TAXATION income tax: TAXPAYER DERIVING INCOME FROM MORE THAN ONE BUSINESS: MEANING OF ‘BUSINESS’ IN THIS CONTEXT: WHETHER EMPLOYEE IS CARRYING ON ‘BUSINESS’
INCOME TAX ASSESSMENT ACT 1922 s 13: INCOME TAX ASSESSMENT ACT 1915 ss 3, 21
The Commissioner of Taxation has forwarded the following case for opinion:
I refer to your memorandum No. 138 of 1926 dated 16th July 1926 covering Crown Solicitor’s opinion in the appeal of A.B. against his Income Tax assessment for the financial year 1924–25.
The Crown Solicitor expresses the opinion that Mr. Owen Dixon K.C. has correctly interpreted the definition of ‘business’ in the Income Tax Assessment Act 1922–1925 by including within the terms of the definition the case of Mr. B.
Mr. B., during the relevant income year, derived income from personal exertion by way of salaries from Benjamin Nathan and from Burton Brewing Company. In these occupations Mr. B. was actually managing and assisting in the management of a number of businesses in the ordinary sense. Mr. B. was therefore an employee of Benjamin Nathan and the Burton Brewing Company.
In the opinion of Mr. Owen Dixon K.C., and the Crown Solicitor, Mr. B. was carrying on a business within the meaning of the definition of ‘business’ in the Income Tax Assessment Act 1922–1925.
Since the receipt, on the 29th March 1917, of your advising No. 47/7/H(1) , the Department has been treating such cases as Mr. B.’s as not being businesses. In the opinion mentioned, you advised in the antepenultimate paragraph thereof as follows:
The definition of a business is very wide, but I do not think that ‘employment’ in that definition means employment as an employee. The word ‘employment’ should be read as ‘ejusdem generis’ with the other terms in the definition, as signifying the position not of an employee but of one who employs himself in a way that produces him profits. (See judgment of Denman J. in Partridge v. Nullandaine 18 C.P.D. 27).(2)
In my opinion, a person who is the employee of another person is not entitled to deduct from his salary losses incurred in a business carried on by him.
By section 3, ‘business’ includes any profession, trade, employment, vocation or calling. I do not think that a person who merely lives on the interest from investments or on rents from property is engaged in a business. The words in the definition imply some active employment or actual labour by which a person makes profits.
On 18.3.19 Mr. Justice Pring in the Supreme Court of New South Wales dealt with the appeal Teece v. Deputy Commissioner of Taxation in re Income Tax.(3)
His Honor is reported in the ‘Sydney Morning Herald’ of 19.3.19 as delivering judgment in the following terms:
Where a man invested his surplus earnings in house property, which he let for profit, he could not understand how that could be said to be carrying on a business of the kind defined by the Act. Nor did he think that the appellant’s employment with the A.M.P. Society came within the words of the definition clause which referred to a profession, trade, employment, vocation or calling, exercised for the purpose of making profit.
This judgment agrees with your advising of March 1917.
I am unable to reconcile your opinion and the judgment quoted above with the views now expressed by Mr. Dixon K.C. and the Crown Solicitor, and apparently not dissented from by you, and I should be glad if the subject could receive your further consideration. If the latest opinion of the Crown Solicitor correctly states the law, it would appear that both of the views quoted above from your advising in 1917, and the judgment of Mr. Justice Pring, may need some modification. It is observed that the judgment of Denman J, in Partridge v. Nullandaine is quoted in your opinion of 1917 and Mr. Dixon’s opinion of 1926 in support of opposing views.
I desire to mention that if the Department is to disregard the Supreme Court judgment quoted above, and to act upon the interpretation now advised in the Crown Solicitor’s opinion, it would appear to be difficult, successfully, to resist a claim for assessment at personal exertion rates in respect of income derived from rents of city properties by an owner who himself collects the rents, arranges tenancies, decides upon and supervises all repairs and alterations of buildings and pays all expenses in connection with the properties. There are in Melbourne cases in which rent producing properties are owned and managed by Companies, partnerships and individuals.
