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Esquire Nominees Ltd. (Trustee of Manolas Trust) v. Federal Commissioner of Taxation.

Judges:
Gibbs J

Court:
High Court

Judgment date: Judgment handed down 31 May 1972.

Gibbs J.: This is an appeal under sec. 187(b) of the Income Tax Assessment Act 1936 (as amended) (``the Act'') against an assessment made by a Deputy Commissioner of Taxation of the tax payable by Esquire Nominees Limited (``the appellant''), as trustee of Manolas Trust, on income derived during the year ended 30 June 1969. No return of income was lodged by the appellant as such trustee and the Deputy Commissioner made a default assessment by which he treated as taxable an amount of $30,910 received as a dividend during the year of income. The assessment purported to be made under sec. 99 of the Act on the footing that the amount of $30,910 was the net income of a trust estate to which no beneficiary was presently entitled.

It is not disputed that on 30 April 1969 the appellant, as trustee under a deed of settlement dated 24 April 1969 which set up a trust described as ``Manolas Trust'', received $30,910.57, the amount of a dividend declared by another company, Mitchell Credits Limited, on one fully paid B class share of $0.01 which the appellant held in that company. Under the deed of settlement no beneficiary was presently entitled to the income represented by the amount of the dividend. Both the appellant and Mitchell Credits Limited were incorporated in Norfolk Island. The question for decision is whether the appellant was rightly assessed to tax on this income.

The appellant had been formed as a company in Norfolk Island in 1967. Its registered office was on Norfolk Island. At all material times it had three directors, Messrs. McIntyre, Paton and Lamb, all of whom were residents of Norfolk Island. Its articles provided for the division of the share capital into A class and B class shares. The A class shares, which were preference shares, conferred on the holders thereof, inter alia,

ATC 4079

the right to exercise all the voting power of the company except that the B class shareholders were entitled to vote in respect of the following matters -
  • (i) The declaration of a dividend other than the 10 per cent preference dividend to which the A class shares were entitled;
  • (ii) Any resolution for the sale of the undertaking of the company;
  • (iii) Any resolution for the winding up of the company;
  • (iv) Any resolution for the reduction of the capital of the company or of any capital redemption reserve fund or of any share premium account involving a distribution of capital.

At all material times, seven A class shares had been issued; six were held by persons resident in Norfolk Island (namely, Messrs. McIntyre, Paton and Lamb, Mesdames Paton and Lamb and Miss Ionn) and one by a company (Myee Limited) which was incorporated in Norfolk Island and of which Messrs. McIntyre and Paton were the directors. Seven B class shares also had been issued; these were held by W.B. & H. Nominees Pty. Limited, a company which was incorporated in Victoria and which (like W.B. & H. (N.T.) Nominees Pty. Limited and W.B.B. & C. Nominees (N.T.) Pty. Limited to which I shall later refer) operated under the control or influence of a firm of accountants, Messrs. Wilson, Bishop, Bowes and Craig (formerly known as Wilson, Bishop and Henderson). (There were in fact two related firms of the same name, one in Melbourne and one in Darwin, but this detail does not concern us.) All meetings of the shareholders and all meetings of directors of the appellant have been held in Norfolk Island.

Before and during the year of income a company known as Manolas Pharmacy Pty. Limited, which was incorporated in the Northern Territory, carried on business in Australia. During the year of income the ordinary shares in that company were held by, or on trust for, members of the Manolas family and there were in addition twenty-five redeemable preference shares which were held by another company, Mitchell Holdings Pty. Limited, which was also incorporated in the Northern Territory. Until immediately before 28 April 1969, the shareholding in the latter company comprised fifty-one redeemable preference shares held by Forum Holdings Limited and forty-nine ordinary shares held by W.B. & H. (N.T.) Nominees Pty. Limited and it now appears, in the light of the decision in
F.C. of T. v. Casuarina Pty. Limited 71 ATC 4068; (1971) 45 A.L.J.R. 213, that Mitchell Holdings Pty. Limited was a public company for the purposes of Div. 7 of Part III of the Act. However, the decision of Windeyer J. in
Casuarina Pty. Limited v. F.C. of T. 70 ATC 4069; (1970) 44 A.L.J.R. 299, which the Full Court affirmed, was not given until 25 August 1970 and before that date the status of companies in the position of Casuarina Pty. Limited was a matter of contention. Early in 1969 Messrs. Wilson, Bishop, Bowes and Craig, who were advisers to the Manolas family, formed the belief that the Deputy Commissioner would assess Mitchell Holdings Pty. Limited as a private company, as indeed the Deputy Commissioner did on 11 April 1969. If that assessment had withstood challenge, the result would have been that Mitchell Holdings Pty. Limited would have been liable for Div. 7 tax unless it had made a sufficient distribution before 30 April 1969, but if it had made a distribution, the shareholders would have been liable to tax on the dividends they received. The accountants discussed with Mr. Kerry George Manolas, who appears to have been an influential member of the family, whether they should rely on a challenge to the assessment being successful or take other action to escape from the dilemma in which they would find themselves if the challenge should fail, and it was decided to adopt the latter alternative.

In consequence of this decision Mr. Sheehan, an accountant employed by Messrs. Wilson, Bishop, Bowes and Craig, visited Norfolk Island for the purpose of having discussions with Mr. McIntyre, who carried on practice there as a solicitor, with a view to the implementation of the plan which the Manolas family had decided to adopt. Mr. Dowding, another agent of Messrs. Wilson, Bishop, Bowes and Craig, also

ATC 4080

visited the Island to assist in carrying out the plan. Mr. McIntyre, in giving his evidence, would not agree that the directors of the appellant, and of the other companies which I shall shortly mention, were simply told by Mr. Sheehan what to do, and objected to the suggestion that the appellant was controlled by Messrs. Wilson, Bishop, Bowes and Craig, although he agreed that the board did take considerable heed of the recommendations made by that firm. If it matters, there is however no doubt that all the events I am about to recount occurred in the course of carrying out a plan previously evolved by the advisers of the Manolas family with the object of finding a way of escape from a liability to tax which it was thought (wrongly as it happened) would one way or the other be attracted if things were allowed to remain as they were.

The first steps to effectuate the plan were taken on 24 April 1969. On that date a deed of settlement was made between one Savas Kiossoglou as settlor and the appellant as trustee. The deed was executed on Norfolk Island and was signed by Mr. Dowding as the attorney of the settlor. The sum settled was $10, but the trust fund, which was to be held by the appellant under the trusts of the deed, comprised not only the settled sum but also, inter alia, all moneys, investments and property paid or transferred to, and accepted by, the appellant as additions to the trust fund. The trusts declared were in favour of various members of the Manolas family, but under the provisions of the deed no beneficiary was presently entitled to the income of the trust fund which was received by the appellant as trustee during the income year in question.

