Commissioner of Taxation v Cyclone Scaffolding Pty Limited

[1988] HCATrans 101

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No Sl50 of 1987

B e t w e e n -

THE COMMISSIONER OF TAXATION OF

THE COMMONWEALTH OF AUSTRALIA

Applicant

and

CYCLONE SCAFFOLDING PTY LIMTED

Respondent

Application for special leave to

appeal

MASON CJ
BRENNAN J

Cyclone

DEANE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 13 MAY 1988, AT 2.48 PM

Copyright in the High Court of Australia

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MR G.K. DOWNES, QC:  If the Court pleases, I appear with my

learned friend, MR C. LONERGAN, for the applicant.

(instructed by the Australian Government Solicitor)

MR A.M. GLEESON, QC: If it please the Court, I appear with

my learned friend, MR A.H. SLATER, for the respondent.

(instructed by Barker Gosling)

r-1.ASON CJ:	Mr Downes.
MR DOWNES:	Your Honours, this is an application for special

leave to appeal from a decision of the Full Federal

Court comprised of the Chief Judge,Mr Justice Beaumont

and Mr Justice Wilcox. The court, by a majority,
Mr Justice Wilcox dissenting, dismissed an appeal from

Mr Justice Hunt of the Supreme Court of New South Wales.

The application for special leave was lodged, I

think, on Christmas Eve last year and, in consequence,
the application in support was a little briefer than

it might otherwise have been and I thought I should

draw Your Honours' attention that there was then filed

a supplementary affidavit which finds its place at the

back of the papers beginning at page 73 and, in

particµlar, on pages 73 and 74 there is a sunnnary of

the material which, in the applicant's submission,

is the basis upon which this Court ultimately should

grant special leave.

Your Honours, the respondent carries on the business of selling and hiring scaffolding equipment.

When I say "selling" perhaps I should tell Your Honours

that that phrase as I use it and is, in part, used in

the judgments encompasses three activities. The first

of those activities is the sale of scaffolding

equipment - - -

MASON CJ:	Mr Downes, we have all read the papers so there is no need to proceed on the footing that we are coming
to it entirely innocent of what is in the application
book.
MR DOWNES: Yes, Your Honour. I understand that. Well,

Your Honours, perhaps, would have appreciated, ,if

I could just then briefly sunnnarize it, that there

is sales of equipment never hired out; sales of

equipment which have been hired out and have been

returned and payments of compensation by hirers with

respect to lost hired equipment. In each case, as

Your Honours, perhaps, will have seen the price is

the same, namely, the respondent's retail price. So

that in each case there is a price paid which exceeds,

so to speak, the wholesale price which the respondent

paid for the equipment. There is a profit element,

if I can use that description, in the difference between

the sale price or compensation price and the amount

originally paid.

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As Your Honours would perhaps also know, the

respondenm paid tax on the profits they earned from

sales of equipment which, in accordance with their
accounting practice, represented equipment sold

in the tax year of purchase. They claim that sales in subsequent years, that is, in the year after the tax year of purchase, were sales of capital equipment

and not liable to tax. As, Your Honours, is pointed

out in the judgments and, in particular, I think, in

the judgment of Mr Justice Wilcox, a taxable sale

might occur, for example, 11 months after purchase or

a tax-free sale might occur only something of the

order of 1 month after purchase.

Now, Your Honours, this business of selling, in

our respectful submission, was a substantial business.

In the tax year in question there were total sales

resulting in gross receipts of some $1.2 million.

They can be divided in two ways. If one divides them

as between direct sales, they are over-the-counter

actual sales, there is some $742,000 worth. And

compensation for lost equipment represents about

$500,000. That is from page 30 of the appeal book.

Or if one divides it in accordance with the way in

which the taxpayer approaches its accounting it

represents sale - gross receipts relating from

sale of what is treated as stock of $696,000 or roughly,

$700,000, and of what is treated as plant after the

so-called capitalization process at the end of the

relevant year of income of some $527,000. So, we

would respectfully submit, that the amount is a

substantial amount and represents a substantial

business. It represents a significant percentage of

the total business of the taxpayer but, we would

respectfully submit, that is not ultimately a material

matter provided the business is substantial.

