Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation [1971] HCA 17; (1971) 124 CLR 97 (21 May 1971)

HIGH COURT OF AUSTRALIA

AVONDALE MOTORS (PARTS) PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1971] HCA 17; (1971) 124 CLR 97

Income Tax (Cth)

High Court of Australia

Gibbs J.(1)

CATCHWORDS

Income Tax (Cth) - Allowable deductions - Losses of previous years - Losses by a company - Same business - Whether carrying on same business at all material times - Carrying on business - Income Tax Assessment Act 1936-1968 (Cth), s. 80E.

HEARING

Melbourne, 1971, May 13, 14;

Sydney, 1971, May 21. 21:5:1971

APPEAL under s. 187 of the Income Tax Assessment Act 1936-1968 (Cth).

DECISION

May 21.

GIBBS J. delivered the following written judgment:-

This appeal is brought by Avondale Motors (Parts) Pty. Ltd. ("the taxpayer") 30th June 1968. The taxpayer, in its return of income for that year, disclosed a net profit of $11,527, but claimed to deduct losses sustained in previous years and claimed that, in consequence, it had gained no taxable income in the year in question. The Commissioner, in his assessment, has disallowed the claim for losses in prior years and has assessed the taxpayer to tax on an income of $11,527. (at p98)

2. The taxpayer is a company which at all material times before 1st April 1968 was called C. & G. Parts Pty. Ltd. For some time before the year 1966 the taxpayer and a related company, C. & G. Motors Pty. Ltd., had been wholly owned subsidiaries of Automobile & General Industries Ltd. ("Autogen"). C. & G. Motors Pty. Ltd. carried on the business of selling and servicing motor vehicles from showrooms in a'Beckett Street, Melbourne and Nepean Highway, Moorabbin and from a service station at Yarra Bank Road, South Melbourne. That Company had franchises for Peugot, Renault, Studebaker, Citroen, Aston Martin, N.S.U. and Mazda cars and Diamond T. trucks, and sold and serviced vehicles of those descriptions, but it also sold used cars of other makes and serviced cars of any make. The taxpayer sold motor parts and accessories to C. & G. Motors Pty. Ltd., to other motor dealers and traders and to the general public. Its stock-in-trade included some parts that were for use only in the vehicles the subject of the franchises (the sales of these parts constituted about three-quarters of the taxpayer's sales) and some parts that could be used in other types of motor vehicles as well. It operated from the premises of C. & G. Motors Pty. Ltd. at a'Beckett Street, Nepean Highway and Yarra Bank Road and also from a storeroom at Heidelberg where the vehicles for which C. & G. Motors Pty. Ltd. held franchises were assembled. (at p99)

3. Both the taxpayer and C. & G. Motors Pty. Ltd. experienced financial difficulties and, in consequence, in 1966, they began to dispose of their assets and to reduce the scale of their business activities. By the end of June 1967 all the four premises at which the taxpayer carried on its business had had been closed and the taxpayer had paid off all its employees. By July 1967 at the latest, the taxpayer had disposed of all of its stock and it then had no plant and its only office equipment comprised some stationery. It still owed and was owed debts and between July 1967 and 29th February 1968 its only activities involved the collection of its accounts and the payment of its debts. After 1st July 1967 those activities were carried on from the premises of Autogen at 35 City Road, South Melbourne and by the staff of Autogen. (at p99)

4. By 29th February 1968 the collection and payment of debts had proceeded to such an extent that all moneys owing by the taxpayer, except a debt of $89,260.14 to Autogen, had been paid and there remained owing to the taxpayer four debts totalling $10,681.12 in amount. On that date the taxpayer and Autogen entered into an agreement in writing and bearing the seals of both companies by which the taxpayer assigned to Autogen the four debts totalling $10,681.12 and Autogen released the taxpayer from the debt of $98,260.14 which it was declared was the only liability of the taxpayer. A formal assignment of the four book debts was executed by the taxpayer in favour of Autogen on the same day. No formal authority was given by the board of Autogen to enter into the agreement of 29th February 1968 or to forgive the debt until 24th April 1968, when a resolution was passed confirming the agreement and the forgiveness of the debt and approving the affixation of the seal to the documents executed on 29th January 1968. However this irregularity in the internal affairs of Autogen did not affect the substance of the transaction. (at p99)

5. On 15th March 1968 Autogen entered into an agreement with Avondale Motors Pty. Ltd. whereby it agreed to sell to Avondale Motors Pty. Ltd. all the issued shares in C. & G. Motors Pty. Ltd. and in the taxpayer. On the same day a meeting of directors of the taxpayer was held; it was resolved that the transfer of shares pursuant to the agreement should be ratified, that the resignations of the existing directors and of the secretary should be accepted, that new directors and a new secretary should be appointed and that the name of the taxpayer should be changed to Avondale Motors (Parts) Pty. Ltd. The change of name was not formally effected until 1st April 1968. (at p100)