On the same day, the directors of the appellant resolved that the appellant would accept the office of trustee in respect of the Manolas Trust and would open a separate bank account in respect of that trust. In fact an account, known as Account No. 19, was opened with the Norfolk Island Branch of the Commonwealth Trading Bank of Australia for the purposes of the Manolas Trust. The directors further resolved that the appellant would accept from Mr. Dowding a loan of $100 at call and free of interest for six months. It is clear enough from the evidence that the purpose of obtaining this loan was to enable the appellant to take up shares, and accept options in respect of unallotted share capital, in two new companies, Mitchell Credits Limited and Pharmaceutical Investments Limited, which were incorporated in Norfolk Island on 24 April 1969; each of these companies had its registered office on Norfolk Island and had a shareholding divided into A class and B class shares with respective voting rights similar to those attached to the two classes of shares in the appellant company. Messrs. McIntyre and Paton were appointed as directors of each of these companies. The directors of the appellant resolved to make from Account No. 19 an advance of $10 at call and free of interest to Mitchell Credits Limited; this advance was accepted by Mitchell Credits Limited on 28 April 1969.

On 25 April 1969 the following further things were done:

  • (1) Mitchell Credits Limited allotted one A class share in that company each to Messrs. McIntyre, Paton and Lamb, Mesdames Paton and Lamb, Miss Ionn and Myee Limited.
  • (2) Pharmaceutical Investments Limited allotted one A class share in that company to each of the same seven persons.
  • (3) Mitchell Credits Limited allotted one B class share in that company to ``Esquire Nominees Limited Account No. 19''.
  • (4) The appellant advised Mitchell Credits Limited by letter that it was willing to assist that company with loan funds, subject, inter alia, to the condition that an option be granted over the unissued capital of Mitchell Credits Limited for a period of ten years, and Mitchell Credits Limited for a consideration of $10 granted to ``Esquire Nominees Limited Account No. 19'' the option at any time until 30 June 1979 to have allotted to it at par all or some of eighty-five unissued A class shares and 999,897 unissued B class shares. (Eight A class and two B class shares left unaccounted for were on 1 May 1969

    ATC 4081

    alloted to another Norfolk Island company, Esquiline Limited.)
  • (5) Pharmaceutical Investments Limited allotted six B class shares in that company to Mitchell Credits Limited.
  • (6) The appellant advised Pharmaceutical Investments Limited by letter that it was willing to assist that company with loan funds, subject, inter alia, to the condition that an option be granted over the unissued A class shares in Pharmaceutical Investments Limited for a period of ten years, and Pharmaceutical Investments Limited for a consideration of $10 granted to ``Esquire Nominees Limited Account No. 19'' the option at any time until 30 June 1979 to have allotted to it at par all or any of the unissued A class shares in that company.
  • (7) The appellant executed a declaration of trust by which it acknowledged that the option over the unissued capital of Mitchell Credits Limited was beneficially owned by W.B.B. & C. Nominees (N.T.) Pty. Limited.
  • (8) Each of the seven holders of the A class shares in Pharmaceutical Investments Limited executed a declaration of trust by which it was declared that each such share was held by the shareholder as nominee and in trust for Mitchell Credits Limited.
  • (9) Mr. Dowding offered to Pharmaceutical Investments Limited a loan of $100 at call, interest free, for six months. (The loan was accepted on 28 April 1969.)
  • (10) The directors of Pharmaceutical Investments Limited resolved to offer to purchase all the issued shares of Mitchell Holdings Pty. Limited at par.

The offers by Pharmaceutical Investments Limited to purchase shares in Mitchell Holdings Pty. Limited were made and accepted by telegram and on 28 April 1969 the directors of Mitchell Holdings Pty. Limited approved the transfer to Pharmaceutical Investments Limited of forty-nine ordinary shares and fifty redeemable preference shares, and approved the transfer to Secretariat Limited (a Norfolk Island company which was the nominee of Pharmaceutical Investments Limited) of the remaining one redeemable preference share.

As a result of these transactions, on 28 April 1969 the whole of the issued shareholding in Mitchell Holdings Pty. Limited was beneficially owned by Pharmaceutical Investments Limited, the whole of the issued shareholding in Pharmaceutical Investments Limited was beneficially owned by Mitchell Credits Limited and the one issued B class share in Mitchell Credits Limited was held by the appellant. On 1 May 1969 the appellant executed a declaration of trust by which it acknowledged that the one B class share in Mitchell Credits Limited, of which it was the registered owner, and the option over the unissued A class shares of Pharmaceutical Investments Limited were beneficially owned by the Manolas Trust. Although this declaration was not executed until 1 May 1969, there is no doubt that from 25 April 1969, when the share in Mitchell Credits Limited was allotted to the appellant, that share was held by the appellant as trustee for the Manolas Trust.

The purchase by and on behalf of Pharmaceutical Investments Limited of all the issued shares in Mitchell Holdings Pty. Limited for a total consideration of $100 proved a good bargain, for on 28 April 1969, the very day the purchase was effected, Mitchell Holdings Pty. Limited declared dividends totalling $30,910.57, payable out of the company's unappropriated profits, on the redeemable preference shares issued by the company. On the same day Pharmaceutical Investments Limited declared a dividend amounting to $30,910.57 in favour of Mitchell Credits Limited as the holder of the issued B class shares, and Mitchell Credits Limited declared a dividend of $30,910.57 ``on the B class shares in this company, such dividend being thus payable to Esquire Nominees Limited Account No. 19''. In payment of these dividends, on 29 April 1969 three cheques, each for $30,910.57, were drawn on the Commonwealth Trading Bank of Australia, Norfolk Island; the cheques were respectively drawn by Mitchell Holdings Pty. Limited in

ATC 4082

favour of Pharmaceutical Investments Limited, by Pharmaceutical Investments Limited in favour of Mitchell Credits Limited and by Mitchell Credits Limited in favour of the appellant. The cheques were debited to the accounts of the respective drawers on 30 April 1969.

On 28 April 1969 the directors of the appellant resolved to accept on behalf of the Manolas Trust the following loans repayable at call, and to be liable for interest at the rate of one-half per cent per month if demanded. 

      From Kerry G. Manolas       $45,000
      From George K. Manola      $111,821
      From Theo G. Manolas         $4,676
      From W.B.B. & C. Nominees
      (N.T.) Pty. Limited         $17,043

These projected loans totalled $178,540 and a cheque for that amount drawn by Mitchell Holdings Pty. Limited on 28 April 1969 was banked to the appellant's No. 19 Account on 30 April 1969. This cheque, and that drawn on 29 April 1969 by Mitchell Holdings Pty. Limited in favour of Pharmaceutical Investments Limited in respect of the dividends, totalled $209,450.57. The account of Mitchell Holdings Pty. Limited with the Commonwealth Trading Bank of Australia, Norfolk Island, on which these cheques were drawn, was able to meet the cheques only because on 30 April 1969 there was placed to the credit of that account a deposit of $209,469 made up of four cheques drawn respectively by Manolas Pharmacy Pty. Limited (two cheques of $5,000 and $30,929 respectively), Manolas Holdings Pty. Limited ($83,097) and Manolas & Sons Pty. Limited ($90,443). These cheques were debited to their respective accounts on 6 May 1969. It was not explained what arrangements had been made by Kerry G. Manolas, George K. Manolas, Theo G. Manolas and W.B.B. & C. Nominees (N.T.) Pty. Limited, with the three companies which drew these cheques, but this is not material.

