Commission of Taxation v Werchon, E.J

[1982] FCA 169

Re: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA
And: TONIA WERCHON and EDWARD JAMES WERCHON (1982) 62 FLR 214
VG No. 21 and 22 of 1982
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Smithers(1), Northrop(2) and Sheppard(3) JJ.

CATCHWORDS

Income Tax - shares purchased with a view to making a loss - taxation avoidance scheme - whether loss deductible if sale within 12 months regardless of purpose of acquisition - interpretation of s.52 - whether s.52 has restricted meaning or states a general principle - use of proviso generally and to ascertain the scope of basic words - effect of notification under s.52 which falsely states purpose of acquisition - Income Tax Assessment Act 1936 (Cwth) ss. 26(a), 26AAA, 43, 52.

Income Tax - Allowable deductions - Purchase and sale of property at loss - Transaction within twelve months pursuant to plan to produce loss - Effect of incorrect statement in notice under s. 52 that property bought to sell at profit - Whether s. 52 deductions allowable for s. 26AAA transactions, or only s. 26(a) transactions - Income Tax Assessment Act 1936 (Cth), ss. 26(a), 26AAA, 52.

HEADNOTE

The two respondents each owned an interest in a partnership business of bookmaker. The partnership bought shares in the year of income ended 30th June, 1975, and sold them at a loss of $176,995 in the same year. These transactions were part of a plan devised by an adviser which involved the purchase of shares with borrowed funds, their sale after a declaration of dividend at an amount equivalent to the cost price reduced by the amount of the dividend, the diversion of an amount equivalent to the dividend, and the borrowing of this amount and its use, with the proceeds of the sale, to pay off the original indebtedness. This sale was to produce a loss for which a deduction would be sought. The respondents for the partnership gave the Commissioner notice for the purposes of s. 52 of the Income Tax Assessment Act, and claimed as a deduction the loss for the partnership, thereby reducing its taxable income from $178,079 to $1,084. The Commissioner disallowed their claims, and the respondents successfully appealed to the Supreme Court of Victoria. The Commissioner appealed.

Held, allowing the appeals that deductions under s. 52 were available only where the profit on the property sold would have been assessable under s. 26(a). The profit of the partnership, had the shares been sold at a profit, would have been assessable only under s. 26AAA, not under s. 26(a).

Per Smithers and Sheppard JJ. - A notice under s. 52 which indicated that property had been bought to sell at a profit, where that was not in fact the case, was not a sufficient notice for the purposes of s. 52.

HEARING

Melbourne, 1982, June 10-11; August 11. #DATE 11:8:1982

APPEALS

Appeals by the Commissioner against the judgment of Tadgell J. of the Supreme Court of Victoria.

L.J. Priestley Q.C. and M.L. Robertson, for the appellant.

N.H.M. Forsyth Q.C. and K.S. Pose, for the respondents.

Cur. adv. vult.

Solicitor for the appellant: B.J. O'Donovan, Commonwealth Crown Solicitor.

Solicitor for the respondent: P.W. Murray.

J.H. TELFER

ORDER

1. The appeal be allowed.

2. The order of the Supreme Court of Victoria dated 4 December 1981 herein be set aside.

3. The respondent pay the appellant's costs of the appeal and of the proceedings in the Supreme Court of Victoria.

JUDGE1

These are two appeals from judgments of the Supreme Court of Victoria in which it was adjudged that certain losses on the sale of certain shares within twelve months from their acquisition were allowable deductions under the provisions of s.52 of the Income Tax Assessment Act (the Act) 1936. The relevant circumstances were that:-

"During the year of income ending on 30 June 1975 the appellants, Mr. and Mrs. Werchon, held a 47 per cent interest, each in a partnership business of a bookmaker in the Northern Territory called T.J.T. Enterprises. The day-to-day operations of the business were the responsibility of Mr. Werchon. His accountant, who had prepared his income tax returns for some years, suggested to Mr. Werchon during the 1975 year of income that he consult a Mr. Sheehan, saying that he might be able to help him reduce the incidence of income tax. In consultation with Mr. Werchon, Mr. Sheehan suggested a plan which was designed greatly to minimise the former's assessable income from the profit of the partnership for the current financial year. The plan was explained in its essential features by the Board of Review in the following terms, which I am content to adopt -

'It was a simple concept and had features in common with a dividend-stripping operation. Broadly, it envisaged the purchase of shares with borrowed funds; their sale after a declaration of dividend at an amount equivalent to the cost price reduced by the amount of the dividend; the diversion (for the benefit of family trusts) of an amount (in tax-free form) equivalent to the dividend, and the borrowing of this amount and its use, with the proceeds of sale, to pay off the original indebtedness.'

The proposed plan was implemented and the income tax return for the partnership for the year ending 30th June 1975 claimed that a loss on a sale of shares of $176,995 had resulted in a reduction of the profit of the partnership from $178,079 to $1,084. The partners' individual returns disclosed income from the partnership proportionate to their respective partnership interests. The claim for a deduction from the partnership income of the loss said to have been incurred on the sale of shares was subsequently disallowed by the Commissioner, with the result that the taxable income of each of Mr. and Mrs. Werchon as assessed was increased by $83,188."

It is unnecessary to set out the details of the mode of implementation of the plan suggested by Mr. Sheehan. Suffice it to say that it was conceded by Counsel for the respondents that the shares in question were acquired for resale at a loss and that the purpose of the scheme of which that procedure was a part was to produce an ultimate loss.

With a view to satisfying the requirement of the proviso to s.52 the taxpayers gave notification to the Commissioner in a document annexed to the partnership's income tax return for the year ending 30 June 1975 in the following form:-
"COMPANY SHARES PURCHASED AND SOLD AS PART OF A PROFIT MAKING UNDERTAKING YEAR ENDED 30TH JUNE 1975

During the year, the Partnership undertook a profit-making arrangement involving the purchase of two companies and sale of one of them prior to the end of the year. The two companies involved were M.V. Johnston Motors Pty. Ltd. and Rabbit Limited.

After its purchase, M.V. Johnston Motors Pty. Ltd. declared a dividend of $177,000 to Rabbit Limited. After its reserves had been depleted, M.V. Johnston Motors Pty. Ltd. was then sold for an apparent loss of $176,995. Rabbit Limited however, has increased in value by more than this and the Partnership's consolidated overall position has improved. As the end of the financial year occurred befoe any distribution was made by Rabbit Limited, the benefit of the increase in the worth of Rabbit Limited will not be received until it makes a sufficient distribution which will be in the 1975/76 financial year. As any receipt next year will be subject to tax, the loss this year must be claimed as a deduction.

Accordingly, the loss on the sale of company shares amounting to $176,995 is claimed as an allowable deduction under s.52 of the Income Tax Assessment Act."
Counsel for the respondent argued that notification in these terms amounted only to notification that property had been acquired for the carrying on or carrying out of a profit-making undertaking or scheme whereas the deducations claimed by the appellants were sought on the footing that there had been a loss upon a sale of shares and not a loss from the carrying on or carrying out of an undertaking or scheme.

