proceeds of the New-Zealand business would under those provisions be wholly exempt from Australian income tax.

3, 4, 5 and 6.

Questions 3, 4, 5 and 6 relate to the mode in which the board of review exercised or purported to exercise its powers.

Sec. 50 (4) of the Income Tax Assessment Act 1922-1935 enables a taxpayer to require the commissioner to refer his decision upon an objection to the board of review. Under sec. 51 the taxpayer is limited on the review to the grounds stated in his objection and the board on review must give a decision in writing and may either confirm the assessments or reduce, increase or vary the assessment. Under sec. 44 the board for the purpose of reviewing decisions so referred to it has the powers and functions of the commissioner in making assessments, determinations and revisions under the Act.

By reg. 45 (1) of the Income Tax Regulations (S.R. No. 64 of 1927) the board is to give a written decision on each review and shall forward copies of the decision to the commissioner and to the taxpayer and the commissioner is required, unless the decision has been appealed from, to give effect to the decision within thirty days after the receipt thereof. Within thirty days the commissioner or the taxpayer may appeal to this court from any decision of the board of review which in the opinion of the court involves a question of law (sec. 51 (6) and Rules of the High Court of Australia, Order LIA., rule 11).

The five assessments which were the subject of the reference to the board made at the taxpayer's request were each made under the provisions of sec. 28 and not under the ordinary provisions of the Act. The objections covered not only income tax but also the further income tax imposed by sec. 7A (1) of the Income Tax Act 1930 (sec. 5 (1) of the later taxing Acts), a tax sometimes referred to by the not very accurate description, special property tax. The board dealt first with so much of the assessments as related to income tax, deferring the consideration of the further income tax. It stated its conclusions in writing in the form of a decision. As to the first three years, 1929, 1930 and 1931, the board upheld the taxpayer's objection that sec. 28 was not applicable and added—"an assessment under the ordinary provisions of the Act to issue for each of these years in lieu of the assessments under sec. 28." As to the fourth year, 1932, the board stated that an amended assessment was to be issued under sec. 28 on the basis of a specified amount of receipts and of a named percentage fixed by the board. As to the fifth year, 1933, the board simply upheld the objection that sec. 28 was not applicable. In that year the taxpayer company's accounts disclosed a very large loss. These determinations were expressed in the form of a written decision duly signed by its members, such as would comply with the requirements of the Act and the rules that a decision should be given in writing. The document concluded by saying that the case would be re-opened for the purpose of hearing evidence and argument on the ground only relating to the special or further income tax.

But when for this purpose the case came again before the board it made some addition to or perhaps variation of its prior decision upon the other matters. For the first three years the board assessed the amount of the taxable income, that is, under the ordinary provisions. For 1932 the board expressed an actual assessment under sec. 28, at the percentage it had fixed upon the sum for gross receipts that it had specified. As to 1933 the board said that in lieu of the terms in which its decision was expressed upholding the ground that sec. 28 was not applicable, the board considered it desirable to restate the decision in the following terms, viz., notwithstanding that the business produced no taxable income the board in its judgment does not think it proper to assess and charge tax on any percentage of the total receipts of the business. The purpose of this declaration was to enable the commissioner to argue in subsequent years that the loss incurred in 1933 could not be carried into later assessments because sec. 28 had been put into operation for the year 1933.

The taxpayer considered that, if, as the first decision of the board appeared to require, the commissioner proceeded to assess it upon ordinary principles for the first three years, it would be open to the taxpayer company to object to the assessment on any grounds it thought fit and either appeal to the court or request another reference to the board of review. With this possibility in view the taxpayer objects that when the board gave its second decision it was beyond its authority to go back and vary or add to the board's first decision by itself assessing the taxable income for the three earliest years. The taxpayer applies the objection to the fourth year also. These are other matters to which the third, fourth, fifth and sixth questions are directed. The declaration, as it may be called, made in the fifth year, 1933, that the board had proceeded under sec. 28 to its conclusion, is made the subject of separate questions.

