Resch v Federal Commissioner of Taxation
66 CLR 198(Judgment by: Dixon J) Court:
Judges:
Rich J
Starke J
Dixon JMcTiernan J
Judgment date: 4 February 1942
Sydney
Judgment by:
Dixon J
We ought, I think, to hold that all the particular provisions upon which reliance is placed, and to which I have referred, have a sufficient connection with and relevance to the substantial subject upon which tax is imposed by the Income Tax Act 1930. They are in fact attempts to ensure that where income or profit has been earned or wealth increased, those whom it advantages shall at some point or other incur a proper measure of liability to tax on that account, or, in other words, that they shall not escape the consequent aggregation of taxable income. The distinction between profits of a capital nature and profits in the nature of income in the strict sense is not one which the Act maintains. Nor is it a discrimination which the legislature is bound to regard. Indeed, in the United States, under the 16th Amendment which speaks of "income," the term is considered to include all profits whether on account of capital or on account of income in the strict sense. In United States v Stewart [F46] Douglas J. says: " `Income' is a generic term amply broad to include capital gains for purposes of income tax," citing Merchants' Loan & Trust Co v Smietanka [F47] . On the other hand, a distribution of stock dividends in consequence of the capitalization of profits is considered to be a transaction in relation to capital and therefore outside the constitutional power (Eisner v Macomber [F48] ). The Commonwealth enactment proceeds somewhat differently; it treats the appropriation of income in order to effect the capitalization as the occasion of taxing the shareholder: See James v Federal Commissioner of Taxation [F49] and Nicholas v Commissioner of Taxes (Vict.) [F50] . In requiring the inclusion of the paid-up value of shares distributed by a company representing the capitalization of profits s. 16 (b) (ii) does not appear to me to introduce a new subject of taxation. The subject is profits and the occasion is the appropriation of the profits to be used for the advantage of the shareholder.
In bringing into tax the premium obtained by the lessor on the grant of a lease, the legislature is doing no more than treating it as a form of gain, as in truth it is. The manner in which such premiums have been treated as between life tenant and remainderman illustrates the necessity of some specific provision declaring how for purposes of income tax they shall be dealt with: See Executor Trustee & Agency Co of S.A. Ltd v Federal Commissioner of Taxation [F51] , at pp. 35, 38, 39, 41, 42; Lane v Loughnan [F52] ; Begg v Brown [F53] ; Re Stevens; Stevens v Drysdale [F54] . Without going beyond the subject of profits or gains, it is open for the legislature to say that such a premium should be included as a lump sum in the assessment of the year in which it was received. The consideration obtained by a lessee on the assignment of a lease may represent a profit or gain. Doubtless any lump-sum consideration he gave for the lease should be allowed as a deduction. But the subject of the tax is not changed by reason of the manner in which the legislature has in fact treated the deduction, that is to say, instead of allowing it always in the year in which the consideration for the sale of the lease is obtained, providing for the allowance of an apportioned part of so much as has not been allowed in some prior year of income.
The provision in s. 16 (h) requiring the inclusion of the value of stock-in-trade or of live stock sold as part of the assets of a business was introduced for the purpose of overcoming the effect of such decisions as Commissioner of Taxation (W.A.) v Newman [F55] ; New South Wales Land and Agency Co Ltd v Commissioner of Taxation [F56] -cf. De Grey River Pastoral Co Ltd v Deputy Federal Commissioner of Taxation (W.A.) [F57] . This means that the legislature regarded the stock-in-trade or live stock as containing an unrealized profit converted into money upon the sale of the business, and accordingly directed how that profit should be ascertained and brought into account as part of the assessable income. Sir John Salmond so regarded such a transaction (Anson v Commissioner of Taxes [F58] ) and by adopting this view the legislature clearly did not introduce what would ordinarily be considered another subject of taxation. Section 16B naturally falls into line with the general conception of the Act. It is directed against the consequences of Inland Revenue Commissioners v Burrell [F59] . The subject taxed is profits, the occasion is the liberation of the profits to the shareholder in the course of liquidation. The provisions dealt with in Cornell's Case [F60] , the British Imperial Oil Cases [F61] , and the Colonial Gas Case [F62] , are directed against possible means of avoiding tax by misrepresenting real profits or of escaping its collection, and, as the decisions of the Court show, they do not relate to any different subject of taxation.
For these reasons I am of opinion that the attack upon the validity of the Income Tax Assessment Act 1930 on the ground that it contravenes s. 55 of the Constitution must fail.
