Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd

[1985] HCA 44

HIGH COURT OF AUSTRALIA

Gibbs C.J., Wilson, Brennan, Deane and Dawson JJ.

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v. SUTTONS MOTORS (CHULLORA) WHOLESALE PROPRIETARY LIMITED

(1985) 157 CLR 277

11 July 1985

Income Tax

Income Tax—Assessable income—Deductions—Trading stock valuation adjustment—Taxpayer a bailee in possession of trading stock—Income Tax Assessment Act 1936 (Cth), ss. 6(1), 82D.

Decisions

GIBBS C.J., WILSON, DEANE, DAWSON JJ.: Suttons Motors (Chullora) Wholesale Pty. Ltd. ("the taxpayer") is a member company of what may conveniently be called "the Suttons Group". At relevant times, the overall activities of the Suttons Group included carrying on in Sydney a business of retailing new motor vehicles manufactured by General Motors-Holden's Ltd. The function of the taxpayer was to act as the Suttons Group's "wholesaler": it obtained delivery of and subsequently purchased the new vehicles from General Motors Acceptance Corporation, Australia ("G.M.A.C."), which is the Australian "finance company" within the General Motors-Holden's Group and which had purchased the vehicles from the manufacturing company in that Group, and sold them to Suttons Motors (Chullora) Pty. Ltd. ("Suttons Motors") which was the taxpayer's holding company and the Suttons Group's "retailer". The reason for the separate identity of the taxpayer as the Suttons Group's "wholesaler" was that it resulted in the liability to pay sales tax being moved from a company in the General Motors-Holden's Group to a company (the taxpayer) in the Suttons Group and a corresponding ability to retain the funds to satisfy the sales tax liability within the Suttons Group until they had to be paid over to the Commissioner. In issue in the present appeal is the entitlement of the taxpayer to a "trading stock valuation adjustment" deduction pursuant to s.82D(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") of "the prescribed percentage of the value" of certain motor vehicles in the assessment of its taxable income (or loss) for the tax year ended 30 June 1977. It is common ground that the taxpayer's entitlement to that deduction depends upon whether the relevant vehicles were, at the commencement of that tax year, "trading stock on hand in relation to" a business "that was carried on by the taxpayer immediately before the commencement of the year of income" within the meaning of those words as used in s.82D(1).

2. The detailed facts are set out in the judgment of the learned primary judge (Tadgell J.) in the Supreme Court of Victoria which has been reported ((1982) 42 A.L.R. 525). They are repeated in more summary form in the judgments of Toohey J. and Jenkinson J. in the Federal Court which have also been reported ((1983) 47 A.L.R. 449). Tadgell J. and the members of the Full Court of the Federal Court (Bowen C.J., Toohey and Jenkinson JJ.) were all of the view that the relevant motor vehicles were trading stock on hand in relation to the taxpayer's business at the commencement of the tax year and that, subject to a minor and agreed adjustment, the taxpayer was accordingly entitled to the disputed deduction. The central thrust of the various judgments in the Supreme Court and the Federal Court is similar and it can be said at once that we are in general agreement with it. In these circumstances and in view of the fact that the provisions of s.82D(1) are no longer operative (Act, s.82C(2)), it is unnecessary that we do more than briefly state the reasons which lead us to conclude that the taxpayer was entitled to the disputed deduction and that the Commissioner's appeal from the Federal Court should be dismissed. Except where it is desirable to refer specifically to G.M.A.C., we shall refer indifferently to the various companies in the General Motors Holden's Group as "G.M.H.".

3. Section 6(1) of the Act provides that, in the absence of a contrary intention, "'trading stock' includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock". The definition is expansive in that it operates "cumulatively upon the ordinary meaning" of trading stock (per Stephen J., Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (in liq.) (1978) 138 CLR 210, at p 216 and see, to the same effect, at pp 229 (per Mason J.) and 235 (per Jacobs J.)). It is not relevant here to consider the extent to which the "definition" actually widens the ordinary meaning of the term (cf. St. Hubert's Island Case, at pp.225ff. and 243). What is important for present purposes is that it does not restrict that ordinary meaning. If goods are within the ordinary meaning of "trading stock", they are, in the absence of a contrary intention, trading stock for the purposes of the Act. It would seem clear enough that, subject to the exclusion of the items which are specified in s.82B(1) of the Act and which are not here relevant, the term "trading stock" is used in s.82D(1) in its defined sense, that is to say, with its ordinary meaning as "expanded" by s.6(1).