On 28 April 1969 the directors of the appellant further resolved to advance to Pharmaceutical Investments Limited an amount of $209,400 at interest at the rate of 1¼ per cent per month. On the following day the directors of Pharmaceutical Investments Limited resolved to advance $36,000 to Manolas Pharmacy Pty. Limited, $83,000 to Manolas Holdings Pty. Limited and $90,000 to Manolas & Sons Pty. Limited (a total amount of $209,000) at a rate of interest of 1¼ per cent per month. To give effect to these resolutions the appellant on 29 April 1969 drew a cheque in favour of Pharmaceutical Investments Limited for $209,400 and Pharmaceutical Investments Limited drew a cheque for $36,000 in favour of Manolas Pharmacy Pty. Limited a cheque for $83,000 in favour of Manolas Holdings Pty. Limited and a cheque for $90,000 in favour of Manolas & Sons Pty. Limited. These cheques were credited to the respective accounts on 6 May 1969.

The net result of this juggling of cheques was that amounts of $35,929, $83,097 and $90,443 were drawn respectively from the accounts of Manolas Pharmacy Pty. Limited, Manolas Holdings Pty. Limited and Manolas & Sons Pty. Limited and amounts of $36,000, $83,000 and $90,000 respectively were on the same day credited back to the accounts of those companies.

On 23 June 1969 it was resolved by the directors of the appellant to demand from Pharmaceutical Investments Limited payment of interest for the months May to October 1969, but to accept payment at the rate of one per cent per month, namely $12,564, in complete satisfaction; it was also resolved to make a further advance of $12,514 to Pharmaceutical Investments Limited. On the same day the directors of Pharmaceutical Investments Limited resolved to demand from Manolas Pharmacy Pty. Limited, Manolas Holdings Pty. Limited and Manolas & Sons Pty. Limited interest for twelve months at one per cent per month, namely from Manolas Pharmacy Pty. Limited $2,160, from Manolas Holdings Pty. Limited $4,980 and from Manolas & Sons Pty. Limited $5,400, and on the same day resolved to make further advances of $2,052 to Manolas Pharmacy Pty. Limited, $4,731 to Manolas Holdings Pty. Limited and $5,130 to Manolas & Sons Pty. Limited. Cheques to give effect to these resolutions were exchanged on 30 June 1969. The net result of

ATC 4083

the exchanges was that $12,540 went to Norfolk Island from the mainland companies and $11,913 went back.

The accounts of Mitchell Holdings Pty. Limited show that during the year ended 30 June 1968 that company received from Manolas Pharmacy Pty. Limited dividends totalling in amount $31,503.50. It was conceded that these dividends were paid by Manolas Pharmacy Pty. Limited out of the profits of a business carried on by it in Australia. The profit and loss appropriation account of Mitchell Holdings Pty. Limited for the year ended 30 June 1968 showed a balance of $30,910.63. No revenue is shown for the year ended 30 June 1969. It is therefore apparent that the dividend of $30,910.57 was paid by Mitchell Holdings Pty. Limited out of profits derived by that company as a result of the receipt of dividends from Manolas Pharmacy Pty. Limited.

The accounts of Pharmaceutical Investments Limited reveal a total gross income during the year ended 30 June 1969 of $43,451, being the dividend of $30,911 received from Mitchell Holdings Pty. Limited and the interest totalling $12,540 received from Manolas Pharmacy Pty. Limited, Manolas Holdings Pty. Limited and Manolas & Sons Pty. Limited. Expenses amounted to $12,607, including interest of $12,564 paid to the appellant. The net profit of $30,844 was in fact rather less than the amount of the dividend declared in favour of Mitchell Credits Limited.

The sole income of Mitchell Credits Limited during the year of income was $30,910.57 received as a dividend from Pharmaceutical Investments Limited.

The movement of the amount of $30,910.57 from Mitchell Holdings Pty. Limited to Pharmaceutical Investments Limited, thence to Mitchell Credits Limited and finally to the appellant can be clearly traced through the accounts of these companies.

Not all of the facts recited above are relevant to the questions whose decision, in the view that I take, governs this appeal, but I have thought it desirable to state them, first to give the full background to the relevant events, and secondly because if the view that I have formed is wrong, the facts stated may be relevant to the consideration of the questions that would then arise as to the effect of sec. 260 of the Act.

On behalf of the appellant it was submitted that the appellant was a resident of Norfolk Island and that the income in question - the dividend of $30,910.57 received from Mitchell Credits Limited - was derived from a source within Norfolk Island and that the appellant was accordingly not liable to tax on the income by reason of sec. 7(1) of the Act, which provides as follows:

``This Act shall extend to the Territories of Papua and New Guinea, Norfolk Island, Cocos (Keeling) Islands and Christmas Island, but shall not apply to any income derived by a resident of those Territories from sources within those Territories.''

The Commissioner, on the other hand, denied that sec. 7(1) governs the matter. In his submission, sec. 7(1) is merely declaratory and does no more than re-state the position brought about by other sections of the Act, and in particular by sec. 23(r), which provides that ``income derived by a non-resident from sources wholly out of Australia'' shall be exempt from income tax. The purpose of sec. 7(1), in the Commissioner's submission, was to extend to the Territories mentioned provisions of a machinery kind - such parts of the Act as, for example, provide for returns, assessments, appeals, the calculation of tax and the enforcement of penalties - and the proviso introduced by the word ``but'' was included, out of an abundance of caution, to prevent the subsection from being given a construction that would treat income derived by a resident of a Territory from a source within a Territory as assessable income. According to the Commissioner, the case comes within sec. 44(1)(b) of the Act, which is rendered applicable by Div. 6 of Part III of the Act. Section 95 defines, for the purposes of that Division, ``the net income of a trust estate'' to mean ``the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in

ATC 4084

respect of that income, less all allowable deductions, except the concessional deductions...'' and except certain other deductions which need not be mentioned. Section 99, under which the assessment in the present case was made, provides in effect by sub-sec. (2) inter alia that where there is no part of the net income of the trust estate to which any beneficiary is presently entitled, the trustee is liable to pay tax on that net income as if it were the income of an individual and were not subject to any deduction. In
Union-Fidelity Trustee Company of Australia Limited v. F.C. of T. 69 ATC 4084, (1969) 119 C.L.R. 177, it was held that income derived by the trustee of a trust estate from sources outside Australia is not taxable under sec. 99, notwithstanding that the trustee is resident in Australia. Shortly stated, the ground for this decision is that by sec. 95 the net income of the trust estate is to be calculated as if the trustee were a taxpayer in respect of that income, but not as if he were a taxpayer whose residence is known, that is, not as if he were a resident. Since, in the case of a non-resident, only income derived from an Australian source is assessable, sec. 99 taxes only so much of the total income of the trust estate as is derived from Australian sources. The members of the Court in that case, in contrasting the position of residents with that of non-residents, referred to sec. 25 which deals with assessable income generally, but in the present case, where we are concerned with dividends, the provision applicable is sec. 44(1) which, so far as it is material, provides as follows:

``The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall -

  • (a) if he is a resident - include dividends paid to him by the company out of profits derived by it from any source; and
  • (b) if he is non-resident - include dividends paid to him by the company to the extent to which they are paid out of profits derived by it from sources in Australia.''

