John Langley Webb v The CMR of Taxation
30 CLR 450BC2200023
(Judgment by: Higgins) Court:
Judges:
Knox CJ
Isaacs
HigginsGavan Duffy
Starke JJ
Judgment date: 22 June 1922
Judgment by:
Higgins
Company A transfers to Company B its undertaking and assets. Part of the consideration for the transfer is the allotment and issue by Company B to Company A or its nominees of shares in Company B fully paid up to £ 1 each. The nominees of Company A are its existing shareholders. The Commissioner claims that each shareholder should pay income tax on the value of the shares issued to him (less certain deductions which are immaterial for the present purpose).
At first sight the claim seems absurd. The consideration for the transfer is not "income" either of the Company or of the shareholder; it is of the nature of purchase money paid to Company A, and distributed under the Act and regulations of the Company to the shareholders on winding up. Even if it were all clear gain to the shareholders in Company A , that gain is not income. A legacy is not income; the price given for one's house and land is not income; an asset which comes to a shareholder in the distribution of the surplus assets of the company on winding up is not income. A man may buy a house for £ 5000 in 1893, and sell it for £ 10,000 in 1918; the difference is not to be included in his income tax return. There is always something of periodicity, or recurrence, or regularity connoted by the word "income." In the Standard Dictionary "income" is defined as "the amount of money coming to a person or corporation within a specified time or regularly (when unqualified, annually), whether as payment for services, interest, or profit from investment; revenue."
But Company A -- the Broken Hill South Silvermining Company No Liability -- has been a most profitable enterprise. Starting in 1893 with 200,000 shares of £ 1 each, of which £ 163,831 were paid up, it sells all its undertaking and assets as a going concern -- all that remains after much extraction of minerals -- as from 30th June, 1918, for (in addition to other considerations) £ 800,000 in 800,000 shares fully paid up to £ 1 each. The Commissioner argues that these shares issued by the new Company, fully paid up to £ 1 each, represent (after deduction of the capital paid up on each share, etc) "profits" or "bonus," "credited or paid" to the shareholder by the old Company (para 12). The Commissioner makes no distinction as to income tax as between an original shareholder and any shareholder who may have bought his share at ten times the face value -- all shareholders are to pay irrespective of their actual profits, and as if they were original shareholders.
This attitude seems rather extraordinary. If the mine belonged to one Person A B , and if he paid £ 163,831 for it, and sold it after thirty years for £ 800,000 in money or in shares, no income tax would be payable by A B on the £ 800,000. That is admitted. It is not income in the sense of the Act; it is a corpus payment. But because the corpus payment is made to a company, and the company's shareholders derive the benefit, it is said that each shareholder, after deduction of the capital paid on his shares, etc, must treat the rest of the consideration, or his proportion thereof, as income for the purpose of income tax.
The Commissioner relies on the words of the "Income Tax Assessment Act 1915-1918" as justifying his claim, in particular on s 14 ( b ). Under s 14 --
"The income of any person shall include ...
- (b)
- dividends interest profits or bonus credited or paid to any depositor member shareholder or debenture holder of a company which derives income from a source in Australia."
This provision is perfectly intelligible if it be read as applying to a live company, carrying on its business, deriving profits from the business, and distributing some of its profits, as dividends, or under any other name, to its shareholders. The scheme of the Act is that the Company has to pay income tax on its assessable income, after deducting any part of that income that is distributed to the shareholders of the Company --
s 16 (1); and that the shareholder has to pay tax on his whole income, including any dividends (or share of profits) that is credited or paid to him in such distribution.
Moreover, as the words of s 14 ( b ) show, if a man is paid or credited with any interest as a depositor with the Company, or as a debenture-holder, that interest must be included in his taxable income. The words "profits or bonus" seem to be used mainly for the purpose of preventing attempts to evade the tax by word-juggling; the Act looks at the substance of the matter -- is there a payment or credit of any part of the profits of the Company to the shareholder? The word "profits" would be also applicable to a debenture-holder where the debenture-holder is entitled to a share in the profits as well as to interest.
It seems to me obvious that s 14 ( b ) and s 16 (1) are mutually complementary. Under s 10 income tax is levied upon the taxable income derived by every taxpayer from sources within Australia during the twelve months ending on 30th June preceding the financial year for which the tax is payable. But, under s 16 (1), there is to be deducted from the total assessable income of any company taxpayer, so much of the assessable income as is available for distribution, and is distributed to the shareholders; and, under s 14 ( b ), everything that is distributed out of the company's income to the shareholders is to be treated as taxable income of each shareholder. The fact that a going company distributes anything among its shareholders is treated as showing that it is a distribution out of the company's income; for the company cannot distribute any of its capital to the shareholders. This is the law as to such companies, even if there were not the express provision in r 99, that
"no dividend shall be payable except out of the profits arising from the business of the company."
But when a company, about to dissolve, is winding up its affairs, and, after paying all its liabilities and repaying to the shareholders the amounts contributed to the capital, distributes any remaining assets according to law, the distribution is not a distribution of income of the company, and the money or property does not come to the shareholder as part of his income. The fact that the assets distributed would not be so great but for profits made by the company in past years does not affect their character as residuary assets of the company distributed on its winding up. In a recent case from Western Australia this court decided that a tax on income "arising from the business" of a company did not apply to the difference between the price paid for assets by the company and the price received for those assets in winding up. Here, under r 99, the only profits that can be distributed by this Company as a going concern, are profits "arising from the business of the company," and s 14 ( b ) applies, in my opinion, to nothing but dividends, or something in the nature of dividends, declared and paid or credited to shareholders out of the profits of the Company.
