Federal Commissioner of Taxation v Murphy [1961] HCA 66; (1961) 106 CLR 146 (9 November 1961)

HIGH COURT OF AUSTRALIA

FEDERAL COMMISSIONER OF TAXATION v. MURPHY [1961] HCA 66; (1961) 106 CLR 146

Income Tax (Cth)

High Court of Australia
Kitto(1), Taylor(1) and Windeyer(1) JJ.

CATCHWORDS

Income Tax (Cth) - Assessable income - Value of trading stock disposed of - Disposal occurring after taxpayer has ceased to carry on business - Whether value to be included in assessable income - "Being trading stock" - Income Tax and Social Services Contribution Assessment Act 1936-1955 (Cth), ss. 6 ("trading stock"),* 36 (1).**

HEARING

Sydney, 1961, August 28; November 9. 9:11:1961
CASE STATED.

DECISION

November 9.
THE COURT delivered the following written judgment:-
This case stated relates to the year of income ended 30th June 1955. Before business of a grazier on land which he owned at Tarago in New South Wales. The assets of the business included, in addition to the land, plant and improvements, 2,680 sheep, 84 cattle and five horses. On 25th June 1954 the respondent sold the land, plant and improvements to a company, and on the same day he and the company entered into a written agreement whereby he leased the live stock to the company for a term of five years from 1st July 1954, at a rental of fixed amount for the first twelve months and thereafter at an annual rental to be determined on the basis of twenty per cent of the book value of the live stock on 1st July 1955 and each succeeding year. The agreement obliged the company at its expense to look after, manage and depasture the live stock from year to year during the continuance of the agreement, without being responsible to make good any animals lost by death, unless by reason of negligence of the company or its servants. It was agreed that the company should not dispose of any of the livestock, except as agent for and with the consent of the respondent, and that the proceeds of any disposal should be accounted for forthwith to the respondent. The company was to be entitled during the currency of the agreement to the natural increase, wool and other produce of the live stock. (at p150)

2. The company took delivery of the live stock and used them in carrying on a grazing business on the land which it had bought from the respondent. Following a practice which the respondent himself had observed, the company, with the consent of the respondent and as his agent, sold cattle in December 1954, and sheep in February 1955, in order to make room on the property for the natural increase. It sold thirty-one cattle for 516 pounds and 629 sheep for 1,887 pounds, and it paid the total of these amounts to the respondent. (at p150)

3. The respondent's income tax return for the year ended 30th June 1955 contained a live stock account showing the numbers and values of the cattle and sheep sold, of sheep killed for rations, of losses by death, &c., and of stock on hand at the end of the year. It also included an account reconciling the numbers of live stock on hand at the end of the year with the number on hand at the beginning. The return brought into assessable income the socalled rental of live stock (under the description of "bailment fee"), and also the proceeds of sales of skins and hides of animals which had died during the year. But the proceeds of sale of live stock were not treated in the return as forming any part of the respondent's assessable income. The Commissioner considered that they should be so treated, and in assessing the tax he gave effect to his view. At the same time he allowed as a deduction amounts which he described as the "cost" of the sheep and cattle respectively which had been disposed of, these amounts being in fact proportionate shares of the respective amounts at which sheep and cattle had been valued in the return as at the beginning of the year. (at p150)

4. The respondent lodged an objection on the ground that in the relevant year he was not carrying on business, and that the proceeds of sale, being proceeds of a realization of capital assets, were not brought into assessable income either by s. 25(1) or by s. 36 or by any other section of the Income Tax and Social Services Contribution Assessment Act (Cth). (at p151)

5. The objection, having been disallowed, came before a Board of Review. The case for the Commissioner was presented on the footing that the respondent was correct in saying that he was not carrying on business in the relevant year, but that s. 36(1) applies to such a case, and, in the circumstances of this case, justifies the course taken in the making of the assessment. For the operation of s. 36(1) in a given case the concurrence of three conditions is required: (a) that the taxpayer disposes by sale, gift or otherwise of property being trading stock, standing or growing crops, crop-stools, or trees which have been planted and tended for the purpose of sale; (b) that that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and (c) that the disposal was not in the ordinary course of carrying on that business. Where these conditions are all satisfied the value of the property (i.e. its market value on the day of the disposal or, in certain circumstances, the value which in the opinion of the Commissioner is fair and reasonable) is to be included in the assessable income of the taxpayer. (at p151)