It seems to me to follow from the reasoning of the Union-Fidelity Trustee Company case that such of the income of the trust estate as comprises dividends paid to the trustee by a company in which he held shares as trustee will be taxable under sec. 99 only to the extent to which the dividends were paid out of profits derived by the company from sources in Australia. I therefore agree with the submission on behalf of the Commissioner that sec. 95, 99 and 44(1)(b) together have the effect that the appellant should succeed in this appeal if it is held that the dividend in question was paid to the appellant by Mitchell Credits Limited out of profits derived by that company from sources in Norfolk Island.

However, in my opinion it does not follow that sec. 7(1) can have no application to the present case. The proviso to that subsection does present some difficulties of construction, but it is widely expressed, and if given the full meaning of which its words are capable it would at least have the effect that the provisions of sec. 17 of the Act, that income tax is levied and shall be paid upon the taxable income derived during the year of income by any person, whether a resident or a non-resident, do not apply to any income derived by a resident of the Territories mentioned in sec. 7(1) from sources within those Territories. In effect, sec. 7(1) declares that the income to which it refers is not liable to tax. It is difficult to see any valid reason for declining to give effect to this declaration of the intention of the Legislature. Counsel for the Commissioner referred to the decision in
Parke Davis & Company v. F.C. of T. (1959) 101 C.L.R. 521, where it was held that the specific provisions of sec. 44(1)(b), as to dividends, fulfil and carry out the general policy expressed in sec. 23(r) and that the latter provision must be read with the former, which gives it specific effect. I find it difficult to regard sec. 44(1)(b) as elucidating and giving effect to the general policy of sec. 7(1), or to hold that sec. 7(1) cannot be given an operation independent of sec. 44(1)(b). The provisions of sec. 7(1) appear to me to be intended to override the other provisions of the Act, redundant though some of them may then be. I therefore consider that under the Act the appellant has two alternative arguments open to it. The appellant will succeed if it is

ATC 4085

held that it was a resident of Norfolk Island and that the income in question was derived by it from sources within Norfolk Island. Equally the appellant will succeed if it is held that the dividend paid to it by Mitchell Credits Limited was not paid out of profits derived by that company from sources in Australia, and in that event it will be irrelevant where the appellant is resident. However, in the present case, it is perhaps only an academic question whether sec. 7(1) affords an exemption from liability to tax in cases to which it applies, for the circumstances are such that the appellant cannot escape under sec. 7(1) if it is liable under sec. 44(1)(b). If it is right to hold that the dividend paid to the appellant by Mitchell Credits Limited was paid out of profits derived by that company from sources in Australia, so that the appellant is caught by sec. 44(1)(b), the same reasoning would lead to the conclusion that the income derived by the appellant was not derived from sources in Norfolk Island, so that the appellant, even if a resident of Norfolk Island, could not bring itself under the protective mantle of sec. 7(1). If the dividend received by the appellant does not answer the description contained in sec. 44(1)(b), the appellant is not liable to tax under sec. 99 and has no need to invoke sec. 7(1). It therefore seems unnecessary to decide whether the appellant is a resident of Norfolk Island for the purposes of the latter subsection. However, that question has been fully argued and may be briefly dealt with, and it is convenient to deal with it.

It is now well settled that, for the purposes of income tax, a company is resident where its real business is carried on, and its real business is carried on where the central management and control actually abides:
Koitaki Para Rubber Estates Limited v. F.C. of T. (1940) 64 C.L.R. 15 at p.19, and on appeal, 64 C.L.R. 241 at pp.243-244, 246 and 251;
North Australian Pastoral Company Limited v. F.C. of T. (1946) 71 C.L.R. 623 at p.629;
Unit Construction Co. Ltd. v. Bullock (Inspector of Taxes) [1960] A.C. 351 at p.360. For the purposes of the definition of ``resident'' in sec. 6 of the Act, the fact of incorporation in Australia is made conclusive; that definition does not have any direct application to sec. 7(1), but the place of incorporation is a factor to be considered: Koitaki Para Rubber Estates Limited v. F.C. of T., supra, at p.246; North Australian Pastoral Company Limited v. F.C. of T., supra, at p.633. The question where a company is resident is one of fact and degree.

In the present case the appellant was incorporated in Norfolk Island and had its office there. All the directors resided in Norfolk Island. All the A class shareholders who were natural persons were residents of Norfolk Island and it seems proper to conclude that the other A class shareholder, Myee Limited, was also a resident. All meetings of the company and of the directors were held in Norfolk Island. The business of the company was to act as trustee on Norfolk Island. These facts strongly support the conclusion that the appellant was a resident of Norfolk Island. However, the Commissioner, relying particularly on the decision in Unit Construction Co. Ltd. v. Bullock (Inspector of Taxes). supra, that it is the actual place of management of a company and not the place where it ought to be managed which fixes its residence, submitted that the directors of the appellant merely carried out directions given to them by Messrs. Wilson, Bishop, Bowes and Craig, and that the actual management and control of the appellant company was in Australia. It was said that at all relevant times the activities of the appellant were confined to acting as trustee of a number of settlements all of which had been set up on similar lines as a result of instructions received from Messrs. Wilson, Bishop, Bowes and Craig, and that the administration of the trusts of the settlements followed a general pattern which had been laid down in advance by that firm. The extent of the influence of the accountants was shown by the fact that they would not infrequently prepare in detail the agenda of a meeting of the directors of the appellant or of the company itself. These facts, according to the Commissioner, showed that in reality the activities of the appellant were directed from Australia. I am unable to accept this argument. As I have already indicated, it is obvious that what the appellant did in relation to the Manolas

ATC 4086

Trust was done in the course of carrying out a scheme formulated in Australia and that Messrs. Wilson, Bishop, Bowes and Craig not only communicated to the appellant particulars of the scheme but advised the appellant in detail of the manner in which it should be carried out. But if it be accepted that the appellant did what Messrs. Wilson, Bishop, Bowes and Craig told it to do in the administration of the various trusts, it does not follow that the control and management of the appellant lay with Messrs. Wilson, Bishop, Bowes and Craig. That firm had no power to control the directors of the appellant in the exercise of their powers or the A class shareholders in the exercise of their voting rights. Although it is doubtless true that steps could have been taken to remove the appellant from its position as trustee of one or more of the trust estates, Messrs. Wilson, Bishop, Bowes and Craig could not control the appellant in the conduct of its business of a trustee company. The firm had power to exert influence, and perhaps strong influence, on the appellant, but that is all. The directors in fact complied with the wishes of Messrs. Wilson, Bishop, Bowes and Craig because they accepted that it was in the interest of the beneficiaries, having regard to the tax position, that they should give effect to the scheme. If, on the other hand, Messrs. Wilson, Bishop, Bowes and Craig had instructed the directors to do something which they considered improper or inadvisable, I do not believe that they would have acted on the instruction. It was apparent that it was intended that the appellant should carry on its business of trustee company on Norfolk Island. It was in my opinion managed and controlled there, none the less because the control was exercised in a manner which accorded with the wishes of the interests in Australia. The appellant was, in my opinion, a resident of Norfolk Island.

