Country Magazine Pty Ltd v Federal Commissioner of Taxation

[1968] HCA 27

HIGH COURT OF AUSTRALIA

Kitto J.

COUNTRY MAGAZINE PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION

(1968) 117 CLR 162

20 May 1968

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Deductions—Return on basis of accountancy practice allocating payments to year in &hich service rendered—Previous returns and assessments on basis of actual receipts—Claim to deduct amount included in assessable income of previous year—Income Tax Assessment Act 1936-1966 (Cth).

Decision

May 20.
KITTO J. delivered the following written judgment:-
This is an appeal from a disallowance of objections to an assessment of the income tax payable by the appellant company in respect of income derived in the year ended 30th June 1966. (at p163)

2. The appellant company is a publisher of magazines, and the question to be decided relates to so much of the amounts which it received in the 1965 year of income as related to issues to be published in the 1966 year of income. In each year the course it followed with respect to subscriptions in making up its profit and loss account was to deduct from its gross receipts of the year so much of the subscriptions received in the year as related to issues of magazines to be published in the next year or subsequent years. The amount was designated "subscriptions in advance". The reason for making the deduction was, in brief, that over against that proportion of the subscriptions stood the obligation to supply the magazines to which it related, and it could not realistically be treated as having entered into the calculation of a year's profit until the obligation should be satisfied. In effect, the making of the deduction amounted to setting aside the amount so as to be held in suspense, and not be brought back into the profit and loss account until either the magazines to which it related should have been sent to the subscribers, or it had been absorbed by the making of refunds or the meeting of claims in respect of any issues which the appellant might fail to supply. When that condition had been fulfilled the amount was brought into the profit and loss account of the then current year as an ingredient in the sales figure, and so entered into the profit of that year. I do not think it necessary to recount here the evidence as to the method by which the amounts deducted in the one year and brought back in the next were worked out. There was some degree of estimate and approximation involved in the calculations, but nothing turns on that for the purposes of this appeal. (at p163)

3. In making out its income tax returns in respect of each year of income before that with which this appeal is concerned, the appellant treated the deduction it had made in its profit and loss account under the heading of "subscriptions in advance" as not being an allowable deduction, and accordingly added it to the profit shown by the profit and loss account and showed the total, less the amount that had been similarly treated in the preceding year, as its assessable income. The Commissioner, in assessing the tax to be paid in respect of each of those years, treated this course as having been correctly adopted. (at p163)

4. Then, in November 1965, this Court decided the case of Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation (1965) 114 CLR 314 . It was a case decided upon an agreed statement of facts which set out that, according to established accounting and commercial principles, in the case of a business selling goods or supplying services, amounts received in advance of the goods being delivered or the services being supplied are not regarded as income, and accordingly are not entered to the credit of any revenue account until the sale takes place or the services are rendered, but are credited in the meantime to a suspense account. The Court, seeing no reason to differ from accountants and commercial men on the point, held that amounts so treated do not satisfy the notion of "income" derived by the person carrying on the business until they become transferable to an income account, the obligations for which they are the prepayment having been discharged. (at p164)

5. This decision showed that if the appellant in the present case had made up its income tax returns in respect of previous years in accordance with its own bookkeeping methods, neither adding to the profit shown by the profit and loss account the amounts of the unsatisfied "subscriptions in advance" nor deducting the "subscriptions in advance" which had been added in earlier years, the Commissioner should have assessed tax accordingly. But the appellant, by its returns had invited the Commissioner to make the assessments that in fact he made, and had never objected to them when made. In respect of its income derived in the year ended 30th June 1966 the appellant, with the Arthur Murray decision before it, lodged a return which took advantage of the principle of that decision to the extent of not adding back the "subscriptions in advance" which had been deducted in that year's profit and loss account, and accordingly stating the net profit of the year at the figure arrived at in the profit and loss account, namely $12,443. A full application of the principle would have required the appellant to refrain from treating as an allowable deduction the amount which in the previous year's return had been added to the profit shown by the profit and loss account as representing "subscriptions in advance" for that year. However, the appellant did not carry the principle of the Arthur Murray Case to that length. The figure of $12,443 had been reached in the profit and loss account by a process which began by taking as the proceeds of sales an amount of $76,135. This amount in fact included a sum of $10,480 which, in the 1965 year's profit and loss account, had been deducted as the unsatisfied "subscriptions in advance" received in that year and held in suspense until the 1966 year. The appellant in its 1966 return deducted the latter amount from the $12,443 "net profit as per profit and loss account", for the reason that in its 1965 tax return the $10,480 had been added to the "net profit as per profit and loss account" of that year, and so had been already included in an amount of income upon which tax had been assessed and paid. The Commissioner declined to accept this as a valid reason for excluding the $10,480 from the income of the 1966 year, holding that the Arthur Murray Case showed that it was in fact income of that year, and he assessed the appellant to tax on that basis. (at p165)

