Federal Commissioner of Taxation v Morgan [1961] HCA 64; (1961) 106 CLR 517 (26 October 1961)

HIGH COURT OF AUSTRALIA

COMMISSIONER OF TAXATION v. MORGAN [1961] HCA 64; (1961) 106 CLR 517

Income Tax (Cth)

High Court of Australia
Dixon C.J.(1), Fullagar, Kitto(1) and Windeyer(1) JJ.
(THE HONOURABLE MR JUSTICE FULLAGAR died at Melbourne prior to the delivering of judgment in this appeal.)

CATCHWORDS

Income Tax (Cth) - Allowable deductions - "Losses and outgoings . . . incurred in gaining or producing the assessable income" - Purchase of income-producing real estate - Apportionment of rates - Balance on apportionment paid by purchaser to vendors - Whether of a capital, private or domestic nature - Whether deductible - Income Tax and Social Services Contribution Assessment Act 1936-1958 (Cth), (No. 27 of 1936 - No. 55 of 1958), s. 51 (1).

HEARING

Perth, 1961, June 16;
Melbourne, 1961, October 26. 26:10:1961
APPEAL from a Board of Review.

DECISION

October 26.
The following written judgment was delivered: -
DIXON C.J., KITTO and WINDEYER JJ. The question before us for decision is water rates, should be allowed as a deduction from his assessable income, which includes rents from the premises upon which the rates were levied. Section 72 of the Income Tax and Social Services Contribution Assessment Act 1936-1958 (Cth) does not cover the case because the rates were not paid by the taxpayer himself nor was he personally liable for them. He was in fact a purchaser of the premises yielding the rents and the rates had been paid by the vendors before the sale. On the settlement of the transaction the rates were apportioned between vendors and purchaser in the usual manner and the taxpayer as purchaser was required to pay 172 pounds to the vendors in respect of so much of the period covered by the rates paid as on the date of possession remained unexpired. The premises consisted of a block of flats in West Perth. The taxpayer entered into a contract on 30th September 1957 with the owners to purchase the flats for a price of 26,000 pounds. He paid a deposit of 1,000 pounds and agreed to pay the balance of purchase money on or before 31st October 1957, when of course possession would be given. The contract provided that all rental in connexion with the property should be adjusted as at the date of possession being given and taken, and also all rates and taxes. Possession was in the event given on 7th October 1957 and an adjustment was made as from that date. The vendors had in fact paid water rates for the year ending 30th June 1958 and municipal rates for the year ending 31st October 1957. That meant that a sum for water rates covering on apportionment 266 days, and a sum for municipal rates covering on apportionment 24 days, were charged against the purchaser on the settlement, sums together amounting to 172 pounds, and this amount he paid to the vendors in addition to the balance of purchase money. The question is whether, under s. 51 of the Income Tax and Social Services Contribution Assessment Act 1936-1958, in these circumstances he should be allowed a deduction for the sum from his assessable income derived during the year ended 30th June 1958. (at p519)

2. In considering this question, it is said by the taxpayer that it must not be thought that the taxpayer's obligation to the vendors depended wholly on the clause in the contract. The water rates are levied under the Metropolitan Water Supply, Sewerage, and Drainage Act, 1909-1951 (W.A.). They are payable in the first instance by the occupier, but at the Minister's option they may be recovered from the owner and in any case the occupier may recover them from the owner unless there be a special agreement to the contrary: s. 103. Section 105 of the Act contains a provision for apportionment of rates on a change of occupation or of ownership and there is an almost identical provision with respect to municipal rates in s. 414 of the Municipal Corporations Act, 1906-1956 (W.A.). Section 412 of this Act is to the same effect as s. 103 of the Metropolitan Water Supply, Sewerage and Drainage Act, 1909-1951 (W.A.). The provision made by s. 105 and s. 412 respectively is expressed in a very general form. It says that when an occupier or owner ceases to be the occupier or owner of the land in respect of which the rate is made before the end of the period in respect of which such rate is made, such occupier or owner shall, as between himself and the succeeding occupier or owner, be liable to pay a portion only of the rate payable for the whole of such period proportionate to the time during which he continued to be the occupier or owner. The text goes on to place a liability on the person occupying or owning during the remainder of the period to pay his proportion of the rate. It is not clear whether the liability spoken of is between them, inter se, or to the rating authority. But there is a second sub-section enabling the authority to recover from the occupier for the time being. It is assumed that the provision creates mutual rights between the successive occupiers or owners as the case may be. Moreover the Land Agents Act, 1921 (No. 9 of 1922), s. 15, places upon an agent receiving the purchase money on behalf of a vendor a duty towards the purchaser of seeing that rates, taxes and outgoings forming a statutory charge on the land are apportioned. (at p520)