I turn then to the crucial questions in the case. The question arising under sec. 7(1) is whether the dividend which the appellant received from Mitchell Credits Limited was income derived by the appellant from sources within Norfolk Island. The question arising under sec. 44(1)(b) is whether that dividend, which was paid by Mitchell Credits Limited out of moneys received by way of dividend on the shares which it held in Pharmaceutical Investments Limited, was paid out of profits derived by Mitchell Credits Limited from sources in Australia. The appellant's case is that the share on which a dividend is paid should be regarded as the source from which the dividend was derived. The share held by the appellant in Mitchell Credits Limited and those held by Mitchell Credits Limited in Pharmaceutical Investments Limited were registered at the respective offices of those companies on Norfolk Island and could be effectively dealt with only in Norfolk Island. For some revenue purposes at least the shares were situated in Norfolk Island:
Brassard v. Smith [1925] A.C. 37;
Erie Beach Company Ltd. v. A-G for Ontario [1930] A.C. 161;
Commr. of Taxation (N.S.W.). v. Freeman (1956) 30 A.L.J.R. 42 at p.48. Then it was said to follow that the source from which the dividend was derived by the appellant was the place where the share was situated - Norfolk Island. Similarly it was said that the dividend was paid by Mitchell Credits Limited out of profits derived by that company from a source in Norfolk Island.

In ordinary English usage, the ``source'' of income or profits is the place of their origin. In
Nathan v. F.C. of T. (1918) 25 C.L.R. 183 at pp.189-190, this Court, in the course of a discussion of the effect of sec. 10 and 14(b) of the Income Tax Assessment Act 1915-1916 (Cth), said:

``The legislature in using the word `source' meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact.''

This statement has been accepted as correct, and as applicable to similar statutory provisions, in a number of cases in this Court of which one of the earliest is
Studebaker Corporation of Australasia Ltd. v. Commr. of Taxation (N.S.W.) (1921) 29 C.L.R. 225 at p.233 and the most recent is
F.C. of T. v. Mitchum (1965) 113 C.L.R. 401.

ATC 4087

The same test has been applied by the Judicial Committee (
Liquidator, Rhodesia Metals Ltd. v. Commr. of Taxes [1940] A.C. 714 at p.789) and by the Court of Appeal in New Zealand (
I.R. Commr. v. N.V. Philips' Gloeilampenfabrieken [1955] N.Z.L.R. 868 at pp.873, 883, 888, 896). Although in Commr. of Taxation (N.S.W.) v. Freeman supra, at p.48, some doubt was expressed as to the meaning of the phrase ``practical, hard matter of fact'', in my opinion the two adjectives were inserted not for the purposes of empty rhetoric but to emphasise that the question is to be decided in accordance with the practical realities of the situation without giving undue weight to matters of form, and not by the application of absolute rules of law. The position was authoritatively stated in F.C. of T. v. Mitchum, supra, at p.407, by Barwick C.J., with whom Menzies and Owen JJ. concurred, as follows:

``The conclusion as to the source of income for the purposes of the Act is a conclusion of fact. There is no statutory definition of `source' to be applied, the matter being judged as one of practical reality. In each case, the relative weight to be given to the various factors which can be taken into consideration is to be determined by the tribunal entitled to draw the ultimate conclusion as to source. In my opinion, there are no presumptions and no rules of law which require that that question be resolved in any particular sense.''

I would further respectfully agree with the remarks made by Rich J. in
Tariff Reinsurances Ltd. v. Commr. of Taxes (Victoria) (1938) 59 C.L.R. 194 at p.208 and again in
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 at p.538:

``We are frequently told, on the authority of judgments of this court, that such a question is `a hard, practical matter of fact'. This means, I suppose, that every case must be decided on its own circumstances, and that screens, pretexts, devices and other unrealities, however fair may be the legal appearance which on first sight they bear, are not to stand in the way of the court charged with the duty of deciding these questions. But it does not mean that the question is one for a jury or that it is one for economists set free to disregard every legal relation and penetrate into the recesses of the causation of financial results, nor does it mean that the court is to treat contracts, agreements and other acts, matters and things existing in the law as having no significance.''

I regard it as clear that what is said in these authorities with regard to the effect of the word ``source'' equally applies to ``sources'' in sec. 7(1) and 44(1)(b) of the Act. It is true that sec. 10 of the Income Tax Assessment Act 1915-1916 (Cth) considered in Nathan v. F.C. of T., supra, like sec. 25(1) of the Act which was the subject of discussion in F.C. of T. v. Mitchum, supra, spoke of income ``derived directly or indirectly from sources within Australia'' and that the words ``directly or indirectly'' do not appear in either sec. 7 or sec. 44(1)(b). However, although the words ``directly or indirectly'' were in Nathan v. F.C. of T., supra, at pp.188-189 said to be of great importance, and although their absence may be regarded as an indication that the words ``derived from sources'' were intended to mean ``directly derived'', in my opinion their presence or absence has no effect on the meaning of the word ``source'', and what was said in Nathan v. F.C. of T., supra, with regard to the meaning of that word is applicable in the context of sec. 7(1) and 44(1)(b). As has been pointed out on a number of occasions, the words ``directly or indirectly'' are related to the word ``derived'' and not to the word ``source'' (
F.C. of T. v. W. Angliss & Company Pty. Ltd. (1931) 46 C.L.R. 417 at p.441; F.C. of T. v. United Aircraft Corporation, supra, at pp.528, 537; I.R. Commr. v. N.V. Philips' Gloeilampenfabrieken, supra, at p.888) and in the enactments considered in some of the cases which laid down the law as to the effect of the word ``source'' in the same terms as Nathan v. F.C. of T., supra, the words ``directly or indirectly'' did not appear (see Studebaker Corporation of Australasia Ltd. v. Commr. of Taxation (N.S.W.), supra, and Liquidator, Rhodesia Metals Ltd. v. Commr. of Taxes, supra).

ATC 4088

It would be quite opposed to the authorities that I have been discussing to hold that there is a rule of law that requires the situs of the share - in itself a somewhat artificial conception developed primarily for the purposes of death duties - to be treated as the source of the dividends paid on it. However, there are some decisions in which the question what is the source of a dividend has fallen for particular consideration, and to them it is now necessary to turn.