When in its first decision in relation to 1929, 1930, and 1931 the board of review said that an assessment under the ordinary provisions of the Act was to issue I take it to mean that the commissioner would make and issue such assessments. It appears that the board itself has not in the past made assessments as sec. 44 (1) authorizes it to do, and during the discussion before the board the chairman made it clear that assessment by the commissioner was what was in contemplation. But the statement cannot I think, amount to an order or a direction given to the commissioner operating to impose an independent duty upon him. The board is an administrative tribunal with authority to review the commissioner's assessments and decisions, but I do not think that it is authorized to direct him what he shall do. What the statement amounts to is, I think, a declaration that the objection to the former assessments under sec. 28 having been upheld it will devolve upon the commissioner to make assessments upon ordinary principles. In the same way, for the year 1932, the board, having fixed a new percentage under sec. 28 and determined the amount of the total receipts, says that the work of assessing upon that basis falls to the commissioner. The board might have proceeded, I think, to make all four assessments under sec. 44 (1), or it might have gone on, not to make complete assessments, but, nevertheless, to ascertain the taxable income. It is to be noticed that the board's power to assess is limited to the purpose of reviewing the decisions of the commissioner: See sec. 44 (1). That means that in so far as it is incidental to giving effect to the decisions of the board, which must be confined to the grounds of objection, the board may assess.

In the circumstances of the present case it had in the first instance authority to go as far as it afterwards did on the occasion of its second decision. The only question therefore is whether by its first decision it was precluded from taking up the matter where it had left it and going on to assess the taxable income.

Clearly enough the board at the time of giving its first decision regarded it as final except for further income or special property tax. I should doubt very much whether the board could vary a decision once given or give a further decision inconsistent with it. I do not think that sec. 37 which enables the commissioner to alter his assessments is incorporated by sec. 44 among the powers the board is to have.

But upon the view I have expressed as to the nature and legal effect of the statement appended to the first decision, that assessments were to issue, it was not incompatible with the legal operation of the board's first decision for it afterwards to go on and assess the taxable income. To do so was not to depart from but to fufil or complete its decision or order. No doubt its intention to stop short of assessing and to leave the task to the commissioner was changed. But I do not think that the change of intention meant that any operative part of the board's decision was either set at nought or rescinded.

The question arises however whether the board, having elected to stop short of carrying its decision further into effect than a mere declaration, can afterwards change its mind and complete or carry nearer to completion the consequences of its decision. On the whole I think it is at liberty to do so at any time before the closing of the process of review. It is exercising an administrative authority and I do not think that until it has completed the exercise of the function of reviewing the assessments referred to it, its administrative authority is exhausted. I see no reason to doubt that it may give definitive decisions, which it cannot afterwards set aside, upon separate decisions of the commissioner referred for review although those decisions do not clear up the whole assessment. But while the assessment remains before it, I think that it may go on to exercise a power so as to carry out what it has already decided, though at an early stage it chose to refrain from doing so.

In answer to question 3 I think it should be declared that the power of the board of review was not limited to upholding the objection to the assessments for the years 1929, 1930 and 1931.

To question 4 I think the answer should be that notwithstanding its decision in July 1937 as to the years 1929, 1930 and 1931 the board of review did have power to give the decision of October 1937 with respect to those years. The question inquires also about the year 1933, but as that year is dealt with by other questions and it depends on somewhat different considerations I think the answer to question 4 as asked should not include it.

In answer to question 5 I think it should be declared that the board's power in respect of the year 1932 to which sec. 28 has been applied was not limited to setting aside the assessments.

In answer to question 6 it should be declared that the assessments by the board of the taxpayer's taxable income for the years 1929, 1930, 1931 and 1932 made on 18th October 1937 are not void, but, subject to any order made upon the appeals therefrom to this court, are binding upon the taxpayer.

Question 7 is concerned with the bearing upon the application of sec. 28 to the year 1932 of losses by the taxpayer in previous years. The board of review adopted figures for its taxable income in the years 1929, 1930 and 1931 quite inconsistent with the hypothesis that the company incurred any loss. But it is said that if the increased expenditure on purchasing exchange is deductible it will or may be found that, in 1931 at all events, a loss was sustained. Under sec. 26 the taxpayer might be entitled in 1932 to deduct an unexhausted loss incurred in 1931 if the assessment were made not under sec. 28 but upon ordinary principles.

