Dickson v Commissioner of Taxation (NSW)

(1925) 36 CLR 489
26 SR(NSW) 292
42 WN(NSW) 155
[1925] R & McG 168
31 ALR 393

---

(Decision by: Higgins J)

Between: Dickson
And: Commissioner of Taxation (NSW)

Court:

Judges: Knox CJ
Isaacs J

Higgins JRich J
Starke J

Subject References:
Income tax (NSW)

Judgment date: 24 August 1925

---

Decision by:
Higgins J

We have recently had to consider the meaning of an income tax Act of Queensland (Mount Morgan Gold Mining Co. v. Commissioner of Income Tax (Q.) (1922-23) 33 CLR 76 ). In that case - as well as the present case - the peculiar arrangements made for the export of gold, through the agency of the Gold Producers' Association, and with the assistance of the Federal Government, were involved; and we reserved judgment in this case as to a New South Wales income tax Act in order that we might have any guidance which the decision of the Judicial Committee of the Privy Council in the Mount Morgan Case might afford. But the Mount Morgan Case has, as we understand, been settled without any decision. The New South Wales Act has now to be interpreted on its own words. (at p499)

In the Queensland Act the relevant test of taxability as to income derived from personal exertion is this: was the income "arising or accruing from any business carried on in Queensland"; the test in this New South Wales Act is this: was the income "derived from any source in the State" (of New South Wales) (sec. 4). It is further provided (sec. 10 (g)) that this Act is not to apply to "income derived from sources outside the State." The source is local. If a man in New South Wales receive rent from houses in England, or profits from a business carried on in England - or in China - he has not to pay income tax thereon to the New South Wales Government. (at p500)

There is, indeed, a provision (sec. 19 (2)) as to a taxpayer who carries on business both in and outside of the State, that "his taxable income shall be deemed to be a sum which shall bear the same proportion to the net profits of such business as the assets of the business in the State bear to the total assets of the business, or, in the discretion of the Commissioner, as the total amount of sales in connection with the business effected in the State bears to the total amount of such sales effected both in and outside the State." But to effect a profitable sale in England - or in China - is not necessarily to "carry on business" there. As Lord Herschell said, in Grainger & Son v. Gough [1896] AC 325 , at p. 335, "many merchants and manufacturers export their goods to all parts of the world, yet I do not suppose anyone would dream of saying that they exercise or carry on their trade in every country in which their goods find customers" (and see pp. 337, 346). Therefore, sec. 19 (2) does not enable us to affirm that profitable sales made in China involve as a corollary that China is the source of the profits from the sales. (at p500)

The facts set out in par. 4 of the special case need not be repeated by me. But it should be noticed that in this case the identical gold which was produced by the Adelong Company at Tumut is sold to the Royal Mint at Melbourne - that the identity of the gold has not been lost in the process of refining at a refining company's works; further, that the company is a Victorian company, incorporated in Victoria, directed from Victoria - the directors do not sit and reside in the State in which the mine is situated. The Act, in substance, says that wherever the taxpayer, whether a person or a company, resides or has a principal centre, he must pay income tax on all such income as is derived from any source in the State of New South Wales. The words of the Act are not "derived from the carrying on of business operations in New South Wales." If these were the words used - "the carrying on of business operations" - it might reasonably be argued that there must be apportionment of the profits as between the business operations carried on in Victoria (where the directors sit), and the business operations carried on in New South Wales (where the mine is worked). (at p501)

What, then, does the Act mean by income "derived from any source in the State," as distinguished from income "derived from sources outside the State"? We have to find the locality of the source, as between New South Wales and other countries; the generic source as to nature or character lies, or may lie, in personal exertion. (at p501)

