Australian Machinery and Investment Co Ltd v Commissioner of Taxation
180 CLR 9(Judgment by: LATHAM CJ)
Australian Machinery and Investment Co Ltd
v Deputy Commissioner of Taxation
Judges:
Latham CJStarke J
Dixon J
McTiernan J
Williams J
Subject References:
Taxation and revenue
Exempt Income
Income sourced outside Australia
Appeal against assessment
Sale of shares in England
Appeal against assessment
Power to set aside
Legislative References:
Income Tax Assessment Act 1936 (Cth) - s 23(q); s 99
Judgment date: 7 June 1946
Melbourne
Judgment by:
LATHAM CJ
The Australian Machinery & Investment Co Ltd is a company which was incorporated in Victoria in 1924 and is a "resident" within the meaning of that term as defined in par (b) of the definition of "resident" contained in the Income Tax Assessment Act 1936 (Cth), s 6. The assessable income of the company therefore includes the gross income derived directly or indirectly from all sources whether in or out of Australia - s 25(1)(a). Section 23(q) of the Act provides that the following income shall be exempt from income tax - "income derived by a resident from sources out of Australia, where that income is not exempt from income tax in the country where it is derived". The company contends that certain income which was derived in the year ending 31 October 1936 from the sale in England of shares in other companies was income derived from a source out of Australia and that that income was not exempt from income tax in England. If the company establishes this position it is not subject to Australian income tax in respect of the income so derived from English sources.
The Commissioner refused to allow any exemption under s 23(q), the company objected to the assessment, the relevant objections were disallowed, and upon appeal to this court Rich J held that the income which was the principal subject of controversy was derived partly from sources in Australia and partly from sources out of Australia, and that it should be apportioned between the sources. He ordered that the assessment be set aside and that the matter be remitted to the Commissioner to be dealt with under the Act for re-assessment of the company. The company has appealed from certain of the declarations made by his Honour and the Commissioner has cross-appealed as to certain other parts of the order made.
The taxpayer company (which I will refer to as "the company") purchased mining leases etc, particularly in Western Australia. Mr C A de Bernales had large powers of control over the company under the articles of association. One of the objects of the company was to dispose of its mining interests in exchange for shares in other companies. Twenty-seven companies were formed in Western Australia and in each case Mr de Bernales had wide powers of control under the articles of association. By resolutions passed by each of these companies he was given authority as attorney under power of the company to dispose of the assets of the company in exchange for cash or shares, debentures or securities of any other company.
The company transferred mining interests to the twenty-seven Western Australian companies and received as consideration for the transfer over three million shares in those companies. Before proceeding to deal with these shares the company acquired the total number of shares issued by those companies. Thus the company was in possession of a very large number of shares in the Western Australian companies and Mr de Bernales had power, under a power of attorney from the company, to dispose of those shares "at such consideration to be satisfied in such manner as the said attorney shall think fit".
Mr de Bernales went to England in 1932. During a period up to 1935, acting under the powers mentioned, he disposed of shares in the Western Australian companies among seven English companies which were formed in the years 1933-1935. The consideration for the transfer of shares by the company to the English companies consisted of cash amounting in all through the total period to PD481,945, 1,075,000 shares in the English companies valued by the company at par, and options of purchase over 1,267,500 shares in those companies. The amount expended by the company up to 31 October 1936 in acquiring, maintaining and, in some cases, developing the mining properties, and in incorporating the twenty-seven Western Australian companies, amounted to PD119,251.1.10.
The company, having become the owner of shares in the English companies, sold large numbers of those shares. The parties agreed that, as a result of these transactions, the company's assets increased in value according to its accounts during the income years 1933, 1934, 1935 and 1936 by PD1,643,979.0.7, including a sum of PD271,519.17.3 set aside as a reserve for exchange. If the cost of the shares were taken at the abovementioned figure of PD119,251, the transactions showed a large profit, which was dealt with by the company in its accounts as "capital appreciation". The shares not sold and other assets were transferred by the company to two companies, Austmac Ltd and Kookaburra Investments Ltd, in exchange for shares in those companies.