However for the purpose of these appeals the document is treated as one notifying that the property in question "has been" acquired for the purpose of profit making by sale or for the carrying on or carrying out of a profit making undertaking or scheme.

The appellant argued that s.52 of the Act did not apply to a loss incurred on a sale of property not acquired for the purpose of profit making by sale or from the carrying on or carrying out of any profit making undertaking or scheme whether or not the sale had occurred within twelve months from the acquisition of the property. The respondents on the other hand contended that the natural meaning of the substantive words of s.52 applied to a loss on a sale of property within twelve months because, whatever the purpose of the acquisition of the property, any profit on the sale thereof, would have been assessable income by virtue of the provisions of s.26AAA of the Act.

It is necessary to refer to the history of s.26(a) and s.52. and the introduction in 1973 of s.26AAA.

By s.2 of Act No. 50 of 1930, s.4 of the Income Tax Assessment Act 1922 was amended by inserting in the definition of "income" the following paragraph:-
"; and (ba) any profit arising from the sale by any person of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme"

By s.14 of the same Act, s.26 of the Act of 1922 was amended by omitting sub-section (1) and inserting in its stead the following sub-section:-

"(1) Where a loss is made in any year by any person -

(a) in carrying on a business in Australia;

(b) if he is 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 sub-paragraph (1) of paragraph (q) of sub-section (1) of s.14 of this Act;

(c) upon the sale of any property the profits (if any) from the sale of which would have been assessable as income of that person,
that person shall be entitled to a deduction of that loss from the net assessable income (if any) derived by him in that year."

In 1936 the definition of assessable income remained as it had been enacted in 1930 but the provisions of s.26(1)(c) were incorporated in a new section, s.52 of Act No. 27 of 1936 in the following form:-

"Any loss incurred by the taxpayer in the year of income upon the sale of any property or from carrying on or carrying out of any undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in his assessable income, shall be an allowable deduction."

It is to be noted that whereas s.26(1)(c) referred to a loss by any person on the sale of any property, s.52 as enacted in 1936 refers to any loss incurred upon the sale of any property and or from the carrying on or carrying out of any undertaking or scheme.

By s.11 of Act No. 58 of 1941, s.52 of the Act was amended by adding at the end thereof the following proviso:-

"Provided that, in respect of property acquired by the taxpayer after the date of the commencement of this proviso, no deduction shall be allowable under this section (except where the Commissioner, being satisfied that the property was acquired by the taxpayer for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme, otherwise directs) unless the taxpayer, not later than the date upon which he lodges his first return under this Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit-making by sale, or for the carrying on or carrying out of any profit-making undertaking or scheme;"

By s.6 of Act No. 165 of 1973 s.26 of the Act was amended by the insertion of s.26AAA. The relevant provisions of the amendment are as follows:-

"(1) For the purposes of this section -

(a) a reference to property generally or to a particular kind of property includes a reference to an estate or interest in property or in that kind of property, as the case may be;"
and sub-section (2) which is the following terms:-

"(a) Where -

(a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section; and

(b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest in the property before the expiration of the period of 12 months from the date on which he purchased the property,
then, subject to this section, the assessable income of the taxpayer includes any profit arising from the sale of the property or interest."
Hereafter I refer to the provisions of s.52 which precede the proviso thereto as the "basic words".

Those words in their natural meaning refer to losses on the sale of property generally. They refer to sales of property which may not have been "acquired" at all, or which may have been acquired for the purpose of being sold at a loss or for no specified purpose, or for the purpose of profit making by sale. It is only with respect to this last class of case that the words have ever had practical application since s.26 was amended by the insertion therein of sub-section (1)(c) set out above, unless, by reason of the enactment of s.26AAA in 1973, they relate to a sale of property within twelve months of acquisition whether it was acquired for the purpose of profit making by sale or for the carrying on or carrying out of a profit making undertaking or scheme or otherwise. It is argued that the situation envisaged by s.26AAA falls naturally within the ordinary meaning of the basic words whatever the purpose for which the taxpayer acquired the property and even if that purpose was to sell it at a loss. And that of course is this case.

Thus when s.52 was enacted it had one area of operation and only one and that was in providing for the allowance of a deduction in respect of losses incurred in situations specified in s.26(a). That the language chosen for s.52 extends, according to its natural meaning, beyond those situations could have reflected only one of two circumstances. Either that language was chosen merely as a convenient way of referring to situations which could only arise under s.26(a) and was meant to cover those and nothing else, or it was chosen to enact a general principle which would apply, should a law be made at any time, under which a loss occurring in circumstances where had there been a profit, that profit would have been part of assessable income.

It is not to be readily accepted that language having a clear unambiguous import is to be given a restricted meaning. On the other hand it is not likely that a statute should have been enacted in terms having no application to the law as it stood when made, and to be put in storage, so to speak, against the day when some law not in contemplation at the time, might be made to which it might apply. In this case no such law ever came into force unless the law enacted in s.26AAA, forty three years after the enactment of s.26(1)(c) is such a law.

The respondent contends that there is nothing intrinsically unacceptable in the notion that in 1930 and 1936 Parliament might have taken the opportunity to declare a general principle. The appellant in reply pointed out that both in 1930 and 1936 the enactment concerning allowances for losses were clearly and obviously linked with the very specific provisions which have become the current s.26(a) of the Act.

There can be little doubt that despite the width of the natural meaning of language of s.52 that section was enacted for the express purpose of permitting the deduction from income of a loss suffered in the course of the sale of property genuinely acquired with a view to profit making by its sale or from the carrying out of an undertaking or scheme which was genuinely a profit making undertaking or scheme.

Section 26AAA provides for the inclusion in assessable income of a profit made within a specified time. It does not concern itself with the purpose for which the property was acquired. To it, it matters not that the property was acquired for sale at a loss or otherwise. The critical factor in relation to s.52 is said to be that a loss incurred on the sale of property within twelve months of acquisition is a loss upon the sale of a property the profit (if any) from which sale would have been included in the taxpayer's assessable income.

It is said for the appellant that the circumstances that the provisions of s.52 are wide enough to embrace cases additional to those the subject of s.26(a) is not significant and that the legislative intention disclosed therein is that those provisions apply only to cases the subject of s.26(a). And it is said that there is judicial authority to support this view. Thus as Windeyer J. put it in Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1970) 120 C.L.R. 177, 188, "Section 26 and s.52 are in a sense counterparts", the latter "reflects, in an obverse way, the provisions of paragraph (a)" of the former. In the same case, on appeal, Menzies J. said ((1971) 125 C.L.R. 249, 266) of s.52 that "It is a companion section to s.26(a) and it applies only when that provision would apply to a profit, which if made would have to have been included in assessable income". However those comments were made in relation to issues which were solved without the necessity for consideration of the question whether, for instance, had there been in force a provision such as s.26AAA, or a provision of a similar nature, s.52 would have been applicable thereto. To my mind therefore the question of the proper construction of s.52 is one not determined by authority and in respect of which its application to a situation arising under a provision such as s.26AAA remains undetermined and of some uncertainty.

