Commissioners of Taxation (NSW) v Meeks
19 CLR 5681915 - 0429A - HCA
(Decision by: Griffith CJ)
Between: Commissioners of Taxation (New South Wales)
And: Meeks
Judges:
Griffith CJIsaacs J
Gavan Duffy J
Subject References:
TAXATION AND REVENUE
INCOME TAX
Company
Profits
Source of income
Cancellation of contract
Legislative References:
Income Tax (Management) Act 1912 (NSW) (No 11) -
Judgment date: 29 April 1915
Sydney
Decision by:
Griffith CJ
The Sulphide Corporation is a joint stock company registered in England, which carries on its practical operations, consisting of mining and treating and smelting ore, at Broken Hill and at Cockle Creek, both places being in New South Wales. The magnitude of their undertaking may be inferred from the facts appearing in the case. The Corporation also, of course, disposes of the products of those operations. On 7th May 1912 the Corporation through its London agents entered into a contract in writing with one Tillberg and the Hydraulic Power and Smelting Co Ltd for the sale to them of 120,000 tons of Broken Hill slimes concentrates. Delivery was to be made to the purchasers in bags on trucks at Broken Hill, and was to be taken by them in instalments, the delivery of the first 30,000 tons being taken by them between 1st January and 30th June 1913 in parcels not exceeding 5,000 tons per month. The purchasers were to make large payments in advance on account of the price, a certificate being given by the sellers upon each payment that they held the slimes to which the payment related to the buyers' order subject to payment of the balance on delivery of the concentrates produced therefrom. The first payment was to be made on or before 7th June 1912, and others from time to time as stipulated.
Between the date of the contract and the end of February 1913 the purchasers made payments in advance to the extent of PD63,000, but they did not take delivery of any of the concentrates, and none were in fact ever delivered under the contract. All the payments were made outside of New South Wales. Default having been made in further payments, negotiations between the parties were carried on in London, which resulted in a written agreement, signed there on 24th September 1914, and described as supplemental to the contract of 7th May 1912, itself described as "the principal agreement," in the following terms:
"The principal agreement and all subsequent agreements (if any) subsisting between the parties hereto are hereby cancelled from the date hereof, and the said Sulphide Corporation Ltd shall be entitled to retain for its own use all moneys paid thereunder, and none of the parties shall have any claim against the other or others in respect of anything done, or omitted to be done, under the principal agreement or any subsequent agreement."
A sum of PD61,425, representing the PD63,000 already mentioned less commission and brokerage, apparently incurred in England, was entered as an item on the credit side of the balance sheet of the Corporation for the year 1st July 1912 to 30th June 1913, forming part of total credits amounting to over PD350,000, of which a sum of PD285,600 represented the balance of profits on working account, and the appellants claim that this sum of PD61,425 is taxable income within the meaning of the New South Wales Income Tax Acts. The respondent contends that it is not, and the Supreme Court by majority have so held. The question formally submitted for decision is whether that sum is taxable income, which I understand to mean whether the sum of PD63,000 is to be brought into account as income subject to permitted deductions.
By the Income Tax (Management) Act 1912 the term "income" means, "income derived from any source in the State." It is not disputed that the sum of PD63,000 is income. The question for determination is whether that sum, received and retained under the circumstances already stated, was income derived from a source in New South Wales, as contended by the appellants, or from a source outside of New South Wales, as contended by the respondent. His contention is that the true source of the income was the agreement of 24th September 1913, which was entered into and wholly performed outside of New South Wales, or, alternatively, the contract of 7th May 1912, which was also entered into and performed, so far as it was performed at all, outside of New South Wales.
Dr. Brissenden first contended that the money when paid was paid as the price of goods to be delivered, and that upon receipt of it by the vendors it became irrevocably fixed with the character of income earned in New South Wales, subject of course to such deductions as are permitted in respect of the cost of earning it.
I cannot accept this view. In my opinion the Income Tax Acts do not interfere with the rights of parties to such an agreement to rescind it by mutual consent even after payment of the price. If an agreement is bona fide rescinded and the parties are relegated to their original position, there is in fact nothing that can any longer be regarded for the purpose of the taxation of income as a receipt of money. But this does not dispose of the matter. The sum in question was, beyond all doubt, received in the first instance under and by reason of the contract of 7th May 1912. That contract was one made by the Corporation for the purpose of and in the course of its business of smelting ores and selling the product, which business was, except as regards the selling, carried on in New South Wales.
The Act uses the word "source" in connection with income to denote a concept to which locality can be attributed. The first question for determination, therefore, is what was the source from which this income was derived. The next question is what is the locality of that source. Without attempting to give an exhaustive definition, I am of opinion that, when a person or company carries on in the State of New South Wales the business of dealing with natural products for the purpose of preparing them for use, or of extracting from them other products, and then disposing of the ultimate product by way of sale, any income arising from contracts entered into in the ordinary course of that business for disposing of those products, wherever the contracts themselves are made, has its source, in part at least, in the business undertaking. In another sense the source may be said to be the capital embarked in the undertaking, which in this case must be very large. In either view there can be no doubt that the locality of the source is the place where the undertaking is carried on, in this case of New South Wales.
The only question, therefore, remaining to be determined is whether the sum of PD63,000 in question is income arising from the contract of 7th May, which was a contract entered into by the Corporation in the ordinary course of its business undertaking in New South Wales.
It was, as already said, received in the first instance under and by reason of that contract, and the Corporation was bound to take it into account accordingly as a business receipt.
In one view the case may be regarded as one of a sum of money received in the course of business in respect of which no appreciable expense that can be attributed to earning it was incurred. In that view the whole of it, except the commission and brokerage already deducted, is clear profit. In another view the agreement of 24th September may be regarded as an agreement by which each of the parties exonerated the other from further performance of the obligations of the original contract, and the purchasers under that contract agreed to pay, and the Corporation agreed to accept, as liquidated damages a sum equal to that already paid in respect of the price. I am disposed to think that the latter is the preferable view of the facts.
In my opinion, damages received as compensation for non-performance of a business contract stand on the same footing as the profits for the loss of which the damages are paid. It cannot, therefore, make any difference in principle whether the money is actually earned as profit, ascertained by deducting expenses from receipts, or paid as compensation for the loss of the opportunity of earning that profit, or, in the latter case, whether the amount of compensation is assessed by a jury or by mutual agreement.
In my judgment, therefore, the source from which the income in question was derived was the business undertaking of the Corporation, the operations of which were mainly, if not altogether, carried on in New South Wales. It follows that the sum of PD63,000 was derived mainly, if not altogether, from a source in that State, and must be brought into account as income so derived.
If the Corporation can establish a case for apportioning it, by attributing any part of it to a source in England, where the Corporation is registered, or in Victoria, where it conducts some business operations, the Commissioners will no doubt give effect to their representations.
The appeal should therefore be allowed.