In the forefront of these cases is Nathan v. F.C. of T., supra. In that case the appellant, who was a shareholder in a number of companies which were incorporated in England and had their registered offices and central management and control there but which carried on business and made profits in Australia as well as elsewhere, was paid in England dividends declared in England on those shares. He was assessed to tax on sums which represented that proportion of the total dividends received by him which was attributable to the profits derived by each of the companies from that part of their respective businesses which was carried on in Australia. It was held that these sums were ``derived directly or indirectly... from sources within Australia'' and rightly included in the assessment. The Court (at p.192 et seq.) rejected the argument that the place where a share is situated must be regarded as the source of the dividend, and said (at p.196) that ``the share in the capital is not the `source', but the measure of the dividend...''. Although the Court said that the question what is the source of a shareholder's income is one of fact, to be determined on practical grounds, it answered the question by saying that the source of the dividend is the place where the company made the profits out of which the dividend was paid. Their Honours said (at p.198):

``The `dividend' he'' (the shareholder)

``receives is an aliquot part of the fund divided; the fund itself is the source of the part that he receives, and if on analysis the fund is derived from various sources, some of which are within Australia and some outside Australia, he is, according to the provisions of the Act, liable or not liable to taxation in respect of it accordingly.''

In reaching its conclusion, the Court in Nathan v. F.C. of T., supra, at pp.194-195, found some support in the judgments of the Court of Appeal in
Gilbertson v. Fergusson (1881) 7 Q.B.D. 562, a case which has since been overruled by the House of Lords in
Canadian Eagle Oil Company Ltd. v. R [1946] A.C. 119. However, it seems to me that in overruling the earlier decision the House of Lords did not reflect adversely on the statements which this Court in Nathan v. F.C. of T., supra, regarded as opposed to the view that the place of the share, rather than the place where the profits were earned, constitutes the source of the dividend. In Gilbertson v. Fergusson, the London agency of a foreign banking company was assessed to tax on the full amount of dividends paid in London to shareholders resident in London, and the Court of Appeal decided (to adopt the summary given by Lord Russell of Killowen in Canadian Eagle Oil Company Ltd. v. R., supra, at p.146) that ``since those dividends were payable out of the general earnings of the bank, which were composed partly of profits made in the United Kingdom (which had already been taxed under Case I of Sch.D) and partly of profits made elsewhere, the agency should only be assessed under sec. 10'' (of the Income Tax Act 1853 (United Kingdom)) ``on so much of the dividends as were paid out of the profits made elsewhere than in the United Kingdom''. Their Lordships held that this decision of the Court of Appeal was not in conformity with the income tax statutes of the United Kingdom. As Viscount Simon L.C. pointed out (at pp.137-139), the Court of Appeal proceeded upon two errors; first, they acted upon a concession made by the revenue, in accordance with the view then prevailing but since declared to be wrong, that a company charged with paying tax under Sch.D in respect of profits accruing to it in the United Kingdom was assessed and paid the tax as agent on behalf of its shareholders, and secondly, it was assumed that there was a general principle to be applied in construing the Income Tax Acts that tax is not to be payable twice over by the same person in respect of the same thing. The decision in Canadian Eagle Oil Company Ltd. v. R. established that under the English

ATC 4089

legislation a charge is imposed on dividends payable in respect of the shares of a foreign company, ``without any reference to the sources of that company's income'' (per Viscount Simon L.C. at p. 140) and that the charge is not abated in proportion as the income is itself chargeable or not chargeable to British income tax. It is apparent that their Lordships were not called on to decide what was the source from which the dividends arose, and they had no need to discuss, and did not discuss, those passages in the judgments in Gilbertson v. Fergusson, supra, that suggest that if it is necessary to find the source of the dividend, it will be found where the profits were made.

Canadian Eagle Oil Company Ltd. v. R., supra, is one of a line of cases that decide that dividends paid by a foreign company and received in the United Kingdom are assessable as ``income arising from possessions out of the United Kingdom'' within Case V of Sch.D of the Income Tax Act, 1918 of the United Kingdom. That provision does not refer to the ``source'' of the income, but dicta are to be found in these decisions to the effect that the share is the source of the dividend paid on it. Thus in
Bradbury v. English Sewing Cotton Company Ltd. [1923] A.C. 744 at p.753, Viscount Cave L.C. said, ``where the company is, there the share is also, and there is the source of any dividend paid upon it'', and in
I.R. Commrs. v. Reid's Trustees [1949] A.C. 361 at p. 383, Lord MacDermott said:

``Is it permissible, in order to determine the liability of the dividend to tax in the hands of the respondent shareholders, to look beyond the immediate source, the shareholding, and to examine the makeup of the profits out of which the dividend has been declared? In my opinion the answer must be in the negative.''

These dicta, which as might be expected are relied upon by the appellant, support the view that the share is at least the immediate source of the dividend. However, they are directed to a different question arising under a very different legislative scheme, and they do not purport to discuss the meaning of the word ``source''. In
F.C. of T. v. French (1957) 98 C.L.R. 398 all the members of this Court who constituted the majority said that cases decided on Case V of Sch.D are of little assistance in interpreting the widely different provisions of the Commonwealth Act (see at pp.406, 412-413, 415 and 420). In spite of the remarks in Commr. of Taxation (N.S.W.) v. Freeman, supra, to which I shall shortly refer, I do not consider that these dicta throw any light on the meaning of sec. 7(1) and 44(1)(b).

I now return to consider the decisions in this Court. In
Murray v. F.C. of T. (1921) 29 C.L.R. 134 the taxpayer, an English resident who received in England dividends declared in England by English companies which carried on business in Australia and derived their main income from sources in Australia, was held liable under the Income Tax Assessment Act 1915-1916 (Cth) to tax in respect of so much of each dividend as bore to the whole dividend the same proportion that the profits derived by the company from sources in Australia bore to the total profits of the company. An unsuccessful attempt was made to distinguish Nathan v. F.C. of T., supra, on the ground that there the shareholder was resident in Australia. The Court, following Nathan v. F.C. of T., rejected the argument that though the source of the income of the companies was Australian, that of the taxpayer's income was not.

It might have been thought, after the decisions in Nathan v. F.C. of T., supra, and Murray v. F.C. of T., supra, that there was little room for an argument that the source of dividend income is necessarily the situs of the share, but the next case in which the matter was discussed, Commr. of Taxation (N.S.W.) v. Freeman, supra, does appear to afford some support for such a contention. In that case the question was whether payments in respect of dividends on shares held by the taxpayer in Placer Development Ltd. (``Placer'') were excluded from his assessable income by sec. 53(a) of the Income Tax (Management) Act 1936 (N.S.W.), which excluded from assessable income (inter alia) "dividends paid... wholly and exclusively out of one or more of the following:

ATC 4090

(a) income derived from sources outside Australia..."