Upon the footing that the Act might be upheld, the appellant relied on another ground for invalidating the assessment in so far as it includes the distribution of profit in the course of liquidation, namely, that it was out of time. In the first assessment made upon the appellant for the financial year ended 30th June 1931, in respect of the year of income ended 30th June 1930, the Commissioner did not include this distribution or any part of it. He included it afterwards by an amended assessment. Notice of the original assessment dated 15th April 1931 was sent by post to the appellant and was delivered on 16th April 1931. It bore a statement: "This tax may be paid without fine up to 17th June 1931." Section 54 (1) of the Income Tax Assessment Act 1922-1930 provides that income tax shall be due and payable sixty days after service by post of a notice of assessment. Service by post is defined by s. 29 of the Acts Interpretation Act 1901-1930, and, under that definition, sixty days would begin from 16th April 1931. I take it that the first day would be excluded and the last included, so that tax would become payable on 15th June 1931, that is if it were not for the time named in the assessment. But s. 55 (a) empowers the Commissioner to extend the time for payment as he considers the circumstances warrant. Probably in naming 17th June 1931 as the time upon which tax would become payable without penalty, the Commissioner was actuated by the desire to fix a specific time more than sixty days after the probable date of delivery of the assessment by the post, so that there would be a time certain, known to both him and the taxpayer, for the payment of the tax.
Under s. 37 (1A) a limitation of time is imposed upon the power of the Commissioner to amend an assessment. The limitation, so far as material to this case, requires that an alteration in or addition to an assessment shall be made within three years from the date when the tax payable on the assessment was originally due and payable. The power of the Commissioner under s. 37 (1) to amend an assessment is subject to a proviso that every alteration or addition which has the effect of imposing any fresh liability or increasing any existing liability shall be notified to the taxpayer affected. The amendment by which the distribution in the winding up was included in the appellant's assessment may have been made before 15th June 1934, but it was not until that date that the Commissioner of Taxation caused notice of that amendment to be posted to the appellant. The notice of amended assessment was dated 15th June 1934, and was received through the post on 16th June 1934. The appellant objects that the three years within which the Commissioner might exercise his power of alteration expired before the amendment was in fact made. He contends that the amendment was not "made" until he was notified, and that the three years ran, not from 17th June 1931, the date mentioned in the notice of assessment, but from 15th June 1931, sixty days from the receipt of the original assessment. I am not prepared to decide that the alteration or addition constituting the amendment was not "made" within the meaning of s. 37 on 15th June 1934 when the notice of amended assessment was made out and signed, notification being a distinct and subsequent act. But however that may be, I think the tax was originally due and payable on, and not before, 17th June 1931, the date named by the Commissioner. It appears to me that he exercised the power given to him by s. 55 of extending the time for payment as he considered the circumstances warranted it. That power resided in him at the time when he made the original assessment, and there is nothing in the section to support the view that his power arises only after an assessment has been made and served by post. The desire to fix a day so as to obtain complete certainty is a reason which is not foreign to the discretion given to the Commissioner by s. 55. I am therefore of opinion that the amended assessment was made within due time.
Two questions remain as to the correctness of the assessment in point of amount. Section 16B makes taxable only so much of the distribution as represents income derived by the company which would have been assessable in the hands of the shareholders if distributed to them by a company not in liquidation. Among the profits which the Commissioner has included is an amount which the taxpayer contends forms part of the profits accumulated by the company prior to 1st July 1914. The second proviso of s. 16 (b) (i) enacts that where a company distributes to its members or shareholders any undistributed income accumulated prior to 1st July 1914, the sum so received by the member or shareholder shall not be included as part of his income. Accordingly the question arises whether the Commissioner has in fact included such an amount. Profits earned prior to 30th June 1920 and accumulated amounted to PD515,058, of which the amount accumulated prior to 1st July 1914 and at credit on 30th June 1914 was PD139,272. But on 14th February 1923 the company resolved to capitalize out of its accumulated profits, excluding any part of the assessable income which it was liable to include in its return for the purpose of its then current assessment, the sum of PD450,000. The exclusion was no doubt made by reason of s. 16 (b) (ii) of the Income Tax Assessment Act 1922, upon which was decided Federal Commissioner of Taxation v Hyland [F63] . The result was to capitalize PD450,000 out of the PD515,058, leaving PD65,058. As the capitalization effected by the resolution did not discriminate, at all events expressly, between profits accumulated prior to 1st July 1914 and those accumulated subsequently, the Commissioner, for the purpose of ascertaining what part of the former profits remained, treated each and every pound of the PD515,058 as contributing its ratable part of the PD450,000. In other words he treated 450,000/515,058 of the PD139,272 accumulated prior to 1st July 1914, or PD121,680, as the amount of those profits that had been capitalized. Deducting this PD121,680 from the PD139,272 there is left PD17,592, and that sum the Commissioner regarded as the part of the profits accumulated prior to 1st July 1914 still remaining in the possession of the company at the commencement of the winding up and so distributable in the liquidation without imposing liability to tax upon the shareholder.
The appellant now contends that the Commissioner was wrong in treating the capitalization as made ratably out of the accumulated profits to which the resolution expressly related. The appellant maintains that a process of appropriation or attribution should be gone through by which that part of the PD515,058 composed of the profits last to be earned is treated as capitalized first. The result on the figures would be that, before reaching the profits accumulated prior to 1st July 1914, PD375,786 would be supplied by the accumulations of the intervening years, leaving only PD74,214 to be found out of the profits accumulated prior to 1st July 1914, in order to make up PD450,000. On this mode of attribution or appropriation PD65,058 (that is, the difference between PD139,272 and PD74,214), representing profits accumulated prior to 1st July 1914, would remain in the hands of the company at the commencement of the winding up.
