• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v McNeil (Published 10 January 2011).

FC of T v McNEIL

Members:
Gummow ACJ
Hayne J
Callinan J
Heydon J
Crennan J

Tribunal:
High Court of Australia

MEDIA NEUTRAL CITATION: [2007] HCA 5

Decision date: 22 February 2007

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Gummow ACJ, Hayne, Heydon and Crennan JJ

1. The respondent ( " the taxpayer " ) is a widow of advanced years who has lived all her life in Australia. The amount of income tax at stake in this appeal is less than $ 600. The year of income in question is that which ended on 30 June 2001. The litigation has been treated as a test case, in the circumstances which are more fully described later in these reasons, and is said by the appellant ( " the Commissioner " ) to affect more than 80,000 taxpayers.

2. The taxpayer succeeded at first instance in the Federal Court (Conti J) ^[1] McNeil v Commissioner of Taxation 2004 ATC 4385 ; (2004) 206 ALR 44 . and an appeal by the Commissioner was dismissed by the Full Court (French and Dowsett JJ; Emmett J dissenting) ^[2] Commissioner of Taxation v McNeil 2005 ATC 4658 ; (2005) 144 FCR 514 . . No order for costs was made by Conti J. An agreement was made between the parties that there be no order as to costs in the Full Court. It was a condition of the grant to the Commissioner of special leave to appeal to this Court that the Commissioner pay the costs of the appeal in any event and not seek to disturb the position respecting costs in the Federal Court.

The SGL buy-back scheme

3. In 1987, the taxpayer acquired a parcel of shares in St George Building Society Ltd. In 1992, these were converted into ordinary shares in St George Bank Ltd ( " SGL " ) upon its change from a building society to a corporation carrying on the business of banking. Since 1992, shares in SGL have been listed for quotation on the Australian Stock Exchange ( " ASX " ). In the years following 1992, the profitability of SGL increased. As a result of rights issues, share-rounding plans and other events, at the time of the critical announcement by SGL on 12 January 2001 ( " the record date " ), the taxpayer ' s shareholding comprised 5,450 ordinary shares.

4. On the record date, SGL announced an off-market buy-back of ordinary shares to the approximate value of $ 375 million; the buy-back was said to be designed to enhance returns to shareholders and to be the first step in proposals to convert existing preference shares to ordinary shares and issue new preference shares. The buy-back was to be funded by SGL from existing cash resources which, in turn, were to be replaced substantially by the issue of the new preference shares.

5. The number of ordinary shares the subject of the announcement represented approximately 5 per cent of the then issued capital of SGL. For every 20 ordinary shares held at the record date and rounded down to the nearest whole number, SGL on 19 February 2001 ( " the listing date " ) would issue to St George Custodial Pty Ltd ( " Custodial " ) as trustee for the shareholder one " sell-back right " . This would yield 272 sell-back rights for the taxpayer. The term " buy-back " was used from the perspective of SGL, while " sell-back " was used from the perspective of shareholders. Each sell-back right was to be a put option to oblige SGL to

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buy back one share for $ 16.50. Excluded from direct participation on the same terms as other ordinary shareholders were shareholders having a registered address outside Australia and New Zealand, and employees of SGL who held shares under certain employee share benefits schemes. More limited arrangements were made for these " excluded shareholders " to participate indirectly in the buy-back. The taxpayer was not an excluded shareholder.

6. Implementation of the proposed share buy-back was governed, as a matter of company law, by what was then Div 2 (ss 257A-257J) of Pt 2J-1 of Ch 2J of the Corporations Law ^[3] See now Corporations Act 2001 (Cth), Ch 2J, Pt 2J-1, Div 2. . Chapter 2J was headed " Transactions Affecting Share Capital " and in various respects replaced or qualified the previous law respecting reductions in share capital, in particular the prohibition upon the purchase by a company of its own shares ^[4] Trevor v Whitworth (1887) 12 App Cas 409 ; Thornett v Federal Commissioner of Taxation (1938) 59 CLR 787 at 795-796. . An appreciation of this change in the underlying company law is important when considering various of the revenue decisions to which the Court was referred in argument in this case.

