Commissioner of Taxation v Placer Pacific Management Pty Ltd S97/1995 [1996] HCATrans 36 (5 February 1996)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S97 of 1995

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

PLACER PACIFIC MANAGEMENT PTY LTD

Respondent

Application for special leave to appeal

GAUDRON J

McHUGH J

GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON MONDAY, 5 FEBRUARY 1996, AT 11.50 AM

Copyright in the High Court of Australia

MR D.H. BLOOM, QC: May it please the Court, I appear with MR A. ROBERTSON, SC for the applicant. (instructed by the Australian Government Solicitor)

MR I.V. GZELL, QC: If the Court pleases, I appear with my learned friend, MS V.J.J. WEBSTER, for the respondent. (instructed by Blake Dawson Waldron)

GAUDRON J: Mr Bloom.

MR BLOOM: Your Honours, the Administrative Appeals Tribunal held, applying the decision of this Court in De Bavay, section 51 of the Income Tax Assessment Act did not authorise a deduction of an outgoing which related to income derived in earlier years where there had been a complete cessation of the business in the course of which that income was produced. The Full Court of the Federal Court, applying a different test and departing from De Bavay, came to the contrary conclusion.

GAUDRON J: Was there any argument directed towards the reconciliation of the two decisions of this Court?

MR BLOOM: Certainly. Yes, your Honour.

GAUDRON J: Towards the reconciliation?

MR BLOOM: I go on what I have read from the transcript and what I have read in the judgement. I did not appear below; but yes.

If I can take your Honours to that passage at page 39 of the application book at line 35, their Honours in the Full Court say:

In our view AGC -

referring, of course to AGC (Advances) Limited v Commissioner of Taxation - - -

GAUDRON J: Which was a decision on the Act as it now stands, whereas De Bavay was a decision on the earlier provision.

MR BLOOM: That is true, but all of the intervening law, and particularly after section 51(1) came in, said there was really no difference - that the second limb, particularly, adds nothing to the first, nothing relevant to the first in this connection, and that the test still remains one of construing the words of the section itself, so that one has to find out whether an outgoing was incurred in gaining or producing, or in carrying on a business for the purpose of gaining or producing. What the Federal Court has done here is to take different words and substitute those for the words of section 51(1). They have done so, really, in reliance upon AGC, yet there was only one judge in AGC, Sir Harry Gibbs, who held that there had been a complete cessation of business, as in this case, and as in De Bavay. In fact, in AGC, Sir Anthony Mason and Sir Garfield Barwick each held that there had not been a cessation of business in that case.

GUMMOW J: That was an alternative ground, really, was it, to be fair? Sir Anthony Mason was. A form of logic chopping seems to go on in analysis of these tax decisions.

MR BLOOM: It is not limited to tax decisions, one hopes, your Honour.

GUMMOW J: It is particularly demonstrated by them.

MR BLOOM: Particularly, yes, your Honour. Perhaps if we could just examine it. Their Honours say that:

AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally, the fact that that outgoing was incurred in a year later than the year in which the income was incurred and the fact that in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility.

and then go on to say:

There is no relevant distinction to be drawn between losses and outgoings.

I will come back to that in a moment, and then lay down this new test, we would say, 51(1) - a matter of importance to the Commissioner, because 51(1) is his general deduction section. They say:

Provided the occasion for the loss or outgoing is to be found in the business operations -

not the incurring, which is what the section says, but:

Provided the occasion for the loss or outgoing is to be found in the business operations directed to gaining or producing assessable income, that loss or outgoing will be deductible -

If we go to AGC and to what Sir Harry Gibbs said; it is in 132 CLR and the relevant passage is at 192 to 193. He says at about point three at page 192:

The fact that the losses were incidental and relevant to the production of income in earlier years does not in itself prevent the losses from being deductible under s. 51. However, s. 51 does not authorize the deduction of losses that relate to income derived in earlier years if there has been a complete cessation of the business in the course of which that income was produced. This is established by Amalgamated Zinc (De Bavay's) Ltd.