Now, the word "source" is not technical; it has to be interpreted according to its ordinary use in common language. The original idea, I suppose, is that of a stream issuing from a mountain; but the metaphorical use of the word is very frequent. This company has power under its rules and regulations to get gold from any part of the world; but all its gold comes actually from this land at Tumut in New South Wales. What would the "practical man" say was the "source" of these profits, this income? To be more definite, would the country of "source" be New South Wales, or Victoria, or China? If this Victorian company got gold from a mine in Victoria as well as from this mine in New South Wales, and presented to the Mint the gold from Victoria in the form of bar A, and the gold from New South Wales in the form of bar B, the practical man's answer would be obvious - the source of that gold in bar B is in New South Wales; and the income of the company taxable in New South Wales includes all profit made that would not be made but for bar B. The bar is not all income, but the profit from it is. The position is clear when we look at the matter from the point of view of the company, or of the directors who conduct the business of the company. (at p501)

But the subsequent processes whereby the profit is made have to be more fully considered. These subsequent processes were essential to the making of the profit; and they did not take place in New South Wales. The mining operations in New South Wales resulted in gold; by the sale of this gold to the Royal Mint the company gets (1) the standard price for it, and the price, less expenses, is profit; and (2) the profit made by the sale in China of equivalent sovereigns. But for the production of the bar gold from this mine in New South Wales, neither of these profits would be enjoyed. So that the source - the fountain head - of these profits is in New South Wales. (at p502)

Everything that has been done is abundantly within the scope of the company's objects, and the powers of the directors. The objects of the company (reg. 3) include these:

(a)

to purchase or otherwise acquire real or personal property of all kinds in Australia, and to sell, exchange or otherwise deal with the whole or any part of such property;

(b)

to purchase or otherwise acquire gold and other metals;

(g)

to transport or ship to any place in Australia or elsewhere, and to sell there any metals or other products;

(p)

to establish and form or assist in establishing and forming any association calculated in any way to benefit the company;

(q)

to enter into any agreement with any Government and to obtain from such Government any rights, concessions and privileges which may be thought conducive to any of the objects of the company;

(v)

to do all or any of the above things in any part of the world and either alone or in conjunction with others either by or through agents or otherwise;

(w)

to do all such other things as are incidental or may be thought conducive to the attainment of any of the objects.

In brief, the directors can do substantially anything that will enable the company to get the most profit from the gold that it produces. The supreme purpose is gain - gain through pursuing the objects; but the source of this particular gain is in Tumut, New South Wales, and in the mining operations there. (at p502)

But it is urged that the gold sold in China is not the gold produced in New South Wales, but sovereigns which have been sold for the benefit of the gold producers who sell their gold to the Mint; and the processes of sale in China are effected, not by the company, but by the Gold Producers' Association. Yet the agreement with the Federal Government and the concessions and privileges as to the profit from the sovereigns were well within the objects of the company. The Gold Producers' Association is an agent of the company for the purpose of selling (art. 97, arts. 98-100A, of Gold Producers' Association articles). It matters not for our present purpose whether the Association is validly incorporated or not - it is directly an agent for the company. By becoming a member of the Association, this Adelong Company covenants to conform to the regulations, or, at all events, assents to them. The resolution to become a member of the Association is one of the steps taken by the directors of the company with the view of making profit from its mining operations in New South Wales. As for the fact that the gold sold in China is not the identical gold produced from those mining operations, I put, during the argument, the case of a company mining for gold in a back district of Queensland.

The company wants to export its gold for sale in China; it learns that a bank in Sydney, New South Wales, has equivalent sovereigns in its vaults; the roads are bad, and the company arranges with the bank to send the equivalent sovereigns to China in the meantime in place of the company's gold: could it be said that the profit made by the sale of those sovereigns taken from the bank is not profit derived from "a source" in Queensland? The test as to income being taxable is not whether the gold sold in China was derived from a source in New South Wales, but whether the income - the result of all the company's activities under its regulations, including the making of the agreement with the Government - was derived from a source in that State. No ne but gold producers of Australia belonged to the Gold Producers' Association; none but gold producers of Australia, who sold their gold to the Mint, were allowed to export gold. The profit from the export of equivalent gold sovereigns could not have been made but for the fact that the original bar gold had been produced in Australia; and the particular State of Australia from which it was produced was in this case New South Wales. (at p503)