6. The respondent answered the argument based upon this provision by pointing to the words in par.(a) "being trading stock". The Act in s. 6 defines the expression "trading stock" to include anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and to include also live stock. The expression is used in the Act in relation only to a business. The inclusion of live stock by the definition means, in the case of a grazing business, that sales of animals are treated for tax purposes as if the acquisition of the animals had been solely for the purpose of sale, notwithstanding that the purpose of selling the bodily produce may also have existed: see also the definition of "primary production". Accordingly the cattle and sheep which the lessee company sold on the respondent's behalf were, whilst the respondent was carrying on business, trading stock to which s. 36 would plainly have applied if the respondent had disposed of them otherwise than in the ordinary course of the business. But the point which the respondent made was that, because at the time of the disposal he was not carrying on a business, the cattle and sheep did not at that time fall within the description in the words "being trading stock". (at p151)

7. The objection was upheld by the Board of Review by a majority. The members of the Board delivered written opinions by which we have been much assisted. The view which prevailed was, in essence, that the expression "being trading stock" refers only to property which at the time of its disposal is stock of an existing business of the taxpayer, that is to say a business which either is being carried on by him in the ordinary way of a going concern or is in the course of being wound up. The fact was not overlooked that par.(b) makes clear an intention that the provision may apply not only where property disposed of "constitutes the whole or part of the assets of a business which is carried on by the taxpayer", but also where it "constituted the whole or part of the assets of a business which was carried on by the taxpayer". But it appears to have been considered that although assets of a business may still be trading stock for some undefined period after the taxpayer has ceased to carry on the business, they may, though remaining in his hands, become so dissociated from the business by the manner in which he deals with them that their historical connexion with the business no longer justifies a description of them as "being trading stock". It was decided that the respondent, by leasing the live stock after discontinuing his business, effectively deprived them of the character of trading stock, so that their sale, when ultimately it occurred, was a realization of capital which s. 36(1) did not require to be included in assessable income. (at p152)

8. In the reasons of the members of the Board there was some discussion of a suggested inconsistency on the part of the Commissioner in invoking s. 36(1) on the footing that the live stock were trading stock of a business which the respondent had ceased to carry on before the relevant date, while at the same time allowing the "cost" of the live stock as a deduction allowable (as he presumably considered) under s. 28; for s. 28 applies only where a taxpayer "carries on business". When the case came before this Court, counsel for the Commissioner endeavoured to rebut the suggestion by contending that in truth the respondent was carrying on a business even at the time the live stock were sold - not his old business of a grazier, but either one aspect of that business or a new business, consisting in dealing in live stock, the leasing constituting a chosen method of dealing. It is not possible however, to adopt such a view of the facts. The respondent completely discontinued his grazing business at the end of June 1954; and the leasing of the live stock was an isolated transaction which did not inaugurate or form part of any new business. The learned dissenting member of the Board of Review in his statement of reasons, suggested, as a justification of the course taken by the Commissioner in allowing a deduction under s. 28, that s. 36(1) creates an artificial situation, in effect requiring that a taxpayer disposing of property which had been trading stock of a past business of his shall be deemed to be still carrying on a business, so that s. 28 is to be applied as if he were in fact carrying it on. The suggestion is no doubt based upon the evident purpose of s. 36(1), which is to assimilate sales of trading stock made otherwise than in the carrying on of a business to sales of trading stock made in carrying on the business so far as the character to be attributed to the proceeds for tax purposes is concerned, and thus to make irrelevant the distinction brought out in cases such as Commissioner of Taxation (W.A.) v. Newman [1921] HCA 37; (1921) 29 CLR 484 on the one hand and Joshua Bros Pty Ltd v. Federal Commissioner of Taxation [1923] HCA 3; (1923) 31 CLR 490 and De Grey River Pastoral Co. Ltd v. Deputy Federal Commissioner of Taxation (W.A.) [1923] HCA 42; (1923) 35 CLR 181 on the other. It may be that some such view was taken in the Commissioner's office when the assessment was being made. We have not to decide now whether it is correct or not, for the Commissioner does not seek to withdraw the allowance of the "cost" as a deduction. We have to consider only whether s. 36(1) operates in the circumstances of the case to require the inclusion in assessable income of the value of the live stock sold. It is common ground that the price realized coincided with the market value on the day of the disposal. (at p153)

