Esquire Nominees Limited as Trustee of Manolas Trust v. Federal Commissioner of Taxation.
Judges: Barwick CJMcTiernan J
Menzies J
Stephen J
Court:
High Court (Full Court)
Stephen J.: From the complex facts of this case Gibbs J., whose judgment is reported in 72 ATC 4076, 46 A.L.J.R. 345, has distilled its essence and there emerges from that distillation the problem, the location of the source from which the taxpayer derived a dividend of some $30,000. Section 7(1) of the Income Tax Assessment Act extends the operation of the Act to certain overseas Territories of the Commonwealth, including Norfolk Island, but provides that it shall not apply to any income derived by a resident of those Territories ``from sources within those Territories''. If the source of that dividend lies within Norfolk Island that is an end of the case, the Act will be inapplicable and the Commissioner's assessment should be set aside. His Honour came, however, to the contrary conclusion, hence this appeal.
The taxpayer is the first of five companies linked in a shareholding chain; it holds shares in a second company which holds shares in a third and so on until the fifth and last company of the chain is reached, which carries on business in Australia as a pharmaceutical chemist whereas each of the other four carries on, in substance, no business other than that of holding shares in and receiving dividends from its successor in the chain. The taxpayer and the next two links in the chain are companies incorporated in Norfolk Island and resident there, the last two companies in the chain are resident in Australia.
ATC 4125
The taxpayer having received in the relevant year of income this dividend of some $30,000 and having appealed against its assessment to tax in respect of it, Gibbs J. disallowed that appeal and held that that dividend was not income derived by it from a source within Norfolk Island but was, on the contrary, derived from an Australian source, that source being the profits derived by the fifth company in the chain from its Australian pharmacy business. It is with the correctness of this identification of source that this appeal is concerned.
As
Evatt
J. observed in
F.C. of T.
v.
W. Angliss
&
Co. Pty. Ltd.
(1931) 46 C.L.R. 417
. at p. 441
, taxation by reference to source of income has long been a feature of fiscal legislation in Australia, income being depicted as a flowing stream fed from identifiable sources. To use ``source'' in such a context is not to employ any legal concept but rather a metaphorical expression
-
per
Rich
J. in
F.C. of T.
v.
United Aircraft Corporation
(1943) 68 C.L.R. 525
, at p. 537
-
and in the task of applying this metaphor so as to determine fiscal consequences it has become accepted doctrine that the ascertainment of the actual source of a given income ``is a practical, hard matter of fact'', the source being ``something which a practical man would regard as a real source of income''
-
per
Isaacs
J. in
Nathan
v.
F.C. of T.
(1918) 25 C.L.R. 183
, at p. 189
.
As
Kitto
J. said in
F.C. of T.
v.
French
(1957) 98 C.L.R. 398
, at p. 417
, the Act
``assumes that it is possible to identify, with respect to every amount of income, some activity, event or thing which may properly, though metaphorically, be described as the source from which that income has been derived.''
This assumption is met with in a number of sections of the Act which employ the concept of source of income, but it is primarily with sec. 7(1) that this appeal is concerned.
The process of identification of the locality of a source of income may differ depending upon the nature of the income in question. Where income may be seen to be derived solely from the acts of the taxpayer the source is to be found where those acts are performed; but the problem is seldom set in such simple terms, such personal exertion income will often be seen to be derived from the performance of work pursuant to some contract and the place of performance, the place of payment and to locus of the contract may all affect the question of source - French's case per Taylor J. at p. 422.
Here no question of income from personal exertion arises, the dividend in question is income from property both in the ordinary sense of that phrase and in its defined meaning in sec. 6 of the Act. It has been said that the doing of acts or the possession of property are the only two sources of income and that in the case of the latter the location of the property in a particular country identifies the source of income flowing from it - United Aircraft case per Latham C.J. at p. 536. Thus the appellant relies upon the location of the shares upon which the dividend received by the appellant was declared as decisive in its favour; those shares being situated in Norfolk Island, dividends declared on them are, it is said, derived from that Territory and sec. 7(1) renders the Act inapplicable to that dividend. There are alternative arguments of some sophistication upon which it also relies and which have called forth, in response, arguments of equal ingenuity from counsel for the Commissioner but I am content to dispose of this appeal upon sec. 7(1) alone.
The two contending views, so far as concern sec. 7(1), are, then, on the one hand, that the source of a dividend is situated where the shares on which it is declared are situated and, on the other, that, since identification of source is a question of fact and an essentially practical matter, it is formalistic and in disregard of reality to look simply at the location of the shares; instead the origin of that fund of profits out of which the dividend is paid must be sought in some operation of business and in that search there may be ignored any corporate entities through the hands of which the fund of profits may have passed en route to its final destination in the hands of the taxpayer.
This latter view, that of the Commissioner, does not, I think, accord with the language of sec. 7(1) and is, in my view, opposed to authority. Looking first at the language of
ATC 4126
the sub-section, its proviso speaks simply of ``income derived by a resident of those Territories from sources within those Territories''.The word ``source'' has a quite variable meaning, depending upon the context in which it appears. A river's source may refer to the locality from which come the waters which go to make up its main stream or to its origin in melting snows or monsoonal rainfall; the first is a purely locational concept, the second is concerned rather with the character of its origin. In the present case it is clear that it is in a locational sense that ``source'' is used.