I find some difficulty in understanding exactly what is the application of question 7 to the matters in controversy. It seems to be directed to some contention on the part of the taxpayer that, in exercising its discretions to apply sec. 28 to the year 1932 and to fix the particular percentage which the board in fact adopted, the board ought to have treated the existence of such a loss as a relevant consideration. Presumably if it turns out that there was in truth a loss in 1931 and that the board's assessment of the taxpayer company's taxable income for that year cannot be sustained, then it will be contended that the exercise of their discretion for the year 1932 is vitiated. The question proceeds to inquire upon what principles the existence and amount of such a loss should be ascertained.

The discretions given by sec. 28 are not controlled by any express direction as to what matters must be taken into account or what must be excluded from consideration. It would be hard to say that the fact of a loss in a prior year, still unexhausted and capable of deduction under sec. 26 in a subsequent year, is a matter foreign to the exercise of the discretion to apply sec. 28 in assessing the income of the subsequent year.

But it is another thing to say that neglect to consider or give weight to the fact that such a loss was incurred would invalidate the exercise of the discretion by the board or commissioner, still less a mistake as to the existence of such a loss.

The question is stated in very abstract terms. The facts do not appear which would show the application and the legal consequence of the answer. In my opinion it is both unsafe and unwise to attempt to formulate an answer. An abstract answer is likely to give rise to more difficulties than it will remove. The matter of the question forms only a step in a contention which, though no doubt it seeks a concrete result, cannot be advanced except upon a solid basis of fact. I think that we should not answer the question at all. We should wait until the basis of fact is established and then insist that the concrete question should be considered as an entirety.

Question 8 is said to be pointed at a contention that inasmuch as part of the business of the company is carried on outside Australia, viz., in New Zealand, the business was not of a description to which sec. 28 applied. This contention appears to me to be entirely misconceived. So much of the business of the company as is carried on in Australia is, within the meaning of sec. 28, a business which is carried on in Australia.

In answer to question 8 in my opinion it should be declared that the fact that part of the business of the company is carried on outside Australia is no objection to the application of sec. 28 to so much of the company's business as is carried on in Australia.

Question 9 is included in order that the taxpayer might contend that it is not open to the commissioner to assess a taxpayer under sec. 28 for a given year of income which is preceded and followed by years the income of which is assessed upon ordinary principles. There is no foundation for such a contention.

The question should be answered that it is no objection to the application of sec. 28 to the year 1932 that in the years immediately preceding and following the taxable income of the taxpayer has been ascertained on ordinary principles and not by the application of sec. 28.

9a.

Question 9a, which was added by amendment, relates to the last year, 1933. In the second decision of the board of review it is made quite clear that the board regarded the conditions expressed in sec. 28 as fulfilled so that it was called upon to consider whether any and what percentage should be fixed of total receipts as the income upon which the company should be taxable. The decision stated that the board did not think proper to assess and charge tax on any percentage of the total receipts. The question asks whether the board had authority to refuse to fix any percentage of the total receipts of the business. The commissioner is responsible for raising the matter. His purpose is not to obtain a substantial percentage of the receipts as taxable income, but something however small or even illusory which will establish an assessment for 1933 under sec. 28. His reason for seeking this is that in 1933 the company in fact made a very large loss upon its trading operations and it is expected that it will claim under sec. 26 to carry this loss into 1934 and perhaps subsequent years as a deduction, until it is exhausted The commissioner hopes to establish as a proposition of law that sec. 26 does not enable a taxpayer who in a year of loss has been assessed under sec. 28, even at an illusory figure, to carry the loss into any subsequent year, whether his income for that year is assessed upon ordinary principles or under sec. 28.

The conditions expressed in sec. 28 which the board regarded as fulfilled are the following:—(a) a business which is carried on in Australia, (b) is controlled principally by persons resident outside Australia, and (c) it appeared to the board that the business produced no taxable income or less than the ordinary taxable income which might be expected to arise from that business.