6. The argument in support of the appellant's case has been put in various ways, but I do not think that any of them has substance. First it is said that money received cannot be income in more than one year, that the Arthur Murray Case (1965) 114 CLR 314 and the judgment of Dixon J. in Carden's Case, Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (1938) 63 CLR 108, at pp 151 et seq , show that the question in which year it is income is to be answered according to accepted business and accounting principles, and that a recipient of money in the position of the present appellant, if he has treated the money as income of a year in which it was not income (according to those principles) must (according to those principles) treat it as not income of the year in which (according to those principles) it was income. Of course the argument was not put in this form of words, but this is what it seems to come to. I can only say that I know of no authority for it and I can see no logic in it. The witness, Mr. Faulks, who seemingly was called to establish it, so qualified his opinion in the end that there is no evidence that I could regard as supporting it. Even if there were I should not be at all ready to accept it. (at p165)

7. Then the appellant contends that the Income Tax Assessment Act discloses an intention that an amount which, in an assessment, is (even mistakenly) included in a taxpayer's assessable income of one year of income shall not be included in his assessable income of another such year. This argument does not suggest that there is an estoppel against the Commissioner in such a case; it is purely an argument as to the interpretation of the Act. I must reject it, however, for the reason that I can find nothing in the Act to indicate any such intention. Various provisions have been referred to by counsel, but none of them seems to me to give any countenance to the notion. (at p165)

8. Finally it was argued that the Arthur Murray Case is to be distinguished on the ground that it shows only what is the result of applying ordinary commercial and accountancy practice in a case which is uncomplicated by the special feature of the present case, namely that the taxpayer treated the $10,480 as income in its 1965 return. It is said that ordinary principles concede to a recipient of money for the future supply of goods, or for future services, a discretion to treat the money as income immediately upon its being received, and that the appellant, by making its 1965 return as it did, exercised that discretion in a manner which the Commissioner was bound to accept as determining the matter for income tax purposes. If there be such a discretion, I should have thought that the appellant exercised it, not by what it did in its income tax return, but by treating the $10,480 in its own profit and loss account as an item to be excluded in the ascertainment of the profits of the business for the 1965 year. Moreover the evidence does not support the suggestion that the inclusion of the $10,480 in the income of the 1965 year accorded with any accepted or generally approved method of ascertaining the appellant's income of that year, or gave effect to any recognized concept of what constitutes income in the case of a business such as that which the appellant was conducting. Indeed the evidence of Mr. Grill and Mr. Cremer was to the contrary effect. But, further than this, the Commissioner, in my opinion, is right in the broad answer that he gives, namely that the taxpayer cannot turn what is assessable income of one year into assessable income of a different year by including it in the wrong year's return. The Act requires that he include it in his return for the year of income in which he derived it as income, and he is not excused from doing so by the fact that, under a mistaken view as to when he derived it as income, he included it in his return for an earlier year. Likewise the Act obliges the Commissioner to assess tax in respect of all income which the taxpayer in fact derived in each year, and it gives him no discretion to leave any such income out of the assessment on the ground that the taxpayer mistakenly included that income in his return of the previous year and was taxed accordingly. If there is any remedy for the mistake it must be by means of an amendment of the previous year's assessment. Whether that assessment may or should be amended is a question which must be answered by reference to the specific provisions of the Act relating to amendments; but in its application to the appellant it is not a question which arises on this appeal. (at p166)

9. The appeal in my opinion fails and must be dismissed. (at p166)

Orders

Appeal dismissed with costs.