4. The ordinary meaning of the term "trading stock" upon which s.6(1) builds is that which is attributed to it by legal and commercial people for accounting and other purposes. That ordinary meaning has been held to include shares purchased and held for resale by a share trader (Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 249) and land which a dealer in land holds as an object of his dealing (St. Hubert's Island Case, at p.225). It has been said to include the stock of raw materials which a manufacturer holds for use in manufacture (St. Hubert's Island Case, at pp.226-227 and cf. Act, s.6(1)). It is not necessary for present purposes however to explore the outer limits of the area covered by that ordinary meaning of the term. Its traditional and narrower denotation still lies at the centre of that meaning and is adequate for present purposes. That denotation is of goods held by a trader in such goods for sale or exchange in the ordinary course of his trade. When used in relation to "a business", as the term is used in the Act generally (see s.28) and in s.82D(1) in particular, that central meaning comprehends the goods held on hand in the business for the purpose of sale or exchange in the ordinary course of trade. The fact that particular goods may not have been paid for or may not be owned by the trader does not preclude their being trading stock on hand in relation to his business if, notwithstanding lack of payment or ownership, they are legitimately held in the possession of the trader as or as part of the body of stock to be sold or exchanged in the ordinary course of the trade of that business.

5. On the findings of the learned trial judge, the relevant vehicles were, at the commencement of the tax year, in the possession and at the risk of the taxpayer pursuant to a "floor plan agreement" with G.M.A.C. Title had not however passed to the taxpayer and, under the terms of the floor plan agreement, would not pass until what was in fact the wholesale purchase price payable by the taxpayer, though included in what was described as a "Hiring Amount", was paid by Suttons Motors on the taxpayer's behalf. It is unnecessary for present purposes to investigate the effect of the fact that it appears to have been the settled practice that that payment would not be made by Suttons Motors until the day following a sale of the particular vehicle to a retail customer with the result that Suttons Motors would appear to have purported to pass title to the vehicle before it had obtained title from the taxpayer. Whatever may have been the rights (e.g., by reason of the doctrine of estoppel, the provisions of the Sale of Goods Act 1923 (N.S.W.), s.26 or the provisions of the Factors (Mercantile Agents) Act 1923 (N.S.W.), s.5) of such a retail customer in relation to the particular vehicle in the event of some subsequent dispute, the position between the taxpayer and those with whom it dealt would appear to have been that the taxpayer purchased and obtained title to the vehicle when the "Hiring Amount" was paid and immediately resold the vehicle to Suttons Motors at the price at which it had purchased it, but on the basis that Suttons Motors would discharge the taxpayer's liability for sales tax. The arrangements between the Suttons Motors Group and G.M.H. involved the payment by Suttons Motors of what may loosely be described as a "delivery" fee and of a "charge" in respect of the period between the time when a particular vehicle came into the possession of the taxpayer and the time when it was purchased by the taxpayer from G.M.H. for resale to Suttons Motors. Tadgell J. correctly commented that this "charge" represented, in "practical terms", "interest" on the amount outlaid by G.M.A.C. in effectively financing the acquisition of the particular vehicle during the period between delivery to the taxpayer and ultimate purchase by the taxpayer at the time when a retail sale was made by Suttons Motors. The Suttons Group's liability to pay this "charge" and the settled course of dealing combined to produce a situation where, as a matter of commercial substance as distinct from strict legal obligation, the taxpayer was effectively committed to the ultimate purchase of the particular vehicle from the time it took delivery unless it either ceased to carry on business or was relieved of that practical commercial obligation by some other arrangement within the Suttons Group. The evidence was that no vehicle delivered to the taxpayer was ever in fact returned to G.M.H. by reason of a decision by the taxpayer not to purchase it.

6. The Commissioner's primary argument is that the relevant vehicles could not be stock in trade for the purposes of s.82D(1) because the taxpayer had not, at the commencement of the year of income, made any payment in relation to them and was not, at that time, either the owner of them or under any legally enforceable obligation to buy them. We are unable to accept that argument. The relevant vehicles were, at the commencement of the tax year, plainly in the possession and at the risk of the Suttons Group. They were held by the Group for the purpose, and only for the purpose, of being offered for sale in the ordinary course of the composite business which that Group, looked at as a whole, carried on. They represented the stock which the Group held to offer for sale and to sell in the course of that overall business and which it had become entitled to, and commercially though not legally obliged to, purchase from G.M.H. at G.M.H.'s wholesale price at the time it took delivery. If the Group's overall business from the original acquisition of possession of vehicles under the floor plan arrangement to the ultimate retail sale of them to the public be viewed as a composite whole, it appears to us that the relevant motor vehicles were, at the commencement of the tax year, the trading stock on hand in relation to that business within the traditional and central meaning of the term "trading stock". In the courts below it would appear not to have been seriously disputed that the taxpayer had been carrying on business as a wholesaler and that the relevant vehicles had been held in the possession of the taxpayer to sell to Suttons Motors in the ordinary course of that wholesale business. On that approach, it was but a short and obvious step to divide the composite business of the Suttons Group into its component "wholesale" and "retail" businesses and to conclude that the motor vehicles were, for the purposes of s.82D(1), trading stock which the taxpayer held, at the commencement of the tax year, in relation to its wholesale business.