As to the conditions mentioned in (a) and (b) no difficulty exists. They were fulfilled. The third condition is expressed in the section as something which need only appear to the commissioner or board, as distinguished from something which must be true in fact. But there is I think a question as to what it is that must so appear. The company in 1933 incurred a real loss of considerable dimensions. It did so from causes which those principally in control of the business could neither prevent nor affect. No one suggests that the failure of the business to produce in that year taxable income is a thing which might not be expected in the circumstances. Now sec. 28 in stating the condition under discussion says: "when ... it appears to the commissioner that the business produces either no taxable income or less than the ordinary taxable income which might be expected to arise from that business." The board of review interpreted the provision as meaning that whenever a business in Australia controlled from abroad makes a loss, then the commissioner's discretion arises to fix a percentage of gross receipts as the taxable income of the business. This appears to me to be a too literal construction of the words. The alternative expression means, I think, to require a comparison between the ordinary taxable income which the business controlled from abroad might be expected to produce and what it does produce whether nothing or something. It is expressed elliptically, not to say illogically, but I do not think that the mere fact that the business produces no taxable income in a given year is enough to fulfil the condition independently of the question whether the business might have been expected to produce an ordinary taxable income of appreciable amount. The purpose of sec. 28 was stated in British Imperial Oil Co. Ltd. v. Federal Commissioner of Taxation[25], by Higgins J.:—"It is not correct to say that sec. 28 purports to allow income tax where there is no income; in effect, it says merely that the commissioner may assess for income tax a percentage of the total receipts from the business in Australia where the evidence before him is insufficient to show the true income or any income of that business—where it appears to the commissioner that the business produces either no taxable income or less than the ordinary taxable income. A firm that carries on business in London as well as in Australia can easily hide the profits of its Australian business by increasing the invoiced prices of the goods sent to Australia." Starke J. said:—"The object of sec. 28 is to prescribe a standard for fixing or estimating income in a particular case. It takes the total receipts as the source of income and then prescribe a percentage on those receipts as the standard for assessing income; but it is said that the case in which that standard is prescribed is one in which there is no taxable income. That is true; but it means no taxable income in reference to other standards set up by the Act, and therefore requiring a standard of its own. It is no secret that income tax has been avoided by companies and traders resident outside Australia setting up local companies to trade in Australia, and supplying them with commodities at prices that cannot return a profit here, but returning handsome profits to the company or trader so setting up the local companies"[26].

It would I think be opposed to the general conception of the provision to construe it as if the mere fact that no taxable income was earned by a foreign-controlled company was enough, without any consideration of the question whether it might in the given year have been expected to earn taxable income, to justify the commissioner in assessing upon a percentage of total receipts. It does not mean that every time such a company makes a loss it is to be so assessed, but if it makes the smallest profit or taxable income then it must be considered whether it is less than the ordinary income that might be expected. The question what might have been expected is present, I think, in both cases, according to the true meaning of the provision. I am therefore of the opinion that what appeared to the board was not enough to fulfil the condition in question. For it did not appear to the board that any taxable income might have been expected in 1933.

But in any case I think that sec. 28 by the words "shall be assessable and chargeable" does not mean to impose upon the commissioner an imperative duty to assess upon a percentage of total receipts whenever the three preliminary conditions prescribed by the section are fufilled. I construe those words as conferring a power and a discretion, not as imposing upon the commissioner an inexorable duty to fix some percentage, however small, and to proceed to assess thereon.

I am therefore of the opinion that the board was mistaken in the form in which, in its second decision, it expressed its conclusion that the taxpayer ought not to be assessed for the year 1933 under sec. 28.

Question 9a covers, as will be seen, the ground to which, in relation to the year 1933, question 4 was partly directed, and it was for that reason that I preferred to deal with the whole question of the year 1933 under question 9a.

In my opinion in answer to the question it should be declared that the board of review rightly refused to fix any percentage under sec. 28 and the facts did not warrant any assessment under that section.

The remaining questions relate to the further tax, i.e., further income tax, imposed by sec. 7A (1) of the Income Tax Act 1930 and by sec. 5 (1) of the Income Tax Acts 1931, 1932 and 1933.

10.

Question 10 is concerned with the refusal of the board of review to allow certain deductions in ascertaining the net income subject to the tax. The provision, which was considered by the court in Victoria Park Racing and Recreation Grounds Co. Ltd. v. Federal Commissioner of Taxation[27] is as follows:—In addition to any income tax payable under the preceding provisions of this (taxing) Act, there shall be payable upon the taxable income derived by any person (a) from property; (b) by way of interest, dividends, rents or royalties, whether derived from personal exertion or from property; and (c) in the course of carrying on a business where the income is of such a class that, if derived otherwise than in the course of carrying on a business, it would be income from property, a further tax of ten per centum of the amount of that taxable income.