It was suggested by Mr. Forsyth for the respondents that the form of words adopted in s.14(1)(c) of Act No. 50 of 1930 may have reflected a situation which might arise under s.43 of the Act. He conceded that that section and indeed subdivision (c) of division 2 of the Act in which it occurs was directed to the determination of profit on trading transactions originating overseas where real prices of goods bought could not be satisfactorily identified. That subdivision had no concern with losses on such transactions. (See American Thread Company v. Federal Commissioner of Taxation (1945) 73 C.L.R. 643) Mr. Forsyth's suggestion was that there might be an isolated transaction not incidental to the carrying on of any business, a profit from which would fall within subdivision C of the Act but a loss from which would not be a deduction pursuant to s.51 of the Act. He submitted that that would be a special case which would fall within s.52 if the basic words are interpreted as submitted by the respondent. However it is difficult to think that there really was a link between that possible special case and the choice of the language in s.14(1)(c) of Act No. 50 of 1930. It may be noted also that although s.26AAA was not in force when Menzies and Windeyer JJ. made their several observations set out above, s.43 was then in force.

For the appellant it is said that in this situation it is permissible to seek assistance from the proviso which was introduced long before s.26AAA was introduced. It was said by Viscount Maugham in Jennings v. Keely (1940) A.C. 206 at pp.217 - 218:-
"The learned Lord Chief Justice was influenced in coming to his conclusion by his view that the first part of the section was the operative portion of it, and that the proviso could not properly be used to explain the words as to increase of population in the operative part. He therefore relied on the principle of construction to be found in the case of West Derby Union v. Metropolitan Life Assurance Society (1897) A.C. 647. The principle is thus stated by Lord Watson. 'I am perfectly clear,' he said, 'that if the language of the enacting part of the statute does not contain the provisions which are said to occur in it, you cannot derive those provisions by implication from a proviso.' I am sure that none of your Lordships would desire to depart from this principle where it is applicable, namely, where the enacting part of the section is unambiguous and complete and is followed by a true proviso, that is, a qualification or an exception out of it.

In my view that is not the case here, and, as Lord Herschell pointed out in the same case: 'Of course a proviso may be used to guide you in the selection of one or other of two possible constructions of the words to be found in the enactment and show when there is doubt about its scope, when it may reasonably admit of doubt as to its having this scope or that, which is the proper view to take of it." . . . It cannot, I think, be disputed that in construing a section of an Act of Parliament, it is constantly necessary to explain the meaning of the words by an examination of the purport and effect of other sections in the same Act. . . . This principle is equally applicable in the case of different parts of a single section, and none the less that the latter part is introduced by the words 'provided that' or like words. There can, I think, be no doubt that the view expressed in Kent's Commentaries on American Law (cited with approval in Maxwell, p.140) is correct: 'The true principle undoubtedly is, that the sound interpretation and meaning of the statute, on a view of the enacting clause, saving clause and proviso, taken and construed together, is to prevail.' "

In the light of the history of the legislation and the judicial observations on the scope of the basic words of s.52 it may, I think, properly be said that there is doubt as to the scope of the basic words of that section. In addition, where the proper construction of the proviso is such as to point unambiguously to a particular legislative view of the meaning of the basic words of a provision it is permissible and indeed imperative to have regard thereto. The observations quoted above as to the true principle are in point.

In considering the proviso it is necessary, first, to refer again to the view on which the respondents' contention is based, namely, that although not expressly so stated, the basic words of s.52 are to be construed as enacting that any loss incurred by the taxpayer upon the sale of any property, whether that property was acquired for the purposes of sale at a profit, or with no purpose in mind, or even, for the purpose of selling it at a loss, then the loss is allowable as a deduction. It is to be observed that if the section were to be so read then it would be of no importance at all, whether the Commissioner was satisfied that the property was purchased for resale at a profit, or that the taxpayer should establish that it was or was not. On this assumption the taxpayer is entitled to his deduction in respect of the loss in any event even if he bought the property with a view to selling it at a loss. But the proviso is concerned essentially with the question of whether the property in question was acquired for sale at a profit or otherwise. It provides that a loss is not allowable as a deduction unless one of two conditions is satisfied, namely, that the Commissioner, being satisfied that the property was acquired by the taxpayer for profit making, directs that the loss be allowable, or, that the taxpayer, not later than the date on which he lodges his first return under the Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit making by sale or for the carrying on or carrying out of a profit making undertaking or scheme. It is not to be thought that the mere giving of the notice is to take the place of the Commissioner being satisfied as to, or as proof of, the fact stated therein. The giving of the notice merely operates to render applicable the basic words of the section so that if a deduction is otherwise allowable thereunder it will not be disallowed by the proviso. Therefore, one asks, what is the purpose of the proviso? The answer, I think, is that it is directed to protecting the revenue in a certain class of case.

Where a taxpayer having acquired property and having thereafter sold it at a profit in circumstances in which he has not, antecedently, made any binding declaration or concession that he acquired it for sale at a profit he is in a position to contend, rightly or wrongly, but possibly successfully, that he did not acquire the property for the purpose of profit making by sale.

To my mind the proviso is directed toward the achievement of two practical objectives in relation to the operation of ss.26(a) and 52. First it discourages the practice whereby a man who has acquired property for the purpose of profit making by sale and has sold the property at a profit may pretend that he did not acquire the property for profit making by sale and may claim to be entitled to the profit he has made free of tax as a simple capital gain. It does this by enacting that, should there be a loss instead of a profit on the sale of the property then, subject to the exception mentioned in the proviso, entitlement to an allowance of a deduction in respect of that loss is lost, unless, upon lodging his first return after acquiring the property the taxpayer has notified the Commissioner that he has acquired the property for the purpose of profit making by sale or for the carrying on or carrying out of a profit making undertaking or scheme.

Secondly, in the case of a taxpayer who has in fact acquired property for loss making by its sale, and has not sold the property before he lodges his first return after acquiring it, the proviso operates to deprive him of the opportunity of contending later that he has acquired it for profit making by sale, unless he has committed himself in advance of making the loss, by making to the Commissioner the assertion specified in the proviso namely, that the property was acquired by him, in substance, for profit making.

Notwithstanding the proviso, a man, having acquired property for profit making by sale, and having made such profit and not having given the notification specified in the proviso is in a position, unhampered by any previous assertion as to the purpose of acquiring the property, to contend that he did not acquire the property for profit making by sale. If he has given such notification he is considerably embarrassed in contending to the contrary of its terms. But if he refrains from giving the notice, and makes a loss on the sale of the property, then, according to the proviso, that loss will not be allowable as a deduction under s.52 of the Act. To protect himself against this eventuality he must notify the Commissioner as specified in the proviso.