7. Section 257A of the Corporations Law permitted a company to buy back its own shares if the buy-back did not materially prejudice the ability of the company to pay creditors and the company followed the procedures laid down in Div 2. Section 257B(1) specified the procedures appurtenant to different types of buy-backs. In respect of what were classed as " selective buy-backs " , s 257D stipulated special requirements for the obtaining of shareholder approval, beyond those requirements for " equal access schemes " (see s 257B(2)). No issue arises respecting compliance with Div 2. It is unnecessary to resolve apparent differences in submissions of the parties respecting the classification of the SGL buy-back scheme as a " selective " or " equal access " scheme.

8. The arrangements announced by SGL on the record date were implemented and controlled by a series of interconnected deeds poll, to which further reference will be made. Each of these documents was executed on the record date, 12 January 2001. On 10 January, ordinary shares in SGL had been traded at $ 13.88; the highest price at which shares had previously been traded was $ 14.10. On the listing date, 19 February, the share price was between $ 14.45 and $ 14.64 per share. The right to require SGL to purchase a share for $ 16.50 had a value represented by the amount by which that sum exceeded the market value. The parties agreed for the purposes of these proceedings that on that date the market value of one sell-back right was $ 1.89. Accordingly, the market value of the taxpayer ' s sell-back rights at the listing date was $ 514.

9. On the listing date, SGL granted to Custodial more than 22 million sell-back rights to be held on the terms of the arrangements made by the deeds poll.

10. The taxpayer and the other shareholders who had wished to obtain legal title to all or some of their sell-back rights so as to be able personally to sell their shares back to SGL or sell the sell-back rights on the market had been obliged to give a direction to Custodial before 5.00 pm on 16 February ( " the election date " ), that is to say, before the grant of those rights on 19 February. The taxpayer gave no such direction. The result of the controlling instruments in cases where no direction was given was that, on the grant by SGL on 19 February of 272 sell-back rights to be held for the taxpayer by Custodial as trustee, Custodial was obliged to sell those rights to a merchant bank, Credit Suisse First Boston Australia Equities Ltd ( " CSFB " ). CSFB was required to trade or exercise those rights and to account to Custodial as trustee for the taxpayer.

11. From the issue date, the sell-back rights were listed and traded on the ASX and this continued until 13 March 2001 ( " the listing period " ). In this way, there was created a market in the sell-back rights themselves. This was important for those shareholders who did not wish to exercise the legal title to some or all of their sell-back rights or who, like the taxpayer, stood by and took no steps before the election date to acquire that legal title. The existence of this market also would help facilitate attainment of SGL ' s announced intentions of effecting a buy-back to the extent of about 5 per cent of its issued capital.

12. The explanatory material sent by SGL to shareholders made it plain that shareholders not wishing to do so did not have to sell any shares to SGL. But the material also told shareholders that they could purchase additional sell-back rights on the ASX and thereby increase the number of shares they could oblige SGL to

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acquire. In this way, the sell-back rights are more readily seen to have been separate and detached from the shares in respect of which they had been granted by SGL; the rights were objects of commerce and by reason of acquisition by another shareholder could be exercised in respect of shares of that shareholder.

13. The issue of the 272 sell-back rights for the taxpayer and what then ensued did not involve any return of capital paid up on her shares, nor any variation or re-expression of her rights as a shareholder. Shareholders, such as the taxpayer, who before the election date gave no directions in respect of their entitlements were to be paid the proceeds of trading activities in their rights which were to be conducted on their behalf by CSFB. But, unlike those shareholders who exercised their sell-back rights to require SGL to purchase their shares at the buy-back price of $ 16.50, or who purchased additional rights on the ASX and exercised them, these shareholders retained their shares.

