Resch v Federal Commissioner of Taxation

66 CLR 198

---

(Judgment by: Starke J) Court:

Judges: Rich J

Starke JDixon J
McTiernan J

Hearing date: 11 November 1941; 12 November 1941; 13 November 1941; 1942 November 1941; 4 February 1941
Judgment date: 4 February 1942

Sydney

---

Judgment by:
Starke J

Case stated pursuant to s. 51A of the Income Tax Assessment Act 1922-1930.

On the hearing of an appeal pursuant to that section, the Court, that is, the Justice of the Court who hears the appeal, may state a case in writing for the opinion of the High Court upon any question which in the opinion of the Court is a question of law. The case is so prolix and obscure that I suspect that it was prepared by the parties and merely adopted by the Justice before whom the appeal came for hearing. That procedure will not, I hope, become the practice of the Court: the responsibility is upon the Justice to ascertain and state with precision the facts upon which the question of law arises.

A good deal of our time was taken up clarifying and explaining the matters arising upon the case. In the end, the following contentions emerged:

1. That the Income Tax Assessment Act 1922-1930 infringed s. 55 of the Constitution, which enacts that laws imposing taxation shall deal with one subject of taxation only, and was therefore invalid.

The sections of the assessment Act which were the subject of attack were 16 (b) (ii), 16 (d), 16 (h), 16B, 20 (2). Such an objection is rather late in the day, having regard to the many reported decisions upon the construction of the Federal Income Tax Assessment Acts (Australian Digest 1825-1933 - Taxation), in some of which the constitutional provision in s. 55 has been examined (Harding's Case ^[F8] ; Cornell's Case ^[F9] ; British Imperial Oil Case ^[F10] ; Colonial Gas Case ^[F11] ). It has been pointed out that the provisions of s. 55 are complementary to those contained in s. 53 of the Constitution, but whether an Act imposing taxation is void if it deals with more than one subject of taxation has been discussed in several cases but never, I think, actually resolved (Osborne's Case ^[F12] ; Harding's Case ^[F13] ; British Imperial Oil Case ^[F14] ). It might be enough, in view of the question stated in the present case, to say that the Income Tax Assessment Act 1922-1930 is not a law imposing taxation within the meaning of the constitutional provisions: it makes provision for assessing and collecting the tax: it has nothing to do with the imposition of the tax except that it is legal machinery by which the obligation declared by the imposition is effectuated (Osborne's Case ^[F15] ; Crespin & Son's Case ^[F16] , at p. 217; British Imperial Oil Case ^[F17] ).

But the attack was then transferred to the Income Tax Acts 1930 (No. 51 as amended by No. 61), which incorporate the Income Tax Assessment Act 1922-1930 and declare that it shall be read as one with the tax Acts. Ample power, of course, exists in the Commonwealth under its power in relation to taxation to enact the challenged sections (Constitution, s. 51 (ii.)). But the incorporation of the assessment Act in the tax Acts causes the last-named Act, so it is contended, to deal with more than one subject of taxation, in contravention of the constitutional provision in s. 55: See Osborne's Case ^[F18] ; Harding's Case ^[F19] . The provision, however, allows, as Higgins J. said in Osborne's Case ^[F20] , the insertion of any provision that is fairly relevant or incidental to the imposition of a tax upon one subject of taxation.

Income is as large a word as can be used to denote a person's receipts (Re Huggins; Ex parte Huggins ^[F21] at p. 938), it signifies that which comes in. An "Act to impose a tax upon incomes" is not less general in scope; it must be liberally construed, and include everything which by reasonable understanding might fairly be regarded as income. Of course, Parliament cannot by any definition or provision that it may adopt contravene the provisions of the Constitution. But I am by no means convinced that the Parliament cannot under cover of an income tax tax anything that comes into a taxpayer without regard to the characteristics or attributes of capital and income in the works of economists or in the decisions of the courts. It is enough, however, for present purposes to say that the Parliament possesses power, without infringing the provisions of s. 55 of the Constitution, to bring to charge in an income-tax Act all profits and gains accruing to a taxpayer, without distinguishing whether the profit or gain should be regarded as a receipt on capital or on income or revenue account.