It is apparent therefore that the primary aim of the proviso is to ensure, so far as its terms will do so, that a loss allowed under the basic words of s.52 will in truth have been incurred in respect of property acquired for profit making by sale or from the carrying on or carrying out of a profit making undertaking or scheme. Of course where property has been both acquired and resold either for profit or at a loss, before the taxpayer lodges his first return after acquiring the property the efficacy of the proviso in this respect may be minimal. When the time arrives for the taxpayer to lodge his return he knows whether he has made a profit or loss.

However, it is apparent that in relation to the second objective mentioned above, namely the prevention of a successful claim for a deduction in respect of a loss on the sale of property acquired for loss making, the proviso ensures that the taxpayer simply cannot satisfy the condition subject to which the basic words of s.52 are permitted to speak with regard to the relevant transaction, unless he has notified the Commissioner untruthfully, that he acquired the property for profit making. Of course that is what these respondents have done. The important factor is the light which this aspect of the proviso throws upon the meaning of the basic words. The respondents' case is that if the basic words of s.52 are permitted to speak with regard to the transaction in respect of which they claim that their loss is an allowable deduction, those words, upon their proper interpretation, will entitle them to an allowance of that deduction even though in fact the purpose of their acquisition of the relevant property was to sell it at a loss. But if that were the law it is unthinkable that the legislature would have stipulated that to obtain the benefit of it the taxpayer should be required to give a notification to the Commissioner in terms which, to the taxpayer's knowledge, are quite false. Clearly the statutory basis on which the proviso is constructed is that a loss on the sale of a property acquired otherwise than for profit making by sale or for carrying on or carrying out a profit making undertaking or scheme is not an allowable deduction under the basic words of s.52.

Where the taxpayer gives the notification specified in the proviso, whether true or false, the basic words of s.52 are permitted to speak with respect to the loss which is claimed. What they say is that the loss is allowable only if the facts are as stated. The fate of the claim will depend upon the ascertainment of the true facts. In this case the true facts are admitted. The property on the sale of which the loss was incurred was acquired by the taxpayer for the purpose of selling it at a loss.

As was said by the learned Judge from whose decision these appeals are brought profit on the carrying on or carrying out of a profit making undertaking or scheme is income whether or not any property dealt with in the undertaking or scheme was acquired for profit making by sale or otherwise. This follows the plain meaning of s.26(a). Accordingly a loss suffered as the outcome of such an undertaking or scheme is an allowable deduction under the basic words of s.52. The learned Judge took the view, and accorded considerable weight to it, that the proviso departs from the concept of s.26(a) in that it enacts that, to qualify for a deduction in respect of a loss from the carrying on or carrying out of a profit making undertaking or scheme under s.52, the taxpayer must satisfy the Commissioner or state in his notification to him, as an alternative to satisfying him that property was acquired for the purpose of profit making by sale, that it was acquired for the carrying on or carrying out of any profit making scheme. However, it would seem that the departure is more apparent than real. The proviso is only applicable where the relevant losses are incurred in respect of property. A deduction claimed in respect of a loss from the carrying on or carrying out of an undertaking or scheme, simpliciter, is not affected by the proviso. Its allowance depends on the proper construction of the basic words of s.52. Where however, a loss is claimed in respect of property dealt with or intended to be dealt with as part of an undertaking or scheme, in its own right, so to speak, independently of the outcome of the scheme, perhaps because the undertaking or scheme was abandoned, or for some other reason, the proviso is fully applicable to that loss. To subject a loss so claimed as a deduction under the basic words, to the requirements of the proviso does not appear to be a departure from the concept imposed in s.26(a). In such a case the purpose of acquisition of the property either for profit making by sale or for the carrying on or carrying out of a profit making undertaking or scheme is relevant as an evidentiary aid, in the application of the basic words to any ensuing loss. In such a case the requirement that there be a concession or assertion by the taxpayer, particularly if made before the loss is incurred, that the property in respect of which the loss was ultimately incurred was acquired for the carrying on or carrying out of a profit making undertaking or scheme is a reasonable one. It is helpful in the manner disclosed above in the search for the real truth in the resolution under the basic words, of the ultimate enquiry, whether, although the property was acquired in connection with some undertaking or scheme, it should properly be regarded, at least in a broad sense, as having been acquired for the purpose of profit making by sale. Accordingly it appears that there is, in the proviso, no such suggested departure.

Having regard to the foregoing I would allow the appeal with costs.

JUDGE2

These two appeals, heard together, raise a question of general application and importance under the Income Tax Assessment Act 1936, as amended, "the Act", namely whether a loss incurred by a taxpayer on the resale of property before the expiration of the period of twelve months from the date on which the property was purchased by the taxpayer is an allowable deduction under s.52 of the Act.

Section 26AAA was inserted into the Act by Act No. 165 of 1973, s.6, and came into operation on 11 December 1973. For present purposes, the relevant parts of s.26AAA are set out:
"26AAA . . .
(2) Where -

(a) a taxpayer . . . purchases property after the commencement of this section; and

(b) the taxpayer has . . . sold the property . . . before the expiration of the period of 12 months from the date on which he purchased the property,
then, . . . the assessable income of the taxpayer includes any profit arising from the sale of the property . . . "
The first paragraph of s.52 of the Act is set out in full:
"Any loss incurred by the taxpayer in the year of income upon the sale of any property or from the carrying on or carrying out of any undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in his assessable income, shall be an allowable deduction:"
The second paragraph of s.52, which commences with the words, "Provided that" is set out later in these reasons.

Counsel for the respondent submitted that the words of s.52 "any loss incurred by the taxpayer . . . upon the sale of any property . . ., the profit (if any) from which sale . . . would have been included in his assessable income" on their face applied where the profit (if any) from the sale would have been included in the assessable income of the taxpayer under s.26AAA and that there was no reason why that construction of the section should not be applied to the facts of these cases.

The facts giving rise to the appeal are complex and need not be set out in detail. The nature of the facts is set out in summary form as they appear in the reasons of judgment of Tadgell J. in the Supreme Court (1981) 40 A.L.R. 137 at p.138:
"During the year of income ending on 30 June 1975 the appellants, Mr. and Mrs. Werchon, held a 47 per cent interest each in a partnership business of a bookmaker in the Northern Territory called T.J.T. Enterprises. The day-to-day operations of the business were the responsibility of Mr. Werchon. His accountant, who had prepared his income tax returns for some years, suggested to Mr. Werchon during the 1975 year of income that he consult a Mr. Sheehan, saying that he might be able to help him reduce the incidence of income tax. In consultation with Mr. Werchon, Mr. Sheehan suggested a plan which was designed greatly to minimise the former's assessable income from the profit of the partnership for the current financial year. The plan was explained in its essential features by the Board of Review in the following terms, which I am content to adopt -

'It was a simple concept and had features in common with a dividend-stripping operation. Broadly, it envisaged the purchase of shares with borrowed funds; their sale after a declaration of dividend at an amount equivalent to the cost price reduced by the amount of the dividend; the diversion (for the benefit of family trusts) of an amount (in tax-free form) equivalent to the dividend, and the borrowing of this amount and its use, with the proceeds of sale, to pay off the original indebtedness.'