The effect of the last paragraph of the provision, par. c, is, I think, to include income derived by any person in the course of carrying on a business, if the income is of such a class that, when it is derived otherwise than in the course of carrying on a business, it is income from property: Cf. Victoria Park Racing and Recreation Ground Co. Ltd. v. Federal Commissioner of Taxation[28].

During the years in question the taxpayer received interest on Commonwealth loans liable to income tax, and in three of the years, viz., 1930, 1931 and 1932, the amounts were large. The interest was liable to the special or further income tax under par. b of the provision.

The taxpayer company also received some items of revenue which have been brought under par. c without objection on its part. For the purpose of selling its petrol it establishes kerbside pumps. The cost of doing so is very large indeed. The cost of maintaining the pumps also is very heavy. There are outgoings for repairs, for municipal taxes and licence fees, losses on reselling pumps regularly withdrawn from use and an annual provision for depreciation. But many petrol pumps are hired to the proprietors of garages who pay hire, or, as it is called, rent for the pumps. The hire from the company's point of view is not considerable and in fact is but a small saving on the very large expenditure in connection with petrol pumps which the exigencies of the business of distributing petrol throw upon the taxpayer company. But the payments for hire form the items of revenue which have been brought under par. c as liable to the further income tax. The company is by no means opposed to the inclusion of the hire from petrol pumps in the income to be taxed; for it forms the first step in an argument for the allowance against all the items brought under the further tax, including interest, of deductions which would overtop the items in amount and leave no net balance to be taxed. The deductions claimed are for the expenditure in maintaining the pumps, i.e., for the items to which I have referred. The theory of the company is that all the gross income from the classes of property falling under the three pars. of sec. 7A (1) is to be lumped together for the purpose of ascertaining the taxable income and all the expenditure incurred in producing any of the items is also to be lumped together for the purpose of deducting the total from the total of gross income. It contends that all the items of expenditure incurred in maintaining the pumps were incurred in producing the hire or pump rents. The board met the contention by disallowing the items, with the exception of one called administration expenses. It did so on the ground that the expense was referable to the business of selling petrol rather than to the obtaining of pump rents.

I think that this ground is not altogether sound. The truth, in my opinion, is that there was no net or taxable income from the hire of petrol pumps and the item never should come into the computation at all. The fact is that the hire obtained represents no independent source of revenue. It is nothing but a recoupment of a very small part of a large expenditure upon the establishment and maintenance of a means of selling petrol. The circumstances are singular and in my opinion they do not admit of the method of treatment which the taxpayer seeks to apply. To treat the receipts from hire as an item of gross revenue and the expenses of maintaining the pumps, because incurred in producing the hire, as items of a total expenditure to be thrown against the total receipts from all sources liable to the special or further tax is to overlook the fact that the pump rents are mere incidents of the expenditure; the expenditure is not an incident of the pump rents. Sec. 7A (1) (or see sec. 5) of the taxing Acts does not make it clear how the net income to be further taxed is to be ascertained. The expression "taxable income" cannot have its full defined sense, that is, the full meaning given it by sec. 4 of the Income Tax Assessment Act, viz., "the amount of income remaining after all deductions allowed by this Act have been made." For instance, it can scarcely be supposed that any part of a premium paid by a taxpayer upon his wife's life insurance is allowable in ascertaining the net amount liable to further tax: Cf. sec. 23 (1) (c). A conceivable interpretation of the provision is that it requires an apportionment of the net taxable income ascertained for the purpose of ordinary income tax, an apportionment with a view to finding so much of the net sum thus ascertained as is attributable to the inclusion in the assessable income of the items described in pars. a, b and c. But I do not think this is its meaning. It may be that what the provision intends is that a further assessment of taxable income shall be made on the assumption that no other assessable income was derived by the taxpayer but only assessable income filling the descriptions contained in pars. a, b and c.