He refers to what the Chief Justice and what Sir Owen Dixon said in that case. In particular, if I could go to what Sir Owen Dixon said at the bottom of page 192 in 132 CLR:

"A very wide application should be given to the expression `incurred in gaining or producing the assessable income'. But the words refer to the assessable income from which the deduction is to be made. In a continuing business, items of expenditure are commonly treated as belonging to the accounting period in which they are met. It is not the practice to institute an inquiry into the exact time at which it is hoped that expenditure made within the accounting period will have an effect upon the production of assessable income and to refuse to allow it as a deduction if that time is found to lie beyond the period. And, in the case of expenditure for which the taxpayer contracted a liability during an earlier accounting period than that in which it has matured, it is not the practice to consider whether its effect upon the production of income of a still continuing undertaking has already been exhausted ... The expression `in gaining or producing' has the force of `in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself ...

In the present case, the actual expenditure was met in the current year. But it was completely dissociated from the gaining or producing of the assessable income of that year ... None of the assessable income arose out of the business in the course of which the taxpayer became liable to the charge. The sources from which the assessable income did arise included no operations in the course of which the payment was made.

Then Sir Harry Gibbs continues:

These statements related to a provision - - -

GUMMOW J: We can read Sir Harry Gibbs's judgment ourselves, and we have. Your strongest point has to elevate yourself a bit above that, does it not? You have to say there is no clear guidance from this Court at the moment on this question under the 1936 Act.

MR BLOOM: We do say so, and Your Honour, we say this, too: many times it has been said that one should not depart from the words of section 51(1). It is wrong in applying it, whether to the De Bavay situation - - -

McHUGH J: That passage does, does it not, in De Bavay? I mean, it is not a literal application of the passage, it being an accounting practice.

MR BLOOM: That was more in relation to section 26 of the old Act than section 23 where it came to the question of losses; a distinction that Sir Garfield Barwick also made in AGC. If I can just say that too - in AGC Sir Garfield said that De Bavay was completely distinguishable on the basis that it was a case involving an outgoing, whereas this was a case involving a loss, and of course the case before your Honours is likewise a case involving an outgoing.

McHUGH J: But the test that the majority of the Full Court applied in this case reflects the language of Sir Anthony Mason in AGC, does it not?

MR BLOOM: It does, your Honour, yes. But, as we point out, his Honour went on to hold that there had not been a cessation of business. So, there is no authoritative determination in that sense of this question.

McHUGH J: But he stated a principle. The Commissioner has lived with the principle since AGC, has it not?

MR BLOOM: No, your Honour. The principle the Commissioner has always lived with is De Bavay, and with the words of section 51(1) themselves. What came from Sir Anthony Mason in AGC has only been followed now in this case, in this decision by the Full Federal Court, which is what makes it so important to the Commissioner.

GUMMOW J: We will hear what Mr Gzell says about that.

MR BLOOM: The passages in Sir Garfield Barwick's judgment - while your Honours have the case before you - at page 186 point five, where his Honour says:

In any case, Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (9) was concerned with an expenditure and not with a loss.

Then over at page 187 where his Honour indicated that maybe on expenditure he would have been inclined to follow De Bavay if there had been a complete cessation of the business. One is left only with Sir Anthony Mason in AGC, and again Sir Anthony Mason's judgment in terms refers only to losses; it does not refer in terms to outgoings. The extension which the Full Federal Court makes here is to treat what Sir Anthony says, (a) as a principle, which is somehow binding on them in a sense, and secondly, to treat it as applying not only to losses but also to outgoings.

There is a second aspect to our submissions, as your Honours will have seen, and it is this: if their Honours in the Federal Court were correct, once they decided that the test was a different one to that applied by the tribunal, the proper course, in our respectful submission, was for them to remit the matter to the tribunal so that the tribunal could find facts relevant to that new and different test.

GAUDRON J: It had been conceded, had it not, that the facts were as - were they not in an agreed statement of facts?

MR BLOOM: There was an agreed statement of facts before the tribunal, that is true, but the tribunal is not limited - - -

GAUDRON J: I would have thought in the context of an agreed statement of facts coming up to the Federal Court you would need to be stating your position very early in the piece that you did not accept those facts as the basis on which the appeal should be determined, or the ultimate issue of liability should be determined.

