Western Gold Mines NL v. Commissioner of Taxation (WA)

59 CLR 729
[1938] ALR 203

(Judgment by: Dixon J, Evatt J)

Between: Western Gold Mines NL
And: Commissioner of Taxation (Western Australia)

Court:
High Court of Australia

Judges: Latham CJ
Starke J

Dixon J

Evatt J
McTiernan J

Subject References:
TAXATION AND REVENUE
Dividend duty
Sale of mining leases
Realization of capital

Legislative References:
Dividend Duties Act 1902 (WA) (No 32) -

Hearing date: 9 November 1937
Judgment date: 24 February 1938

Melbourne


On appeal from the Supreme Court of Western Australia.

Judgment by:
Dixon J

Evatt J

The starting point in the consideration of the present case is the decision of this court in W. Thomas & Co Ltd v Commissioner of Taxation (W.A.), [F14] which establishes that under the Dividend Duties Act 1902-1924 (W.A.) the profits liable to tax are the "profits arising from the trading or business operations of a company, and not ... profits of any description, such as increments arising from the appreciation in the value or the realization of capital assets of a company". [F15] (See Forwood Down & Co Ltd v Commissioner of Taxation (W.A.).) [F16]

The profits which by the order under appeal have been adjudged taxable appear on an analysis of the assessment to consist in the face value of shares allotted to the appellant company in consideration for the transfer of the company's interest in certain mining leases. The transaction took place in September and October 1933. The interests of which the company was possessed comprised an option expiring on 8th November 1933 for the purchase of six gold-mining leases with some appurtenant and incidental rights and an absolute right to four other leases and to a mining reservation. The four mining leases and the option had been assigned to the company on its formation, which took place on 23rd January 1933. It was a working option for the acquisition of the six mining leases for a consideration of PD50,000 in cash or, at the election of the purchaser, twenty-five per cent of the nominal capital of any company formed to acquire the leases. The mining reservation the company had acquired afterwards.

The nominal capital of the company was PD50,000, of which the equivalent in shares of PD10,000 and another PD10,000 in cash had been applied in acquiring the option. It had spent also over PD10,000 in exploratory work. Those who were in control of the matter decided to form another company to take over the leases and reservation in order to work them. The new company was registered on 29th September 1933 under the name of "Triton Gold Mines No Liability." Its nominal capital was fixed at PD600,000, divided into shares of 10s. each.

On 26th September 1933 the appellant company entered into an agreement with a trustee for the then-intended company afterwards so registered. The appellant company agreed to sell to the new company its property comprising the mining leases and rights, the subject of the option agreement, and the mining reservation. As consideration for the sale the new company was to allot to the appellant company or its nominees 200,000 fully paid shares of 10s. and to pay it PD50,000 in cash. The agreement was expressed as a sale of the mining leases and not of the option; in other words, it proceeded on the footing that the appellant company would exercise the option and then transfer its right to the leases, as distinguished from assigning the option before its exercise to the new company. In fact notice exercising the option had been given by the appellant company on 22nd September 1933, that is, four days before the date of the agreement of sale. The election conferred by the option to pay the purchase price in cash or shares was made in favour of the cash consideration, and, accordingly, the appellant company became bound to pay the vendor of the gold-mining leases PD50,000 in cash. Triton Gold Mines No Liability provided this sum in the cash consideration of PD50,000 which it, as the new company, undertook to pay in addition to allotting 200,000 of its 10s. shares fully paid. It thus worked out that what the appellant company really obtained on the sale of the gold-mining leases and the mining reservation consisted in fully paid-up shares.

The account by which the commissioner has calculated the profit upon which he has levied dividend duty treats the gross receipts as PD150,000 but allows the PD50,000 payable on the exercise of the option as a deduction. It also allows further deductions representing expenditure and a special statutory concession. But the result is that the shares, put down as PD100,000, less the expenditure and the special statutory deduction, are made the subject of the duty.

The appellant company has not converted these shares into money but has held them as an investment, and it does not appear on what basis they are brought into the account at their face value.

Dwyer J., who heard the company's appeal from the assessment of the commissioner, formed the conclusion that it had never been the company's intention to acquire the mine and work it as a going concern, but that it obtained the option for the purpose of testing the mining leases and then, if satisfied, of acquiring them, developing them and disposing of them. This view of the facts led him to hold that the profit was dutiable.

In considering whether a profit arising from a transaction is of an income or capital nature, it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities. We have become only too familiar with the standard or criterion which the law provides for distinguishing between the two descriptions of profit. (See Jolly v Federal Commissioner of Taxation.) [F17] But it is a most unsatisfactory criterion, and a decision must often be made by reference to matters of degree and by reason of the weight given to particular circumstances affecting the activities of the taxpayer, and, further, by reliance upon that kind of imputed intention of which Lord Sumner speaks in Inland Revenue Commissioners v Blott, [F18] at p. 218, when he says:"The intention, which the final decision assumed, was one of those so-called intentions which the law imputes; it is the legal construction put on something done in fact."

In the present case facts which it is unnecessary to discuss in detail appear to us to show that a number of persons connected with the financial and industrial activities of mining first obtained the option, then formed the appellant company and later Triton Gold Mines No Liability. They acted with the object of obtaining a mine which could be worked by some company in which they held a substantial interest. Their business was not that of buying and selling options or mining leases. When the appellant company was formed and the option was assigned to it, no one decided that the appellant company should not be the body to work the mine if it was decided to carry on mining operations indefinitely. The purpose was simply to explore, examine and then decide what was to be done. In September 1933, however, on a report that had been received, it was determined that capital must be raised from the public and, for this reason mainly, that a new company should be floated for the purpose of working the mine.

There is not much, if any, evidence in the materials laid before the court to show what, if any, other activities were pursued by the appellant company. Perhaps in the short period of its existence the appellant company had undertaken nothing except the investigation and exploitation of the mining leases. But, whatever the reason, the ambit of the survey of the taxpayer's operations in this case is, on the facts before us, very narrow. We should, we think, adopt the assumption that the transaction under consideration does not represent an example of a general business carried on, or intended to be carried on, by the appellant company in investigating, acquiring and then disposing of mining leases and the like. We should treat it as a single transaction forming no part of any actual or intended system or organized business. So treating it, the operation appears to us to be no more than the conversion of a capital asset into a new form.

The striking fact is that the appellant company did not realize the 200,000 shares it obtained as consideration for the transfer of the leases and did not enter upon the sale to Triton Gold Mines No Liability for the purpose of converting its interests in the leases and mining reservation into money. The reason for floating the latter company was not to provide money for the appellant company, but to facilitate the raising of money for the working of the venture and to give to the appellant company a new title to share in the success of the venture, namely, the 200,000 paid-up shares. It is true that the new title is a realizable asset, a marketable security. But the object was not to turn the marketable security into money. The uncertainty when the option was acquired as to what should be done and the insufficiency of the appellant company's nominal capital to work the mine on a large scale do not appear to us to show a scheme of profit-making by buying and selling. It is consistent with the intention to float a new company as was done in the event.

On the whole, we think that it was a capital transaction.

In our opinion the appeal should be allowed with costs. The order of Dwyer J. should be discharged, and in lieu thereof a declaration should be made that the profit of the appellant company derived from the disposal of the six leases and mining reservation under the agreement of 26th September 1933 is not liable to dividend duty, and an order should be made setting aside the assessment and remitting it to the commissioner with liberty to him to reassess the appellant company consistently with this order. The appellant company should have the costs of the proceedings in the Supreme Court.