Examined on this basis, the sections of the Income Tax Assessment Act which have been challenged do not contravene the constitutional provision. Thus s. 16 (b) (ii) brings to charge profits which have been capitalized; s. 16 (d) brings to charge amounts received by way of premium, fines or foregifts demanded in connection with leases, etc, which are a kind of gain or profit-see Dalrymple's Case ^[F22] ; s. 16 (h) brings to charge receipts from any trading or live stock sold as part of the assets of a business. Such receipts are in substance the proceeds of the business carried on by the taxpayer; s. 16B brings to charge undivided profits distributed in the course of the winding up of a company; s. 20 (2) brings to charge, in substance, the interest or income of a company's debenture holders who are absentees or whose names are not supplied by the company. The clause is designed to prevent evasion, but it is a tax upon income, as was held in the Colonial Gas Case ^[F23] .

It follows that the attack upon the constitutional validity of the challenged sections fails, and it is therefore unnecessary for me to consider whether the tax Acts would have been invalid if the constitutional provision had been infringed.

2. That an amended assessment dated 15th June 1934 was invalid because it was not made within three years from the date when the tax payable on the assessment was originally due and payable.

By the Income Tax Assessment Act 1922-1930, the Commissioner may cause to be made all alterations in or additions to any assessment as he thinks necessary in order to ensure its completeness and accuracy, notwithstanding that income tax may have been paid in respect of income included in the assessment. But the alteration in the present case could only be made within three years from the date when the tax payable on the assessment was originally due and payable (Act, s. 37 (1), (1A) (c)). Tax is due and payable sixty days after the service by post of a notice of assessment (s. 54 (1)), but the Commissioner may extend the time for payment as he considers the circumstances warrant (s. 55). And the Acts Interpretation Act provides in s. 29 that: "Where an Act authorizes or requires any document to be served by post ... then ... service shall be deemed ... to have been effected at the time at which the letter would be delivered in the ordinary course of post."

On 15th April 1931 the Commissioner assessed the appellant to income tax, but at the foot of the notice of assessment stated that the tax might be paid without fine up to 17th June 1931. Notice was sent by post in the manner required by the Acts Interpretation Act and was delivered on 16th April 1931 in the ordinary course of post. On 15th June 1934 the Commissioner amended the assessment and notified that the date of payment of the additional tax was 14th August 1934. Notice of this amended assessment was sent by post in the manner required by the Acts Interpretation Act, and was delivered on 16th June 1934 in the ordinary course of post. Accordingly, the date when the tax payable on the assessment was originally due and payable was either sixty days after the 16th April 1931 or 17th June 1931, the date which the Commissioner notified the tax might be paid without fine. The sixty days is reckoned exclusively of the first day and inclusively of the last day. So the time would expire either on 15th June 1931 or 17th June 1931.

The amended assessment was made on 15th June 1934, though notice of it was not served until 16th June 1934. But the relevant provision of the Act (s. 37) is that an alteration or addition to an assessment may be made within three years from the date when the tax payable on the assessment was originally due and payable. It was contended, however, that the amendment was not made until it was notified, that is, on 16th June 1934. But notification was not essential to the making of the amended assessment, though it was for determining when the tax was payable (s. 54). If this view be wrong, still I think the Commissioner extended the time for payment until 17th June 1931 and the amended assessment was made and notified within three years of that date. Accordingly, the question stated must be answered in the negative.

3. That the amended assessment was erroneous in several respects.

"Where in the course of the winding up of a company a distribution is made by the liquidator to the members or shareholders, the amount distributed shall, to the extent to which it represents income derived by the company (whether prior to or during liquidation) which would have been assessable in the hands of the members or shareholders if distributed to them by a company not in liquidation, be deemed to be assessable income of the members or shareholders derived in the year in which the distribution is made" (Income Tax Assessment Act 1922-1930, s. 16B). Resch's Ltd was a company carrying on business in New South Wales as brewers. It had in 1929 an issued capital of 750,000 one pound shares, of which the appellant and his brother Arnold each held 374,983 shares fully paid up, and the other thirty-four shares were acquired by them equally shortly before the winding up of the company. In July 1929 resolutions were duly passed at meetings of the company that the company be wound up voluntarily and liquidators were appointed, who, pursuant to the Companies Act 1899 (N.S.W.), s. 261, were authorized to sell to Tooth & Co Ltd the whole or any portion of the business and property of the company upon such terms and conditions as they thought fit, but subject nevertheless to the provisions of s. 261 of the Act, and to enter into an agreement in the terms of a draft submitted to the meeting. A scheme had been arranged whereby Tooth & Co Ltd , who were also brewers, took over the business and assets of Resch's Ltd Accordingly, agreements were entered into between Resch's and its liquidators and Tooth & Co Ltd , whereby Resch's business and assets, with some exceptions, were sold to Tooth & Co Ltd , for a sum in the neighbourhood of three millions of pounds.