The proposed plan was implemented and the income tax return for the partnership for the year ending 30 1975 claimed that a loss on a sale of shares of $176,995 had resulted in a reduction of the profit of the partnership from $178,079 to $1,084. The partners' individual returns disclosed income from the partnership proportionate to their respective partnership interests."

The plan was implemented in the latter half of June 1975. On 26 June 1975 Morla Pty. Ltd. lent the partnership, T.J.T. Enterprises, the sum of $388,290 and on the same day the partnership purchased from Jumal Enterprises Pty. Ltd. 34,845 ordinary fully-paid shares of $2 each in the capital of M. V. Johnston Motors Pty. Ltd. for that sum. On the same day the partnership applied for and was allotted at par 93 B-class shares of $1 each in the capital of Rabbit Ltd., a company incorporated in Norfolk Island, being 93 per cent of the issued capital of Rabbit Ltd. The partnership thus acquired a controlling interest in the shares of Rabbit Ltd. On the same day Rabbit Ltd. purchased at par ten fully paid redeemable preference shares of $2 each in the capital of M.V. Johnston Motors Pty. Ltd. On the following day, 27 June, M.V. Johnston Motors Pty. Ltd. declared a differential dividend of $177,000 in respect of the ten preference shares held by Rabbit Ltd. On 30 June the partnership sold for $211,295 the 34,845 shares in the capital of M.V. Johnston Motors Pty. Ltd. which it had purchased on 26 June. As a result of the sale, the partnership incurred a loss of $176,995 on the sale of those shares. The loss so incurred by the partnership was $5 less than the amount of dividend paid to Rabbit Ltd. It is not necessary to set out details of the other series of transactions involving the implementation of the plan devised by Mr. Sheehan and put into effect by him and the taxpayers.

On the material before the Court it is clear, and in fact was accepted by counsel for the taxpayers, that the taxpayers did not acquire the property, being the shares in M.V. Johnston Motors Pty. Ltd. for the purpose of profit-making by sale, nor, in giving effect to the plan, were the taxpayers carrying on or carrying out any profit-making undertaking or scheme, see s.26(a) of the Act. In fact, the taxpayers acquired the shares for the purpose of making a loss on sale, albeit as a step in the implementation of the plan devised by Mr. Sheehan. Nevertheless, in an attempt to gain the benefit of the first paragraph of s.52 of the Act, the taxpayers annexed to their partnership return for the year ending 30 June 1975 a notice in the following form:
"COMPANY SHARES PURCHASED AND SOLD AS PART OF A PROFIT MAKING UNDERTAKING YEAR ENDED 30TH JUNE, 1975.

During the year, the Partnership undertook a profit making arrangement involving the purchase of two companies and sale of one of them prior to the end of the year. The two companies involved were M.V. Johnston Motors Pty. Ltd. and Rabbit Limited.

After its purchase, M.V. Johnston Motors Pty. Ltd. declared a dividend of $177,000 to Rabbit Limited. After its reserves had been depleted, M.V. Johnston Motors Pty. Ltd. was then sold for an apparent loss of $176,995. Rabbit Limited however, has increased in value by more than this and the Partnership's consolidated over-all position has improved. As the end of the financial year occurred before any distribution was made by Rabbit Limited, the benefit of the increase in the worth of Rabbit Limited will not be received until it makes a sufficient distribution which will be in the 1975/76 financial year. As any receipt next year will be subject to tax, the loss this year must be claimed as a deduction.

Accordingly, the loss on the sale of company shares amounting to $176,995 is claimed as an allowable deduction under Section 52 of the Income Tax Assessment Act."

Section 26(a) and the second paragraph of s.52 of the Act are set out:
"26. The assessable income of a taxpayer shall include -

(a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;"
"52. . . .
Provided that, in respect of property acquired by the taxpayer after the date of the commencement of this proviso, no deduction shall be allowable under this section (except where the Commissioner, being satisfied that the property was acquired by the taxpayer for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme, otherwise directs) unless the taxpayer, not later than the date upon which he lodges his first return under this Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme."

The primary contention of counsel for the appellant was that s.52 of the Act had no application to cases where the "profit" (if any) would have been included in the assessable income of a taxpayer only by reason of s.26AAA of the Act.

The Commissioner of Taxation disallowed the deduction claimed by the taxpayers. The Taxation Board of Review No. 2 upheld the Commissioner's decision and disallowed the deduction. The Supreme Court of Victoria upheld appeals by the taxpayers and allowed the deduction. Pursuant to leave granted on 15 February 1982, the Commissioner appeals to this Court from the judgment of the Supreme Court.

Sections 26(a) and 52 of the Act were in their present form when s.26AAA came into operation in December 1973. Counsel for the taxpayers contended that the words of s.52 being "any loss incurred by the taxpayer in the year of income upon the sale of any property . . . , the profit (if any) from which sale . . . would have been included in his assessable income . . . " applied to the sale by the taxpayers of the shares in M.V. Johnston Motors. He submitted that any profit on that sale would have been included in their assessable income by reason of s.26AAA and it followed therefore that the loss incurred was an allowable deduction under the first paragraph of s.52. He referred to s.43 of the Act as illustrating another provision of the Act on which s.52 could operate if a loss in fact occurred under s.43. That section appears in a sub-division of the Act headed "Business Carried on Partly in and Partly out of Australia" and it is difficult to see how s.52 could have application to facts coming within that section.

The contention on behalf of the taxpayers is rejected. This is not a case for the application of s.25(1) of the Act, see for example Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. (1982) 39 A.L.R. 521. Nor is it a case for the application of the first limb of s.26(a) of the Act since the taxpayer did not acquire the shares for the purpose of profit-making by sale. Likewise, this is not a case for the application of the second limb of s.26(a) of the Act since the profit (if any) would not have been a profit arising from the carrying on or carrying out of a profit-making undertaking or scheme by the taxpayer. In my opinion the application of s.52 is to be limited to cases which otherwise come within s.26(a) of the Act.

No time limit is prescribed by s.26(a). If a taxpayer acquires property for the purpose of profit-making by sale, the first limb of s.26(a) applies irrespective of when the property is sold. If profit arises from the sale of property in the course of carrying on or carrying out a profit-making undertaking or scheme, and it is not relevant that the property was not acquired for the purpose of profit-making by sale, the second limb of s.26(a) applies whenever the proceeds of a sale are taken into account in calculating the profit arising from the carrying on or carrying out of that profit-making undertaking or scheme.

The wording of the first paragraph of s.52 is not identical with the wording of s.26(a) in that the words "acquired by him for the purpose of profit-making by sale" do not appear in s.52 immediately after the word "property" nor do the words "profit-making" appear immediately before the word "undertaking" where first appearing. Nevertheless, a comparison of these two provisions indicates an intention that they were intended to be complementary and that the first paragraph of s.52 "is a companion section to s.26(a)". Prior to December 1973, and putting to one side s.43 of the Act on the basis that the profit referred to in that section cannot come within s.52, of necessity the first paragraph of s.52 was limited in its application to matters which otherwise would have come within s.26(a). This of itself, however, would not prevent s.52 applying to a transaction coming within s.26AAA, but is an indication that s.52 is not to be so construed in the absence of an amendment to s.52. No such amendment was made, even though after s.26AAA had been enacted the definition of "income from personal exertion" in s.6 of the Act was amended to include "any profit that is included in the assessable income of the taxpayer by reason of s.26AAA", see s.3 Act No. 126 of 1974 which came into operation on 6 December 1974.