6. Before 15th March 1968, Avondale Motors Pty. Ltd., and companies connected with it, had carried on at Hampton and Dandenong a business of selling and servicing motor cars, and a connected business of selling motor car parts and accessories. The group had franchises for Volkswagen, Karmann Ghia, Audi, Rover and Landrover, but it sold used cars of other makes, and serviced cars of any make. After the 15th March 1968 this business of selling and servicing motor cars was carried on by C. & G. Motors Pty. Ltd., whose name was changed to Avondale Motors Pty. Ltd., and the associated business of selling parts and accessories, which had formerly been conducted by one of the companies in the Avondale group, was continued by the taxpayer, under its new name of Avondale Motors (Parts) Pty. Ltd. The taxpayer occupied a section of both premises, at Hampton and Dandenong, which were also used as showrooms for selling motor vehicles, and in the course of its business sold motor parts and accessories to Avondale Motors Pty. Ltd., to other garages and motor repairers and to individual members of the public. I have already said that before 15th March 1968 the taxpayer had paid off its employees and sold all its stock-in-trade; at that date, when it commenced to carry on business under the new control, it acquired the stock-in-trade of the Avondale company whose place it took and employed persons, some at least of whom had previously worked for that Avondale company, and none of whom had previously worked for the taxpayer. After 15th March 1968 the taxpayer in the course of its trade obtained goods from a number of firms which had also been suppliers to it of goods before the change; this is hardly surprising, since most of these firms were in the business of supplying parts and accessories to dealers in those items. Further, some of the customers of the taxpayer after 15th March 1968 had also been customers before that date; they seem to have been firms and institutions that were likely to trade with more than one dealer in motor vehicle parts, and perhaps in some cases the fact that the premises at Hampton were only about two and one-half miles from those at Moorabbin may have had something to do with the matter, but in any case, there is no evidence that any of these customers dealt with the taxpayer after 15th March 1968 by reason of any business association with it before that date. (at p101)

7. It was frankly conceded by counsel for the taxpayer that the purchase by Avondale Motors Pty. Ltd. of the shares in the taxpayer was prompted solely by the desire to obtain the benefit for taxation purposes of the losses incurred by the taxpayer, which the parties agreed totalled $102,189. (at p101)

8. By s. 80 (2) of the Income Tax Assessment Act 1936-1968 (Cth) ("the Act"), which was in force during the year of income, so much of the losses incurred by a taxpayer in any of the seven years next preceding the year of income as has not been allowed as a deduction from his income in any of those years is allowable as a deduction in accordance with the following provisions of the section to which it is not necessary to refer. However, if the taxpayer is a company, a loss incurred in a year before the year of income is not to be taken into account for the purposes of s. 80, unless the company satisfies one of two requirements. The first of these requirements, stated briefly, is that, at all times during the year of income, shares in the company carrying between them the right to exercise at least forty per cent of the voting power in the company, and the right to receive at least forty per cent of any dividends that may be paid, and of any distribution of capital in the event of the winding up or of a reduction in capital of the company, were beneficially owed by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds (s. 80A), or, if the company is a subsidiary, that at all times during the year of income the holding company had a controlling interest in the subsidiary and shares in the holding company carrying between them the rights already described were beneficially owned by persons who, at all times during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holding company carrying rights of those kinds (s. 80C). It is common ground that this requirement is not satisfied in the present case. The alternative requirement, which must be fulfilled by the taxpayer, if it is to succeed in this appeal, is that provided by s. 80E (1) which reads as follows:

"(1) Subject to the next succeeding sub-section, where -

(a) the whole or a part of a loss incurred by a taxpayer, being

a company, in a year before the year of income would not,

but for this section, by reason of section eighty A of this

Act (including that section as affected by the last preceding

section) or section eighty C of this Act, be taken into

account for the purposes of section eighty or section

eighty AA of this Act;

(b) the whole of the loss would, but for a change that has

taken place in the beneficial ownership of shares in the

company or in a company that had a controlling interest

in the company, have been so taken into account;

(c) the first-mentioned company carried on at all times during

the year of income the same business as it carried on

immediately before the change took place; and

(d) the first-mentioned company did not, at any time during

the year of income, derive income from a business of a

kind that it did not carry on, or from a transaction of a

kind that it had not entered into in the course of its

business operations, before the change took place,

section eighty A or section eighty C of this Act, as the case may

be, does not operate to prevent the whole of the loss being so

taken into account."