But before it can be found that a receipt constitutes income falling within par. c something more must be asked than whether, if the receipt had been obtained otherwise than in carrying on a business, it would have been income from property. The peculiarity that the thing which incidentally produces the receipt is maintained at a great cost for business purposes and that the receipt arises merely incidentally and accidentally makes it necessary to inquire whether the receipt can be at all regarded as income of a class which, if it is obtained otherwise than in carrying on a business, is income from property. The establishment and maintenance of petrol pumps has no relation to anything but the carrying on of the business of selling petrol. The receipt is impossible except as a saving or recoupment in connection with selling petrol. It is a complete distortion of the transaction to regard the receipt as capable of an independent existence as revenue. It is obtainable only from the retail seller of the company's petrol who is provided with a pump for the purpose of selling it. In truth there is no "income" from the petrol pumps considered as property; there is only a reduction or recoupment in part of the expenditure in establishing and maintaining an implement of trade. Before you can arrive at the conclusion that there is taxable income derived in the manner described by par. c it must appear possible that taxable income might arise from the source in question otherwise than in the course of carrying on the business. No taxable income does or could arise from maintaining the pumps apart from selling petrol.

I think that question 10 should be answered that the deductions claimed are not allowable against interest, but, having regard to the expenditure they represent and the purpose of the pumps, there is no taxable income from pump rents.

11.

Question 11 asks whether a taxpayer who is assessed for his ordinary tax under sec. 28 is also liable to assessment, in addition, for the further income tax or so-called special property tax.

It is suggested that to apply sec. 28 to a given year is to exclude for that year the special property tax. This suggestion does not appear to me to be well founded.

There are two taxes, income tax and further income tax. For the first an assessment must be made of income generally whether under the ordinary provisions of the Income Tax Assessment Act or under sec. 28. For the second, another ascertainment of a particular class of income or of classes of income must be made. It is an independent ascertainment of a different taxable income. For this sec. 28 is not available. The two taxes are independent; the subject matters taxed, although of the same general nature, viz., income, are of different classifications; and the subjects of tax must be separately ascertained. There is nothing in the use of sec. 28 for the ordinary income at all inconsistent with the imposition of the special property tax.

In my opinion question 11 should be answered that notwithstanding the application of sec. 28 to the assessment of the taxpayer company for ordinary income tax in respect of the year of income 1932, it remained liable to the further income tax under sec. 5 of the Income Tax Act 1933 (No. 41 of 1933).

12.

Question twelve enquires how, for the purpose of the further income tax or special property tax, the taxable income is to be ascertained in a year to which sec. 28 has been applied for the purpose of ordinary income tax.

In my opinion, sec. 28 has no application to the ascertainment of the "taxable income" described in sec. 7A (1) or sec. 5, as the case may be of the taxing statutes relevant to the various years. It is essentially concerned with the income from a business and cannot be employed for such a purpose as the special property tax. There is nothing in sec. 28 to require that when it is applied to ordinary income it shall also supersede the general operation of the provision contained in sec. 7A (1) or sec. 5, as the case may be. That provision operates just as if sec. 28 had not been used for ordinary income tax.

In answer to question twelve it should be declared that for the year 1933 the amount of the income upon which the further income tax imposed by sec. 5 of the Income Tax Act 1933 is levied should be ascertained or assessed independently of sec. 28 and in the same manner as if sec. 28 had not been applied in that year for the purpose of assessing the taxpayer company to ordinary income tax.

The costs of this reference should be reserved to be dealt with at the hearing of the appeals.

I concur in the answers which my brother Dixon proposes should be given to the questions and in the reasons given by him for those answers.

The order of the court was, as amended on 8th April 1940, as follows:—With respect to the questions set out in the order of Rich J. of 3rd November 1939 as amended order and declare as follows:—

As to Question 1. Declare that so much of the amount of the exchange referred to in the said question as is found to be referable to expenditure incurred in or for the purpose of discharging or providing for liabilities on revenue or income account ought to be allowed as a deduction in ascertaining (except under sec. 28 of the Income Tax Assessment Act) the taxable income of the company in the year in which payments as set forth in the mutual admissions were made.

As to Question 2. Declare that no part of the expenditure or outgoings incurred by the appellant company for the purpose of carrying on its business in New Zealand ought to be allowed in ascertaining the company's taxable income under the Income Tax Assessment Act and that in ascertaining the taxable income of the company for the income year 1930 none of the gross income derived by the company from carrying on its business in New Zealand should be included in its assessable income.

As to Question 3. Declare that the power of the board of review was not confined to upholding the objection of the appellant company to the assessments for the years of income 1929, 1930 and 1931.