The appellant claims that there is a principle or presumption of law governing in revenue matters the allocation or attribution of payments. It is said that if a payment by a taxpayer out of a particular fund or part of a fund would operate in reduction or relief of the taxpayer's liability to taxation or of that of a shareholder in the company, then, in the absence of some express appropriation of the debit to the contrary or of some inconsistent intention, the taxpayer or company is to be presumed to have applied his funds in that manner. Reliance is placed by the appellant on the decision in Symon's Case [F64] . In that case the Court was dealing with a provision exempting gifts for certain purposes if made "out of" the assessable income derived during the year in which the gifts were made. The practical application of such a provision is obviously fraught with difficulties. In dealing with these difficulties, the majority of the Court found some assistance in certain decisions on a provision of the English income-tax Acts relating to taxation of interests, annuities and other annual payments at the source. They work out the application of a statutory direction to the effect that if and in so far as payment of tax is made by a taxpayer "out of the profits or gains brought into charge" he is entitled to retain for his own benefit the deduction on account of tax which he is authorized to make from payments of interest, annuity or other annual payments. I do not think the decision in Symon's Case [F65] establishes the wide general principle or presumption of law for which the appellant in the present case contends, and in this view I am supported by the decision of the Court of Appeal in Inland Revenue Commissioners v Crawshay [F66] , which has been decided since Symon's Case [F67] . The resolution of the directors under consideration for the capitalization of profits presents, in my opinion, a very ordinary example of an appropriation of a smaller sum out of a larger without regard to the source or sources whence the larger fund was derived. The company regarded its accumulated profits as an entire fund and did not concern itself with what may have been considered a mere matter of history, namely, the different years in which various amounts of profit had been earned and accumulated. The intention was to treat the fund as an entirety and not as an aggregation of separate funds. The liquidation of the company made it necessary to inquire to what degree the accumulations up to 1st July 1914 were exhausted. But until this happened there was no reason why the fund should be considered otherwise than as a single whole, and clearly the resolution of the directors so regarded it. In such a case the fund must be considered as ratably reduced. The smaller sum must be taken to have absorbed so much in the pound of every ingredient by which the fund was made up. Of this there are many examples in the law. The rule has been applied in relation to the discharge of guaranteed debts: Cf. Ellis v Emmanuel [F68] ; Re D. (a Lunatic Patient) [No. 2] [F69] , at pp. 485, 486; Blackstone Bank v Hill [F70] . It has been applied in revenue cases both in relation to the payment of share capital and in other connections: See Commissioner of Stamp Duties (N.S.W.) v Perpetual Trustee Co Ltd [F71] , where it was said: "When a single payment is made on account of a total sum composed of several liabilities and there is no appropriation, it must be taken to reduce them ratably"; W. & A. McArthur Ltd v Federal Commissioner of Taxation [F72] , at p. 20, per Starke J.-Cf. Douglass v Federal Commissioner of Taxation [F73] , at pp. 105, 106. In my opinion the Commissioner's method of allocation was correct.
This view gives rise to a further question. The balance-sheet of the company for the year of earning ended 30th June 1914 showed a balance of profits of PD73,543, of which the due proportion retained by the company on the Commissioner's method of ratable attribution would be PD9,289. The Commissioner did not treat this sum of PD9,289 as falling within the proviso of s. 16 (b) (i). He regarded the sum as not forming undistributed income accumulated prior to 1st July 1914. The balance-sheet, of course, could not be made up before 1st July 1914, and the extent of the profits was therefore not ascertained on that date, although it might have been anticipated or assumed. No definite step was taken or resolved upon amounting to accumulation. All that could be said was that profits actually existed, although not ascertained or dealt with. The second proviso to s. 16 (b) (i) goes on to state that for its purpose, amounts carried forward by a company in its profit and loss account appropriation account revenue and expenses account or any other account similar to any of the foregoing accounts shall not be deemed to be accumulated income. This makes it clear that accumulation is treated as something more than a mere failure to distribute. In my opinion it is impossible to say that the sum of which PD9,289 forms a part was accumulated prior to 1st July 1914. Reliance was, however, placed by the appellant upon the decision of this Court in Forrest v Federal Commissioner of Taxation [F74] . How far that case is consistent with Hooper & Harrison Ltd (in Liquidation) v Federal Commissioner of Taxation [F75] and Sharp, Stevenson & Hare Pty Ltd v Federal Commissioner of Taxation [F76] may be doubted. But at all events the decision is distinguishable upon the ground that there the Court was concerned with a specific capital profit made by a single definite transaction and not with an unascertained balance of a profit and loss or trading account. In my opinion it does not govern the present case.
[Portion of this judgment not reproduced].