It was accepted by the Court that one of the dividends was paid wholly and exclusively out of funds made up of dividends received from another company, Bulolo Gold Dredging Ltd. (``Bulolo''), and the question then arose whether the dividends received by Placer from Bulolo constituted ``income derived'' by Placer ``from sources outside Australia''. Bulolo was a company whose main activity was the working of a goldmining property in New Guinea. It was incorporated in British Columbia, where its principal register of members was kept, but it also kept a branch register in Sydney, and a number of the shares held by Placer were on the branch register and dividends in respect of those shares were paid and received in Sydney. The Court said (at p.48) that they took Nathan's case ``to be authority for the proposition that, as a `practical, hard matter of fact' - whatever that expression may mean - though not as a matter of `legal concept', the place where a company earns its profits may be said to be the source from which a taxpayer, entitled by way of dividend - and upon such conditions as the articles of the company may prescribe - to participate in the company's profits, derives his dividend receipts''.

Their Honours offered some criticism of Nathan's case, but said that the views expressed therein have, however, been acted upon on a number of occasions, and then went on (at p.48):

``But we do not understand Nathan's case to decide that the locality where a company derives the profits from which it pays dividends must be regarded exclusively as the source of a shareholder's dividend receipts. If it does, it is, it seems to us, in conflict with the reasoning in such cases as Canadian Eagle Oil Co. Ltd. v. R. ((1946) A.C. 119), and I.R. Commr. v. Reid's Trustees ((1949) A.C. 361). The latter case was decided on the basis that dividends declared by a South African company and transmitted to a shareholder resident in the United Kingdom were `income arising from possessions out of the United Kingdom'. And we can see no reason why, if dividend income can be said to arise from the shares in respect of which the dividends have been paid, the shares themselves should not be regarded as the immediate source of the dividends. Such shares, although intangible property, may be said to have a location and there is no reason in principle why the place where they are located and where the rights to which they give rise may be enforced should not be regarded as the place from which the shareholders' dividends are derived. In the present case it is clear that those shares of Placer which were registered on Bulolo's Australian register were situated in Australia (Brassard v. Smith (1925) A.C. 371;
R. v. Williams (1942) A.C. 541, and
Treasurer of Ontario v. Blonde (1947) A.C. 24). They constituted items of property situated in Australia and Placer's right to receive dividends in respect of them sprang directly from their ownership. In these circumstances we are of opinion that it is proper to regard the place where they were located as the direct or immediate source of the relevant dividend payments even if Nathan's case requires the conclusion that the place where Bulolo earned its profits should, perhaps paradoxically, be regarded as their indirect or ultimate source.''

They added that the words ``directly or indirectly'', which in Nathan's case were said to be of great importance, may furnish some ground for drawing a distinction between an immediate source, on the one hand, and an ultimate source on the other; and that they could see nothing inconsistent with this conclusion in the reasoning of the Judicial Committee in Liquidator, Rhodesia Metals Ltd. v. Commr. of Taxes, supra, nor anything unreal in the view that the same income may be derived from a number of territorial sources.

It is not easy to reconcile Commr. of Taxation (N.S.W.) v. Freeman, supra, with the decision in Nathan v. F.C. of T., supra, or with the reasons given for that decision that have come to be treated as authoritative. One possible explanation of the case is that it

ATC 4091

intended to lay down, as a matter of law, that the direct or immediate source of a dividend must be held to be the situs of the share, even though the indirect or ultimate source may be found elsewhere. So to hold, however, would be to resolve the question of source by the application of a rule of law rather than by making a conclusion of fact, and this is the approach that the decisions from Nathan v. F.C. of T., supra, to F.C. of T. v. Mitchum, supra, have steadily rejected. Another possible explanation of the case is that it depends on its particular facts, but the reasons for judgment do not appear to treat the question as simply one of fact. Perhaps the most acceptable explanation is that what was said in Commr. of Taxation (N.S.W.) v. Freeman, supra, relates only to the special provisions of the New South Wales statute, and this view finds some support in the emphasis which the Court placed upon the word ``exclusively'', and also in some of the observations in Parke Davis & Company v. F.C. of T., supra, to which I am about to refer. However, against this explanation it must be said that once it had been found that one of the dividends received by the taxpayer from Placer had been paid wholly and exclusively out of the dividends declared by Bulolo, the question that remained to be decided was whether the latter dividends had been derived from sources outside Australia, and it might have been thought immaterial whether those dividends were exclusively so derived.

Commr. of Taxation (N.S.W.) v. Freeman, supra, fell for consideration in Parke Davis & Company v. F.C. of T., supra. In that case the appellant, anon-resident, had received from another company, resident in Colorado, a distribution that was deemed under sec. 47(1) of the Act to be a dividend, and that was paid out of profits derived by the Colorado company from sources in Australia. It was held that the distribution formed part of the assessable income of the appellant by virtue of the combined effect of sec. 44(1) and 47. The appellant argued that the income was exempt under sec. 23(r) as being income derived by a non-resident (the appellant) from sources wholly out of Australia because, it was said, the source of the dividend was the share whose locality was fixed by the register and was therefore in Colorado, and relied upon Commr. of Taxation (N.S.W.) v. Freeman, supra. in the course of considering this submission, Dixon C.J., who delivered the judgment of the Court, said (at p.531):

``I think that it would not be useful to institute a comparison between the provisions of the Commonwealth legislation and those of the New South Wales Income Tax (Management) Act 1936 as amended. It is enough to say that at one point in the complicated facts of Freeman's case a question did arise as to the source of a dividend, and that for the purposes of the expression used in the New South Wales Act, we thought that the fact that the dividend was derived from a share on a register in New South Wales showed that the source was in New South Wales.''

After citing a passage from the judgment in Commr. of Taxation (N.S.W.) v. Freeman, supra, at p. 48, which I have already set out, Dixon C.J. continued (at p.532):

``It will be apparent from the emphasis placed on the word `exclusively' that the Court, in deciding Freeman's case was contemplating the possibility that a dividend may be attributed to different sources according to the character of enactment dealing with the matter and perhaps according to the facts, and that the Court did not intend to say that the only source to which a dividend could be imputed was the locality of the share. In the present case we are of opinion that the answer to the contention lies in the view we take of the relationship of sec. 44(1)(b) and sec. 23(r). The view we take of the relationship is that sec. 44(1)(b) is not cumulative upon and independent of sec. 23(r), but is carrying out sec. 23(r) and stating what, in the case of a dividend received by a non-resident, is the source for the purposes of sec. 23(r). If it were treated as cumulative and independent it would mean that in the case of a non-resident holding shares in an Australian company, assuming that for the purpose of sec. 23(r) so construed the share was

ATC 4092

regarded as the source of a dividend upon it, he would be liable to tax on dividends paid out of Australian profits if his shares were upon an Australian register of the company but not liable to such tax if his shares were upon a register kept in some place out of Australia by the company.''