Perhaps, I can make the position as it appears to me, clearer thus: - The Federal Government has prohibited the export of gold, and the gold producer has no market for his gold except at the Royal Mint, at the standard price; whereas if the gold were sold in China the price would be much higher than the standard. The gold producer may hoard his gold and wait for more advantageous opportunities for selling; but the Federal Government says (I am paraphrasing):

"We are paying you less than would be paid in the open market, and we prevent you from going to the open market. But if you will sell your gold to us at the fixed standard price we are willing to give you not only that price, but also the difference between that price, and the net sum to be realized by the sale of equivalent sovereigns in China; and you will have permission - notwithstanding the prohibition - to export the equivalent sovereigns through your Association."

Thus stated, it seems to my mind clear that the source of all this profit, all this income, is in the State where the mine is. (at p504)

It must be borne in mind that we have not to deal with the Gold Producers' Association as a taxpayer, but as an agent for the Adelong Company. If we had to deal with the Association as a taxpayer, it might be fairly contended that any commission earned by itself for acting as agent was not made from a "source" in New South Wales, but from a "source" (its own business operations) in China. But here we are dealing with the Adelong Company as a taxpayer; and, from this point of view its income is made, through agents in China, from a source in New South Wales. (at p504)

I have examined the cases referred to in argument and I cannot find any case which throws doubt on this reasoning. More than ever I feel the importance of keeping one's mind fixed to the particular Act to be applied. In the case of Commissioners of Taxation v. Kirk [1900] AC 588 the Judicial Committee had to deal with a previous Land and Income Tax Act of New South Wales (Act of 1895). The income of the company - the Broken Hill Proprietary Co. Ltd., incorporated and directed in Victoria - was in part derived from the extraction of ore (base metals) from the soil of New South Wales, and in part from the conversion of the crude ore into a marketable product in New South Wales. The finished product was sold exclusively outside New South Wales. It was held that the profits were assessable for income tax - as to the extraction of the ore, because it was income "derived from lands of the Crown held under lease," & c., and as to the manufacturing process because it was included in the words of the Act "from any other source whatsoever in New South Wales." The only question asked was, had the company any income in the relevant year within the meaning of the Act; and the answer was Yes. The Judicial Committee had not to consider whether all the income was taxable. In Commissioners of Taxation (N.S.W.) v. Meeks (1915) 19 CLR 568 the Sulphide Corporation was incorporated and had its head office in London, conducted its Australian business at Melbourne, but its practical operations of mining, treating and smelting ore in New South Wales. It was held in this Court, under this very New South Wales Act, that the tax was assessable on the profits so far as attributable to the practical operations in New South Wales as the place of source of such profits; but it was said that if the company could establish a case for attributing any portion of the profits to England or to Victoria, where it carried on certain business operations, the Commissioner should give effect to such proof.

In Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 the subject of discussion was the Federal Income Tax Assessment Act which taxed "income derived directly or indirectly from sources within Australia" (sec. 10). Dividends were received in England by a shareholder from companies incorporated in England and having their control and management there; but the companies carried on their businesses in part in Australia. It was held that the taxpayer was assessable as to the dividends so far as attributable to the profits of that part of the business carried on in Australia. It was said (1918) 25 CLR, at p 191 that the place of head office and directorate and declaration of dividend did not govern the matter, "but the real source of production of the dividend, namely, the company's actual operations, should govern to the extent that they so contributed." This case, so far as it goes, supports the view that the scene of the actual mining operations in the present case (New South Wales), not the seat of direction (Victoria), is the test of the source of income. Lovell & Christmas Ltd. v. Commissioner of Taxes [1908] AC 46 was an appeal from New Zealand. The Act prescribed that income derived from business was to be deemed to include "all profits derived from or received in New Zealand"; and it was merely held that the profits of a commission agent, made by the sale of New Zealand produce in London, were not profits of a business carried on in New Zealand; and as the profit derived from that business in London was not "derived from or received in New Zealand," these profits were not taxable. (at p505)