7. The Commissioner's argument in this Court took a new turn in that particular emphasis was placed on the limited scope of the particular functions performed by the taxpayer in the Suttons Group. It was submitted that the taxpayer was not at the relevant time in possession of the motor vehicles at all but that they were in the possession of the retailer, Suttons Motors. Indeed, according to the argument, the taxpayer was carrying on no business at all. It was only engaged in "the shuffling of paper". That being so, the relevant vehicles could not properly be seen as being trading stock which the taxpayer had on hand in relation to its business and in respect of which it was entitled to a deduction pursuant to s.82D(1). In our view, however, this attempt to isolate the taxpayer from the overall business of the Suttons Group and thereby deprive the taxpayer both of possession of the relevant vehicles and of any business at all fails at every point.

8. The transcript makes clear that the case was conducted on behalf of the Commissioner at first instance on the basis that the vehicles acquired by the taxpayer from G.M.H. were, from the time of acquisition to the time when a retail sale of a particular vehicle was made by Suttons Motors, held in the possession of the taxpayer. The issues were defined by counsel and cross-examination proceeded on that basis. It was (and still is) common ground "that the vehicles were delivered" by G.M.H. under the floor plan agreement between G.M.A.C. and the taxpayer. It was not suggested that the arrangements under which the vehicles were purchased by the taxpayer from G.M.H. and sold by the taxpayer to Suttons Motors were a sham or that the taxpayer did not in fact purchase and sell the vehicles. In these circumstances, it was inevitable that the learned trial judge would find, as he did, that, during the period between delivery to and sale by the Suttons Group, the relevant vehicles were in the possession of the taxpayer as bailee pending purchase and resale. His Honour's finding to that effect was not challenged in the detailed grounds set out in the notice of appeal to the Federal Court and each member of that Court proceeded on the expressed basis that, at the commencement of the tax year, the relevant vehicles were in the "possession" of the taxpayer. It would be quite wrong for this Court either to reverse that finding of the learned trial judge or decline to accept or act upon it. That being so, it is unnecessary to consider whether, even if the taxpayer had not been in possession of the relevant vehicles, they would have constituted trading stock on hand in relation to its business if they were properly to be seen as held available to be sold in the ordinary course of the taxpayer's business under the course of dealing between the taxpayer and G.M.H.

9. The submission that the taxpayer carried on no relevant business at all has a degree of superficial plausibility. The taxpayer, so it was said, had no staff, no bank account, no premises, no stationery, no "competitive activities" and no "intention to pursue nor did it pursue profit or gain" on its own behalf: its "only profit" in the tax year was a payment of $500.00 which it received from Suttons Motors "for services rendered in providing motor vehicles at short notice and in consideration of financial expenses saved as a result of the wholesale facility provided". Upon analysis, however, the argument involves no more than the proposition that the taxpayer's activities in purchasing from G.M.H. wholesale and selling to Suttons Motors vehicles of a value of millions of dollars (approximately $3.8m.) each year could not have been a "business" by reason of the facts that it was carried on through agents who were not its employees and that it was not primarily carried on for the purpose of profit to the taxpayer itself but as part of the overall business activities of the Suttons Group which were directed towards producing profits for Suttons Motors which was the taxpayer's holding company. It may be thought that this proposition comes somewhat unexpectedly from the Commissioner since its implications in other cases involving a member of a Group of Companies could be large indeed. Be that as it may however, the proposition is untenable in the circumstances of the present case where it would be unreal to isolate the taxpayer's activities of acquiring vehicles from G.M.H. and selling them to Suttons Motors from the context of the overall business of the Suttons Group. It is plain that the Group was, at the commencement of the tax year, carrying on a composite business including, among other things, the wholesale purchase and resale of the vehicles by the taxpayer and the purchase and retail resale of the vehicles by Suttons Motors. The wholesale component of that business was carried on by the taxpayer and that component did not lose its commercial or business character either by reason of the fact that it was carried on by the taxpayer through agents or by reason of the fact that the taxpayer, while operating at a small cash surplus (the $500 fee), did not pursue profit to itself as distinct from overall profit to the Group of which it was a member. At the commencement of the tax year, the taxpayer was carrying on a business and the relevant vehicles were in the process of being acquired by the taxpayer from G.M.H. and were held on hand in the possession of the taxpayer so as to be immediately available to be sold at any time in the ordinary course of that business. They were, at the commencement of the tax year, stock in trade held by the taxpayer on hand in relation to that business. It follows that the taxpayer was entitled to a deduction pursuant to s.82D(1) of "an amount equal to the prescribed percentage of the value" of those vehicles.