The issues on the appeal

14. The taxpayer ' s 272 sell-back rights were included in more than 11 million sell-back rights sold by Custodial to CSFB on 20 February 2001. These then were sold by CSFB on the ASX during the listing period or exercised by CSFB itself in accordance with the CSFB Deed Poll. On 2 April 2001, the taxpayer received her portion of the proceeds, being $ 576.64, by direct deposit into her bank account with SGL. Of that sum, $ 62.64 represented the increase in the realisable value after the issue date. The taxpayer concedes that the sum of $ 62.64 was assessable income as a capital gain. The dispute turns upon the character of the balance of $ 514, representing market value at the issue date. The Commissioner seeks to bring this to tax either as income according to ordinary concepts, pursuant to s 6-5 of the Income Tax Assessment Act 1997 (Cth) ( " the 1997 Act " ) or as a capital gain. However, if the Commissioner succeeds in his reliance upon s 6-5, then the anti-overlap provision of s 118-20 means that if the same event gives rise to both income and a capital gain, the capital gain is reduced to the extent that income was assessable.

15. As an Australian resident, the assessable income of the taxpayer included income according to ordinary concepts derived directly or indirectly from all sources; in determining the existence of a derivation and when it occurred, the taxpayer was taken by s 6-5(4) " to have received the amount as soon as it [ was ] applied or dealt with in any way on [ her ] behalf or as [ she directed ] " .

16. Having allowed the taxpayer ' s objection, Conti J remitted the matter to the Commissioner for reassessment according to law. On appeal by the Commissioner, the Full Court divided. French and Dowsett JJ, in separate judgments, held that the appeal failed. There had been no derivation of income and no capital gain beyond the $ 62.64. Emmett J disagreed and concluded that there had been a derivation of income to which s 6-5 applied. Although that conclusion made it unnecessary to do so, Emmett J went on to consider the issue respecting capital gains tax and decided this adversely to the Commissioner.

17. The majority of the Full Court erred in application of the principles respecting the derivation of income according to ordinary concepts. It follows that the appeal should be allowed on that ground. This renders it unnecessary to consider the operation of the capital gains provision.

18. The Commissioner primarily submits that the grant on 19 February 2001 of the 272 sell-back rights in respect of the taxpayer ' s shareholding and held by Custodial for her absolute benefit was the derivation of income by her in the amount of $ 514 and, alternatively, further submits that, in any event, the receipt of the proceeds on 2 April 2001 was income in her hands. It is the primary submission that should be accepted, so that the alternative submission need not be determined.

General principles

19. Before turning to explain why the appeal should have that outcome, and before looking more closely at the documents by which the share buy-back procedures were implemented, there are several preliminary points to be made.

20. First, whether a particular receipt has the character of the derivation of income depends upon its quality in the hands of the recipient, not the character of the expenditure by the other party ^[5] GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136. . It follows, despite indications to the

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contrary in the judgments of the majority in the Full Court ^[6] (2005) 144 FCR 514 at 529, 530, 568-569. , that the character of the sell-back rights held for the taxpayer is not determined by considerations that her entitlement arose out of the decision by SGL to effect the buy-back process and that this involved capital restructuring by SGL. The Commissioner correctly submits that, while the share buy-back scheme explains the involvement of SGL and the genesis of the conferral of the entitlement upon the taxpayer, for revenue purposes it does not explain the character of her sell-back rights.

21. Secondly, as a general proposition, a gain derived from property has the character of income and this includes a gain to an owner who has waited passively for that return from property ^[7] Parsons, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting, (1985) at 87-89. . The question then becomes one whether, as the Commissioner contends, the rights enjoyed by the taxpayer arose and were severed from, and were a product of, her shareholding in SGL, which she retained. The metaphor of severance and like expressions were used by Pitney J in
Eisner v Macomber ^[8] 252 US 189 at 206-207 (1920). in a passage accepted in
Federal Commissioner of Taxation v Montgomery ^[9] 99 ATC 4749; (1999) 198 CLR 639 at 660-663 [ 62 ] - [ 69 ] . See also Inland Revenue Commissioners v Blott ; Inland Revenue Commissioners v Greenwood [ 1921 ] 2 AC 171 at 195. as identifying the core meaning of " income " where the character of a gain associated with property is at stake.