A sum of PD172,382.9.0 has been included by the Commissioner in the final assessment made by him in respect of the year ended on 31 October 1936. This sum included an amount of PD150,168, which is the balance of profit shown in an account which sets out dealings in shares in the year 1936. The principal question which arises is whether this sum, or any part of it, was income derived from a source in England. The account includes on the credit side three items. First there is a sum of PD196,875, which is the value of 350,000 shares at 9s plus exchange in one of the English companies, the Commonwealth Mining & Finance Ltd It includes also a credit item of PD9,516, which is the net surplus shown on transactions in shares by way of exchange between two of the English companies, namely Great Boulder Mining & Finance Ltd and Commonwealth Mining & Finance Ltd These amounts are determined by the values placed by the company upon the shares of which it disposed and which it acquired. The other relevant receipt is PD62.10.0, derived from a sale of shares in another of the seven English companies - Anglo-Australian Gold Development Ltd The debit items record reduction in value of shares and loss on sales of shares.
In addition to the shares in the English companies acquired in the manner stated, the company in England purchased shares in those and other companies, received dividends on some of them, and resold some of them in England. As to these transactions it is not disputed that the income so derived was derived from a source in England.
Commonwealth income tax was assessed upon the whole of the profits derived by the company in the year ending 31 October 1936, with the exception of the last-mentioned income, upon the basis that the whole of the said profits were derived from sources in Australia. The Commissioner also determined that any profits (including the excepted income mentioned) derived by the company from sources out of Australia were exempt from income tax in England. The company, as will immediately appear, may not be liable to pay any tax in England on these profits.
In England the company was assessed to tax upon its profits from th whole of the transactions mentioned but upon appeal to the General Commissioners of Taxes it was held (par 32 of admissions) "that the profits assessable were the profits received from the sale of the shares in the Western Australian Companies to the seven English Companies and that in calculating such profits the par value of the Western Australian Companies' shares must be deducted as the cost to the Company of the purchase of such shares. It was agreed that, consequent upon such finding, the assessments failed to be discharged." Apparently the Commissioners in reaching this decision applied the principle which is to be found stated in Craddock v Zevo Finance Co Ltd ( [1944] 1 All ER 566 .). On this basis there would be no profits from the share transactions until the receipts from sales exceeded the par value of the shares. At the instance of the Crown a case has been stated in the English proceedings for the opinion of the High Court, but the case has not yet been heard by the Court. Thus the position is that, at the present time at least, it has been decided that no tax is payable in England upon any of the profits in question. The Commissioner, however, did not maintain upon this appeal the contention that the profits were exempt from income tax in England. In my opinion if such an argument had been submitted it would have failed for the reasons stated in Texas Co (Australasia) Ltd v Federal Commissioner of Taxation ((1940) 63 CLR 382 .) Income cannot be described as exempt from tax because, upon taking an account in order to ascertain the taxable income, the deductible contra-charges exceed the receipts.
The first declaration made was -
"That the business and operation from which the appellant derived its profit were carried out in part in Australia and in part in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the income of the appellant is derived in part from sources out of Australia."
The appellant asks that this declaration be expressed in another form so as to be limited to the transactions in question up to the stage when the shares in the English company were acquired. Rich J treated the company as engaged in a profit-making enterprise, namely the business of dealing in shares in England, such shares representing the wares or stock in trade of the company. (The Commissioner in his notice of cross-appeal challenged these findings, but those grounds of appeal were abandoned upon the hearing of the appeal.) His Honour held that the profit was derived partly from an English and partly from an Australian source, and that the profit should be apportioned between the two sources. The shares were locally situated in Western Australia, being shares in Western Australian companies which were transferable upon Western Australian registers. The sales were actually made in England and his Honour said:
"I feel no doubt that if a person, trading in wares which are locally situated in one country, makes a profit by selling them in another country, the source of his profit is in part the wares and in part the contracts of sale, and the locality of the source is in part the locus of the wares and in part the locus of the contracts: cf Maclaine & Co v Eccott (Inspector of Taxes) ( [1926] AC 424 , at pp 431-432); Commissioner of Taxation (NSW) v Hillsdon Watts Ltd ((1937) 57 CLR 36 )."
His Honour left it to the Commissioner to determine the proper apportionment of income between the two sources.
In Commissioners of Taxation (NSW) v Kirk ( [1900] AC 588 ), their Lordships of the Privy Council considered whether a profit made by selling in England metals mined and treated in New South Wales were derived from a source in New South Wales. Their Lordships said
"There are four processes in the earnings or production of this income -
(1) the extraction of the ore from the soil;
(2) the conversion of the crude ore into a merchantable product, which is a manufacturing process;
(3) the sale of the merchantable product;
(4) the receipt of the moneys arising from the sale. All these processes are necessary stages which terminate in money, and the income is the money resulting less the expenses attendant on all the stages."
