Douglass v Federal Commissioner of Taxation
45 CLR 95(Judgment by: Dixon J)
Between: Douglass
And: Federal Commissioner of Taxation
Judges:
Rich J
Starke J
Dixon JEvatt J
McTiernan J
Subject References:
TAXATION AND REVENUE
INCOME TAX
DEDUCTIONS
Tax paid on profits
Shareholder entitled to rebate
Legislative References:
Income Tax Assessment Act 1922 (Cth) - s 16(b)(i); s 16(b)(iii); s 23
Judgment date: 11 May 1931
Melbourne (heard in Sydney)
Judgment by:
Dixon J
The question in this case arises upon the second of the two provisoes which were added by s. 5 of Act No. 27 of 1923 to par. (b) of s. 16 of the Income Tax Assessment Act 1922. The provisoes relate to the allowance of a rebate or exemption to a taxpayer whose assessable income includes dividends distributed to him out of the profits of a company of which he is a member if the profits have already been taxed in the hands of the company. The first proviso deals with the case of a taxpayer liable for a rate of tax which is lower than that at which the profits have already been taxed in the company's assessment. The amount of the dividends must be excluded from the assessment of the income of such a taxpayer
"unless the rate of tax payable by him on income from property, if the dividends ... are included, exceeds the rate of tax paid or payable by the company."
The second proviso enacts:
"that if the rate of tax is not less than the rate of tax paid or payable by the company, the taxpayer shall be entitled to a rebate in his assessment of the amount of tax paid by the company on that part of the said dividends ... which is included in his taxable income."
The taxable income is the amount of income remaining after all deductions allowed by the Act have been made from the assessable or gross income. The dividends are included in the assessable income, which, of course, may be composed of many items besides the dividends. Many of the deductions allowed by the Act are not directed to the earning of assessable income, and are permitted irrespective of the nature of the items included in the assessable income. Provision is made by s. 23 (2) for distinguishing between income from personal exertion and income from property in making deductions. When the gross income from property and the deductions allowable from such income have been ascertained, then, speaking generally, the sum of the deductions allowed from income from property is to be deducted from the sum of the items of assessable income from property.
Upon the interpretation of the second proviso which the Commissioner has adopted, the provision requires the ascertainment of what amount of one of the items which compose the total assessable income, namely, dividends, is contained in the residue of the assessable income remaining after the total sum of the deductions has been subtracted. Thus, if a case be supposed in which a taxpayer has a greater income from property than from personal exertion and his income from property consists of PD300 derived from interest, PD300 from rent and PD400 from dividends, making in all an assessable income of PD1,000, from which he is entitled to deduct PD50 paid as premium for life insurance and PD50 in respect of each of four children under the age of 16 years, making a total of deductions of PD250, the question would be how much of the PD400 derived from dividends is included in the residue of the taxable income from property, namely, PD750.
The Commissioner construes the word "said" in the phrase "that part of the said dividends ... which is included in his taxable income" as referring to the dividends included in his assessable income, so that the phrase means "that part which is included in his taxable income of the dividends which have been distributed to him as a shareholder out of the profits upon which the company has paid tax and which are included in his assessable income." Further, he construes the words "which is included in his taxable income" as referring, not to the inclusion of the dividends in the account from which the taxable income results as a balance, but as referring to the inclusion in the figure which constitutes that balance of a less figure which consists of part of the dividends. If this be the correct construction of the second proviso, it does require the ascertainment of so much of the amount of dividend taken in as assessable income as remains in the net residue after the deductions, that is, in the taxable income.
There appear to be two methods only in which the problem may be solved of ascertaining what part of the dividends forming one of the items composing the assessable income is included in the figure which constitutes the taxable income. One method is to treat each and every part of the deduction as deductible from each and every part of the assessable income, at any rate unless some deduction is included which is allowed by reason of the corresponding inclusion in the assessable income of some particular item of revenue, and so should be thrown against that item. This is the method adopted by the Commissioner. He treats the deductions, which are allowable irrespective of the nature of the items in the assessable income as deductible ratably from the whole of the assessable income from property. Thus he ascertains that part of the dividend which is included in the taxable income by deducting from the amount of the dividends included in the assessable income a ratable part of the deductions. The residue of the dividend is included in the taxable income. In the example already given he would treat the sum of the deductions, namely, PD250, as deductible from each and every part of the sum of the items of the assessable income, PD1,000. So each of the three items of assessable income would be diminished ratably by 5s. in the PD1, and the taxable income would include PD300 of dividends, PD225 of rents and PD225 of interest.
The other method is to treat the word "included" as referring to the amount by which the taxable income is increased by reason of the presence of the dividends in the assessable income. This means that to the extent that the taxable income is greater because of the inclusion of the dividends in the assessable income, the dividends are included in the taxable income. Thus, in the instance already given, as the taxable income would have been PD600 if no dividends had been included in the assessable income. the amount of the dividends included in the taxable income upon this view would be PD400. If the deductions exceeded PD600 instead of amounting to PD250 there would be no taxable income if the dividends were omitted from the assessable income. For example, if the deductions amounted to PD700, then, by including the sum of PD400 derived from dividends, the taxable income would be brought from nil to PD300. That part of the dividends included in the taxable income would therefore be PD300. These alternatives arise if in other respects the construction be accepted which the Commissioner places upon the second proviso and, notwithstanding the opinion of my brother Starke, I am not at present prepared to say that it is wrong.
But I find it unnecessary to give a definite opinion whether that construction be correct because, assuming it to be so. I think that the second of the two alternatives affords the right solution of the problem which that construction raises. The choice between the alternatives really depends upon the force attributed to the word "included." Probably those who framed the provision did not appreciate the problem which was inherent in what they were prescribing, but whether they did so or not, it is upon this word that the difficulty arises. When the question is asked how much of an item contained in a gross sum is included in a net residue of that sum, it is not unreasonable to understand it as inquiring by how much the net residue is increased by reason of the presence of the item in the gross sum. The object of the provision was to secure to the taxpayer an allowance in respect of tax already paid upon the profits out of which the dividends were paid. Justice seems to require that he should receive an allowance in respect of so much of his taxable income as would not exist but for the inclusion of the dividends in the assessable income. It therefore seems proper to give to the word "included" a force which is in accordance with the meaning which ought fairly to be attributed to the legislation and which it may reasonably bear. In a case in which the dividends exceed the taxable income, it may be necessary to determine whether the construction of the second proviso from which this problem arises is the true one, or whether it should receive a construction by which its operation would be the same as if in terms a rebate were allowed of the amount of tax paid by the company on so much of the dividends as are included in the assessable income. In the present case, however, it is enough to say that accepting the construction of the proviso assigned to it on behalf of the Commissioner the method is erroneous which he has adopted in the application of the proviso so construed.
The question in the stated case should be answered: The appellant is entitled to a rebate of 1s. in the PD1 on the sum of PD11,830.