22. It should be pointed out with respect to the application to this case of the reasoning in Eisner that, contrary to one approach in the Full Court ^[10] (2005) 144 FCR 514 at 569. , the taxpayer was not in a like position to a party who received payment to give up part of a profit-yielding structure or on the sale of new rights in the nature of a profit à prendre which were carved out of that structure. The taxpayer ' s shareholding in SGL remained untouched.

23. Further, the sell-back rights which the taxpayer enjoyed and which were turned to account on her behalf did not represent any portion of her rights as a shareholder under the constitution of SGL. The sell-back rights were generated by the execution, and subsequent performance, of covenants in the deeds poll, to which further reference now should be made.

The deeds poll

24. Three deeds poll, all made on 12 January 2001, the record date, established the scheme arrangements as they affected the taxpayer ^[11] The Deed Poll (Excluded Shareholder) may be put to one side. . By the Sell Back Right Deed Poll executed by SGL in favour of parties including shareholders, such as the taxpayer, who were registered at the record date, and also Custodial and CSFB, SGL covenanted to grant the sell-back rights to Custodial " for the absolute benefit " of those shareholders (cl 2(a)). The entitlements of those shareholders who did not take up their legal title to the rights were to be sold to CSFB, to be dealt with by CSFB under the CSFB Deed Poll (cl 2(c)).

25. The Deed Poll (Shareholders) was executed by SGL and Custodial. The latter as trustee, was obliged to hold absolutely for each " participating shareholder " the proceeds of the dealings by CSFB in those entitlements not taken up by shareholders (cl 2.2); Custodial appointed CSFB its paying agent to effectuate payment by SGL of those proceeds to shareholders (cl 3.2).

26. The CSFB Deed Poll was executed by CSFB in favour of parties including those " non-acceptance shareholders " such as the taxpayer, and also SGL and Custodial. CSFB was obliged to sell on the ASX or to exercise the sell-back rights relative to those shareholders and to deal with the proceeds as already described (cl 3).

27. In the events that happened, including the election of the taxpayer not to take the steps necessary to acquire legal title to her sell-back rights, she became, at the issue date, entitled at least to the observance and performance of the obligations owed to her under the deeds poll by Custodial and CSFB. Further, it may also be said that she acquired a beneficial interest in the covenants supporting the obligation assumed by SGL to honour the relevant put options it had created by deed poll. However the situation be treated from the viewpoint of the principles of equity ^[12] cf CPT Custodian Pty Ltd v Commissioner of State Revenue 2005 ATC 4925 ; (2005) 224 CLR 98 ; Halloran v Minister Administering National Parks and Wildlife Act 1974 2006 ATC 4135 ; (2006) 80 ALJR 519 ; 224 ALR 79 . , two relevant observations may be made. First, the taxpayer ' s rights were accrued, not merely executory, and were vested in her. Secondly, that result applied notwithstanding the apparent absence of any consideration moving from her; this result was a significant consequence in the law from the use of covenants in the deeds poll ^[13] Jones v Bartlett (2000) 205 CLR 166 at 206-207 [ 141 ] . .

Previous authorities in this Court

28. Counsel for the taxpayer referred to various authorities in this Court in which issues arose respecting the revenue character of certain distributions to shareholders. The authorities began with
Commissioner of Taxation (NSW) v Stevenson ^[14] (1937) 59 CLR 80. . The taxpayer had participated in an

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informal distribution of assets of a family company in advance of an attempted voluntary liquidation. The majority in this Court (Rich, Dixon, Evatt and McTiernan JJ) held that no part of the money received by the taxpayer was a dividend, profit or bonus paid by the company within the meaning of the New South Wales taxation legislation and that the legislation brought to tax distributions or detachments of profit by a company as a going concern but not " distributions in retirement or extinguishment of the shares " ^[15] (1937) 59 CLR 80 at 103. . Rich, Dixon and McTiernan JJ stressed that the case turned upon the construction of the legislation and the definition of " dividend " ^[16] (1937) 59 CLR 80 at 98-99, 103. .