I am strongly inclined to think, also, that s 14 ( b ) applies to distribution by the Company, not to distribution by law, and that this distribution is not a distribution by the Company. The second proviso to s 14 ( b ) excepts from that sub-section sums received by a shareholder, "where a company distributes to its shareholders any undistributed income accumulated prior to the 1st July 1914." s 16 (2) provides that --
Where in the opinion of the Commissioner a company has not in any year distributed to its members or shareholders a reasonable proportion of its taxable income, the taxable income of the company shall be deemed to have been distributed to the members or shareholders in proportion to their interests in the paid-up capital of the company, if the Commissioner is satisfied that the total tax payable on it as distributed income is greater than the tax payable on it by the company.
These clauses refer to distributions at the will of the company or of its directors; here the distribution is not dependent on that will, but on the law. By s 416 of the "Companies Act" it is provided that -- "If after all the liabilities of a no-liability company are discharged there remains any surplus of its property the surplus shall be distributed amnog the parties entitled thereto." Looking now at the regulations of the Company to find what parties are entitled, and to what, we find (r 130) --
If the company shall be wound up, all or any of the assets divisible among the shareholders may be divided in specie, or may (with the sanction of a general meeting) be transferred to trustees for the shareholders entitled thereto.
Neither Act nor rules say in what proportion the shareholders are entitled to the assets; but the law implies, in the absence of any express provision to the contrary, that any surplus after return of capital is to be distribated among the shareholders in proportion to the number of shares respectively held -- Birch v Cropper , 14 App Cas. 525; Re Driffield Gaslight Co , (1898) 1 Ch 451. No doubt these cases were decided under the English "Companies Act 1862;" but I can find nothing in Part II. of the Victorian Act that renders the implication less applicable. But this tentative view is not essential to my opinion on this special case.
I do not base my opinion on the recent decision of the House of Lords in Inland Revenue Commissioners v Blott , (1921) 2 App Cas. 171. In that case, a live, going company, in pursuance of its articles, resolved that, out of its undivided profits, a bonus should be paid to its shareholders, and that in satisfaction of that bonus a distribution might be made among the shareholders of unissued shares fully paid up. The majority of the law Lords held that the shares so allotted to a shareholder could not be treated as part of his "total income from all sources for the previous year." They were an addition to the shareholders' capital, not to his income. The minority held in substance that the allotment of shares, when analysed, meant
- (1)
- a distribution in money of profits arising from the business; and
- (2)
- an application of that money in paying up the amount on each share.
Whatever view we may take as to this decision, it does not seem to me to affect the case before us here. In Blott's Case the shares were not distributed as assets distributable on a winding up; they were distributed by a going Company by way of dividend from its undistributed profits. In the much discussed case of Bouch v Sproule , 12 App Cas. 385, also, the distribution was not of assets on a winding up; it was a distribution of profits as such by a going company. So, too, in a very recent case before Sankey, J -- Pool v Guardian Investment Trust Co ., 38 The Times LR 177; and in the cases before this court of Knowles v Ballarat Trustees, Executors and Agency Co ., 22 ALR 431 ; and Fisher v Fisher , 23 ALR 318 .
It is probably expedient to explain that neither party to this special case suggests that what has been done by way of reconstruction is invalid. So far as I can see, there is no provision in the "Companies Act" for a liquidator in the winding up of such a company. The case speaks of a liquidator acting, but there is no substantive allegation that a liquidator was appointed by the Company.
Moreover, there is no statement (assuming the Commissioner to be right in principle) that 57 per cent. is the true proportion attributable to profits earned and accumulated since 1st July, 1914. But both parties concede that, notwithstanding the form of the question asked, we should only decide whether the shares received from the new Company are to be treated as income of the shareholders at all.
Again, there is no direct statement that any of the shares received from the new Company (or their value) are due to profits earned and accumulated since 1st July, 1914; it is merely stated (para 16) that the Commissioner "contends" to that effect. But, as both parties have treated the statement as if made, I treat it as if made. There is no doubt, when one examines the closing entries in the books (Sch C to the case), that, in estimating the assets transferred to the new Company, the old Company was credited with the sum of the amounts credited to profit and loss of the Company, and to the reserve account, the equalisation reserve account, appropriation for dividend. But it by no means necessarily follows that these profit funds are due to assessable income of the Company, within s 16 (1); they may have been due to mere increases in the value of the assets of the Company, and we are not told on what system this Company calculated its profits -- whether it included appreciation in value of its assets, or merely the difference between receipts and expenditure -- see Lee v Neuchatel Asphalte Co ., 41 Ch D 1; Ammonia Soda Co Ltd v Chamberlain , (1918) 1 Ch 266.
There is not even any statement that any part of the profits of the Company was "credited or paid" to this shareholder within the meaning of s 14 ( b ). Primá facie , "payment" implies money payment, not satisfaction in shares or other assets; and "credited" implies some accountancy entry. But, in my view of the position, it is unnecessary to rely on such a defect in the statement of the case as agreed to by the parties.
My answer to the question must be "No"