But it is argued that "derived" must mean "directly derived," when the Act says "income derived from any source in the State"; and by "directly," as the context shows, what is meant is "immediately" - the source must be that which is proximately antecedent. Here, it is said, the immediate source of the income is the sale of sovereigns in a foreign country. In my opinion, the word "source," when its metaphorical basis is considered, connotes the very contrary of that which is proximately antecedent. If one, looking at the mouth of the River Murray, were to ask where is the source of the river, no one would say that its source was Lake Alexandrina, from which the river immediately falls into the sea; the answer would be that the source was in mountains of Queensland, New South Wales and Victoria. Nor is there anything in Lovell's Case [1908] AC 46 to favour this view of immediacy in connection with "source." The word "source" is not even used in the New Zealand Act; and what was held was that profits made by commission agents in their London business of selling New Zealand produce were not "profits derived from or received in New Zealand from such business," although in New Zealand the commission agents did their best to bring goods from New Zealand "within the net of the business which is to yield a profit." The word "directly," as used in that case, is not used in the sense of "immediately," but as contradistinguished from ancillary - the profits were not to be regarded as due to the canvassing and securing orders in New Zealand. The case of Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 is actually an authority against this view of immediacy. The taxpayer's dividends came from companies which carried on some of their business in Australia, but the Court rejected the argument that the "source" of the dividends was in the companies or in the shares in the companies, from which the dividends were immediately received. (at p506)

It seems clear, then, that question 2 should be answered in the affirmative - "Whether any part of the said sum of 1,916 pounds is taxable income of the appellant company" - as answered in Kirk's case [1900] AC 588 . But we are asked the further question, whether the Judge was in error in holding that the whole of the said sum is taxable income. I cannot say that the learned Judge was in error; on the facts stated he was, in my opinion, absolutely right. (at p506)

This is a special case, and we cannot go beyond the facts as stated. If the company desired to raise the point that there was some further source for the income in question in Victoria or in China or elsewhere than in New South Wales, the relevant facts should have been inserted in the special case; and, without the consent of both parties, we are not, in my opinion, justified in ruling as to facts not inserted. The case is stated under sec. 32 of the Income Tax (Management) Act 1912, and the section does not give any express power to the Supreme Court to draw inferences of fact. The decision of the Supreme Court, and of this Court, must be "on any question of law arising before the Court" (of Review). The learned Judge of the Court of Review said:

"On these facts I decided that the sum of 1,916 pounds was taxable income of the appellant company within the meaning of the Income Tax (Management) Acts 1912-1918.... The questions for the determination of the Court are:

(1)

Whether my said decision is correct in law."

In my opinion, question 1 by itself is a good question within sec. 32. In effect, the Judge had decided that the whole sum of 1,916 pounds was taxable income - so far the question depended on facts, and conclusions of fact; but as his decision involved the construction of the Act, a question of law, he asked the Supreme Court to say was "my said decision... correct in law." I am glad to feel that this important case is not to be returned unanswered because of what I regard as extremely cramped views as to the duty of this Court on special cases. (at p507)

In Kirk's Case [1900] AC 588 the Judicial Committee confined itself strictly to answering the precise question asked by the special case; the question being whether the companies had any income taxable within the New South Wales Act, the answer was Yes. In Meeks' Case (1915) 19 CLR 588 , the question being was all the sum in question taxable, this High Court said, in its reasons for the judgment and on the facts stated in the case, that the sum was apportionable between New South Wales and any other places where the business was carried on; but it is to be noticed that there is no mention of apportionment in the formal judgment as expressed at p. 592. We have been shown the formal judgment as passed and entered. No apportionment was actually directed. (at p508)

In my opinion, the Court of Review was right, the three Justices of the Full Court of New South Wales (Gordon, Ferguson and Wade JJ.) were right, and the appeal should be dismissed with costs. (at p508)