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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Barwick C.J.: The taxpayer is a company incorporated in Norfolk Island under and in accordance with the Companies Ordinance of that Territory of the Commonwealth of Australia. It there has its registered office and its central management and control.

In the income tax year 1968/69 it received in Norfolk Island the sum of $30,910 being a dividend paid on shares held by it in Mitchell Credits Ltd., a company also incorporated in Norfolk Island under the said Ordinance and having its registered office and central management and control there.

The taxpayer held the shares in Mitchell Credits Ltd. as trustee of a trust known as the ``Manolas Trust''. According to the terms of the trust deed no person in the year of income was beneficially entitled to the income of this trust and in particular to the money received by way of dividend on the shares in Mitchell Credits Ltd. or to any part thereof.

Section 7 of the Act provides as follows -

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

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(2) Any Taxpayer who is resident in a Territory specified in sub-section (1.) of this section shall, for the purposes of assessment and payment of income tax on income derived from sources in Australia, be deemed to be a resident of Australia.''

The respondent Commissioner, however, took the view that by reason of certain facts to which I shall shortly refer the proceeds of the dividend paid by Mitchell Credits Ltd. did not constitute in the hands of the taxpayer income derived from sources within the Territory of Norfolk Island. Accordingly, he assessed the taxpayer under sec. 99 of the Act in respect of the sum of $30,910 on the footing that it constituted income derived from Australia. The taxpayer duly objected to the assessment which objection, being disallowed, was transmitted at the taxpayer's request to this Court as an appeal against the assessment.

My brother Gibbs, who heard the appeal, upheld the assessment rejecting the taxpayer's submission that the dividend was derived from sources within Norfolk Island. His Honour held that the taxpayer was a resident of Norfolk Island, a conclusion with which I fully agree. The sole question therefore before this Court, is whether or not the proceeds of the dividend paid to the taxpayer by Mitchell Credits Ltd. was income derived by the taxpayer from sources within Norfolk Island. If yea, no part of the Act will apply in respect of the taxpayer's receipt of that sum. If any, then sec. 44 and 99 clearly apply and no further questions arise.

In resolving the fact which determines whether or not the Act applies at all, one cannot resort to the substantive provisions of the Act itself as in any way definitive of the question. It may be that regard might be had to express definitions in the Act of any of the words used in sec. 7(1). However, the only expression in that section which needs definition or construction is to be found in the words ``derived from sources within...'' Norfolk Island. Of these words or of any of them there is no express definition in the Act. Consequently the question whether or not the proceeds of the dividend constitute income derived from a source within Norfolk Island must be determined according to the general law. But, of course, decisions upon the meaning of the word ``source'' will be relevant to be considered though they were given in the construction of other provisions of this Act or of others of other Acts: but care needs to be taken to observe whether or not those decisions in any respect turn on the particular terms of the Act which they purport to construe and apply.

As I have said, Mitchell Credits Ltd., is a company incorporated in Norfolk Island. Its share register at material times was there. It was not a trading company, but in the year of income, held shares in Pharmaceutical Investments Ltd., a company also incorporated and having its central management and control in Norfolk Island. From this company, Mitchell Credits Ltd. had received a dividend of $30,910 upon those shares. The money received by way of this dividend provided the fund of profit out of which Mitchell Credits Ltd. paid the dividend to the taxpayer.

The various operations as a result of which Pharmaceutical Investments Ltd. was enabled to pay such a dividend to Mitchell Credits Ltd. are recounted in the reasons for judgment of my brother Gibbs. Holding the view which I do and which I will ultimately express upon the question raised in this appeal there is no need for me to include in my reasons a recital of that detail. Suffice it to say that those in control of Mitchell Holdings Pty. Ltd., a company which was at material times a resident of Australia for the purposes of the Act, and of other Australian resident companies connected with Mitchell Holdings Pty. Ltd., contrived to pass a sum of about $30,000 which was initially part of the profits made in Australia by a trading company to the hands of Pharmaceutical Investments Ltd. The method of passing the money included the declaration and payment of dividends and the making of loans from one company to another. The manoeuvres which effected this transfer of money were undertaken because those in control of Mitchell Holdings Pty. Ltd. supposed, mistakenly as it proved, that that company was under the necessity of making a distribution of its profits in order not to expose itself to liability to tax under Div. 7 of the Act.

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My brother Gibbs held that the source of the dividend paid by Mitchell Credits Ltd. to the taxpayer was Australia, being a portion of profits made in Australia. However, with due respect I am unable to agree that the profits earned in Australia were the source of the dividend paid to the taxpayer according to the general law. Of course, if one were asking what was the source of the money which ultimately enabled the payment of the dividend, it might be said that it was money which had been earned in Australia; but that in my opinion is not the question. The question is what is the source of the dividend. There is, in my opinion, a clear distinction between the source of the dividend and the source of the money which enables a dividend to be paid.