It was held that some part of this income was "earned and arising and accruing in New South Wales" and so was derived from a source in New South Wales. It was said that it was a fallacy to leave out of sight the initial stage and fasten attention exclusively on the final stage in the production of the income. It will be observed that their Lordships referred only to one income. It was not held that there were four incomes corresponding to the four sources which contributed to the production of the income. There was only one income, namely "the money resulting less the expenses" - a balance of receipts over all charges. It was part of that income which was held to be derived from a source in New South Wales. The result was that the income had to be apportioned between New South Wales, the place where the ore was extracted and treated, and England, the place where the product was sold and the purchase moneys were received. Since Kirk's Case this principle of apportionment has been applied in Australia in the interpretation of provisions taxing income according to its source (See Commissioners of Taxation (NSW) v Meeks (1915), 19 CLR 568 ; Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax (Q) (1923), 33 CLR 76 ; Dickson v Commissioner of Taxation (NSW) (1925), 36 CLR 489 ). Under English income tax law it is necessary sometimes to determine the source of particular income (See, eg, Bennett (Inspector of Taxes) v Marshall, [1938] 1 KB 591 ), and authorities there cited but no doctrine of apportionment of a single amount of income between sources is necessary under English legislation. Provisions such as s 23(q) and s 25(1)(b) (non-resident taxpayers) in the Commonwealth Act require such an apportionment, and see the legislative provisions for apportionment in particular cases contained in ss 38-43.
In my opinion the decision of his Honour upon this point was right - some part of the profit derived from the transactions of acquiring and disposing of the English shares obtained in exchange for the Western Australian shares was derived from sources in Australia and the other part from sources in England. The parties agree in asking, however, that the form of the declaration should be varied so as to show that some income of the company was derived exclusively from a source in Australia (e.g rents from property in Western Australia), some from a source exclusively in England (e.g the profits on sale of shares purchased in England which have already been mentioned) and some from a source partly in Australia and partly in England (e.g what the company described as capital appreciation of English shares obtained in England by exchange for Western Australian shares and thereafter sold). The parties also ask for a specific declaration that the income derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in England. I can see no objection to these variations.
The second sentence is as follows: "That the operations of the appellant amounted to the carrying on of a business for the purposes of s 28 and corresponding enactments, and that shares and options formed trading stock within the meaning of that section and of s 31 and corresponding previous enactments." Part III, Div 2, sub-div. B, of that Act, which relates to the opening and closing entries for trading stock, includes the carrying on of any business. The definition of "trading stock" in s 6 includes anything acquired or purchased for the purpose of sale or exchange, and is therefore wide enough to include any personal property acquired or purchased for these purposes. In Craddock v Zevo Finance Co Ltd the Master of the Rolls said that shares should be regarded as the stock in trade of a company which is trading in shares. It is submitted by the author of Stroud's Judicial Dictionary that stock in trade comprises all such chattels as are acquired for the purpose of being sold or let on hire in a person's trade. Shares have been held to be goods, wares or merchandise (Evans v Davies, [1893] 2 CH 216 ). Property in chattels personal may be either in possession or in action. Shares in a company are personal chattels which are not in possession and are therefore choses in action (Colonial Bank v Whinney (1885), 30 Ch D 261; on appeal Colonial Bank v Whinney (1886), 11 AC 426). Section 29 refers to the value of livestock and each article of other trading stock. Section 31 refers to the value of each article of trading stock (not being livestock). An article can mean a separate thing, whether material or immaterial. The respondent does not object to the sentence because, in his opinion, it adds nothing to and subtracts nothing from the operation of the first sentence. I think that this is right. I am also inclined to think, without finally deciding the point, that shares are trading stock within the meaning of the sub-division. The sub-division in any event merely prescribes sound accountancy practice. I would therefore retain the second sentence.