3. There appears to have been much division of opinion among Boards of Review upon the allowability of deductions claimed by taxpayers who are purchasers of property in respect of rates and the like outgoings of the land paid by the vendors but apportioned to the purchasers. No doubt that is the reason why the Commissioner has brought the present appeal to this Court. It is not remarkable that such question should evoke difference of opinion. For there are two opposed sets of considerations affecting the answer. Against the allowing of the deduction it is urged that the amount of the rates or other outgoings already paid by the vendors but apportioned to the purchaser forms an item of the total payment which the purchase must make in order to obtain a transfer of the property, and if it is not strictly part of the consideration for the land, at all events it is a payment made as the fulfilment of a condition precedent to obtaining a transfer. Further it is a sum for which the taxpayer becomes liable not as a consequence of being or having been in enjoyment of the rents and profits of the land but as a preliminary to obtaining that enjoyment. Section 51 (1) speaks of outgoings . . . incurred in gaining or producing the assessable income and says also that they must not be outgoings of capital or of a capital nature. It is said that a difficulty should be felt in regarding a payment to the vendors made by way of reimbursement of part of the rates paid by them as an outgoing "in" gaining the income consisting of the rents; and moreover that the whole transaction by which the land was acquired was a transaction on account of capital, one into which receipts or expenditure on account of revenue could not enter. (at p520)

4. On the other side of the question, however, there are many considerations of reason and of logic in the application of the more basal distinctions between expenditure upon capital account and upon income account. It is evident that the vendors are reimbursed simply because they happen to have paid the rate. If it remained unpaid the purchaser would himself pay it direct to the municipality or water authority. The rate forms an outgoing which is recurrent and is inherently an outgoing on account of revenue: for it is incurred in respect of the enjoyment of the land or the rents and profits. Rates accrue due periodically. Whether between the rating authority and the ratepayer the rate is regarded as accruing day by day is not of importance; for it is measured by the passage of time, whether it be a year, six months or some other period of time, and as between the vendors and the purchaser it is treated as apportionable on the footing of days of enjoyment of the fruits of the property in respect of which the rate is payable. Suppose the purchaser were to make up an account of his net return for the first year from the property he had purchased, and suppose him to be guided by proper principles of accounting. Would it not be necessary for him to throw against the rents accruing during the year the whole amount of the outgoings incurred for the year, whether he had paid them to the vendors or to the rating authorities? (at p521)

5. On the whole the better view appears to be that the apportioned part of the rates does form an allowable deduction from the assessable income of the year covering the period to which that part is referable. Not only as a matter of reason and business sense is it an outgoing on account of revenue, but an examination of the grounds on which it is said to be capital and not incurred in gaining the assessable income disclose their inadequacy. In the first place neither under the contract nor under the statutory provisions does the apportioned part of the rates really represent a payment for the land as a profit or income earning subject, that is as a capital asset. The price remains fixed. The payment of the apportioned part is separate and represents nothing but the reimbursement of a charge for an ensuing period of enjoyment, one of a very limited duration. It is not in form or substance part of the consideration for the property considered as a "corpus". In the next place it is entirely variable with the time of settlement or giving of possession and with the amount paid in respect of a period thereafter by the vendors. It is, in other words, treated as between them as part of the "flow" of outgoings so characteristic of expenditure on revenue account. When you turn to the words of s. 51 "in gaining . . . the assessable income", no real reason can be seen why a payment made at the beginning of a period in which assessable income is gained should not be regarded as made in gaining the income. We need not apostrophize the word "in" as Lord Birkenhead did the word "then" as "one of infinite finesse, flexibility and variety" (Lucas-Tooth v. Lucas-Tooth (1921) 1 AC, at p 601 ), but at least we can attribute to it a wide enough scope to include that conception. (at p522)

6. No one nowadays would deny that the rates levied on a rentproducing property form an outgoing to be regarded as made in producing or gaining the rents as income. If they are paid or actually borne by the taxpayer, does it matter by whom they are actually paid to the council or water authority? And why should it matter that they are borne by the taxpayer not because he paid them to the rating authority directly but because he reimbursed them, so far as they relate to his period of enjoyment of the rents, to a previous owner of the property? The correct view appears to be that the reimbursement is on account of revenue, not on account of capital, and is made in gaining the assessable income consisting of the rents. (at p522)

7. The form of proceeding before us is a case stated for the opinion of the Full Court. Question 1 of the case stated should be answered No. Question 2 of the case stated should be answered Yes. (at p522)

ORDER

Question 1 in the case stated answered No. Question 2 in the case stated answered Yes. The appellant to pay the costs of the case stated.