Ranson v Federal Commissioner of Taxation

[1973] HCA 18

HIGH COURT OF AUSTRALIA

. Mason J.

RANSON v. FEDERAL COMMISSIONER OF TAXATION.

(1973) 128 CLR 659

30 May 1973

Income Tax (Cth)

Income Tax (Cth)—Deductions—Double deductions—Deductible payments on mining shares acquired for profit-making by sale—Deductions limited so that total amount of tax reduction through deductions does not exceed amount paid on shares—Method of calculating reduction in tax payable—Income Tax Assessment Act 1936-1969 (Cth), ss. 52, 77A, 77C, 82(4).

Decision

May 30.
MASON J. delivered the following written judgement:- <406590 This appeal by the taxpayer from a decision of a Board of Review raises a question as to the application of s. 82(4) of the Income Tax Assessment Act 1936-1969 in circumstances in which the taxpayer in the year of income ended 30th June 1969 acquired and sold shares on which in the same year he paid moneys which were allowable deductions under ss. 77A and 77C. (at p660)

2. The taxpayer earned a net income of $4,586, a figure which is arrived at after deducting from his assessable income all allowable deductions (including the sum of $8,373 in respect of amounts paid on shares under ss. 77A and 77C and a loss on the sale of shares, but excluding any adjustment provided for by s. 82(4)). Of the amount of $8,373 the sum of $4,373 was expended in paying application moneys and calls on shares acquired for the purpose of profit-making by sale within the meaning of s. 26(a). (at p660)

3. In the year of income these shares were acquired at a total cost of $6,998 and sold for the total sum of $6,001, thereby giving rise to a loss of $997. The taxpayer in his return in calculating the loss on sale which he claimed as an additional deduction took into account the expenditure of $4,373, notwithstanding that it formed part of the deductions allowable under ss. 77A and 77C. In assessing the taxpayer to tax, the Commissioner did not give him the benefit of the whole of the expenditure of $4,373 in calculating the loss made on the sale of the shares, relying on the provisions of s. 82(4). The basis of calculation then adopted by the Commissioner need not be explained because it was disapproved by the Board of Review and it is not now urged that it should be followed. The Board of Review directed that the taxpayer's taxable income should be reduced by an amount of $204 and the assessment amended accordingly. Although the Board found the Commissioner's method of calculation of the deduction permitted by s. 82(4) to be erroneous, it did not accept the method of calculation proposed on behalf of the taxpayer. The question is whether the taxpayer's approach or that accepted by the Board to the application of s. 82(4) is to be preferred. (at p661)

4. Section 82 is a provision which according to the marginal note relates to "double deductions". The purpose of s. 82(4) is to limit the extent to which an expenditure on property giving rise to an allowable deduction may again be taken into account in arriving at the profit or loss on the sale of the property for the purpose of calculating the taxpayer's assessable (or taxable) income. The effect of sub-ss. (1), (2) and (3) was considered by Stephen J. in A.C. Williams v. Commissioner of Taxation (1972) 128 CLR 645, at pp 650-652 , and I need not repeat what his Honour then said. In this case it is common ground that sub-s. (4) applies. It provides that where expenditure incurred in connexion with property is allowable as a deduction under certain provisions of the Act (including ss. 77A and 77C), that expenditure may be deducted in arriving at the amount of any profit or loss made on the sale of that property only to the extent to which the deduction thereby made does not result in the tax payable in the year of income in which the deduction is made being reduced by an amount greater than the difference between (a) the amount of that expenditure; and (b) the amount, or sum of the amounts, by which tax payable by the taxpayer for the year of income and previous years of income will be or has been reduced by the first-mentioned deduction. (at p661)

5. No difficulty arises in the application of the sub-section when the expenditure in connexion with property is an allowable deduction in a year of income before that in which the property is sold. Then it is an easy task to ascertain what the taxpayer's liability to tax would have been in the earlier year of income had the deduction not been allowed and to calculate the amount of the tax saving (which is the amount referred to in s. 82(4) (b)). Once this amount is ascertained the maximum tax saving to be obtained by taking into account the expenditure in calculating profit or loss on the sale of the property is readily obtained by calculating the difference between the amount of the expenditure allowed or allowable in the earlier year of income and the amount of the tax saving thereby made. (at p662)

6. But when the expenditure in connexion with the property gives rise to an allowable deduction and the sale of the property takes place in the same year of income a difficulty arises in calculating the amount referred to in s. 82(4) (b) if differential rates of income tax are to be applied, for it is impossible to ascertain that amount without adopting a method which enables the calculation of the expenditure to be taken into account in ascertaining the profit or loss on the property sold. (at p662)

7. For the taxpayer, Mr. Connolly submits that the amount referred to in s. 82(4) (b) is to be ascertained by ignoring the limitation introduced by s. 82(4) and assuming that the full amount of the expenditure allowed under ss. 77A and 77C is taken into account in arriving at the loss on sale of the property. In the circumstances of this case the figure is calculated by adding to the income of $4,586 the full amount of the expenditure incurred in acquisition which is otherwise allowable, that is, $4,373, making a total of $8,959 on which the tax payable is $2,935.90 and deducting from it the tax payable on an income of $4,586, which is $983.93, producing a figure of $1,951.97. On this view the permissible tax reduction permitted by s. 82(4) is $2,421.03 which is greater than the tax reduction permitted if the allowable expenditure is fully brought to account in determining the loss on sale, that is, $1,951.97, the tax difference between incomes of $8,959 and $4,586 respectively. (at p662)