Your Honours, the accounting records, as I think

I have perhaps indicated and Your Honours may have read,

of the taxpayer treated acquisitions within the year

of acquisition as trading stock and thereafter by a

process described as capitalization treated the

equipment as plant, claimed depreciation, and that

depreciation was allowed over a period by the

Commissioner.

When the taxpayer was dealing with sales of

what it regarded as plant it brought to tax the

difference between written-down value and cost under
section 59 but excised from its own accounts, for

the purpose of taxation accounting, the difference

between cost and sale price. The Commissioner sought

to claim, before His Honour Mr Justice Hunt and, again,

in the Full Federal Court, that the difference between

the cost price and the sale price, the profit, was

income in accordance with ordinary concepts pursuant

to section 25 of the Act and ought to be brought to tax.

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MASON CJ:  I think we are familiar with the case as presented

by the two parties and we are familiar with the manner

minority in the Full Court, so you can approach it on	in which it was disposed of by the majority and the
that footing.

MR DOWNES: Yes, Your Honour. Well, Your Honours, I was about

to come, I think, to the point which Your Honour is urging me to come to. The case as presented by the

Connnissioner before both courts was a case which had

as its relevant point of law for consideration the
kinds of considerations which one finds in, for

example, the LONDON AUSTRALIA INVESTMENT COMPANY case,

138 CLR, and more recently, in MYER's case and,

Your Honours, that depended upon an argument that

these sales were an integral part of the taxpayer's

business, were systematic, regular and so forth.

That argument found favour, as Your Honours know,

before His Honour Mr Justice Wilcox. In effect, we

would respectfully submit, it also found favour before.

the majority because the majority said - and I take

Your Honours if I may to, I think, page 38 of the

appeal book at the middle of the page, line 15:

If it were permissible to isolate these

transactions from their context within the

general framework of the taxpayer's

treatment of its activities overall, there

would be much to be said for the

Connnissioner's contention that the profit

arising on the sale of equipment held beyond

the first year is income. -~

Now, notwithstanding that finding or tentative consideration on the part of the majority, the majority ultimately came to the view that the profit was not taxable and came to that view solely because of the

way in which the taxpayer had treated the matter in

its accounts.

BRENNAN J: Well, is it right to say that they came to the

conclusion that it was not taxable w: was it, that at.

end of the day, one found that that was offset against

something else and the swings and roundabouts

method threw up the correct amount for bringing

to charge?

MR DOWNES:  We would submit that that is not the conclusion

that the majority ultimately came to. The majority,

we would respectfully submit, came to the conclusion

that either because the trial judge had found that
the taxpayer's accounting records produced a true

reflex or because the Connnissioner had, in the past,

accepted the accounting records of the taxpayer, or

a combination of both, the equipment, after the year

of acquisition was plant and what one then had was

simply a realization of plant; that that did not

attract income tax under section 25 for the reason

that it was simply a realization of plant and, in

those circumstances, although the facts viewed

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independently might have led to a different conclusion

because of the accounting treatment, the profit was

not to be brought to tax. And the way in which the

majority began the judgment, we would respectfully

submit, shows plainly that this was the approach that

Their Honours were taking. At page 25 on line 18

Their Honours said:

The question in the appeal is whether the

accounting procedures adopted by the

taxpayer were, in the language of

Sir Owen Dixon in CARDEN's case, "calculated

to give a substantially correct reflex of

the taxpayer's true income."

MASON CJ: You accept CARDEN's case, do you not?

MR DOWNES:  Yes, Your Honour.

MASON CJ: Well, is that not the question?

MR DOWNES:	No, with respect, it is not, Your Honour.
MASON CJ:	Why not?
MR DOWNES:	Because as Sir Owen Dixon in CARDEN's case said,

Your Honours, himself - we have copies of CARDEN's case.

Perhaps it would be convenient to hand them up. The

passage that the majority relies upon is the passage

at page 154, the paragraph at the bottom of the page:

In the present case we are

concerned with rival methods of accounting

directed to the same purpose, namely, the

purpose of ascertaining the true income.