Tooth & Co Ltd paid the purchase money to Resch's liquidators in accordance with the terms of the sale, whereupon the liquidators established a credit with a bank and drew two separate cheques against the credit, each for half the total amount of the purchase money, one of which was handed to the appellant and the other to his brother. But it had been arranged that upon the acquisition of the business by Tooth & Co Ltd the appellant and his brother should each apply for 625,000 ordinary shares of one pound each in Tooth & Co Ltd at a premium of twenty-five shillings per share, which they did, and paid for the shares by cheques drawn upon credits at the bank created by the cheques received from the liquidators and certain other money paid to them by Tooth & Co Ltd All this was done in the month of July 1929.

The Commissioner claims that the amount distributed to the appellant and his brother in the course of the winding up represented to a certain extent income derived by Resch's and brought to charge pursuant to the provisions of s. 16B of the assessment Act. Doubtless s. 16B cuts across the decision in Burrell's Case ^[F24] and what I regard as the dubious decision of this Court in Stevenson's Case ^[F25] . It is irrelevant for the purposes of this section that income derived by a company has been merged in the assets of the company. The amount distributed is brought to charge to the extent that income is found or is represented in that amount whether the income has been capitalized or accumulated or carried forward, but subject to this, that the income would have been assessable in the hands of the members if distributed to them by a company not in liquidation. The amount brought to charge under the section must depend upon a detailed examination of the accounts of any company and the circumstances of each particular case, which brings me to the particular facts in question here.

In February 1923 a sum of PD515,058, undistributed profits, stood to the credit of an account in Resch's books called the Property Reserve Account. In the same month Resch's resolved to capitalize the sum of PD450,000 out of its accumulated profits. The resolution was in these terms: "Resolved that the company capitalize the sum of PD450,000 out of the accumulated profits of the company (excluding any part of the assessable income of the company which it is liable to include in its return for the purposes of its current assessment) and that in consequence and for the purpose of carrying out such capitalization, fully paid shares shall be issued to the shareholders of the face value of the said sum of PD450,000, being one and one-half shares for every share held ... in the company and that any dividend necessary to be credited to the respective shareholders for the purpose of carrying out such capitalization and crediting the said 450,000 shares as fully paid in consequence of such capitalization be credited accordingly." This capitalization was duly effected through the Property Reserve Account.

The appellant and his brother thus acquired a considerable addition to their share capital in Resch's. Its capital and its undistributed profits, including capitalized profits, PD450,000, were all invested in the business, in the form of fixed assets, plant, stock-in-trade, and so forth. The distribution which the liquidators made to the appellant and his brother resulted in a return to them of all the capital they had subscribed, also all the undistributed profits capitalized as already mentioned, and other sums as well.

Consequently, there is found or represented in the amount distributed by the liquidators to the appellant and his brother the sum of PD450,000 income or profits derived by Resch's which had been capitalized. But the sum of PD515,058 in the Property Reserve Account, through which the capitalization of PD450,000 was effected, included a considerable amount of profits accumulated prior to 1st July 1914, and which were undistributed on 30th June 1914. The second proviso in the Income Tax Assessment Act, s. 16 (b) (i) prescribes that where a company distributes to its members any undistributed income accumulated prior to 1st July 1914, which is the date, it may be observed, from which income first became assessable to income tax under the laws of the Commonwealth, the sum so received shall not be included as part of his income: See Tax Act 1915 No. 41, s. 5; Assessment Act 1915 No. 34, s. 10.