The third declaration was made in answer to the question whether profits made from the realization of English shares or options over English shares received as part consideration for shares in the twenty-seven Western Australian subsidiary companies are liable to federal income tax where such shares or options were realized in Australia. His Honour declared that the profits made from the realization of shares in English companies and options over such shares received as part of the above consideration were derived partly from a source within Australia and partly from a source outside Australia, and the question what part is derived from these sources is a matter to be determined by the Commissioner, subject to review and appeal under the provisions of the Income Tax Assessment Act 1936. The declaration, unlike the question, is not limited to sales in Australia. The appellant now asks that the declaration should be so limited but this is not agreed to by the respondent. It is unfortunate that the appellant did not approach his Honour in order to ascertain whether, as appears probable, these words were omitted by accident. The declaration could then have been amended under the slip rule, O XXVII, r 9. I believe that his Honour must have intended that the declaration should coincide with the question. I have already expressed the opinion that profits made by the appellant on the sale in England of shares in English companies are derived exclusively from a source in England. I would therefore amend the declaration by adding the words "in Australia".
Three further grounds of appeal remain to be considered. They are grounds 2, 6 and 7. Ground 2 is "That his Honour should have declared that the income derived by the appellant company in the tax year ended 31 October 1936 by trading in England in shares in English companies whether such shares were acquired in return for shares in the Australian companies or otherwise or in other property not situated in Australia was derived exclusively from a source in the United Kingdom and is not liable to income tax under the legislation of the Commonwealth if that income so derived is not exempt from income tax in England." Ground 6 is "That his Honour should have declared that the cost of the shares in the seven English companies acquired by the appellant company in return for shares in the 27 Western Australian companies was Nil." Ground 7 is "That his Honour was in error in making no order as to costs and that his Honour should have ordered the Commissioner of Taxation to pay the appellant company's costs of the appeal."
For the reasons already given, I agree with ground 2 as a general proposition. But I also consider that the declaration claimed is couched in too general terms and that any declaration that is made should have specific reference to the evidence. The income taxed by the respondent has already been classified under four heads. Of the items included in this classification I am of opinion that the sum of PD9,516.1.8 under the first head and the items under the third head were derived exclusively from a source in England and are not exempt from income tax in England, and that the appellant is entitled to a declaration to this effect.
In support of the sixth ground it was said that the amount of money expended by the appellant in acquiring the shares and other consideration from the English companies was PD119,251.1.10, and that since it had received from these companies a greater amount in cash namely PD481,875, the PD1,075,009 worth of shares must have cost it nothing. But I agree with the General Commissioners that there were in law three separate transactions. The cost to the appellant of the whole of the consideration received from the English companies was the value of the shares in the Western Australian companies. The shares in the English companies have been valued for the purposes of the assessment as fully paid shares. It must therefore be taken that these companies received from the appellant property which their directors could honestly, and not colourably, consider a fair equivalent for the release of the appellant from its obligations to pay for the shares in cash. There is nothing on the face of the contract to show that the consideration was illusory or only of sufficient value to pay for the shares in part. If there was, or the facts were sufficiently plain, it might be proper to treat the shares as unpaid or only partly paid without setting the contracts aside (Hong Kong & China Co Ltd v Glen, [1914] 1 CH 527 , at p 539; In re White Star Line Ltd, [1938] 1 Ch, at p 477). But this could only be done in proceedings between the shareholder and the company, and the effect of doing so would be to destroy or reduce the value of the shares as a profit for income tax purposes. I would therefore refuse to make this declaration.
The seventh ground complains of his Honour's order as to costs. It is true that the appellant achieved a considerable success upon the appeal, and that in the exercise of his discretion another judge might have made an order in its favour. But his Honour exercised his discretion judicially. He evidently regarded the appeal as one of divided success. Other cases are not of much assistance as a guide to the exercise of a discretion in any particular case, but it is to be noted that, under similar circumstances in Re Crossman dec'd ((1934) 152 LT 98, at p 103), Finlay J made the same order. An appeal against this order was dismissed by the Court of Appeal in In re Crossman ( [1935] 1 KB 26 ) which, however, allowed the appeal on the merits. The House of Lords in Inland Revenue Commissioners v Crossman ( [1937] AC 26 ) restored the order of Finlay J, including his order as to costs. In my opinion no sufficient ground exists for interference with the exercise of his Honour's discretion.
Of the grounds taken in the notice of cross-appeal, grounds (a), (b) and (d) were not pressed. The respondent applied to substitute the following paragraph for ground (c): That his Honour should have held that the assessable income of the taxpayer company to be apportioned for the purposes of s 23(q) of the Act was the difference between the cost to the taxpayer company of the shares in the Western Australian companies acquired by it plus expenditure in relation thereto incurred by it prior to the sale thereof and the total sum ascertained by adding to the cash portion of the considerations received for the sales of the shares in the twenty-seven Western Australian companies the money value, as at the respective dates of the said receipts of the shares rights and options forming the balance of the said considerations together with the profits mentioned in declaration 3 of the order herein.