29. Stevenson was applied, with respect to the Income Tax Assessment Act 1922 (Cth) ( " the 1922 Act " ), in
Thornett v Federal Commissioner of Taxation ^[17] (1938) 59 CLR 787. . At stake was the revenue nature of money and investments being part of the assets of a company which the taxpayer was paid out upon cancellation of certain issued shares in that company. The reduction of capital had received court confirmation under applicable companies legislation. This Court held that the distributions to the taxpayer were not a dividend, bonus or profit, credited, paid or distributed to a shareholder within the meaning of the 1922 Act. Latham CJ said that what the transaction " really amounted " to was " a surrender by a shareholder of all capital interest in the company in return for a lump sum payment " ^[18] (1938) 59 CLR 787 at 796. .

30. 
Federal Commissioner of Taxation v Blakely ^[19] (1951) 82 CLR 388. concerned the revenue treatment under the Income Tax Assessment Act 1936 (Cth) ( " the 1936 Act " ), as it stood amended in 1942, of distributions to shareholders in an informal liquidation conducted without any action to put the company into liquidation or to appoint a liquidator. This Court held that, as s 44 of the 1936 Act then stood, there had been no distribution by way of dividend out of profits of the company as required to attract that provision. Section 47, as it then stood, did not apply because there had been no distribution by a liquidator in the winding-up. Fullagar J (with whose reasons Dixon J agreed) considered that what had been received was of a capital rather than income nature; there had been " a realization " of a share investment but " no detachment or severance from the funds of the company of money or other assets as representing a profit made by the company " , and nothing in the 1936 Act gave the character of income to what otherwise was a capital receipt ^[20] (1951) 82 CLR 388 at 407. . The reasoning in Stevenson and Thornett was followed.

31. Thereafter, in
Federal Commissioner of Taxation v Uther ^[21] (1965) 112 CLR 630. , it was decided (Taylor and Menzies JJ; Kitto J dissenting) that s 44 of the 1936 Act, read with the definition of " dividend " in s 6(1) as it then stood, did not bring into assessable income the excess of the amount received by a shareholder in respect of shares cancelled in consequence of a duly confirmed reduction of capital over the amount actually paid up on those shares. Later, in
Federal Commissioner of Taxation v Slater Holdings Ltd , the reasoning of Kitto J was said by Gibbs CJ (with whom Mason, Brennan, Deane and Dawson JJ agreed) to be " compelling " ^[22] (1984) 156 CLR 447 at 457. . Kitto J ^[23] (1965) 112 CLR 630 at 640. took a view of the legislation which differed from that of Fullagar J in Blakely ; the particular dividend provisions in question looked not to the nature of the receipt (as principle generally required) but to the nature of the source from which the distribution was made; here, that was profits. In Slater Holdings , Gibbs CJ summed the matter up as follows ^[24] (1984) 156 CLR 447 at 457. :

" Fullagar J was right in saying that the distribution made to the shareholders in Federal Commissioner of Taxation v Blakely was a capital receipt according to general principles, but he gave insufficient weight to the change that had been effected to the law by defining ' dividend ' so as to include a distribution made by a company to any of its shareholders. "

32. In the meantime, as a sequel particularly to the majority decision in Uther , the definition of " dividend " in the 1936 Act was replaced and amendments were made to s 44 by the Income Tax Assessment Act (No 4) 1967 (Cth). Section 44 is the central provision in subdiv D, headed " Dividends " , of Div 2 of Pt III of the 1936 Act. Division 2, which begins with s 25, deals with " Income " .