Again, as in problems of causation, the answer to any question as to ``source'' or ``origin'' must depend upon whether a proximate or a remote, or perhaps ultimate, source or origin is enquired after.
To say that questions of source depend upon practical matters of fact will not necessarily assist in determining which of a range of possible meanings of source is meant, but context should provide a solution. The context furnished by the proviso to sec. 7(1) is that of the individual taxpayer and of his derivation of his income either by his own acts or from property rights which he possesses. It is a context unconcerned with the questions of ultimate origin; the source referred to is that from which income is produced by the taxpayer's own acts of derivation or ownership. All this suggests that a quite proximate source is being referred to.
The income-producing property rights here in question consist of the taxpayer's rights as a member of a company. All the possible relevant facts relating to that company point to a geographic location of source in Norfolk Island; the company is resident there, the share in its capital held by the taxpayer was held on a Norfolk Island register, the fund of profits out of which the dividend was declared was derived from the company's shareholding in another company resident in Norfolk Island and the dividend was declared and paid there. In those circumstances there is no occasion to make a choice between the locality of the taxpayer's share and some other possible criterion of locality of source, such as the place where the company made its profits; whatever guide to locality of source be adopted the result will be a Norfolk Island source unless what I regard as the relevant context be ignored and some more remote source be sought for, perhaps because the taxpayer's property rights as a member of the dividend-paying company are thought not to constitute a legitimate source for this purpose.
The Commissioner's contention appears to me to deny that ownership of income-producing property necessarily constitutes a relevant source of income and to assert that before such income-producing property can constitute a relevant source of income it must, when it consists of a shareholding in a company, be a shareholding in a company which does not derive its own income from shareholdings in other companies but rather from some independent business activity which it pursues. I am unable to discern any such limitation in the words of sec. 7(1).
The authorities seem to me to be opposed to what I have called the Commissioner's contention. No nice distinctions appear, in the past, to have been drawn between different kinds of property, some constituting a relevant source of income and others being disregarded and passed over in favour of more remote origins. In the United Aircraft case, Latham C.J., after describing property as one possible source of income, said, at p. 536, ``if a person has rights over property or in relation to property he may derive income from that property''. His Honour regarded as essential to the identification of income as having a source in a particular country the ownership of something in that country or the doing of something in that country. No qualification upon the nature of what was owned, so long as it was income-producing, was hinted at.
In that case, at p. 539, Rich J., albeit in a very different context, denied the legitimacy of tracing back beyond a relevant source to the more remote origins of an item of income; he instances an Australian tourist's purchase of an article from an American shopkeeper in New York, saying that there could be no justification for describing the shopkeeper as having derived income from a source in Australia because the tourist paid
ATC 4127
for it out of income which he had received in Australia. So too here, unless for some reason not apparent to me the shareholding of the taxpayer is to be disqualified as a possible source of its income, it appears equally inappropriate to describe the source of that income as to be found in some transaction, however remote, which lies behind the fund of profits out of which the dividend has been declared in favour of the taxpayer.In the earlier case of
Tariff Reinsurances Ltd.
v.
C. of T. (Vict.)
(1938) 59 C.L.R. 194
,
Latham
C.J., in considering the position of an English re-insurer of a Victorian underwriter's risks, had said at p. 205
-
``In order to determine whether the profits are derived in or from Victoria it is necessary to ascertain what the taxpayer does in order to obtain the profits in question ( Premier Automatic Ticket Issuers Ltd. v. F.C. of T., per Dixon J.). It is not relevant to consider what another person, who is not an agent in any sense of the taxpayer, does in order to obtain the moneys which he uses for the purposes of making payments to the taxpayer.''
and he went on to say, at p. 206, that although the insurance activities of the Victorian underwriter in Victoria ``provided the moneys with which the Victorian company paid its debts to the English company'', which was entitled to gross premiums received less certain deductions, ``that fact does not bring about the result that profits are derived by the English company from Victoria. If the contrary view were taken income would be derived from Victoria by every person in other countries who sold goods to persons who paid for the goods with moneys earned in or derived from Victoria''.
Rich
J., at p. 209, spoke of the reasoning which the Court was asked to adopt but which its members rejected when he said ``if this method of reasoning were allowable the income of the first producer of any article should be traced through to the ultimate consumer who pays for it''. In
Commr. of I.R.
v.
N.V. Philips' Gloeilampenfabrieken
[1955] N.Z.L.R. 868
, the Chief Justice said, at p. 876, of a Dutch company which the Commissioner had sought to assess to tax in respect of interest on a loan made by it to an affiliated New Zealand company.