Mr Weston did not object to a declaration in the form of this paragraph omitting the words italicized. For the reasons already given I am of opinion that if this declaration were to be made these words should be omitted.
Grounds (e) and (f) relate to that part of the order under appeal by which the assessment was set aside and a re-assessment ordered. It was contended that the Court has no power to set aside an assessment and that Rich J should have ordered that the assessment be remitted to the respondent for amendment. Section 199 provides that the Court hearing the appeal may make such order as it thinks fit and may by such order confirm, reduce, increase or vary the assessment. It was contended that the initial generality of the section is limited by its subsequent explicitness, so that the jurisdiction of the Court is confined to confirming, reducing, increasing or varying the assessment. A casual glance at the Commonwealth Law Reports is sufficient to show that orders setting aside assessments have been frequently made. The power conferred upon the Court to make such order as it thinks fit is expressed in the most general terms and is clearly intended, in my opinion, to bestow upon it the most ample authority to mould its order to meet the circumstances of any particular appeal.
It is plainly necessary to set the assessment aside where a taxpayer is not liable to be assessed at all. Where a taxpayer is liable to be assessed but is taxed on a wrong principle, it is usually convenient and often necessary to re-assess de novo . That involves a setting aside of the existing assessment expressly or by implication. It was suggested that such an order created a danger of a taxpayer escaping liability through lapse of time under s 170. I can discover no such danger. In any event there is an order for a re-assessment and that is an order of a superior court. Such an order, even where made without jurisdiction, is not void but voidable and is binding upon the parties until set aside (Cameron v Cole (1944), 68 CLR 571 .)
The section confers upon the Court certain specific powers. If it dismisses the appeal it can expressly confirm the assessment although the dismissal would have this effect without an express order. But the process of assessment is so complex that the cases would be rare in which the Court could itself reduce or increase the amount of an assessment. It would generally be necessary to remit the matter to the Commissioner in some form in order that he should calculate the correct amount. There is no authority to do so specifically conferred by the section. It is thus necessary to the effective operation of the section that the general words should be given their full natural grammatical meaning. The objection that his Honour had no power to set aside the assessment therefore fails.
But the result of doing so is that there is at present no assessment, and the re-assessment will be a new assessment. Section 201 provides that the fact that an appeal is pending shall not in the meantime affect the assessment under appeal and the tax may be recovered as if no appeal were pending. The appellant did not pay the tax assessed when it became due and payable and thereby incurred an additional tax of ten per cent per annum on the amount unpaid under s 207. If the assessment is set aside, and there is a re-assessment, the appellant will escape this additional tax. It would of course only have to pay additional tax upon the proper amount for which it should have been originally assessed. It will probably be found that in all the previous cases where assessments have been set aside the appellant had paid the tax when it became due and payable, so that the setting aside of the assessment would not have relieved him from any proper liability. The circumstance that additional tax has been incurred is, I think, a reason for not setting aside the present assessment. His Honour's attention does not appear to have been called to this unusual feature of this appeal.
In my opinion the assessment should be remitted to the respondent for amendment conformably with the order of this Court, or his decision on the objections set aside and the objections remitted to him for re-consideration and re-determination conformably with such order. I agree with Mr Weston that the appellant should have a right of appeal against the ratio of apportionment made by the respondent where there is a dual source, but objection 19 appears to be wide enough to protect the appellant in this respect.
Each party has partly succeeded and partly failed and I would make no order as to costs of the appeal and cross-appeal.
But the declaration in this form does not deal specifically with separate items which, on the basis of the company's accounts (whatever the realities may be) are treated as profits derived from trading in shares and as assessable income. I have referred already to the item of PD150,168 which is the credit balance in an account containing the three credit items which have already been mentioned.
The credit item of PD196,875 represents a supposed gain by the exchange by the company in England of Western Australian shares for shares in one of the English companies, namely Commonwealth Mining & Finance Ltd This is a disposition in England of shares locally situated in Australia and, in my opinion, the rule stated in the passage which I have quoted from the judgment of Rich J relating to the disposition in one country of things locally situated in another country is applicable, so that the profit in this case should be held to be derived partly from a source in Australia and partly from a source in England. The same conclusion follows with respect to the credit item PD62.10.0.