MR BLOOM: I suppose if I put it another way, your Honour. If the tribunal had had the prescience to know that the test was not going to be that laid down in De Bavay but that which comes from Sir Anthony Mason's judgment in AGC, it would, in our submission, have inquired further into the circumstances of the claim. There is nothing in the agreed facts. They are very, very thin. There is nothing in them concerning the nature of the claim; the cause of action which underlay it; what its elements were; what the settlement was for; which aspects of that claim; whether the claim was liquidated or unliquidated - none of that information was information before the tribunal. All we say is that had the tribunal known that the test was the new and different test it would have been appropriate for it to inquire into such facts as it found necessary and for the Federal Court in this case to have remitted it to the tribunal for that purpose.

GUMMOW J: What relief would you be seeking here?

MR BLOOM: We would have to seek a grant of special leave.

GUMMOW J: Obviously; but if you got that, what relief would you be seeking?

MR BLOOM: Either that your Honours said that the Full Federal Court was incorrect and the proper test was De Bavay, or alternatively, that if the proper test was not De Bavay that the matter went back to the - - -

GUMMOW J: What order would you be seeking?

MR BLOOM: Sending it back to the tribunal. If the decision in De Bavay was correct - - -

GUMMOW J: We would be saying that the Full Federal Court was in error, and the order we would make is the one they should have made; and what would that be?

MR BLOOM: That would be upholding the decision of the tribunal. But if you said they were not in error on the legal question then we would ask it be remitted.

GAUDRON J: Yes, that is a course that is fraught with some difficulties on the part of an applicant for special leave.

MR BLOOM: We appreciate that. If your Honour pleases.

GAUDRON J: Yes, Mr Gzell.

MR GZELL: If the Court pleases, our central submission is that the Full Court applied the principle in the AGC Case and has not been shown to be in error in so doing. The AGC Case was determined on two separate bases; one clearly was that there was as a matter of fact no cessation of the business and in consequence the issue was distinguishable from De Bavay. But, in addition to that, the majority of the Full Court also concluded that provided the occasion for the loss in that case is to be found in the business operations directed to gaining or producing assessable income, it will be deductable under the second limb of subsection 51(1) if it is not capital or of a capital nature, notwithstanding the cessation of the business. That matter was analysed in depth by Justice Mason as he then was; it was agreed to in a postscript, if you like, to the decision of the then Chief Justice and that aspect of the case is equally available as is the decision in distinguishing De Bavay.

The Full Court took the view that that second basis for the decision in AGC applied to the matter before them. They were correct in so doing, in our submission. It was a decision on the second limb of subsection 51(1) and De Bavay was limited to the first limb of section 51(1) because the then legislation which was considered in De Bavay did not have an analogue for the second limb of that section. So that in our submission, there is no doubt which attends the decision of the Full Court which would justify a grant of special leave.

In the alternative, we submit that the manner in which this case was dealt with before the Full Court of the Federal Court makes it an unsuitable vehicle if your Honours were of the view that there was a necessity to revisit the principle in the AGC Case. That is for two reasons. Before the Full Court it was conceded that there was no dispute on the analysis of the law that we had put before the court. It was conceded that the approach taken by Justice Mason in the AGC Case was appropriate. If I can refer your Honours to the supplementary application book, first at page 65 line 22 where counsel who was then appearing for the Commissioner said:

I must say, your Honour, when I saw it, I assumed that it was before a single judge and it was only last week that I realised it was before a Full Court and I then wondered why. It does not really raise an issue of principle. Your Honours will see from what we say about the law that there is no real dispute about the relevant law between the parties.

If your Honours then go to page 69 - I should say there is another passage which is relevant at page 68 line 25 - but then at page 69 from line 5 following:

DAVIES J: Well, you are disputing the analysis of Mason J in AGC?

MR SLATER: I am sorry, your Honour?

DAVIES J: Are you disputing the analysis made by Mason J in AGC?

MR SLATER: No, your Honour, we are not disputing that analysis.

And no submissions were put to the Full Court.

