K Porter & Co Pty Ltd v Commissioner of Taxation (Cth)

High Court of Australia Stephen, Murphy and Jacobs JJ K Porter & Co Pty Ltd v Commissioner of Taxation (Cth)

Stephen and Murphy JJ

This is a contest between taxpayer and Commissioner concerning the deductibility of the taxpayer company's past losses. The appellant taxpayer seeks to have deducted from its assessable income for the two years ended 30 June 1967 and 1968 its losses of past years. The Commissioner relies upon s 80B(5) of the Income Tax Assessment Act as it stood until amended in 1973 in order to deny it entitlement to those deductions.

The story begins in 1966. The taxpayer was then a small family company; its issued capital of only £2 was represented by two £1 shares held respectively by Mr Porter and his wife; its business was that of carpentry and joinery and it had acquired this business from Mr Porter on its incorporation in 1961.

It had incurred losses in each of the three financial years preceding 30 June 1966; by 1965 it had become insolvent. Mr Drever, its accountant, was also a member of a firm of accountants which its creditors had engaged to undertake an examination of its financial position. It so happened that in 1966 Mr Drever was independently engaged in negotiations with another accountant, Mr McMullen, concerning the sale to the latter of what in this field are known, sometimes optimistically, as tax loss companies. On behalf of the Porters, Drever suggested to McMullen that he should also make an offer to "buy" the taxpayer as a tax loss company.

This led to the receipt by Drever in May 1966 of a written offer from McMullen, in what was apparently McMullen's standard form of offer for tax loss companies. That form of offer, inherently imprecise, was in this case also factually inappropriate; it wrongly assumed the taxpayer to be subject to some scheme of arrangement with its creditors and at the same time to possess an official manager. However the gist of the offer was clear enough: the "structure" of the taxpayer was to be bought for $550 provided its tax losses were not less than $11,000; 60% of its share capital was to be held by the purchaser, who would nominate new directors and a secretary; the taxpayer's creditors were to assign its indebtedness to the purchaser in return for the prospect of entitlement to share in the distribution of the $550 after Crown and preferential creditors had been satisfied.