10. It should be mentioned that the Commissioner sought to limit the operation of s.82D(1) by reference to a claimed inter-relation between ss.28-31, 51(2) and 82D of the Act. We are not persuaded that any relevant limitation of the operation of s.82D(1) can properly be derived from the inter-relation between those or any of those sections. In particular and in the context of the apparently deliberate use of different language in the various sections, we are unable to discern anything in the Act which would warrant the conclusion that goods cannot be within the words "trading stock on hand in relation to the business" for the purposes of s.82D(1) unless they have been acquired by "(e)xpenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock" within s.51(2). It is true that there is an at least superficial element of anomaly in the taxpayer's entitlement to a s.82D(1) deduction in the circumstances of the present case. The Commissioner did not however seek to rely upon any provision of the Act dealing with tax avoidance. Moreover, an apparent element of anomaly can be discerned in many cases which would unquestionably have come within s.82D(1). Indeed, the availability of a deduction under s.51(2) contributed to, rather than avoided, an at least superficial element of anomaly in a s.82D(1) deduction being available in the common case where stock was valued at cost, was purchased with borrowed funds and was turned over during the year. In such a case, the trader would not have been required to invest more of his own funds in the business and the increased market or replacement value would, to the extent that it was reflected in assessable income, have already been reflected in the s.51(2) deduction for expenditure incurred on purchases and the associated deduction in respect of the "cost" of the borrowed funds.

11. There remains to be considered one further argument advanced on behalf of the Commissioner. By reason of the provisions of s.82B(5) of the Act, the "value" of the relevant vehicles cannot, for the purposes of s.82D(1), exceed their "cost price". It was submitted that, at the commencement of the tax year, the taxpayer had neither paid nor incurred a binding legal obligation to pay any cost price for the vehicles. That being the case, so it was said, the cost price of the relevant vehicles was nil. The simple answer to that submission is that the "cost price" of the vehicles was what was in truth the wholesale purchase price described as a "Hiring Amount" under the floor plan agreement which the taxpayer had agreed to pay on the purchase which would, as a matter of commercial reality, take place in due course.

12. The appeal should be dismissed.

BRENNAN J.: The question in this case is not whether motor vehicles can be "trading stock on hand" for the purposes of s.82D of the Income Tax Assessment Act 1936 (Cth) as amended at 30 June 1977 ("the Act"). Clearly they can: see the definitions of trading stock in ss.6(1) and 82B(1). The question is whether motor vehicles can satisfy that description on a particular date if a taxpayer then has no greater interest in them than the interest of a bailee in possession with an option to purchase. In my opinion the answer is, No.

2. The phrase "trading stock on hand" is common to s.28 and s.82D of the Act. By s.28(1) the value of all trading stock on hand at the beginning of the income year and the value of all trading stock on hand at the end of the income year are taken into account in ascertaining whether the taxpayer has a taxable income. An excess in the value at the end of an income year over the value at the beginning of the income year is assessable income (s.28(2)); a deficiency in the value at the end as against the value at the beginning is an allowable deduction (s.28(3)). The effect of s.82D(1), broadly stated, is to allow the deduction of a prescribed percentage of the value of any trading stock on hand at the commencement of a year of income. Essential to the notion of trading stock of a taxpayer on hand at a relevant date is the availability of the stock at that date to be traded by the taxpayer, that is, its availability to be sold or otherwise disposed of for value by him: cf. Farnsworth v. Federal Commissioner of Taxation (1949) 78 CLR 504, at pp 515,518. If, at a relevant date, a taxpayer owns stock and the stock is physically available to be sold by the taxpayer or otherwise disposed of for value by him, it may be trading stock on hand. A taxpayer does not have trading stock on hand unless he has such a proprietary interest in the stock as to enable him to transfer title to or property in the stock to a buyer or other disponee. If a taxpayer has no such proprietary interest in stock at a particular date, he cannot then sell or otherwise dispose of that stock - unless he has a power of sale over it. But there is no fiscal or commercial justification for adding to a taxpayer's assessable income an increase in value of another person's property, or allowing a taxpayer a deduction for a decrease in value of another person's property, merely because the taxpayer has a power of sale over that property. Nor is there any such justification for allowing a taxpayer a deduction being a percentage of the value of another person's property over which the taxpayer has a power of sale at the relevant date. I do not think that either s.28 or s.82D is intended to operate so as to affect the taxable income of one who has only a power of sale over stock owned by another.