UnJess in the statute itself some definite

direction is discoverable, I think that the

admissibility of the method which in fact

has been pursued must depend upon its

actual appropriateness. In other words,

the inquiry should be whether in the

circumstances of the case it is calculated

to give a substantially correct reflex of

the taxpayer's true income.

But then His Honour said, on page 157, relating to

the accounting records, about eight lines from the

bottom of the page:

They do not decide the question. They in no

way remove the necessity of discovering

whether, as a matter of fact, the basis of

the accounting is or is not appropriate to

reflect truly the professional income of

Dr. Carden;

MASON CJ: Well, that is the passage that the majority quoted at

page 39.

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MR DOWNES:	Yes, Your Honour. Well, they quoted the true reflex passage at page 154, I think, at the point
I read to Your Honours. But, Your Honours, what
the majority did, we would respectfully submit, is to erect the principle which one gains from CARDEN's
case to a point which it does not bear. The
passage I took Your Honours to at page 38 recognizes
that the facts viewed, apart from the accounting
records, may give rise to tax but because of the
accounting records and because they, having regard
to the finding of the trial judge, give rise to a
true reflex, one finds that the relevant profits
are not to be brought to tax.

We would respectfully submit to Your Honours

that to ask of the principle laid down by

Mr Justice Dixon in CARDEN's case an operation -

w~ll, to ask of that principle an operation which
says, "Even though the facts may lead to tax,

nevertheless, because of an accounting record and

because it is by some other means to be regarded as

a true reflex, the property is not to be brought to

tax.	We would respectfully submit that that disregards
the qualifying words of Mr Justice Dixon.	It disregards

the qualifying words of this Court, again of the

same order in HENDERSON's case and it disregards

the qualifying words of this Court, again of the same

order, in the ARTHUR MURRAY case. We would

respectfully submit that what, in effect, the majority

is doing is to ask whether the accounting records

disclose a true reflex; to answer that in the affirmative,

having regard to findings made by the judge below; then to acknowledge that the facts might otherwise

give rise to tax and to say that the accounting records

are, in effect, an answer to that argument. Either,

Your Honours, we would respectfully submit, the majority

is, so to speak, putting the cart before the horse
or it is contradicting by its ultimate finding or

its ultimate recognition of the possibility that the

facts give rise to a taxable profit, it is contradicting

its earlier finding that the accounting records give

rise to a true reflex.

BRENNAN J: At the end of the day the question of whether the

accounting records do give a true reflex or not is

a matter of fact, is it not?

MR DOWNES:	We would respectfully submit not for a number of reasons. In our respectful submission,
Your Honour, the true reflex proposition does not really arise in the present case and it does not arise for the following reasons. This is not a case
in which one has accounting records which present an
answer, and the question is whether the answer presented by those accounting records is a true reflex or not.
If one takes, for example, CARDEN's case or HENDERSON's
case, the accounting records there were prepared on

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accruals or cash basis and produced an answer in terms of income and the question was is that the

correct answer. Now, the accounting records in the

present case do not, we would respectfully submit,

do that at all. Whereas the accounting records in,

say, CARDEN's case or HENDERSON's case did not throw

up the alternative, the accounting records in the

present case plainly do. CARDEN's case and HENDERSON's

case were concerned essentially with, what I might call,

matters of timing: is something assessable in
tax year 1 or in tax year 2? Is the way of arriving
at the answer as to when it is assessable an accruals basis

or a cash basis?

The accounting records in the present case throw

up all the information that is necessary to determine
the question. The accounting records throw up the

very profit which the CoIIm1issioner seeks to tax. What

the taxpayer argues is that because it has proceeded

for a period on a basis which treats the equipment as

trading stock and thereafter as plant, that that in

some way throws up a true reflex which precludes the

Court from looking at what, arguably on the majority

view and with certainty on the view of Mr Justice Wilcox,

gives rise to a taxable profit on the basis of

section 25 and the principles of income in

accordance with ordinary concepts.

Now, there is nothing, we would respectfully submit,

in these taxpayer's records which makes them, so to speak,

analogous with records of the kind that have in the past

been examined to see whether they throw up a true reflex.