The Commissioner treated the sum of PD450,000, capitalized as already mentioned, as drawn proportionately from the amounts comprising the sum of PD515,058 undistributed profits to the credit of the Property Reserve Account. A sum of PD139,272 profits accumulated prior to 1st July and at credit on 30th June 1914 formed part of the sum of PD515,058. Accordingly, for the purpose of capitalization, the sum of PD121,680 was treated as drawn from this sum of PD139,272. (450,000/515,058 of 139,272 = 121,680.) Accordingly, he concluded that the difference between the sums of PD139,272 and PD121,680, = PD17,592, was the sum which represented undistributed income of profits accumulated prior to 1st July 1914 and not assessable to the appellant and his brother by force of the provisions contained in ss. 16B and 16 (b) (i) of the Assessment Act. On the other hand, the appellant insists that the profits or income accumulated prior to 1st July and not distributed at the date of liquidation was PD65,058. He claims that the capitalized sum of PD450,000 should be treated as drawn or appropriated from additions to the Property Reserve Account for the years 1914 to 1920 inclusive, PD375,786, and the balance of the PD450,000 (PD74,214) from the profits or income accumulated prior to 1st July 1914, thus leaving the difference between PD139,272 and PD74,214, or PD65,058, as the sum not assessable to the appellant and his brother by force of the provisions already mentioned. Symon's Case ^[F26] and the cases there referred to were much relied upon. But they are, I think, irrelevant to this case. They are dealing with the right of a person dealing with his own funds, whereas here we are dealing with the funds of a company in which the appellant was only a member, though holding half its share capital. The company never made any appropriation, but simply capitalized the sum of PD450,000 through the Property Reserve Account, leaving a general balance of PD65,058 remaining at credit of that account (Inland Revenue Commissioners v Crawshay ^[F27] ). Accordingly, the appellant has no right to rely upon an appropriation by the company according to the method he propounds, because the company never made any such appropriation and simply resolved to capitalize PD450,000 out of its accumulated profits. On the other hand, the method adopted by the Commissioner accords with methods which have been adopted in other cases of allocating or appropriating funds in cases in which no allocation or appropriation has been made. But I take leave to say that these so-called rules of appropriation are not so much rules of law as rules of convenience and of administration adopted to provide for cases in which no method of appropriation has been indicated or no particular intention is discoverable. It is, I think, for the Justice who hears the appeal to consider whether the method adopted by the Commissioner is now the only practicable method which exists of allocating the capitalized sum. If it is, the assessment of the Commissioner is so far right and should not be disturbed.

Another question arises in relation to a sum of PD9,289, which represents the balance of profits transferred to the Property Reserve Account for the year ended 30th June 1914, after applying the method of appropriation adopted by the Commissioner. It represents the difference between the profits transferred to the Property Reserve Account for the year ended 30th June 1914 and the sum treated by the Commissioner as drawn from the profits of that year in the capitalization of the sum of PD450,000, or in other words the sum of PD73,543, less the sum of PD64,254, or PD9,289. The Commissioner did not treat this sum as undistributed income accumulated prior to 1st July 1914. For the purposes of the proviso, amounts carried forward by a company in its profit and loss account, appropriation account, revenue and expenses account, or any other account similar to any of the foregoing accounts, are not deemed to be accumulated income (Act, s. 16 (b) (i), second proviso). The facts stated in relation to the matter are meagre, and whether the Commissioner was right or wrong appears to me to be a question of fact. But the Commissioner insists that the profits of the year which ended on 30th June 1914 could not have been ascertained nor accumulated until after that date. The date on which the profits for the year were ascertained is not stated, nor is the date on which the sum of PD73,543 from profits of the year was transferred to the Property Reserve Account. But when the sum of PD73,543 was transferred to that account, then may it not be described as accumulated? It was credited to a particular account, not of the character excepted by the proviso, and separated from the other funds of the company. Forrest's Case ^[F28] aids, I think, this view. However, the authority under which the transfer was made, when and how it was made, are all unstated, and for my part the question whether the sum of PD9,289 should or should not be treated as undistributed income accumulated prior to 1st July 1914 should be determined by the Justice who hears this appeal with more detailed knowledge of the facts relevant to the question.

[Portion of this judgment not reproduced].