As to Question 4. Declare that notwithstanding the decision of the board of review of 28th July 1937 the said board had power to give with respect to the years of income 1929, 1930 and 1931 its decision of 18th October 1937 and that with respect to the year of income 1933 the said board rightly refused to fix any percentage under sec. 28 and no assessment under the said section was warranted by the facts.

As to Question 5. Declare that the power of the board of review with respect to the year of income 1932 was not confined to setting aside the assessment.

As to Question 6. Declare that the assessments by the board of review for the years of income 1929, 1930, 1931 and 1932 are not void, but, subject to any order made by this court in these appeals, are binding upon the appellant company.

As to Question 7. Declare that no order should be made upon this reference to the Full Court.

As to Question 8. Declare that the fact that part of the business of the appellant company is carried on outside Australia is not a valid ground of objection to the application of sec. 28 of the Income Tax Assessment Act in assessing the company in respect of income tax.

As to Question 9. Declare that it is not a valid ground of objection to the application of sec. 28 of the Income Tax Assessment Act to year of income 1932 that in the years immediately preceding and following that year the taxable income of the appellant company has been ascertained on ordinary principles and not by the application of sec. 28.

As to Question 9a. Declare that the board of review rightly refused to fix any percentage under sec. 28 of the Income Tax Assessment Act for the year of income 1933 and the facts did not warrant the making of any assessment under that section.

As to Question 10. Declare that in ascertaining the taxable income of the appellant company upon which the tax imposed by sec. 5 of the Income Tax Act 1934 and by the corresponding previous taxing provisions is payable the deductions claimed by the appellant company for outgoings and expenditure in connection with petrol pumps are not allowable against interest derived by the appellant company but the receipts from pump rents ought not to be included in the gross income for the purpose of such ascertainment.

As to Question 11. Declare that notwithstanding the application of sec. 28 of the Income Tax Assessment Act to the assessment of the appellant company for ordinary income in respect of the year of income 1932 the appellant company remained liable to the further income tax payable under sec. 5 of the Income Tax Act 1933.

As to Question 12. Declare that for the year of income 1932 the amount of the taxable income upon which the further income tax payable under sec. 5 of the Income Tax Act 1933 is levied should be ascertained independently of sec. 28 and in the same manner as if sec. 28 had not been applied in respect of that year for the purpose of assessing the appellant company to ordinary income tax.

Solicitor for the Federal Commissioner of Taxation, H. F. E. Whitlam, Commonwealth Crown Solicitor.

[1] (1923) A.C., at p. 148.

[2] (1932) 48 C.L.R., at p. 118.

[3] [1935] HCA 81; (1935) 54 C.L.R. 295.

[4] (1926) 39 C.L.R., at p. 70.

[5] (1926) 38 C.L.R., at pp. 171, 197, 217, 218.

[6] (1912) A.C. 118.

[7] (1912) A.C., at p. 127.

[8] (1912) A.C., at p. 127.

[9] (1915) A.C., at p. 466.

[10] (1938) 61 C.L.R., at p. 198.

[11] (1923) A.C., at p. 148.

[12] (1935) 54 C.L.R., at p. 307.

[13] (1932) 56 C.L.R., at p. 305.

[14] (1816) 1 Mer., at p. 608 [35 E.R. at pp. 792, 793].

[15] (1926) 38 C.L.R., at p. 214.

[16] [1930] UKPCHCA 1; (1931) A.C. 275; 44 C.L.R. 530; (1926) 38 C.L.R. 153.

[17] [1925] HCA 4; (1925) 35 C.L.R. 422.

[18] (1888) 20 Q.B.D. 693.

[19] (1900) 17 T.L.R. 162.

[20] (1901) 84 L.T. 331; 69 L.J.P. 117.

[21] [1939] HCA 35; (1939) 62 C.L.R. 545.

[22] (1934) 51 C.L.R.: Cf. at pp. 575, 576.

[23] [1938] HCA 68; (1938) 61 C.L.R. 263.

[24] [1938] HCA 73; (1938) 61 C.L.R. 337.

[25] (1926) 38 C.L.R., at p. 209.

[26] (1926) 38 C.L.R., at pp. 214, 215.

[27] [1934] HCA 65; (1934) 52 C.L.R. 9.

[28] (1934) 52 C.L.R., at p. 26.

High Court of Australia

Texas Company (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382 (8 April 1940)

HIGH COURT OF AUSTRALIA