The credit item of PD9,516, however, is of a different character. It represents an appreciation in value derived by the exchange by the company in England of shares in one English company (Great Boulder Mining & Finance Ltd ) for shares in another English company (Commonwealth Mining & Finance Ltd ). There is no Australian element in the production of this apparent profit. The facts that the company is an Australian company and that the English companies own shares in Australian companies are not in my opinion sufficient to make it proper to declare that any of the profit arose from an Australian source.
As already stated, it is not disputed that profit derived from the purchase in England and sale in England of shares in English companies was derived from an English source. No argument was heard with respect to profits arising from transactions in the shares of three Western Australian companies, Lalla Rookh Gold Mines Ltd, Comet Gold Mines Ltd, and King of Creation Gold Mines Ltd Counsel informed the court that no questions now arose and that no decision of the court was sought in respect of these matters.
Another item to which some argument was directed is an amount of PD2,500 taken by the Commissioner to be a profit upon the disposition of an option to purchase shares in Mephan Ferguson Pty Ltd, a Victorian company. The facts with respect to this transaction are set out in the following admission of fact (par 35):
"During the said accounting period the Company sold in England an option to purchase shares in a Victorian Company known as Mephan Ferguson Pty Ltd and such selling price was PD2,500 in excess of the purchase price thereof, which said excess is the sum referred to in paragraph 7 of the said Notice of Objection.
The Company acquired by agreement made in England an option to purchase shares in Mephan Ferguson Pty Ltd and subsequently by further agreement obtained an extension of the option - the cost of the option and extension thereof was PDE8,000. Pipe Options Ltd, an English subsidiary of the Company, paid the Company PDE10,000 in England for the right to take up the said shares. Subsequently the option expired. The said sum of PDA2,500 represents the difference in Australian pounds between the said sums of PDE8,000 and PDE10,000. The subsidiary Company, Pipe Options Ltd, lost the whole PDE10,000 paid to the Company and there was, therefore, a net loss of PDE8,000 or PDA10,000 on the transaction."
The option which was disposed of was obtained in England and was dealt with in England. Any income derived from this transaction was income derived from a source in England.
In my opinion the order of Rich J should be varied by making with respect to the specific items mentioned the declarations which I have above set out.
The second declaration in the order made by Rich J declares that ss 21, 28 and 31 of the Act dealing with the valuation of trading stock are applicable to the transactions of selling the shares in Western Australian companies. There is no appeal with respect to this declaration.
The third declaration relates to profits made from the realization of shares in English companies and options over such shares. The declaration states that such profits were derived partly from a source in Australia and partly from a source outside Australia. The declaration as it stands applies to all profits made from any realizations of English shares. The company asks that the declaration should be limited to realizations in Australia of such shares.
In my opinion the declaration as it stands is too wide. In some cases English shares were bought by the company in England - and were subsequently sold. In these cases there was, in my opinion as already stated, no Australian source of the resulting income.
If the declaration is expressed so as to apply to realizations in Australia of English shares then the declaration would, in my opinion, be accurate - the shares being English in respect of locality and the realization of them being an act done in Australia. Therefore the profits would result partly from a source in Australia and partly from a source outside Australia.
But the amendment of the declaration should not, in my opinion, be regarded as involving the proposition that profits derived from realization of English shares in England were in no case partly derived from an Australian source. Where a profit was made by realization of English shares obtained in exchange for Australian shares and it is sought to tax that profit as income under the Commonwealth Act, the question which arises under s 23(q) is a question as to the apportionment of the final balance, representing taxable income of the whole year. In that case there is both an Australian source (namely shares situated in Australia) and an English source (realization in England) of the resulting income. Thus, while I agree that the desired alteration may be made in the declaration, that alteration should not be regarded as involving by any form of inference or suggestion the conclusion that income derived from realizations in England of shares in English companies received in exchange for Australian shares was not also income derived partly from a source in Australia and partly from a source outside Australia.
Declarations 4 and 5 relate to transactions in Lalla Rookh and Comet shares. There are no appeals from these declarations. Declaration 6 relates to the allowance as a deduction of the cost of acquiring properties in Australia. There is no appeal as to this declaration.