There can be no doubt that a dividend is the product of the share or shares in respect of which it is paid and by virtue of which the recipient is entitled to receive it. But the concept of the Act is that all income is derived from some source having a geographical location or, at any rate, that it is possible to predicate of all income that it is so derived. This relation of income to a geographically located source has provided its problems in the past and no doubt will do so in the future. I do not think that any single verbal formula can be devised which by its mere mechanical application to any given factual situation will yield the answer to the problem of the location of the source of some item of income.

But some things, I think, are clear. The dividend is a division of such part of the company's profits as its directors decide shall be distributed. That is to say, some part of the fund constituted by the profits earned by the company, whether in the same or in earlier years, can properly be regarded as the source of the dividend. The destination of the amount divided is determined by the holding of the appropriate share or shares in the capital of the company. But the location of that fund, or perhaps in particular cases of its distributed part, remains to be decided. The location of the share itself whether actual or notional, is in no way identified or connected with the earning or the making of the fund which is the source of the declared dividend. It might be, for some purposes, that the location of the share fixes the location of the right to receive the dividend. But it is not, in my opinion, the geographical source of the dividend. Thus the location of the share cannot, in my opinion, be decisive of the source of the dividend.

In general, in my opinion, the location of the fund of profits which is distributed by means of the dividend is the place where they are made. Of course, the profits of a company may not be made in the same geographical area: in such a case it may be necessary to resort to apportionment of the total fund of profits and to assign a different locality to the portions so estimated or calculated. Further, the whole of a fund or a part of a fund of profits made in the one place need not necessarily be treated in the same way, as for example in the case of profits derived from activities carrying some tax concession. In some cases real difficulties may be met in deciding in point of geographical location, where the relevant profits of a company were made. But it is a question of fact to be determined on all the facts and circumstances in each particular case. Prima facie it seems that the place where the distributed profits were made is the geographical source of the fund out of which the dividend itself is declared: therefore it may be said that that place is the geographical source of the dividend.

The second matter which I think clearly emerges is that it is the fund of profits of the company in which the share is held which is the source of that dividend. There can, in my opinion, be no warrant for treating the profits of some other company as the source of the shareholders' dividend.

Further a company may make profits without trading in goods or commodities or for that matter in securities. It may make profits simply by investment and may do so though its investment portfolio consists only of shares in one other company or even of all the shares in one other company. In such a case its net income from its investment will be its profits. Further, in my opinion, the place where the company makes its investment income will be the place where it has its central management and control. It will, of course, be different in the case of a company conducting manufacturing or

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trading activities. In the case of such companies the place where these activities are carried on can be seen in fact to be the geographical source of the profits these activities yield.

To apply these propositions to the present circumstances, Mitchell Investments Ltd. had only one shareholding and that shareholding produced its income. Nothing in the company's manner of conducting its affairs requires consideration. The amount of the dividend received from Pharmaceutical Investments Ltd. represented both its gross and its net profit. As already indicated, its central control and management was in Norfolk Island. Its profits were not made in more than one place so the complications which can arise in the case of a trading company do not arise here. The geographical source of its profit, being its net income from investment, was Norfolk Island, for there, in my opinion, that profit was made. The whole process of profit-making of Mitchell Credits Ltd., rudimentary as it might appear, was geographically located in Norfolk Island. It is, of course, true but in my opinion irrelevant that the fact that Mitchell Credits Ltd. held shares in Pharmaceutical Investments Ltd.; and the fact that the latter company was in a financial position to pay a dividend on such shares were contrived in furtherance of a plan to avoid the exposure of an Australian resident company to Div. 7 tax. It is the source of the dividend in this case which determines whether the Act other than sec. 7 applies at all to the circumstances of the case. If that source is within Norfolk Island none of the other provisions of the Act apply, including sec. 44 and sec. 260.

In so remarking I must not be taken as in any way suggesting that if sec. 260 of the Act were available to the Commissioner in this case the ``arrangement'' made in this case might fall within the scope of that section. That is not a question which presently arises.

My brother Gibbs dealt fully in his reasons for judgment with such of the decided cases as bear on the problem of the source of income for the purposes of taxation. Perhaps none of them of itself, provides the solution of the present problem. However, in my opinion, what was decided and said in
Nathan v. F.C. of T. , 25 C.L.R. 183 , supports the views which I have expressed. The source of the income is a matter of fact and generally, in respect of company dividends, it is the profit of the company which pays the dividend. I have no need on this occasion to discuss the validity of the reasoning which led to the result in
Parke Davis v. F.C. of T. , 101 C.L.R. 521 , a result with which I am in respectful agreement. Suffice it to say that I do not regard that case as requiring any different conclusion in this case to that which I have expressed.

In my opinion, the source of the dividend received by the taxpayer upon its shares in Mitchell Credits Ltd. was within the Territory of Norfolk Island.