The view that the first paragraph of s.52 applies only when, if a profit had been made, the profit would have been included in assessable income under s.26(a) is supported by an examination of the second paragraph of s.52. The second paragraph is introduced by the words "Provided that". Normally those words are used to introduce a proviso which limits or qualifies the substantive provisions of the paragraph to which the words are appended, but in appropriate cases may have a wider effect and add to and not merely limit or qualify that which precedes it, cf. Commissioner of Stamp Duties v. Atwill (1973) A.C. 558 at p.561. In the present case, the second paragraph of s.52 constitutes a proviso which prevents a deduction being allowed under the first paragraph "except where the Commissioner, being satisfied that the property was acquired by the taxpayer for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme otherwise directs". The exception uses words identical with those contained in the first limb of s.26(a) and supports the view that the first paragraph of s.52 is to be construed as allowing a deduction where the profit (if any) on sale would have been included in the taxpayer's assessable income by reason of the first limb of s.26(a). The exception, however, is not the identical equivalent of the second limb of s.26(a) but is limited to those cases where the property was acquired by the taxpayer for the carrying on or carrying out of any profit-making undertaking or scheme. In other words, a taxpayer who does not acquire particular property for that purpose, cannot gain the benefit of the first paragraph of s.52 since under the proviso the Commissioner is not empowered to otherwise direct. Thus the first part of the proviso to s.52 prevents a deduction being allowable under the first paragraph unless the undertaking or scheme comes within the second limb of s.26(a) and the relevant property was acquired for the carrying on or carrying out of that undertaking or scheme.

Apart from the exception just discussed, the proviso to s.52 prevents the deduction being allowed under the first paragraph "unless the taxpayer, not later than the date upon which he lodges his first return under this Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme". Again, these words correspond to the two limbs of s.26(a) but with the same limited application insofar as the second limb is concerned. It is interesting to note the etymology of the words used in the phrase "the property has been acquired". That phrase makes use of the passive participle of the verb "to acquire" used in the perfect tense and is to be contrasted with the phrase "had been acquired" which makes use of the passive participle of the verb "to acquire" used in the imperfect tense. The perfect tense and the imperfect tense of a verb each denote a thing or action that is past, but the former denotes it in such a manner that there is still remaining some sense of time to elapse in relation to the thing or action that has occurred, whereas the imperfect tense denotes the thing or action of the past in such a way that in relation to it there is no sense of time still to elapse. In general, the perfect tense is used when the thing or action of the past is connected with the present time. In general, the imperfect tense is used when the thing or action is past and finished. The phrase "the property has been acquired" is to be contrasted with the corresponding words used in the exception contained in the proviso, namely the phrase "the property was acquired". The words "has been acquired" suggest that the notification can be given only when the property which had been acquired during the year of income is still held by the taxpayer at the time he gives the notification under the proviso. Here the taxpayers did not hold the shares at the time they gave the notification, but it is not necessary to decide this issue in these proceedings. It is sufficient to note that the notification given by the taxpayers in their partnership return for the year ending 30 July 1975 may have no effect under the proviso to s.52 of the Act unless the Commissioner is satisfied that the shares were acquired by the taxpayers for a purpose specified in the exception to that proviso.

The whole of the proviso to s.52 is framed on the basis that the first paragraph of the section is to be construed as being limited to those cases where the profit (if any) would have been included in the taxpayer's assessable income under s.26(a) of the Act. The policy of the proviso is clear. The difficulties involved in determining whether a taxpayer acquired property for the purpose of profit-making, often many years after the acquisition, are notorious. The exception first referred to in the proviso continues the power in the Commissioner to determine that matter of fact at a time after the property has been sold under the first limb of s.26(a). The giving of the notification under the proviso places on record the purpose of the acquisition of property. If, subsequently, a profit results from the sale of that property, the application of the first limb of s.26(a) is apparent. Likewise with respect to the application of the second limb of s.26(a). If a loss results, the application of the first paragraph of s.52 likewise is made more apparent. The notification procedure referred to in the proviso is directed to questions of proof and in particular to the establishment of the requisite purpose for which the property has been acquired. In these circumstances the first paragraph of s.52 is to be construed as being limited to the two limbs of s.26(a) where property had been acquired for any of the purposes specified therein. In the present case, it is not necessary to decide whether the Commissioner is empowered to go behind a notification to determine the true facts.

Section 26AAA of the Act contains its own provisions relieving a taxpayer, in specified circumstances, from including in his taxable income the profit on sale of property before the expiration of the period of twelve months from the date on which he purchased the property. It would be strange indeed if s.52 applied to allow a deduction of a loss where the purpose of the purchase did not come within any of the stated purposes contained in the proviso. It would be manifestly unjust and would make a mockery of the legislation if a taxpayer, by giving a notification under the proviso to s.52 which in fact did not comply with the true facts, could thereby be allowed a deduction under the first paragraph of s.52. The contentions of counsel for the taxpayer are rejected.

This view of the construction of the first paragraph of s.52 is supported by a reference to the history of the legislation and by dicta of High Court Justices. In earlier legislation the equivalent to s.26(a) and the first paragraph of s.52 of the Act were first inserted into the Income Tax Assessment Act 1922-1929 by Act No. 50 of 1930, see s.2(c) and s.14(a) of that Act, but the allowable deduction was limited to a loss "upon the sale of any property the profits (if any), from the sale of which would have been assessable as income". The Income Tax Assessment Act 1936 replaced the earlier Acts and included s.26(a) and the first paragraph of s.52. The proviso to s.52 was inserted by s.11 of Act No. 58 of 1941. In Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1970) 120 C.L.R. 177, Windeyer J., in speaking of s.52 of the Act, said at p.188:
"That section reflects, in an obverse way, the provisions of par. (a) of s.26. Section 26 and s.52 are in a sense counterparts."
The appeal from that judgment is reported, 125 C.L.R. 249. On the appeal Menzies J., after holding that the facts of that case did not come within s.26(a) of the Act, considered the application of s.52 and said at p.266:
"Consistently, however with the view which I have expressed about s.26(a) and its inapplicability to this transaction, I have come to the conclusion that s.52 does not apply here. It is a companion section to s.26(a) and it applies only when that provision would apply to a profit, which, if made, would have to have been included in assessable income."