The fifth ground of the company's appeal is that his Honour was in error in holding that the cost price to the appellant company of the shares in the twenty-seven Western Australian companies which it sold in England was PD52,836.5.8 and that his Honour should have held that such cost price was PD118,921.3.11. The former sum was the cost of acquiring, maintaining and developing Western Australian properties up to 31 October 1932. Such cost up to 31 October 1936 was PD119,251.1.10 not the amount stated in the ground of appeal. In my opinion it is not necessary to vary the order on account of this error in stating the figures, because the order itself contains no reference to them, and, the parties agreeing that PD119,251.1.10 is the correct figure, no difficulty can arise with respect to it.
By the sixth ground of appeal the company contends that his Honour should have declared that the cost of the shares in the seven English companies acquired by the appellant company in return for shares in the Western Australian companies was nil. When the company disposed of the Western Australian shares to the seven English companies it acquired (a) PD481,945 in cash, (b) 1,075,000 shares and (c) options over 1,267,500 shares. There is no more reason for saying that item (b), the shares in the English companies, was acquired for nothing and that value was given for items (a) and (c) than there is for saying, for example, that item (a), the cash, was acquired for nothing, and that value was given only for items (b) and (c). In my opinion the declaration sought by the company should not be made.
Finally, the company objects to the order made as to the cost of the proceedings before Rich J. Success and failure were fairly evenly distributed between the parties and his Honour made no order as to costs. I can see no reason for interfering with this exercise of discretion.
I come now to the cross-appeal of the Commissioner. The first ground of appeal was that his Honour was in error in declaring that the operations of the company amounted to carrying on a business for the purposes of s 28 of the Act and corresponding previous enactments. The second ground was that his Honour was in error in declaring that shares and options formed trading stock within the meaning of ss 28 and 31 of the Act and corresponding previous enactments. The fourth ground of appeal related to the allowance of the cost of acquiring properties as a deduction. These grounds were abandoned upon the hearing of the appeal. The court was, however, asked to include in the order a declaration in the following terms:
"That the assessable income of the taxpayer company to be apportioned for the purposes of section 23(q) of the Act was the difference between the cost to the taxpayer company of the shares in the Western Australian companies acquired by it plus expenditure in relation thereto incurred by it prior to the sale thereof and the total sum ascertained by adding to the cash portion of the considerations received for the sales of the shares in the twenty-seven (27) Western Australian companies the money value, as at the respective dates of the said receipts, of the shares rights and options forming the balance of the said considerations."
I would not add this declaration because in my opinion "the assessable income of the company to be apportioned for the purposes of s 23(q)" is the whole income of the company: that is, in order to ascertain the exemption to which the company may be entitled under s 23(q) it is necessary to inquire in relation to each and every item of income whether it was derived from sources out of Australia. Accordingly the income in relation to which the question of apportionment arises is not limited to the net income from the transactions mentioned in the proposed declaration.
The Commissioner further asks the court to vary the order by remitting the matter to the Deputy Commissioner of Taxation instead of setting aside the assessment. It is first contended that there is no power in the court to set aside an assessment. My brother Dixon refers in his reasons for judgment to a large number of cases in which the court has set aside an assessment. Section 199 of the Act provides that the court hearing the appeal may make such order as it thinks fit and may by such order affirm, increase, reduce or vary the assessment. In my opinion the initial words of this provision enable the court to set aside an assessment. It is argued, however, that if the assessment is set aside no further assessment (as distinct from an amendment of an existing assessment - see s 170(7)) can be made in this case by reason of the provisions of s 170(2), (3) and (4). It is also objected that, if an entirely new assessment can properly be made, and such an assessment were made, the taxpayer would be able to rely upon entirely new objections, even though those objections were not connected with any alterations contained in the new assessment. Further, s 207 provides that "If any tax remains unpaid after the time when it becomes due and payable, additional tax shall be due and payable at the rate of ten per cent per annum on the amount unpaid, computed from that time." The Commissioner submits to the court that if the present assessment is set aside and a new assessment is made interest on arrears (which, upon the contention of the Commissioner, represents a large amount of money) could be charged only from the date of the new assessment.
On the other hand, the company is concerned that when the Commissioner apportions income as between Australian and English sources there should be a right of appeal if the company were dissatisfied.
In my opinion all the suggested difficulties can be met by altering the form of the order made and remitting the assessment to the Commissioner for amendment in accordance with the order of the court, or by setting aside the decision of the Commissioner upon the objections and remitting the objections to him for re-consideration.
Each party has partly succeeded and partly failed upon the appeal and, in my opinion, no order should be made as to the costs of the appeal.