Subsection (2) of s. 80E is not material. (at p102)

9. It is conceded in the present case that the provisions of pars. (a) and (b) of s. 80E (1) are satisfied and that par. (d) will not prove an obstacle to the taxpayer's success if it answers the test set out in par. (c). The whole question in the case, therefore, is whether the taxpayer within the meaning of s. 80E (1) (c), "carried on at all times during the year of income the same business as it carried on immediately before the change took place", that is, immediately before 15th March 1968. In the circumstances of the present case this involves two subsidiary questions, one whether immediately before 15th March 1968 the taxpayer carried on any business and, if so, whether it was the same business as it carried on at all times during the year of income. (at p102)

10. During the period from 29th February 1968 to 15th March 1968 the company had no liabilities, and with the exception of the stationery, no assets. It had no employees and no premises of its own. It earned no income and incurred no liabilities. It had no trade in stock and entered into no contracts. In these circumstances the Commissioner submits that immediately before 15th March 1968 the taxpayer was not carrying on any business. In reply to this submission the taxpayer relies on the rule, established in bankruptcy cases, that a trader who has put up his shutters and has, in fact, ceased to trade is regarded as continuing to carry on business until all trade debts have been paid and all sums due have been collected: Theophile v. Solicitor-General (1950) AC 186 ; In re Bird v. Inland Revenue Commissioners ; Ex parte The Debtor (1962) 1 WLR 686 . It has been held that this rule does not extend beyond the field of bankruptcy and into that of taxation law (Tryka Ltd. v. Newall (1963) 41 TC 146, at p 158 ) but although I am doubtful whether the principle can be applied for the purpose of holding that a company was carrying on business within the meaning of s. 80E of the Act I need not decide that question. In the present case, by 29th February 1968 all the trade debts of the taxpayer had been discharged and the taxpayer had assigned its right to any moneys that had been owing to it. Assuming that the rule affirmed in Theophile v. Solicitor-General (1950) AC 186 is not confined to bankruptcy cases the facts calling for its application in the present case do not exist. (at p103)

11. It is further submitted on behalf of the taxpayer that, quite apart from the rather artificial rule to which I have just referred, it should be held that it was still carrying on business after 2.th February 1968 notwithstanding its inactivity after that date. It is said that those controlling the taxpayer had no intention of putting it into liquidation and that on the contrary it was obviously their intention that it should again engage in business of a similar kind, after its shares had been sold to a purchaser who wished to benefit by its accrued losses. To say this, however, clearly does not mean that the taxpayer was still carrying on business. There are cases in which it has been held that a company does not cease to carry on business notwithstanding that its activities are reduced to a minimum or indeed are almost entirely suspended. In South Behar Railway Co. Ltd. v. Inland Revenue Commissioners (1925) AC 476, at p 488 Lord Sumner said: "Business is not confined to being busy; in many businesses long intervals of inactivity occur." In some cases the very nature of the business is such that its conduct may require little activity, e.g. the business, considered in Inland Revenue Commissioners v. Korean Syndicate Ltd. (1921) 3 KB 258 , of acquiring a concession and turning it to financial benefit. However the business of a dealer in motor parts and accessories is not one that can be conducted with mere passivity. In other cases it has been held that a company continues to carry on business notwithstanding a suspension of activity due to causes beyond its control, e.g., where a steamship company had lost its only ship and was in the course of building another (Merchiston Steamship Co. Ltd. v. Turner (1910) 5 TC 520 ) or where a company which was endeavouring to get business could obtain no contracts because of the conditions then prevailing (Kirk and Randall Ltd. v. Dunn (1924) 8 TC 663 ). The facts in Federal Commissioner of Taxation v. Broken Hill South Ltd. [1941] HCA 33; (1941) 65 CLR 150 provide another example of a reduction of activity resulting from circumstances beyond the control of the company, although the question actually decided in that case was different from that which now arises. In the present case the taxpayer's activity had ceased completely. The cessation of activity was not due to the nature of the business which the taxpayer carried on, or to some temporary adversity which the taxpayer intended to endeavour to overcome; it was due to a decision to discontinue the business previously carried on because it had been unprofitable and there was no intention to resume the conduct of that business. The plain fact of the matter is that the taxpayer was not carrying on any business immediately before 15th March 1968. It follows that the provisions of s. 80E (1) (c) are not satisfied. (at p104)