MASON CJ:  The question is not whether they throw up a true reflex. The question is whether the accounting methods

are appropriate or apt to throw up a substantially

correct reflex.

MR DOWNES:  Yes, Your Honour, I follow that.

MASON CJ:  Now, that is the principle established by CARDEN;

that is the principle that was repeated by the majority in the Full Court; that is the principle they applied.

Now, you may challenge the correctness of their

application. That may be a matter of debate. But why

does it give rise to a question of special leave?

MR DOWNES:  Because this is a decision of the Full Federal Court.

It will have a substantial effect in the legal

coIIm1unity and because, Your Honours, what it does is

to, by application, I agree, or purported application

of the principles in CARDEN's case, extend those

principles to a point which they ought not to be and

never have in the past been, we would respectfully submit,

extended and we would submit that that is a matter upon

which it is appropriate for this Court to grant special

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leave so that this Court can examine the question of

whether the principles in CARDEN's case are appropriate

at all to be applied to the facts of a case such as

the present.

MASON CJ:  But there would be no end to our labours if we

treated every application of a principle to a new set

of facts as warranting the grant of special leave.

MR DOWNES:  What Your Honour says is undoubtedly true but

we would respectfully submit that this case is a case

of the kind which justifies Your Honours intervening

and granting special leave.

Could I move on to another point which we

seek to look to in support of this application, and

that is that there is, as Your Honours will have

seen from the decision of the majority and the minority,

another decision of the Full Court of the Federal Court,

MEMOREX V THE COMMISSIONER,which was determined only a matter of weeks prior to the decision in this case

in which the factual situation was very similar and

in which the relevant profits of a similar kind

were held to attract liability to tax.

Now, we would respectfully submit that His Honour

Mr Justice Wilcox's analysis of that case and the effect of it is such that it is appropriate to enable

the matters which are thrown up by the two cases to
be considered for this Court to grant special leave.

Mr Justice Wilcox deals with the MEMOREX case at

page 66.	He says, at ~he second-last line that the
majority:

regard that case as distinguishable from

the present one, but the suggested distinction

depends entirely upon nomenclature. When
one goes to the facts, the two cases are

remarkably similar. In each case the

taxpayer supplied equipment either by hire

(lease) or sale, depending upon customer

choice. During relevant years each taxpayer

periodically sold equipment which had been

previously hired (leased). In each case

the profits on sales were a substantial,

recurrent element in the income of the

business. Although Davies and Einfeld JJ

said, at p.23, that there was no analogy

between the case before them "and the case of

plant or equipment that a taxpayer may have

and may use as part of the structure of an

enterprise", the Court was unanimous in

rejecting the argument put by counsel for

Memorex "that if the sales ... were to be

brought to account in a calculation of the

applicant's taxable income, it could only

be by treating the goods as trading stock".

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That argument is similar to that put by

Cyclone, with the added rider in the present

case that this course is impossible because

the goods were treated in the accounting

system as "plant".

DEANE J: But, Mr Downes, that is all very well but the importance

of MEMOREX is, surely, the reference to it in the

majority judgment and that reference makes it quite

clear the extent to which the majority see this case

as turning on its own facts which is precisely the

point that the Chief Justice raised with you.

MR DOWNES: Yes. But, Your Honour, the effect of that

combination of the two cases is as follows, namely,

that two identical fact situations, we would respectfully

submit, which would give rise to tax - - -

DEANE J: What, you say the majority misstated the facts,

do you, when they distinguish the facts at pages 39 to HO?

MR DOWNES: But, Your Honour, the distinction only, if one

looks at the first lines on page 40, flows from the

different accounting treatment. That is the only

distinction which the majority draws between the two

cases. So, one has, Your Honours, as we would respectfully

submit it, identical fact situations which can give rise

to a different result in terms of tax contrary to the

statement by the Court in HENDERSON's case that one

can only have one correct tax assessment and simply

because of the accounting method chosen. And we

would respectfully submit that that approach, namely,

an approach which says that the accounting method can

be determinative, is an extension of the CARDEN's case,

HENDERSON's case and ARTHUR MURRAY case approach

which is not warranted and ought not to occur.