GAUDRON J: It was not submitting the analysis but I do not know that that amounts to a concession that De Bavay did not apply.

MR GZELL: So, that applies and that is taking the place of De Bavay's Case. Whether one says it takes De Bavay away is probably overstating it, your Honour, because, say if, in so far as it was argued in AGC that De Bavay's Case established an inflexible rule, it was overruled, it was distinguished; the circumstances that the business is long since terminated is one which is material.

If I take your Honours to the passage which appears at page 75 of the supplementary appeal book, from line 45 to the end of that page, it is clear, in our respectful submission, that there was no dispute about the proposition that if there were merely a cessation of the business, that that would deny deductibility. What counsel said:

Your Honours, as to the merits of this particular case, as a matter properly before a single judge rather than the full court, we would say that the tribunal did not draw the inference or make the finding which your Honour, Sackville J, has suggested could have been made, but made a different finding. As to the issue of principle, we do not propound that it is impossible by reason of lapse of time to find the necessary nexus. What we do say is that whether the necessary nexus is there is a question of fact in each case.

GUMMOW J: This was all bound up with the question as to whether, it coming from the AAT, there was a question of law.

MR GZELL: The only submission which was put, with respect, was that there was no question of law which arose on the agreed statement of facts before the tribunal.

GUMMOW J: It seems to be said the law is clear.

MR GZELL: Yes, quite.

McHUGH J: I do not know about that. If you look at what you said at page 76 line 30:

My instructions are that it was conducted before the AAT on the basis that there was no contest as to the facts and the test which the AAT was asked to determine was whether or not the principle in De Bavay's case made the deduction inadmissible.

MR GZELL: That is so, your Honour. Before the tribunal - I was not there but my instructions were - and this was put on my instructions to the Full Court - that before the tribunal the parties had agreed on a statement of facts which were sufficient to raise the question whether De Bavay's Case prevented the deduction. The Commissioner had, in ruling on the claim and ruling on the objection, accepted that prima facie the outgoings were deductible, but he had said that because in his view there was a continuity of business test which De Bavay's Case had required, and since there was no continuity of the business in this case for that reason, he disallowed the deduction. The Full Court, in their judgment, accepted that that was the way in which the matter was dealt with before the tribunal.

GAUDRON J: I am at a loss, if that be the case, Mr Gzell, as to find out how AGC became an issue in the case.

MR GZELL: AGC was always the issue in the case, your Honour, because - - -

GAUDRON J: If it was, it was always an either/or proposition between De Bavay and AGC.

MR GZELL: Yes, except that - - -

GAUDRON J: And it must have been conducted accordingly.

MR GZELL: Except that before the Full Court counsel then appearing for the Commissioner said that they did not challenge the analysis that Justice Mason, as he then was, had made in the AGC Case.

McHUGH J: Is not your best point on this the passage that appears at the top of page 69 where Mr Slater said:

I am not disputing the point of principle that if there is a sufficient nexus between the business and the outgoing it is deductible.

He seems to have treated it as a question of fact.

MR GZELL: Yes, your Honour, and, as the Full Court said ultimately - - -

GAUDRON J: But the decision that there was a nexus then proceeded into an area of law outside De Bavay's Case.

MR GZELL: Clearly, your Honour, because the proposition which was advanced by us was that AGC was the case which should rule the day, notwithstanding the factual difference that there had, in this case, been a cessation of business because AGC had determined the principle, in the submission which we made which was accepted by the Full Court, that notwithstanding any cessation of business one could still obtain a deduction under the second limb of section 51(1) if the occasion for the outgoing was the conduct of the business with a view to the generation of assessable income. That is precisely what the Full Court determined.

I was at pains at the time I took your Honours to the supplementary record to say that the analysis that was made in the AGC Case was not challenged before the Full Court. That the submissions which were put to the Full Court were circumscribed in the manner that appears in the judgment of the Full Court at the bottom of page 30 in the application book, where their Honours said:

It was thus a matter of some surprise to the Court that the Commissioner submitted that the Tribunal's finding was one of fact only and thus not susceptible to appeal to this Court. Emphasis was placed by the Commissioner in support of this submission upon the fact that the terms of settlement of the claim between Placer and NWCC had not been put in evidence and that in some way the Tribunal's decision had depended upon this fact. It was said that the deductibility of a voluntary outgoing required analysis of the purposes for which settlement of the proceedings was obtained.