Counsel for the taxpayers sought support from the judgment of Hunt J. in Black & Baer Pty. Ltd. v. Federal Commissioner of Taxation (1980) 48 F.L.R. 191. In that case his Honour found that the taxpayer had in fact acquired shares in a company for the purpose of profit-making by sale and thus the transaction came within the first limb of s.26(a) of the Act. The taxpayer sold the shares at a loss and his Honour allowed the amount of that loss as a deduction under the first paragraph of s.52 of the Act. In addition, the taxpayer had given the requisite notification under the proviso to s.52. That was sufficient to dispose of the matter. The shares, however, had been sold by the taxpayer before the expiration of the period of twelve months from the date on which they had been purchased by it and his Honour held further that since any profit on the resale would have been included in assessable income under s.26AAA, and since a notification had been given under the proviso to s.52, the deduction was also allowable. His Honour did not consider the possibility of a notification falsely describing the purpose for which the property had been acquired and did not need to consider the essential difference between the nature of the provisions contained in s.26(a) and s.26AAA. In the circumstances I do not accept the dicta expressed by his Honour.

In the circumstances it is not necessary to decide whether a taxpayer, by giving a false notification under the proviso to s.52, can gain the benefit of the first paragraph of s.52 of the Act. It is sufficient to say that the first paragraph of s.52 is the counterpart of s.26(a) and that the "profit" referred to therein must be "profit" under s.26(a). In the present case s.26(a) could have had no application. Likewise, it is not necessary to determine whether the notification actually given by the taxpayers is a sufficient notice under the proviso to s.52. Likewise, it is not necessary to express an opinion on the other matters raised by the appeal.

In the result, I would allow each appeal, set aside each of the judgments of the Supreme Court and confirm each of the assessments by the Commissioner of Taxation. I would order that the respondents pay the appellant's costs of the appeals and the proceedings in the Supreme Court.

JUDGE3

These are two appeals from judgments of the Supreme Court of Victoria allowing appeals by the respondents ("the taxpayers") from a decision of a Board of Review. The taxpayers are two of the partners in a partnership known as T.J.T. Enterprises which carries on the business of a bookmaker. The taxpayers are the major partners holding between them in equal shares a 94 per cent interest therein.

Towards the end of the 1975 tax year they decided, upon advice, to enter into a scheme which they believed would result in a loss to the partnership against which profits earned by it in the course of its ordinary business could be offset. To a degree the transactions into which the taxpayers, the partnership and certain companies entered are complex, but stripped of any complexity the relevant transactions may be shortly stated as follows:

1. On 25 June, 1975, a company known as Rabbit Limited was incorporated.

2. Immediately after the incorporation Rabbit granted an option to the partnership to take up the whole of its shares at par.

3. The following day, 26 June, 1975, the partnership bought shares in a company, M. V. Johnston Motors Pty. Limited, for $388,290.

4. On the same day the partnership was allotted 93 shares in Rabbit Limited. The shares were ordinary shares of $1 each and it paid $93 for them.

5. Also on 26 June, 1975, Rabbit Limited bought 10 shares in M. V. Johnston Motors Pty. Limited for $10.

6. On 27 June, 1975, the Johnston company declared a dividend of $177,000 on the shares held by Rabbit Limited.

7. On 30 June, 1975, the partnership sold its shares in the Johnston company for $211,295. It thus incurred a loss on the sale of the shares of $176,995.

In the partnership return for the year ending 30 June, 1975, the loss of $176,995 was claimed as a deduction pursuant to the provisions of s.52 of the Income Tax Assessment Act 1936 ("the Act"). Included in the partnership return was a statement in the following terms:
"COMPANY SHARES PURCHASED AND SOLD AS PART OF A PROFIT MAKING UNDERTAKING YEAR ENDED 30TH JUNE, 1975.

During the year, the Partnership undertook a profit making arrangement involving the purchase of two companies and sale of one of them prior to the end of the year. The two companies involved were M.V. Johnston Motors Pty. Ltd. and Rabbit Limited.

After its purchase, M.V. Johnston Motors Pty. Ltd. declared a dividend of $177,000 to Rabbit Limited. After its reserves had been depleted, M.V. Johnston Motors Pty. Ltd. was then sold for an apparent loss of $176,995. Rabbit Limited however, has increased in value by more than this and the Partnership's consolidated over-all position has improved. As the end of the financial year occurred before any distribution was made by Rabbit Limited, the benefit of the increase in the worth of Rabbit Limited will not be received until it makes a sufficient distribution which will be in "the 1975/76 financial year. As any receipt next year will be subject to tax, the loss this year must be claimed as a deduction.

Accordingly, the loss on the sale of company shares amounting to $176,995 is claimed as an allowable deduction under Section 52 of the Income Tax Assessment Act."

The learned trial judge found that the partnership had not in fact entered into any profit-making undertaking or scheme. During the hearing of the appeal senior counsel for the taxpayers conceded that the scheme which was entered into was a loss-making scheme. The purpose of it was to create a loss which could be claimed as a deduction against income earned by the taxpayers as partners in their business of bookmaking.

After the end of the 1975 tax year further transactions were entered into. These are described in the decision of the Board of Review (Case No. L 40 79 A.C.T. 221, particularly in paragraphs 12-19, pp.222-224). However, it is unnecessary to refer to these later transactions for the purpose of deciding these appeals.

Section 52 of the Act pursuant to which the deduction was claimed is in the following terms:
"Any loss incurred by the taxpayer in the year of income upon the sale of any property or from the carrying on or carrying out of any undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in his assessable income, shall be an allowable deduction.

Provided that, in respect of property acquired by the taxpayer after the date of the commencement of this proviso, no deduction shall be allowable under this section (except where the Commissioner, being satisfied that the property was acquired by the taxpayer for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme, otherwise directs) unless the taxpayer, not later than the date upon which he lodges his first return under this Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme."

The notice earlier set out was given by the partnership in purported compliance with the proviso to the section.

It was the contention of the Commissioner that this section only enabled losses to be claimed as deductions in situations where, if there had been profits rather than losses, the profits would have been taxable pursuant to the provisions of s.26(a) of the Act.

Section 26(a) is in the following terms:
"The assessable income of a taxpayer shall include -

(a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;"

Counsel for the taxpayers agreed that s.52 applied to make deductible losses where, if profits had been made, they would have been taxable under s.26(a), but he contended that it was a general section with a wider application than simply as a counterpart of s.26(a). He submitted that s.52 applied to make deductible losses where, if there had instead been profits, the profits would have been taxable under other sections of the Act. The other provisions were s.26AAA and s.43. It is s.26AAA which is directly in question in this appeal. Despite the length of the section it is a simple provision which, subject to certain exceptions, brings to tax any profit arising from the sale of property or an interest therein if the property or that interest is sold at a profit within a period of twelve months from the date of purchase. The term "property" is in part defined but it is unnecessary to refer to the terms of the definition. In the taxpayers' submission s.26AAA would have applied in the present case if the partnership had made a profit on the sale of the shares in M. V. Johnston Motors Pty. Limited instead of a loss. The shares were purchased on 26 June, 1975, and sold again after the declaration of the divident on 30 June, 1975. I emphasise that it was common ground that, in the event of profits, there would not have been any liability to tax under s.26(a) because the undertaking or scheme was not a profit-making one; it was a loss-making undertaking or scheme. There was no question of the shares having been acquired for the purpose of profit-making by sale so as to bring the transaction, in the event of profit, within the first limb of s.26(a).