12. Even if I am wrong in thinking that the taxpayer ceased to carry on business before 15th March 1968, and if it be assumed that immediately before that date the taxpayer was still carrying on its former business of dealer in motor parts and accessories, the attempt to invoke the aid of s. 80E (1) must still fail, because it has not been established that the business carried on immediately before 15th March 1968 was the same as that carried on after that date. If s. 80E (1) (c) requires that the business carried on throughout the whole of the year of income should be identical with that carried on immediately before the change in ownership of the shares, i.e., that it should be the same business rather than the same kind of business, it is clear that the taxpayer cannot meet that test. Before 15th March 1968 the taxpayer carried on the business of dealer in motor parts and accessories at three different premises in conjunction with a motor dealer having franchises for certain vehicles. After that date it carried on the same kind of business but under a different name, at different places, with different directors and employees, with different stock and plant and in conjunction with a motor dealer having different franchises. The question whether a company has commenced a new business or has continued an old business under different conditions is simply one of fact. In some circumstances a company may expand or contract its activities, it may close an old shop and open a new one, without starting a new business, but the only conclusion that can be drawn from all the circumstances of the present case is that the business of the taxpayer after 15th March 1968 was different from that which it carried on before that date. However, the taxpayer submits that s. 80E (1) (c) does not require that the business carried on during the year of income should be identical with that carried on immediately before the change referred to in that paragraph. It is submitted that the word "same" in that paragraph means "similar" or "analogous" and not "identical", and that it is enough that the businesses are similar in their nature. There is no doubt that the word "same" is capable of meaning "similar" or "of like kind", as the authorities, as well as the dictionaries, show (Swift v. Swift (1863) 32 LJ Ch 479 at p 481 ; Kingsbury v. Martin (1901) 1 SR (NSW) (L) 272 ). According to the Oxford English Dictionary, "same as" usually expresses identity of kind and "same that" absolute identity, except in contracted sentences where "same as" alone is found. The taxpayer accordingly submits that in s. 80E (1) (c) the phrase, in its natural and grammatical meaning, refers merely to identity of kind and that if it is not used in this sense it adds nothing to the words of the subsection, since if it had been intended to require absolute identity that could have been achieved by omitting the words "same" and "as", and by simply using the expression "the business it carried on". (at p105)

13. The meaning of the phrase "same as", like that of any other ambiguous expression, depends on the context in which it appears. In my opinion in the context of the section the words "same as" import identity and not merely similarity and this is so even though the legislature might have expressed the same meaning by a different form of words. It seems to me natural to read the section as referring to the same business, in the sense of the identical business, and this view is supported by a consideration of the purposes of the section. The relevant sections of the Act show an intention on the part of the legislature to impose, in the case of companies, a special restriction on the ordinary right of a taxpayer to treat losses incurred in previous years as a deduction from income. The company cannot take the losses into account if there has been a change in the beneficial ownership, of its shares or of the shares in the company of which it is a subsidiary, of the kind mentioned in s. 80A or s. 80C. This restriction is imposed to prevent persons from profiting by the acquisition of control of a company for the sole purpose of claiming its accrued losses as a tax deduction. However the restriction if imposed absolutely would lead to injustice in cases where a company, notwithstanding substantial changes in the ownership of its shares, continued to carry on the same business. No injustice would, in my opinion, result from a refusal to treat an accrued loss as a tax deduction where the company after the change carried on a different business, although one of a similar kind. In such a case, as a general rule, there would have been no business reason for the purchase of the shares, but only the wish to obtain the right to claim another's losses as a deduction from one's own income. To allow the accrued losses to be claimed as deductions in a case where shares in a company had been acquired, not for the purpose of carrying on any existing business of the company, but simply for the purpose of "buying" its accrued losses, would be to reward an obvious device for no intelligible reason. I conclude that s. 80E (1) (c) requires that the business carried on at all times during the year of income should be the same business; mere similarity of kind is not enough. (at p106)

14. I do not agree with the submission made on behalf of the taxpayer that the construction which I prefer gives no effect to the provisions of s. 80E (1) (d). Paragraph (c) requires that the business should be the same before and after the change in shareholding; par. (d) goes further and deals with the case where the same business is carried on but in addition the company derives income from a business of a different kind or from a transaction of a kind in which it had not previously engaged. An example might be a case in which the company before the change carried on the business of motor dealer and after the change continued to carry on the same business but carried on in addition the business of grocer. The provisions of par. (d) seem to me to support the view at which I have arrived rather than to be opposed to it; pars. (c) and (d) together show that the legislature intended that where there has been the specified change in the beneficial shareholding of a company the accrued losses can only be treated as deductions if the company after the change was carrying on the same business that it carried on before and no other business. It does not, of course, follow that a business will not be the same because there have been some changes in the way in which it is carried on; some cases under s. 80E may give rise to questions of degree which do not arise in the present case. (at p106)

15. For the reasons I have given, I hold that the taxpayer did not carry on at all times during the year of income the same business as it carried on immediately before the change in beneficial shareholding that occurred on 15th March 1968. It follows that the claim to deduct the losses accrued before that date was rightly disallowed. (at p106)

16. I dismiss the appeal. (at p106)

ORDER

Appeal dismissed with costs. Usual order as to exhibits.

Authorities Cited2

Referred to (2)