Commissioner of Taxes (Victoria) v Nicholas
59 CLR 230(Judgment by: Starke J)
Commissioner of Taxes (Victoria)
v Nicholas
Judges:
Latham CJ
Rich J
Starke JEvatt J
McTiernan J
Subject References:
Taxation and revenue
Income tax
Bonus shares
Assessable income of shareholder
Legislative References:
Unemployment Relief Tax (Assessment) Act 1933 (Vic) (No 4171) - the Act
Income Tax Act 1935 (Vic) (No 4309) - the Act
Judgment date: 25 March 1938
Perth
Judgment by:
Starke J
Special case stated by a judge of the County Court at Melbourne pursuant to the Income Tax Act and the Unemployment Tax Relief Acts. The facts are stated in the case.
Lorraine Investments Pty Ltd was a company registered in Victoria, and the taxpayer is one of its shareholders. The company had accumulated profits amounting to a sum of PD350,000 which it had not distributed to its shareholders. In 1934 the directors of the company allotted 350,000 unissued shares in the capital of the company to its shareholders. To the taxpayer 210,000 shares were so allotted. All the shares were issued to the shareholders as fully paid up, and the sum of PD350,000-the undistributed profits of the company-was appropriated by the company to satisfaction of the liability on the shares. The Commissioner of Taxes included in his assessment of the taxpayer to special income tax and unemployment-relief tax for the year ending on 30th June 1935 the sum of PD210,000, the face and the real value of the 210,000 shares already mentioned.
The question stated for the opinion of the Supreme Court was: Should the said assessment of taxable income for the purposes of (1) special tax and (2) unemployment-relief tax have included the said amount of PD210,000? The Supreme Court answered this question in the negative, and the commissioner has now appealed to this court.
Under the English Finance Acts it is settled that in cases in which a limited company transfers or transmutes its undivided profits into paid-up capital and does not distribute them amongst its shareholders as income, then the profits so dealt with are not chargeable to income tax (Inland Revenue Commissioners v Blott [F39] ; Inland Revenue Commissioners v Fisher's Executors [F40] ; Commissioner of Income Tax, Bengal v Mercantile Bank of India Ltd [F41] ; Inland Revenue Commissioners v Wright [F42] ). Consequently, it follows in this case that the company, if the English cases govern the matter, did not liberate or distribute any profits to its shareholders as income, but capitalized them. But we have in this case to consider the Victorian Income Tax Act 1928, the Income Tax Act 1935 (No. 4309), s. 2 (1) (g) (special tax), and the Unemployment Relief Tax (Assessment) Act 1933 (No. 4171), s. 4. Under the Act of 1928 a company is chargeable to income tax in respect of its profits, and shareholders were exempt from tax in respect of dividends from companies (See ss. 42 and 21). But companies are not chargeable to special tax or unemployment-relief tax (Act 4309, s. 2 (g); Act 4171, s. 3 (5)). Special provision was made in these Acts rendering shareholders or members of companies assessable to tax in respect of the special tax and the unemployment-relief tax. It was as follows:"In the case of any person who is a member or shareholder of a company registered in Victoria-any dividend interest profit or bonus credited paid or distributed to him by the company from any profit derived in or from Victoria or elsewhere by it" "is to" (Act 4309), "shall" (Act 4171), "be deemed to form part of the assessable income of that person."
The Federal Income Tax Assessment Act 1915-1921, s. 14 (b), in much the same words, was the subject of consideration in this court in Webb v Federal Commissioner of Taxation [F43] and James v Federal Commissioner of Taxation [F44] . But under the Federal Act 1915-1921 a company was not chargeable to income tax in respect of so much of its assessable income as was available for distribution and was distributed to its shareholders (s. 16 (1)), and shareholders were by force of s. 14 (b) chargeable in respect of dividends, bonuses or profits credited, paid or distributed to them from any profit derived by the company from a source in Australia. The Federal Act 1922-1925, on which was decided the case of Executor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxation (S.A.) [F45] , at p. 302, contained other provisions. The Federal law is now governed by the provisions of the Income Tax Assessment Act 1936, ss. 44; 19; 6, "Dividend," "Paid." Under this Act shareholders are now chargeable in respect of the paid-up value of shares distributed by a company to its shareholders to the extent to which the paid-up value represents the capitalization of profits.
The case before us falls, however, for decision under the Victorian Acts already mentioned. On the part of the taxpayer it is contended that the taxes imposed by these Acts are taxes on income and that it is not meant to tax anything else (London County Council v Attorney-General [F46] ). Nothing, it is argued, has been liberated or released to the shareholders as income; the company has capitalized its profits. On the other hand, the commissioner contends that the Victorian Acts tax not only dividends etc credited, paid or distributed in the ordinary course by a company to its shareholders, but seize also upon the intermediate operations of a company in the course of capitalizing its profits; intercept those profits and tax them if credited, paid, or distributed to its shareholders.