The first submission by the taxpayer

33. Counsel for the taxpayer referred to the above decisions of this Court and to the structure of Div 2 of Pt III of the 1936 Act to

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claim support for her case in two respects. First, the reasoning in these cases was said to indicate an error in the case put by the Commissioner, the error being in speaking of the sell-back rights as severed or detached from the taxpayer ' s shares. It was said that the Commissioner conflated two rights, the " general right " to returns of capital, this being " part of the variety of rights making up the share " , on the one hand, and the grant by SGL of the sell-back rights in " effectuation " of the foregoing " general right " .

34. In further support of this submission, counsel referred in particular to passages in
Ord Forrest Pty Ltd v Federal Commissioner of Taxation ^[25] 74 ATC 4034; (1974) 130 CLR 124. . There, Gibbs J and Mason J, in the course of dismissing an argument in terrorem by the taxpayer as to the consequences of holding that the Gift Duty Assessment Act 1941 (Cth) applied to the particular facts, denied the general proposition that there was an element of gift where a share was allotted for less than its true value ^[26] 74 ATC 4034; (1974) 130 CLR 124 at 150-151, 155-157. . Mason J said that " the allotment is made to a member in satisfaction of the rights which he enjoys as a shareholder … under [ the corporation ' s ] memorandum and articles of association " ^[27] 74 ATC 4034; (1974) 130 CLR 124 at 156. . Nor was there an element of gift in an offer made by a company to its shareholders of renounceable (ie, saleable) rights to take up new shares in proportion to then existing holdings ^[28] 74 ATC 4034; (1974) 130 CLR 124 at 151, 157. . From that standpoint, the taxpayer submitted that the issue of bonus shares and of renounceable rights does not give rise to the derivation by the shareholder of income according to ordinary concepts, because, for the reasons explained by Gibbs J and Mason J in Ord Forrest , there was not the requisite " detachment " or " severance " from the existing shareholding.

35. The taxpayer also relied in this respect upon
Federal Commissioner of Taxation v Miranda ^[29] 76 ATC 4180; (1976) 11 ALR 85. and
Macmine Pty Ltd v Commissioner of Taxation (Cth) ^[30] 79 ATC 4133; (1979) 53 ALJR 362; 24 ALR 217. . However, the question there was whether the sale of rights made at a profit attracted s 26(a) of the 1936 Act and did not concern what may have been the revenue nature of those rights as they were issued.

36. Contrary to the taxpayer ' s submission, it is insufficient to say that SGL issued the sell-back rights to Custodial on behalf of shareholders " in partial satisfaction of the shareholders ' right to participate in reductions of capital " , this being " within the congeries of rights comprising the shares " . It is the character of the grant of rights to the shareholders that, as already explained, is decisive. It is not the reduction of capital effected by SGL pursuant to the new statutory processes provided by the Corporations Law.

37. The gain made by the taxpayer upon grant of the sell-back rights and the subsequent receipt of the proceeds of sale on her behalf was not the receipt of a distribution of any form of the assets of SGL. Nor, as explained earlier in these reasons, was the sell-back scheme provided " in satisfaction " of the rights of shareholders under the constitution of SGL. The scheme took its life from the deeds poll executed on the record date.

38. Thus, there is no sound analogy between this case and the liquidation and informal distribution cases beginning with Stevenson ^[31] (1937) 59 CLR 80. , and the cases dealing with the dividend provisions of the 1936 Act. Nor is the receipt of bonus shares a sound analogy to the position of the taxpayer here. Bonus shareholders do not receive a gain severed and detached from their existing shareholding. Rather, their proportional interest in the business of the company is re-expressed in the sense explained in
Inland Revenue Commissioners v Blott ^[32] [ 1921 ] 2 AC 171 at 192-196. . In that case, Viscount Finlay, with reference to Eisner ^[33] 252 US 189 at 207 (1920). , said ^[34] [ 1921 ] 2 AC 171 at 195. :

" In the present case the bonus or so-called dividend was not severed from the capital; on the contrary, it was added to it. … What might have been paid as income went to increase the capital of the company. The shareholder got his proportionate share in the business of the company as increased by the additional capital. "

The first submission by the taxpayer should be rejected.