Your Honours, one hesitates in an application

on special leave to refer Your Honours to journal

articles but there already has appeared in one tax

. journal an article about these two cases which, in a

sense, suggests that the decision in this case is

inconsistent with MEMOREX and that the decision in

the MEMOREX case is the decision to be preferred.	Now,
Your Honours may not ultimately consider that the decision in the MEMOREX case is the one to be preferred but, with respect, Your Honours, the fact
that one does have in the community writers who are
concerned with the topic, commenting upon the - - -

BRENNAN J: Would it be right to say, Mr Downes, that many of

the tax journals are journals which are written by

those who have a particular view of the tax and

its administration?

MR DOWNES: That may be so, Your Honour. This learned author

seems to have a view, if that has in any way affected

his reasoning, which favours the Commissioner. But,

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Your Honours, I do not know whether Your Honours

wish to see it but the fact that there is debate

in the connnunity, we would respectfully submit,

whilst not a matter of great significance in terms of Your Honours' deliberations, it is ultimately a matter for Your Honours, but nevertheless is a

matter which is appropriate for Your Honours to take

into account.

MASON CJ:  I do not think it would assist us, Mr Downes.

MR DOWNES: If Your Honour pleases.

MASON CJ: One must try and keep special leave

applications within reasonable confines. If we were
to encourage the production of academic writings

there would be no end to special leave applications.

MR DOWNES: Yes, Your Honour.

DEANE J:  Except there would not be all that many articles in the

tax journals favouring the Connnissioner so we

probably would not have to worry all that much.

MR DOWNES:  I was just making a connnent upon His Honour

Mr Justice Brennan's connnent.

There is just one other matter, if I may, that

I would wish to refer to and that is this: the majority,

also, by looking at CARDEN's case and by looking at

HENDERSON's case and other cases, talks about "a

principle of estimation" and, indeed, there is a passage

that Your Honours will recollect in Sir Garfield Barwick's

judgment in HENDERSON's case that refers to "estimation".

Now, Your Honours, the majority, in a sense,	'
approach the matter on the basis that the accounts of the taxpayer presently, by estimation, throw up

what is a true reflex. Now, undoubtedly, Your Honours,

there is some estimation in the accounts of the

taxpayer and that, we would respectfully wish to say,

is not anything which ever has been or is now challenged

by the Connnissioner. But one can see what estimation

or the principle relating to estimation is concerned

with by looking at what is the estimation which arises

in the present case and the estimation which arises in

the present case is the estimation which flows from
the fact that it is impossible, so the evidence
suggested, to actually identify a particular piece of

scaffolding equipment and say of that piece of

equipment, "It was bought before 30 June and sold after

30 June". So, the taxpayer has a procedure which one

calls a last-in, first-out procedure for determining

what scaffolding equipment it has sold and that,

Your Honours, is estimation. That throws up figures

which, in effect, cannot be examined. One cannot look

at the taxpayer's figures and say, "Well, if he hadri't

adopted this approach what would have been the result

that would be arrived at?"

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Now, Your Honours, that, we would respectfully

submit, is what estimation is concerned with; that

is what true reflex concepts are concerned with. But

the moment the taxpayer's figures throw up a precise

amount that can be looked at from his own accounts

and of that amount the question can be asked, "Is this

income in accordance with ordinary concepts?", then

we would respectfully submit that the principle
relating to estimation, the principle relating to

true reflex has no room to play.

MASON CJ: Well, you have said as much as you can say, have

you not, in support of the application?

MR DOWNES:  Yes. For those reasons we would submit that the

Court should grant special leave.

MASON CJ:  We need not trouble you, Mr Gleeson.

As the judgment of the majority of the Full Court.

of the Federal Court demonstrates, the outcome of this

case depends on its own facts in relation to one

income year. The proposed appeal does not raise a

question of general principle, it raises only a question
of applying general principle. For those reasons the

application is refused.

MR GLEESON:  We would ask for costs, Your Honour?

MASON CJ: You do not resist that, Mr Downes?

MR DOWNES:  No, Your Honour.

MASON CJ: The application is refused with costs.

AT 3.21 PM THE MATTER WAS ADJOURNED SINE DIE

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