``The Dutch company owns no property in New Zealand, and it has done nothing in New Zealand. It has no servants or agents in New Zealand, and, therefore, cannot do anything here. As was said by Sir John Latham, C.J., in
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 ): `a person who neither owns anything in a country nor does nor has done anything in that country cannot, in my opinion, derive income from that country'. ( ibid., 536). And be it noted that the learned Chief Justice made those remarks in reference to an Act which, like ours, contained references to `source' and `directly or indirectly'. It must always be remembered that we are concerned with the source of the Dutch company's income - not with the source of its debtor's earnings. The interest on this loan is no doubt paid by the debtor out of moneys it receives from carrying on its business in New Zealand. But that is no concern of the lender.''
The Court of Appeal affirmed the judgment of the Chief Justice and in the cause of doing so Gresson J. said, at p. 884 -
``proper regard must be paid to the word `derive'; it should not be read as `received'. The word `derived' means more than received; it connotes the source or origin, rather than the fund or place, from which the income was taken. It means flowing, springing, emanating from, or, as was said in
C. of T. v. Kirk ( [1900] A.C. 588 , 592 ), arising from or accruing. To be a `source' of the income within the meaning of the subsection, it is necessary, I think, to look to the originating cause. It is not sufficient to ascertain the fund out of which the income was in fact paid, which is no more than the reservoir from which it was drawn. It is not whence it was paid, but why it was paid, that is the determining factor. The emphasis is not upon the receipt, but upon the derivation of the income. Consequently, it does not
ATC 4128
constitute the source within the meaning of the section that the money was drawn from or provided by the trading profits in New Zealand. The New Zealand company was free to obtain the funds with which to perform its obligation anywhere it chose, from deposits in England, if it had any, or from borrowing in England, or from the profits of its trading in New Zealand. That was a domestic matter. The money could `come from' any of these `sources', but none of them would be the source from which the Dutch company derived what it received as income. The combination of the words `derived' and `source' import, I think, some causative link.''
These passages suggest that when source of a taxpayer's income is in question and it is found that he has received income from another person who is not his agent and in whose business activities he is no participant the reason why that income is so received is all important but the source from which that other person derived the moneys from which he provides the taxpayer with his income is of no relevance.
As has been remarked by
Gibbs
J., there is difficulty in reconciling some of the passages from the joint judgment in
C. of T. (N.S.W.)
v.
Freeman
,
11 A.T.D. 38
, with the joint judgment in
Nathan's case
but for the reasons already stated the present case calls for no such reconciliation. Whatever differences may be discerned in these two decisions,
Freeman's case
does not, I think, cast any doubt upon the factual character of the investigation into source of income emphasised in
Nathan's case
and acknowledged in later cases, including decisions of this Court subsequent to the decision in
Freeman's case
. If the two judgments do suggest conflicting answers to the question ``Where lies the source of a dividend?'' at least neither, so far as applicable to the present case, seems to me to involve any investigation of origins more remote than the activities of the company declaring the dividend; nor does either suggest that certain types of income producing property may be disregarded as a relevant source of income, the search for a source therefore having to be pursued to a more remote origin.
Accordingly I reject the Commissioner's contention and conclude that the source of the dividend in this instance was in Norfolk Island. There was situate the relevant share register and the fund of profits available for distribution and there were undertaken the business activities of the company paying the dividend, that is to say, the activity of holding shares and receiving payment of dividends, which was its only business activity. The fact that a further company in the chain and in which it held shares and from which it derived its sole income in turn derived its income from dividends the origin of which was Australia I regard as too remote to be relevant to the location of the source of the taxpayer's income.
It follows that I regard this dividend as derived by the taxpayer from a source in Norfolk Island.
Two further aspects should be mentioned; the first relates to the Commissioner's contention that because the taxpayer was a trustee of its shareholding sec. 7(1) had no application to it and that, instead, the relevant section was sec. 44(1)(b), made applicable by Div. 6 of Part III of the Act. It suffices that I express my agreement with what was said in this regard by
Gibbs
J., who held that the provisions of sec. 7(1) were intended to override the other provisions of the Act; I respectfully adopt his Honour's reasons for this conclusion. I may add that sec. 44(1)(b) cannot, in my view, be relied upon by the Commissioner as affecting the meaning of sec. 7(1) and as thereby justifying a search for some remote source of the taxpayer's dividend. In
Parke Davis
&
Co.
v.
C. of T.
(1959) 101 C.L.R. 521
at p. 532
, the Court said of sec. 44(1)(b) that it was not cumulative upon and independent of sec. 23(r) but merely carried out sec. 23(r) and stated what was, in the case of a dividend received by a non-resident, its source for the purpose of sec. 23(r). Its role is not, however, to provide any similar interpretive function for the overriding provisions of sec. 7(1).
The second aspect concerns the Commissioner's reliance, in the alternative,
ATC 4129
upon sec. 260 of the Act. If, as I have concluded, sec. 7(1) operates to exclude from the operation of the Act this income of the taxpayer then I consider that sec. 260 cannot have any operation in relation to that income.In my view this appeal should be allowed and the assessment set aside.
ORDER :
Appeal allowed with costs. Order that the assessment be set aside and further order that the matter be remitted to the Commissioner to be dealt with in accordance with the reasons of this Court.
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