The taxpayer ' s second submission

39. The taxpayer also submitted what was said to be a " code " argument. This was that s 44 and companion sections in subdiv D of Div 2 of Pt III of the 1936 Act together constitute a complete code with respect to the taxation of receipts by shareholders from companies.

40. The term " code " ordinarily is used to describe the statutory replacement of the

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common law upon a particular subject ^[35] See, for example, Gamer ’ s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236 at 243-244; Bellino v Australian Broadcasting Corporation (1996) 185 CLR 183 at 220. . However, taxes are imposed and levied by statutes and the term " code " has an awkward application in that setting ^[36] Malika Holdings Pty Ltd v Stretton (2001) 204 CLR 290 at 309 [ 63 ] . . Moreover, the practice for laws of the Commonwealth imposing taxation not to deal in the one Act both with imposition of taxation and the assessment, collection and recovery of the tax ^[37] See Permanent Trustee Australia Ltd v Commissioner of State Revenue (Vict) (2004) 220 CLR 388 . indicates that the 1936 Act, when read with the 1997 Act, cannot be said to constitute a " code " in any real sense of the term.

41. It is to be recalled that the 1936 Act and the 1997 Act, for income years following that which ended on 30 June 1998, have concurrent operation; although the latter now contains the general provisions rendering income liable to taxation, the former still contains specific provisions governing the taxation of certain forms of income. Section 44 of the 1936 Act is one of those provisions (see s 10-5, 1997 Act). In essence, the submission by the taxpayer on this branch of the case is that the application of the generally expressed provision in s 6-5 of the 1997 Act is to be restricted by a process of construction giving an exhaustive operation to the dividends subdivision in the 1936 Act. That exhaustive operation of subdiv D of Div 2 of Pt III of the 1936 Act, for the submission to be accepted, must cover not only receipts by shareholders which are brought to tax as assessable income by the subdivision, but also receipts which are not dividends in the defined sense of the term and are not otherwise reached by the subdivision. Thus, the " exhaustive " operation of the subdivision gives it a negative effect which is found by implication and goes beyond the terms of the subdivision.

42. Both sides agree that the taxpayer ' s sell-back rights were not " dividends " in the statutory sense. It may be assumed for present purposes that the rights otherwise would give rise to income according to ordinary concepts. Nevertheless, if the " code " argument be correct, they cannot do so. It would be an heroic exercise, and certainly not one previously undertaken in the cases to which the taxpayer referred, to construe the dividend provisions, which bring in gains, some of which would otherwise be of a capital nature, as implicitly excluding from the general income provision what otherwise would fall within it.

43. The exercise must fail. The taxpayer gave many examples of the inclusion in the dividend provisions of measures to deem as assessable income that which would not be income according to ordinary concepts. But that does not support the implicit exclusion from s 6-5 of the 1997 Act of other items of income according to general concepts.

44. Counsel invoked the decision of this Court applying s 109 of the Constitution by reference to the " covering " of a " field " . But it is agreed, as noted above, that the grant of the sell-back rights fell outside the dividend provisions which must mark out the field.

45. The general position respecting the relations between the general and specific provisions of the 1936 Act was indicated by Dixon CJ and Williams J in
Federal Commissioner of Taxation v Dixon ^[38] (1952) 86 CLR 540 at 555. as follows:

" As a result of s 25 what is gross income derived directly or indirectly from all sources or all sources in Australia, as the case may be, depends upon what is income. … [ The 1936 Act ] begins with the general conception of gross income and specifies in s 23 what is exempt and in s 26 and other sections particular classes of income that are to be included. Sometimes these classes of income appear to be specified simply for greater certainty, sometimes because they do not fall within the natural understanding of gross income " .