9. The chief difficulty arising on the language of s. 36(1) is to reconcile the use of the past tense in addition to the present tense in par.(b) with the use of the present tense in the expression "being trading stock" in par.(a). The members of the Board of Review who were in the majority considered it an unlikely intention that property which a taxpayer, on giving up business, had retained for himself out of trading stock and kept perhaps for many years could never be disposed of without its value being included in the taxpayer's assessable income as the value of "property being trading stock". "Suppose", it was said, "the case of a jeweller who sells his business on a walk-in-walk-out basis but subject to his keeping a rare and valuable piece of jewellery which he had acquired as trading stock in the course of carrying on that business. Twenty years after going out of business he gives the piece to his daughter. Is the market value of the piece at the date of gift to be brought into his assessable income?" (at p153)

10. That the value should be included in assessable income under some description is not remarkable, since the expenditure incurred in acquiring the property for the purpose of the business, by manufacture or production or even by purchase, would have been, at least in the normal case, an allowable deduction to the taxpayer in the year of acquisition, even if it had been, according to ordinary principles of accountancy, properly chargeable to capital: s. 51(1) and (2). The force of the argument based on unlikelihood of intention lies in the use of the expression "being trading stock" in a context which clearly relates it to the time of the disposal. It is a force which might be great if the words "trading stock" were used with their ordinary significance only and in a context which postulated an existing connexion with a current course of trading. But the definition must not be forgotten. It is, in form, inclusive and not exhaustive, but its terms are so comprehensive as probably to include everything which would ordinarily be covered, and to go further. It contains two limbs. The first limb provides an historical test, making decisive the purposes for which the taxpayer produced, manufactured, acquired or purchased the property. If the purposes were those of manufacture, sale or exchange, the property is the taxpayer's "trading stock". The second limb refers only to the physical nature of the property. If it is "live stock", it is included. Animals used as beasts of burden or working beasts in a business other than one of primary production are excluded by the definition of "live stock", but all other animals normally spoken of as live stock are "trading stock". There is nothing in the definition section (s. 6) to tie the expression to a period in which the taxpayer carries on a business. The Act does not so far desert ordinary usage in its substantive provisions referring to "trading stock" that they may apply to property otherwise than in virtue of its association with a business. But bearing in mind that property is by definition "trading stock" if it has a particular history or a particular physical nature, there is no grammatical incongruity in its being referred to as being trading stock of a business which was carried on by the taxpayer. In s. 36, the connexion of property with a business of the taxpayer goes to the root of the reasoning upon which the provision is constructed; but it is reasoning which is valid whether the carrying on of the business by the taxpayer be current or past. The connexion with a business having supplied the ground for an allowable deduction under s. 51 of the outgoing incurred in the acquisition, it supplies also the logical basis for an inclusion in assessable income of the value obtained or foregone upon the disposal, whether the disposal be during the carrying on of the business by the taxpayer or at any time thereafter. For the case where a disposal occurs after the taxpayer has gone out of the business, s. 36 insists upon the former connexion of the property with the business by describing it as having constituted the whole or part of the assets of a business which was carried on by the taxpayer. But it is with complete consistency that even in that case the section refers to the property as still "being trading stock". The present participle is used because the section is not in those words, any more than it is in the other descriptive expressions in par.(a), addressing itself to the connexion of the property with the business: it is merely describing the property as presently possessing a particular history or a particular physical nature, leaving its connexion with the business to be dealt with separately in par.(b). The result produced, even in a case where trading stock left over from the carrying on of a business is sold after the lapse of many years, is as readily understandable as that which s. 63(3) produces in the comparable case of the recovery of a debt which has been deducted as a bad debt in a previous year of income "under this or (even) the previous Act". (at p155)

11. Construing s. 36(1) in the manner indicated, we are of opinion that the Commissioner was right in including the proceeds of sale of the live stock in the respondent's assessable income. The question in the case stated should be answered: Yes. (at p155)

ORDER

Question in the Case Stated answered Yes. Costs of the Case Stated reserved for the judge disposing of the appeal.