Constitutionally it is quite competent for Parliament so to legislate, and the question first and last is: What is the proper construction of the Act? It does not depend on the English Finance Act or directly on any English case. The Victorian Acts and the Federal Income Tax Acts are different in structure from the English Acts.
Under the Federal Acts companies pay income tax at a flat rate, whilst shareholders pay on a steeply graduated scale. The taxation of companies and shareholders under these Acts is complementary in its nature. Perhaps that aids the construction of the Act which commended itself to this court in James' Case [F47] that profits credited, paid, or distributed to shareholders in the operation of capitalizing profits were chargeable under that Act to income tax. Executor Trustee and Agency Co of South Australia Ltd v Federal Commissioner of Taxation (S.A.) [F48] is consistent with the decision in James' Case [F49] , if the passage in the judgment of Knox C.J. and Gavan Duffy J. [F50] is read with the light thrown upon it by Higgins J. [F51] .
But it is the construction of the Victorian Acts which govern this case. Under these Acts the companies do not pay special or unemployment-relief tax, but only shareholders. It might perhaps be expected in these circumstances that the profits of a company made available to shareholders, whether capitalized or not, would be chargeable to the special tax and unemployment-relief tax imposed by those Acts. But it depends upon the construction of the Acts, and in my opinion the words of the Acts are explicit. Any dividend, interest, profit or bonus credited, paid or distributed to a shareholder from any profit derived by a company shall be deemed to form part of his assessable income. If profits of a company are credited, paid or distributed to shareholders, they are chargeable to income tax. It may be true, but it is nothing to the point to say, that they have not been liberated or released to the shareholders as income but have been capitalized. The critical matter is whether they have been credited or paid or distributed to shareholders. Even the case of Swan Brewery Co Ltd v The King [F52] , much as it has been criticised and limited, allows that accumulated profits transmuted into shares in the capital of a company were chargeable to tax under the Dividend Duties Act 1902-1906 of Western Australia. The Victorian Acts, though income-tax Acts, are equally explicit. It appears to me a fallacious method of solving the problem involved in this case to start with the proposition that capitalized profits are not income on the basis of the English decisions and cannot therefore be assessable income under the Victorian Acts. It depends on the language of those Acts, and, to adopt the words of Higgins J. in the Executor Trustee Co 's Case [F53] , probably most people would have thought it sufficiently clear that the profits appropriated to the shares issued to the taxpayer as fully paid up had been credited to him under and by virtue of the words of those Acts.
But it is necessary to consider those words more closely. It is clear, and was, I think, conceded that the taxpayer in the issue of shares to him did participate in the profits of the company. "Paid" prima facie implies payment of money and not satisfaction in shares or other assets (Webb's Case [F54] , at p. 487, per Higgins J.). "Distributed" means divided. In the present case I should not think that the profits had been paid or distributed to the shareholders. But there is the other word, "credited." It is rather indefinite in meaning. It is a commercial or, rather, a book-keeping term. A person is "credited" with an amount if it is entered on the credit side of his account. But special tax or unemployment-relief tax could not be evaded simply by refusing or omitting to make entries customary in accountancy which the transaction involved "in business as in contemplation of law."
In the present case the company has avoided so far as possible the entry in any book of a credit to the account of the taxpayer in respect of its accumulated profits. But shares have been issued to the taxpayer and accepted by him, and the only share register used by the company records that the shares are fully paid up, and the shares, no doubt, contain the same statement upon their face. It is commonplace of company law that "paid-up shares cannot be issued unless they are paid up by someone other than the company"(Palmer, Company Precedents, 14th ed. (1931), Part I., p. 957).
The taxpayer did not pay for the shares in cash. But the company appropriated accumulated profits from its reserve to unallotted capital, "being bonus shares allotted from reserve," to discharge the taxpayer's liability on the shares. What is such an appropriation but the crediting of the taxpayer with the amount of accumulated profits of the company? It resulted, no doubt, in a capitalization of the profits, but in the course of that operation the taxpayer is necessarily both as a matter of business and as a matter of law given credit for and "credited" with the amount paid up on his shares. Otherwise, the shares are not paid up at all.
In James' Case [F55] the entries made in the books of the company were not the same as in the present case, but the governing principle is the same, and it ought to be followed in this court.
The appeal should be allowed and the question stated answered in the affirmative.