3. In Benjamin Smith and Son v. Commissioners of Inland Revenue (1928) 139 LT 97, at p 99, Lord Sumner said in reference to a provision relating to "trading stock in hand" on a prescribed date:

" It can hardly be doubted that shippers, whose trading stock included grain, which they had sold and had to deliver, could claim to treat it as part of their stock in hand, when the property was still vested in them and the grain was still at their disposition pending the actual taking up of the shipping documents. If so, the same grain could not at the same time be also the trading stock in hand of the appellants, to whom it did not yet belong, and to whom the right of present disposition had not yet passed, whatever the future intentions of the parties might be in the matter, unless either double relief was to be obtained by two taxpayers on the same grain or two different and mutually exclusive tests of 'trading stock in hand' were to be within the meaning of the Act."

(Cf. Edward Collins &Sons,Ltd. v. The Commissioners of Inland Revenue (1924) 12 TC 773, at p 780).

4. If the time of the transfer of ownership determines when stock ceases to be the trading stock on hand of one trader and becomes the trading stock on hand of another, the vehicles owned by GMAC were not trading stock on hand of the taxpayer at the commencement of its income year. On the relevant date, the taxpayer had no proprietary interest in any of the vehicles. Indeed, the creation of such an interest would have been incompatible with the floor plan agreement which provided that until the hiring amount and other moneys owing in respect of a vehicle were paid to GMAC the vehicle remained the exclusive property of GMAC (cl.15). The taxpayer was entitled at any time during the hiring of a vehicle to terminate the hiring by returning the vehicle to GMAC (cl.14). Although the taxpayer had an option to purchase each vehicle, until the option in respect of a vehicle was exercised the taxpayer had no proprietary interest in it. The manner in which the taxpayer and the retail company carried on their respective businesses hardly acknowledged the legal realities of ownership of the vehicles which were sold to retail customers, but it was common ground that the legal relationship between the taxpayer and GMAC was governed by the floor plan agreement, the terms of which alone governed the transfer to the taxpayer of ownership of the vehicles which the retail company sold to retail customers. The taxpayer's option to purchase no doubt allowed it to treat the vehicles as though it was able to sell them because it was able to acquire title to the vehicles by payment of the hiring amount and other moneys owing to GMAC. The title acquired by the taxpayer on payment of these amounts fed the on-sales made by it to the retail company and by the retail company to the retail customers.

5. At the relevant date, however, all that the taxpayer had on hand were options to purchase a number of vehicles. Those options are not claimed to be its trading stock and, in any event, options are choses in action which are excluded from the definition of trading stock for the purposes of s.82D (see par.(e) of the particular definition of trading stock in s.82B(1)). It is not to the point that the taxpayer dealt with the vehicles as though it had such a proprietary interest in them when, in truth, it did not. Nor is it to the point that commercial or accountancy practice would treat the taxpayer as the owner of the vehicles which were in its possession at any time and would treat GMAC as entitled to the hiring amount and other moneys referred to in cl.15 of the floor plan agreement. Such a practice simply shuts its eyes to the legal reality on which the application of s.82D depends and erroneously advances to the commencement of the income year an event, namely, the passing of title in exchange for payment which was expected to occur, and always did occur, at the time of retail sale.

6. At the commencement of the taxpayer's year of income it did not have on hand such a proprietary interest in the vehicles as made them available for sale or disposition by it; it had options to acquire such an interest in the respective vehicles but it did not acquire that interest until the option was exercised. In my opinion, the vehicles were not, at the commencement of its income year, trading stock on hand of the taxpayer. I would allow the appeal, set aside the judgment of the Full Court of the Federal Court and of the Supreme Court of Victoria and restore the Commissioner's assessment.

Orders

Appeal dismissed with costs.