The Commissioner made two further submissions. They were:-

1. The taxpayers had not given an effective notice pursuant to s.52 of the Act because the notice, insofar as it described the undertaking as a profit-making one, was plainly incorrect. It was therefore no notice at all with the result that the proviso had not been complied with. Compliance with the proviso was in this case a prerequisite for the allowance of the deduction, the shares in question having been acquired by the partnership long after the date of the commencement of the proviso. Although the Commissioner had power to otherwise direct pursuant to the proviso, no such direction could be given because the Commissioner, in the light of the findings of the trial judge and the concession made by counsel for the taxpayers, could not be satisfied that the property was acquired for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme.

2. The taxpayers should be denied the deduction because of the principles propounded by the House of Lords in W.T. Ramsay Limited v. Inland Revenue Commissioners (1981) 2 W.L.R. 449 and Inland Revenue Commissioners v. Burmah Oil Co. Limited (1982) S.T.C. 30, and by two judges of this Court in Commissioner of Taxation v. Ilbery (1981) 81 A.T.C. 4662.

In the submission of the taxpayers:-

1. It was sufficient that a notice pursuant to the proviso had been given. It was immaterial whether the notice was factually correct. Alternatively the circumstances of the case were such as not to require the giving of a notice with the result that an inappropriate notice had been given was irrelevant.

Counsel for the taxpayers also relied upon earlier legislation which s.52 and s.26(a) replaced in the 1936 Act. The earlier legislation is referred to in the judgment of the learned trial judge and in the judgment of Smithers J. which I have had the advantage of reading. It was contained in s.4 of the Income Tax Assessment Act 1922 (inserted by Act No.50 of 1930) and in s.26 thereof also inserted by the same Act. I have considered these earlier provisions but I am of opinion that they do not shed the light on the problem which counsel for the taxpayers submitted that they did. I think it is a question of looking at the existing legislation.

The dicta of Windeyer and Menzies JJ. in Investment & Merchant Finance Corporation Limited v. Federal Commissioner of Taxation (1970) 120 C.L.R. 177 at p.188 and (1971) 125 C.L.R. 249 at p.266 provide, in my opinion, a powerful reason why this Court should reject the taxpayers' submissions. Both judges regarded s.52 as a counterpart of s.26(a). However, when they wrote what they did s.26AAA was not in force. It came into force in 1973 (Act No. 165 of 1973, s.6). Section 52 is not in terms expressed in such a way as to restrict its operation to situations where, if there were losses instead of profits, the losses would only be allowed as deductions in cases where, if there had instead been profits, those profits would have been taxable pursuant to s.26(a). In other words, although it may have been true to say in 1970 and 1971 that the two provisions were counterparts, it would be possible for the legislature to introduce other provisions to which s.52 could also have application. That is indeed the submission which the taxpayers here make.

I can understand the force of the taxpayers' submission that one should not give to the proviso, when construing s.52, the same significance which it would have if it had been enacted at the same time as the operative part of the section. But at the time s.26AAA came into force s.52 was in its present form and I do not see how one can escape from looking at the section as a whole when one comes to the question of its relationship, if any, to s.26AAA. What the taxpayers seek to do is to show that they fall quite comfortably within the opening words of the section. They have suffered a loss upon the sale of property, namely the shares in M.V. Johnston Motors Pty. Limited. If they had sold the shares at a profit, the profit plainly enough would have been taxable pursuant to the provisions of s.26AAA, the shares having been bought and sold within a period of twelve months.

It is unnecessary to have regard to so much of s.52 as speaks of a loss incurred as a result of the carrying on or carrying out of any undertaking or scheme. It is the first limb of the section to which, for the purposes of the taxpayers' argument, it is necessary only to have regard. But for the reasons earlier given I think it quite inappropriate not to have regard to the terms of the proviso for the purpose of seeing for what it was the deduction provided for in s.52 was to be allowed.

In my opinion a consideration of the proviso reveals that the draftsman evinced the plain intention that no deduction pursuant to the section was to be allowed unless:

(a) the property was acquired by the taxpayer for the purpose of profit-making by sale; or

(b) the property was acquired by the taxpayer for the carrying on or carrying out of a profit-making undertaking or scheme.

What I have said does not take account of a case where a taxpayer either had property which later became the subject of a profit-making undertaking or scheme prior to the date when the proviso was added to the section or had acquired property after that date but not at that time for the purpose of profit-making by sale or for the carrying on or carrying out of a profit-making undertaking or scheme. In other words, supposing a taxpayer had purchased land for the purposes of primary production many years before it became clear that it had a potential for residential development and then decided to use it in a profit-making undertaking or scheme, the deduction would be available although no notice was or could be given. That is not this case, which, as I have earlier said, is a case concerned only with losses or profits arising from the sale of property, not losses or profits arising from an undertaking or scheme. Here the shares were acquired with the object in view of making a loss which would be deducted from the ordinary profits made by the partnership in the course of its business. The shares were not acquired for the purpose of profit-making by sale nor, on the basis of his Honour's findings and the taxpayers' concession made in the course of the hearing of the appeal, was the property acquired for the carrying on or carrying out of any profit-making undertaking or scheme.

In those circumstances the taxpayers have not demonstrated their entitlement to any deduction. They are not within the section.

In reaching this conclusion I have borne in mind reliance placed by counsel for the taxpayers on s.43 of the Act. But I do not regard that section as bearing at all on the question here to be decided. I express no view on whether s.52 could apply as a counterpart of s.43 in the same way as the section applies as a counterpart of s.26(a).

My conclusions mean that these appeals should be upheld for reasons advanced by the appellant as his first ground of appeal. What I have said also demonstrates that he is entitled to succeed on the second ground of appeal. I would reject any argument which was based on the proposition that a purported notice under s.52 not in accordance with the facts of a particular case is nevertheless a sufficient notice for the purposes of the section. I emphasise that the notice was necessary because the case was one where property was acquired. I agree with the submission made by counsel for the appellant that this was not a case where the proviso empowered the appellant to "otherwise direct".

It becomes unnecessary to deal with the third ground of appeal and I do not propose to express a conclusion on it. I do wish, however, to say that I adhere to what was said by Northrop J. and myself in Commissioner of Taxation v. Ilbery (supra). The argument that what we said in that case was inconsistent with the decision of the High Court in Commissioner of Taxation v. Westraders Pty. Limited (supra) was not developed fully by counsel in this case. Having considered the decision, I do not find in it anything which would persuade me that in some way what was said in Ilbery's case is in conflict with it.

It is possible that there are factual distinctions to be drawn between Ilbery's case and this one. That is because one may need to take into account the nature and effect of transactions which occurred in the 1976 tax year before one could reach a conclusion. That is not something which I have done and, accordingly, as I say, I express no view in relation to the third ground of appeal.

For the reasons I have given I would allow the appeals.