That was the central submission that was put and rejected, and the submission I make is that the controversy between De Bavay and AGC was not agitated as an issue except incidentally to that issue as set out at page 30. For that reason this matter is an inappropriate vehicle for special leave. Likewise, with the alternative submission that our learned friends have made, that it ought to have been remitted to the tribunal. That was never raised before the Full Court and it was never suggested before the Full Court that it was appropriate in any circumstance that the matter be remitted to the tribunal. Those are our submissions, your Honour.

GAUDRON J: Yes, thank you, Mr Gzell.

MR BLOOM: Your Honours, again, one has, perhaps, hearing what has been said the advantage and also the disadvantage of not having been there below, but your Honours, it is clear from reading the written submissions below that the case proceeded for the Commissioner on the basis that the proper law was that in De Bavay, and that AGC, which was a case that dealt with losses and which was a case that dealt with a business that had been suspended and had not ceased, had nothing to say about that principle.

GUMMOW J: How did the matter get before the Full Court in the first instance? Why was it not dealt with by one judge?

MR BLOOM: It was said to raise an important question of law, I am told, your Honour, by, not Mr Slater - he did not appear, apparently, in that connection - but the important question of law was obviously this tension between De Bavay and AGC.

McHUGH J: What do you say about what Mr Slater said at page 71 lines 10 to 21?

MR BLOOM: Seventy one at 10 to 21, your Honour?

McHUGH J: Yes:

It is not so much that there is such a rule, your Honour, as that the existence of a continuing business is often sufficient in itself to provide the nexus. That was the point in both AGC -

and he goes on to say that if you have not got the continuing business it does not necessarily take away the connection.

MR BLOOM: When you take that principal connecting factor away you are left with no more, on the facts of this case, than the past conduct of the business was something, et cetera. Well, that is De Bavay. What he is trying to say, I think, with respect, your Honour, is that it is wrong to regard anything as inflexible and that De Bavay even as a rule itself, even as a proposition, ought not to be regarded as inflexible. What it says is where there has been a complete cessation of business, and that takes away the nexus, and there is nothing else which provides the nexus - - -

McHUGH J: I appreciate that. That is why I suggested to Mr Gzell it seemed to me the case was turning on a question of fact, or that was the way it was perceived in the Full Court.

MR BLOOM: No, it was turning on a question of law. What was the proper test? Because, the AAT said, "The law is De Bavay. Applying that to the facts as agreed, we get conclusion No one." The Federal Court said, "Not to De Bavay, we apply what Sir Anthony Mason said in AGC. We get the exact contrary result". And necessarily so, they said, on the facts of this case as agreed.

McHUGH J: Yes, but that was not Mr Slater's view. He seemed to say neither test was an inflexible test. It all depended upon the facts.

MR BLOOM: However it comes out in the transcript, and there were written submissions, and really, each counsel spoke to those. The principal submission on behalf of the Commissioner all the way through has remained that the law is as De Bavay laid it down, applicable to section 51, equally to section 23 of the previous Act, and that there has been no change ruled in that by the decision in AGC. That is really what the Commissioner comes before this Court to have determined.

One last thing I should say in reply to what my learned friend, Mr Gzell, said is this: As Sir Harry Gibbs points out in AGC, there is no relevant distinction between the second and the first limb in relation to this. Secondly, nobody, either in the Federal Court or in AGC Advances ever suggested that De Bavay was a case limited to the first limb of section 51(1). If your Honours please.

GAUDRON J: Having regard to the narrow scope of the agreed facts which were before the Administrative Appeals Tribunal, we are of the view that this is not a suitable vehicle for the elucidation of any point of general principle. Special leave will be refused.

MR GZELL: I ask for costs, if the Court pleases.

GAUDRON J: Special leave is refused with costs.

AT 12.19 PM THE MATTER WAS CONCLUDED