The same is true of the relationship between the general provision of s 6-5 of the 1997 Act and the specific provisions contained, amongst other places, in subdiv D of Div 2 of Pt III of the 1936 Act.

46. In
Reseck v Federal Commissioner of Taxation ^[39] 75 ATC 4213; (1975) 133 CLR 45. , differing views were expressed as to the relationship between s 26(d) of the 1936 Act, including in the assessable income 5 per cent of the capital sum of certain allowances and gratuities, and s 25(1).

47. Stephen J (who dissented as to the outcome in Reseck ) asked whether any " conflict " arose between the two provisions and referred to authorities dealing with the relationship between an earlier and later statute, particularly where a specific provision was followed by a general provision ^[40] 75 ATC 4213; (1975) 133 CLR 45 at 53-54. . However, whilst the 1936 Act was much amended, both s

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25(1) and s 26(d) had not been materially changed. No question of implied repeal arose ^[41] cf Minister for Immigration and Multicultural and Indigenous Affairs v Nystrom (2006) 81 ALJR 1 ; 230 ALR 370 . .

48. Gibbs J, who, with Jacobs J, formed the majority in Reseck , construed s 26(d) as having both a charging and liberating effect, to tax both a percentage of an amount otherwise not brought to tax at all and a percentage of an amount otherwise assessable in full ^[42] 75 ATC 4213; (1975) 133 CLR 45 at 50. . Two points should be made here. First, this reasoning as to the relationship between s 25(1) and s 26(d) is an anticipation of the processes of construction of the one statute, now required by
Project Blue Sky Inc v Australian Broadcasting Authority ^[43] (1998) 194 CLR 355 at 381-382 [ 70 ] - [ 71 ] . See also Peldan v Anderson (2006) 80 ALJR 1588 ; 229 ALR 432 . , whereby apparent conflict is alleviated. Secondly, there is no such conflict in the first place between s 25(1) and the dividend provisions which is presented by the circumstances of the present case.

49. Jacobs J, the remaining member of the Court in Reseck , began from the standpoint that, because s 26(d) brought in only 5 per cent of the sum received, only one of the two sections could be applicable ^[44] 75 ATC 4213; (1975) 133 CLR 45 at 57. . His Honour concluded that as a " special provision " which, with s 26(e) " cover [ ed ] the whole subject matter of allowances, gratuities and compensation " , s 26(d) must be given effect in preference to the general provision of s 25(1) ^[45] 75 ATC 4213; (1975) 133 CLR 45 at 57. . The reference to the covering of the whole field does not assist the taxpayer in the present case. First, this is not a case of amounts brought into assessable income, wholly or in part, by two provisions. Secondly, the " special provision " has no operation in the present case and no legislative intention is disclosed to imply a negative which limits the general provision of s 25(1).

50. The taxpayer ' s second submission should be rejected.

Conclusions and orders

51. For the reasons stated earlier in these reasons, the Commissioner ' s submissions that the majority of the Full Court erred should be accepted. In particular, on the listing date, 19 February 2001, when the taxpayer ' s sell-back rights were granted by SGL to Custodial " for the absolute benefit " of the taxpayer, as stated in the Sell Back Right Deed Poll, there was a derivation of income by her represented by the market value of her rights of $ 514 ^[46] cf Abbott v Philbin [ 1961 ] AC 352 . . That conclusion makes it unnecessary to consider the income nature of the receipt of the proceeds on 2 April 2001.

52. The appeal should be allowed and order 1 of the orders of the Full Court set aside. In place thereof, the appeal to that Court should be allowed, the orders of Conti J made on 14 April 2004 set aside and the appeal by the taxpayer against the objection decision of the Commissioner made on 31 October 2002 dismissed. The Commissioner is to pay the costs of the taxpayer of the appeal to this Court.