Esquire Nominees Limited as Trustee of Manolas Trust v. Federal Commissioner of Taxation.

Judges: Barwick CJ

McTiernan J
Menzies J
Stephen J

Court:
High Court (Full Court)

Judgment date: Judgment handed down 24 September 1973.

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McTiernan J.: The question for decision is whether the source of the dividend of $30,910.57 included in the assessment at the amount of $30,910 was within Norfolk Island. It is not disputed that Esquire Nominees Limited was a resident of Norfolk Island. The word ``sources'' in sec. 7 of the Income Tax Assessment Act is not defined by the Act. The word includes ``source''. Neither ``sources'' nor ``source'' is used in the Act as a term of art. In my opinion the question - What was the source of the amount of $30,910.57? - is a question of fact. In the case of a dividend its source is not necessarily the share upon which the dividend is declared. The fact that the dividend was declared by Mitchell Credits Limited on a share held by the appellant in that company is not the only fact material to the question in issue. Having regard to the facts found by the learned judge the share is not as a matter of fact the source of the amount of $30,910.57 received by the appellant from Mitchell Credits Limited. There can be no doubt that this amount is made up of profits of Manolas Pharmacy Pty. Limited for the year ended 30 June 1967 and the next accounting period, out of which dividends were declared by that company on 30 April 1968 and 27 June, payable to Mitchell Holdings Pty. Limited. The former carried on business in Australia. These were associated companies, both incorporated in the Northern Territory. These profits of Manolas Pharmacy Pty. Limited could clearly be regarded as the sources of the

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dividends payable to Mitchell Holdings Pty. Limited. With regard to these dividends the learned judge stated in his judgment: ``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''.

Two new companies, Pharmaceutical Investments Limited and Mitchell Credits Limited were incorporated in Norfolk Island on 24 April 1969. The minutes of a meeting of directors of Pharmaceutical Investments Limited held on 28 April 1969 at the registered office of the company at Kingston, Norfolk Island, contains the following statements: ``The Chairman tabled a cable advising that a dividend of $30,910.57 had been declared by Mitchell Holdings Pty. Ltd. in favour of this Company [Pharmaceutical Investments Limited]''. `` It was resolved: `that a dividend amounting to $30,910.57 be declared in favour of Mitchell Credits Limited of 9 Quality Row, Kingston, Norfolk Island, the holder of all the issued " B " class shares of the Company [Pharmaceutical Investments Limited]'''.

The minutes of a meeting of directors of Mitchell Credits Limited held on 25 April 1969 at Kingston, Norfolk Island, contains the following statements: ``The following share application was tabled before the Board: - Esquire Nominees Limited Account No. 19 of 9 Quality Row, Kingston, Norfolk Island - 1 `B' Class share. It was resolved: `that the application be approved, the share allotted, and the Common Seal of the Company be affixed to the Share Certificate'''.

The minutes of a meeting of the directors of Mitchell Credits Limited held on 28 April 1969 at the last-mentioned place contains the following: ``It was noted that a dividend of $30,910.57 had been declared in favour of this Company on the `B' class shares it held in Pharmaceutical Investments Limited. It was resolved: `that a dividend of $30,910.57 be declared on the " B " class shares in this Company, such dividend being thus payable to Esquire Nominees Limited Account No. 19'''.

The Profit and Loss Statement of Mitchell Credits Limited for the period ended 30 June 1969 reads thus -

      ``Income



          Dividend Received -

            Pharmaceutical Investments

            Limited                                         $30,910.57



         Expenditure                                             Nil



         Net Profit for the period

             transferred to Profit and Loss                 ----------

             Appropriation Account                          $30,910.57

                                                            ----------



         PROFIT AND LOSS APPROPRIATION



         ACCOUNT



         Net Profit for the period transferred

             from Profit and Loss

             Account                                        $30,910.57



         Less     Dividend declared and paid

                  ``B'' Class share - 29.4.1969             $30,910.57



         Unappropriated Profits carried                     ----------

             forward                                            Nil''

                                                            ----------
          

The learned judge found on the facts proved before him that ``... 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 [Esquire Nominees Limited]''. His Honour further found that the share was held by Esquire Nominees Limited as trustee for the Manolas Trust; and that during the year of income the ordinary shares in Manolas Pharmacy Pty. Limited were held by or on trust for the

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ATC 4120

Manolas family. They were the beneficiaries of the Manolas Trust. The trust deed was so drawn that no beneficiary was presently entitled to any share of the income of the trust. The learned judge stated in his judgment that the B class share allotted by Mitchell Credits Limited to Esquire Nominees Limited was a fully-paid share of $0.01.

The learned judge made the following finding with regard to transactions between Mitchell Holdings Pty. Limited, Pharmaceutical Investments Limited, Mitchell Credits Limited and Esquire Nominees Limited: ``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 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 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''

His Honour further found that: ``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 [Esquire Nominees Limited] can be clearly traced through the accounts of these companies.''

The conclusion at which the learned judge arrived is the following: ``The income of the appellant [Esquire Nominees Limited] 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 from sources in Australia...'' The expression ``sources in

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Australia'' is to be found in sec. 44(1)(b) of the Income Tax Assessment Act. His Honour refers to that provision of sec. 44.

The whole of this conclusion is clearly supported by the evidence. Having regard to the evidence it would not, in my opinion, be correct in principle to disturb the finding of the learned judge that the source of the amount of $30,910.57 was within Australia. It cannot, in my opinion, be reasonably said that the finding is clearly wrong. The meaning of the word ``sources'' in sec. 7 of the Act does not require that the B class share allotted to Esquire Nominees Limited in Mitchell Credits Limited should be held to be the source of the income in question. It is attributable exclusively to profits of Manolas Pharmacy Pty. Limited. These are the sources of the income. They are in fact its real source. In the light of the evidence concerning the origin of the amount of $30,910.57 and its transmission to Norfolk Island, the B class share allotted to the appellant by Mitchell Credits Limited cannot be regarded as the real source of that amount. The conclusion which I would draw from the evidence is that the share is nothing other than an artificial source, indeed, an illusory source.

The decisions relating to ascertainment of the source of income for the purpose of income tax are cited by the learned judge in his judgment. I do not think it is necessary for me to add anything to the learned judge's discussion of the decisions.

I would dismiss the appeal.