Company ownership is not relevant, as the Company’s income is not classified by the Act. Irrespective of the nature of the Australian origin, a Company’s income is taxed at the flat rate of 1/- in the £1.
The partnership and individual owners have been treated as deriving income from property. This course was taken in view of paragraph 3 as quoted above of your opinion dated 29.3.1917. Very extensive modifications of Departmental practice must follow if the opinions of Mr. Dixon and the Crown Solicitor are adopted, and widespread upheaval in two or three past years’ assessments may be forced upon the Department by political agitation instigated by persons who may have been assessed at property rates in those years instead of at personal exertion rates.
Mr. B.’s claim for an amended assessment can only be granted by recognition of his contention that he is engaged in a business the proceeds of which are assessable to him at personal exertion rate because the definition of ‘income from personal exertion’ includes the proceeds of any business carried on by the taxpayer. Such an admission by the Department would apparently have the widespread effects indicated above.
In view of the importance and urgency of this question I should be glad to have your early advice as to the correct interpretation of the law, as it may possibly be necessary to amend the law to place the question beyond doubt.
I do not think that the view expressed by Mr. Owen Dixon K.C. in the case and concurred in by the Crown Solicitor is necessarily inconsistent with the view which I expressed in my opinion of 29th March 1917.
My opinion of 29th March 1917 dealt with section 21 of the Income Tax Assessment Act 1915–1916 which provides that:
Where a taxpayer either alone or with other persons carries on or is interested as a partner in more than one business the income (if any) from which would be taxable, and makes a profit in one or more of such businesses, and a loss in another or others, the taxpayer shall be entitled to deduct the sum of the losses from the sum of the profits.
It will be observed that the section speaks of a taxpayer carrying on more than one business, and making profit in one and a loss in another. For the purpose of this section, the definition of ‘business’ which is contained in section 3 of that Act, if applied at all, must be given a narrow interpretation, and as excluding, so far as the word ‘employment’ is concerned, employment for salary or wages. A person so employed cannot be said to be making a profit or loss in carrying on a business.
The case upon which Mr. Owen Dixon has advised is a case which turns on the meaning of the expression ‘carrying on business’ in section 13 of the Income Tax Assessment Act 1922–1925. That section deals, inter alia, with the introduction and operation of the averaging system for the purpose of ascertaining the rate to be applied to the taxpayer’s income. For the purpose of ensuring that the introduction of the system should be fair to the taxpayer, while properly safeguarding the revenue, Parliament has enacted that certain years in which the taxpayer was or was not carrying on business shall or shall not, as the case may be, be capable of being a first average year. I see no reason why, for the purpose of this section, a wide interpretation should not be given to the meaning of the word ‘business’ by treating that word as including employment for salary or wages, as well as employment by a taxpayer in business on his own account.
I am therefore of opinion that there is nothing inconsistent in the opinion recently expressed by Mr. Owen Dixon and concurred in by the Crown Solicitor, and that previously expressed by me.
Nor do I think that it follows that, if Mr. Dixon’s opinion is accepted, the Department would be compelled to assess at personal exertion rates a taxpayer who derived income from rents of city properties and himself collected the rents arranged tenancies, etc. For the definition of ‘income from personal exertion’ specifically excludes rents and dividends.
I do not agree with the statement in the case for opinion that Mr. Dixon and I have quoted the judgment of Denman J., in Partridge v. Nullandaine, in support of opposing views. It is true that we both quote it, but for different purposes. Mr. Dixon quotes it in support of his view that ‘calling’ in the Commonwealth Act is analogous to or synonymous with ‘vocation’, both these words being used in the Commonwealth Act, whereas only the word ‘vocation’ is used in the English Income Tax Act, under which the case was decided. I quote it in support of my view of the meaning of the word ‘employment’. Thus, although we both quote it, we do so in relation to different expressions and for different purposes.
[Vol. 23, p. 73]
(1) Opinion [Vol. 15, p. 113] not published.
(2) (1886) LR 18 QBD 276 at 277–278.
(3) Unreported judgment.