The appellant in Parke Davis & Company v. F.C. of T., supra, was in a position similar to that in which the appellant would have been in the present case if Mitchell Credits Limited had received its profits from Australia without the intervention of Pharmaceutical Investments Limited, and the Court in that case had no need to consider the question as to the effect of sec. 44(1)(b) of the Act that now arises. However, the Court does seem to have taken the view that although for some purposes or in some circumstances the locality of the share may be regarded as the source of the dividend, it is not necessarily and for all purposes its source.

In my opinion, however Commr. of Taxation (N.S.W.) v. Freeman, supra, be explained, neither that decision, nor Parke Davis & Company v. F.C. of T., supra, nor any dictum in the English decisions on Case V of sch. D, warrants the conclusion that the question what is the source of income or of profits, for the purpose of sec. 7(1) or sec. 44(1)(b) of the Act, must, where a dividend payment has constituted the income or profits, be decided as a matter of law rather than as a matter of fact. If there is an inconsistency between Commr. of Taxation (N.S.W.) v. Freeman, supra, and Nathan v. F.C. of T., supra, I would feel bound to prefer the latter authority, not only because the former was a decision on the different words of the New South Wales statute, but also because Nathan v. F.C. of T., supra, has frequently been followed and approved in this Court, and the test which it laid down has more recently than Commr. of Taxation (N.S.W.) v. Freeman, supra, been reaffirmed in F.C. of T. v. Mitchum, supra, I hold, therefore, that the sources of income, for the purpose of sec. 7(1), and the sources of profits, for the purpose of sec. 44(1)(b), must be ascertained as ``a practical, hard matter of fact'', and that in applying these sections to the present case I am not compelled, contrary to the realities of the situation, to hold that the source of each dividend is the locality of the share or shares on which it was paid.

The questions of fact that then fall for decision present little difficulty. The income of the appellant was received in the form of a dividend from Mitchell Credits Limited. That company carried on no business of any kind, but itself received a dividend from Pharmaceutical Investments Limited. The latter company went through the motions of borrowing and lending money, perhaps so that it might be said that it carried on business on Norfolk Island, but those transactions yielded no profit and the company was enabled to pay a dividend only because of the dividend which it received from Mitchell Holdings Pty. Limited. The amount of $30,910.57, which the appellant ultimately received, came from the profits made by the conduct of a business in Australia and was passed on by Mitchell Holdings Pty. Limited, through Pharmaceutical Investments Limited and Mitchell Credits Limited, to the appellant. The only business operations which yielded the production of any income took place in Australia. Nothing that was done at the office of Mitchell Credits Limited or the Office of Pharmaceutical Investments Limited in Norfolk Island produced one cent of the income that the appellant received or one cent of the profits out of which the dividend received by the appellant was paid. Notwithstanding the devices adopted to give the facts a specious appearance, the reality is that the source, and the only source, of the income derived by the appellant was in Australia. Similarly, the dividend paid to the appellant by Mitchell Credits Limited was paid out of profits derived by it from sources in Australia and from no other sources.

I hold, therefore, that the income in question was not derived by the appellant from any source within Norfolk Island and that sec. 7(1) does not exempt the appellant from liability to tax.

I hold further that the dividend paid to the appellant by Mitchell Credits Limited was paid out of profits derived by that company

ATC 4093

from sources in Australia within sec. 44(1)(b). I have already mentioned that the omission from sec. 44(1)(b) of the words ``directly or indirectly'', which qualify ``derived'' in sec. 25, may be regarded as an indication that ``derived'' in sec. 44(1)(b) means ``directly derived''. Assuming that this is so, this does not mean that the section should be construed as though it included the word ``directly'' and as though that word had to be given its precise dictionary meaning. It may, however, mean that indirect modes of derivation which might be caught by the words of sec. 25 are not within those of sec. 44. The import of the words ``directly'' and ``indirectly'' in this context may be gleaned from the judgment in
Lovell and Christmas Ltd. v. Commr. of Taxes [1908] A.C. 46 at p.52, to which the Court in Nathan v. F.C. of T., supra, at pp.188-189, referred. Where income has been derived from more than one source, it may in some cases be said to have been derived only indirectly from the remoter source, although in other cases it may be derived directly from both. In
Dickson v. Commr. of Taxation (N.S.W.) (1925) 36 C.L.R. 489 at p.506, Higgins J. said that ``the word `directly', as used in that case,'' (Lovell and Christmas Ltd. v. Commr. of Taxes, supra) ``is not used in the sense of `immediately', but as contradistinguished from ancillary...''. Although Higgins J. dissented in that case, this observation does not seem opposed to the view of the majority. In that case income had been earned as a result of a series of operations including the recovery of gold in New South Wales, its realization outside New South Wales and the receipt of the proceeds, also outside New South Wales, yet it was held that part of the income was directly derived from a source in New South Wales (see particularly per Starke J. at pp.510-511). An apportionment was necessary because some part of the income was attributable to sources not in New South Wales, but that situation does not arise here. Whatever meaning the word ``directly'' might have in qualifying the word ``derived'', it does not imply that there can be no step between the production of the profits and their receipt by the company (cf. the discussion of the effect of the source of ``direct result'' in
Boiler Inspection and Insurance Company of Canada v. Sherwin-Williams Company of Canada Ltd. [1951] A.C. 319 at p.333). Section 44(1)(b) must have been framed in the contemplation of the complexity of many business activities and obviously it may often be necessary to use some intermediate agency to get the money representing the profits from their source into the company's coffers. In the present case, as I have said, the profits had only one source - the business operations in Australia - and the fact that in an attempt to disguise their real origins they were made to pass fleetingly through the accounts of Pharmaceutical Investments Limited did not mean that they were not directly derived by Mitchell Credits Limited from their source in Australia. It is obvious that in the present case, where the income of the appellant had no source within the Territory of Norfolk Island, no similar question can arise under sec. 7(1).

It was suggested that if a non-resident who received outside Australia a dividend from a company which neither had a share register in, nor itself carried on business in, Australia were liable to tax, there might in many cases be grave difficulty in obtaining sufficient information as to the business of the company to enable a decision to be made as to where the profits of the company were earned, and further difficulty in enforcing the liability against the taxpayer. The fact that problems of administration may arise in some cases is no justification for departing from the proper construction of the Act. As Dixon C.J. said in Parke Davis & Company v. F.C. of T., supra, at p.333, difficulties of accountancy cannot disturb the real meaning of the sections.

It follows from what I have said that the contentions of the appellant cannot be accepted and that it is unnecessary to consider the arguments advanced on behalf of the Commissioner in relation to sec. 260 of the Act.

The notice of objection against the assessment included other grounds which (to state their effect very briefly) raised two main contentions, first, that if the Act purports to render the appellant liable to tax in the

ATC 4094

circumstances of the present case it is unconstitutional, and secondly, that if and in so far as the Commissioner was authorised to make an assessment he ought to have assessed under sec. 99A of the Act rather than under sec. 99. However, no argument was advanced in support of any of these grounds and I therefore need not consider them.

The appeal will be dismissed.

ORDER:

Appeal dismissed with costs. Usual order as to exhibits.


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