8. For the Commissioner, Mr. Pincus submits that in applying the provisions of sub-s. (4) the limitation imposed by the sub-section must be taken into account. To give effect to this limitation the maximum tax saving permitted by the sub-section is to be ascertained by adding to the net income of $4,586 the total of the allowable deductions under ss. 77A and 77C, together with the full amount of the expenditure incurred in acquiring the property to the extent that it was allowed as a deduction under those sections, namely, $8,746, producing a total of $13,332, calculating the tax payable thereon ($5,406) and ascertaining the amount of taxable income referable to a reduction in tax of $4,373. The resulting figure is a taxable income of $4,720 on which the tax payable is $1,033. The reduction in the taxable income is thus $8,612. As it is known that the total of the ss. 77A and 77C deduction is $4,373, the amount permitted by s. 82(4) (which I shall call "the property deduction") in arriving at the figure of loss is $4,239. On this view the expenditure claimed in arriving at the figure of loss exceeds by $134 the expenditure on the shares which is allowable under ss. 77A and 77C. (at p663)

9. In my view the method of calculation adopted by the Board is to be preferred as the one which will more accurately reflect the limitation which is imposed by s. 82(4). In essence the problem is one of ascertaining the individual amounts of tax savings attributable to two separate deductions in the year of income, the ss. 77A and 77C deduction and the property deduction, when the quantity of one may affect the quantity of the other. The method adopted by the Board enables a value to be given to each deduction and a calculation to be made of the reduction in tax referable to each deduction. It achieves this result by taking into account the limitation imposed by sub-s. (4) on the amount of the property deduction. In so doing it conforms to the language of the sub-section which requires the ascertainment of the "sum of the amounts ... by which tax payable ... will be ... reduced by reason of" the ss. 77A and 77C deductions. Moreover, it accords to s. 82(4) the common sense and practical purpose of preventing a taxpayer from securing by reason of the separate deductions a total saving in tax which is greater than the amount of the expenditure allowable as a deduction. (at p663)

10. Criticisms are made of this approach to the problem but in my view they are not of importance. First, it is suggested that the method does not ascertain a value for item (b). This seems to me not to be quite accurate for a value can be found for (b) although it emerges after, and not before, ascertainment of the final figure for taxable income. To this extent the method of ascertaining the statutory limitation does not involve a subtraction of the kind which, it is said, is required by the form in which the sub-section is expressed. But in my view the sub-section provides a formula for the ascertainment of the limitation; it does not specify a procedure to be followed. Consequently, so long as the limitation is ascertained in accordance with the formula, that is enough. (at p663)

11. Next, it is argued that by adding to the taxable income the sum of the two deductions (the ss. 77A and 77C deduction and the full amount of the allowed expenditure) the Board of Review calculated a tax reduction referable to the ss. 77A and 77C deduction which was altogether excessive. All that should be added back, so it is said, is the amount of the deduction itself. Admittedly this is the procedure which is ordinarily adopted when one is concerned to discover the amount of tax saving attributable to a particular deduction, but it is not a procedure which is designed to reflect with accuracy the tax reduction attributable to a deduction when one is required, as the statute requires in this case, to ascertain the amount of tax reduction which is attributable to each of two or more deductions made in the same year of income. Then, as it seems to me, it is necessary to distribute between the two deductions the total amount of the tax reduction achieved by their joint inclusion in the assessment of income. True it is that the method does not involve in the first instance the calculation of the tax reduction referable to the ss. 77A and 77C deduction, but, as I have said, this is in conformity with sub-s. (4). To adopt the approach proposed by the taxpayer in calculating the tax saving attributable to each of two or more deductions is to arrive at figures which to my mind are less than the true tax savings referable to each because in aggregate they will amount to substantially less than the total savings achieved by the joint inclusion of all the particular deductions in the calculation of the net income. (at p664)

12. On the other hand, the method of calculation proposed by the taxpayer is open to serious criticism. First, in the calculation which it makes it ignores the s. 82(4) limitation; it proceeds on the footing that this limitation is to be disregarded. Yet there is no warrant in the language for such a departure. What s. 82(4) (b) requires is the ascertainment of the amount by which the tax payable "will be reduced". It does not state that the amount referred to in (b) is the amount by which tax would be reduced if s. 82(4) had not been enacted. There is not sufficient justification for departing from the language of the sub-section; such a departure could be justified only in the event that the provision could not operate according to its normal and ordinary meaning. (at p664)

13. Secondly, the taxpayer's construction does not ascribe to the provision a discernible policy or purpose. It would permit a taxpayer paying tax at a high rate to obtain from his deductions a tax saving greater in amount than the amount of the expenditure which he incurred - a curious consequence in the case of a provision whose purpose is to limit the tax savings referable to double deductions. (at p664)

14. In the result, therefore, I am of opinion that the Board of Review was correct and that the appeal should be dismissed. (at p665)

Orders

Appeal dismissed. Confirm that the amended assessment
dated 12th October 1970 be further amended as
directed by the Board of Review. Appellant to pay
the respondent's costs of the appeal.
Usual order as to exhibits.