Douglass v Federal Commissioner of Taxation
45 CLR 95(Judgment by: Rich J)
Between: Douglass
And: Federal Commissioner of Taxation
Judges:
Rich JStarke J
Dixon J
Evatt 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:
Rich J
The question raised by this case stated is whether, upon the true construction of the second proviso standing at the foot of s. 16 (b) (iii.) of the Income Tax Assessment Act 1922-1927, the rebate of tax paid by a company to which a shareholder is entitled when the profits are distributed should be calculated only on so much of the taxpayer's dividends remaining after a proportionate part has been substracted of the deductions allowable from the gross or assessable income of the taxpayer in arriving at his net or taxable income.
Section 16 (b) (i.) provides that the assessable income of any person shall include
"in the case of a ... shareholder ... of a company which derives income from a source in Australia ... dividends ... or profits ... distributed to the ... shareholder from any profit derived ... by the company."
Inasmuch as profits distributed by the company will in most cases have been assessed to tax as part of the income of the company before distribution, in order to avoid double taxation some provision is required in relief of liability of the shareholder; accordingly two provisoes at the foot of par. (b) were enacted. They are as follows:
"Provided where the dividends, bonuses, profits or shares referred to in sub-paragraphs (i.) or (ii.) of this paragraph have been distributed out of profits upon which any company has paid or is liable to pay tax under the provisions of any Income Tax Act which comes into operation after the thirtieth day of June One thousand nine hundred and twenty-three the amount of those dividends, bonuses, profits or shares shall, where the shareholder is not a company, be excluded from the assessment of the income of the taxpayer unless the rate of tax payable by him on income from property, if the dividends, bonuses, profits or shares are included, exceeds the rate of tax paid or payable by the company: Provided further 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, bonuses and profits, and of the face value of the said shares, which is included in his taxable income."
In the present case the rate of tax payable by the appellant, who is the shareholder, is not less than the rate of tax paid by the company, and we are, therefore, concerned with the second proviso. The language of that proviso is elliptical because it refers to a matter already dealt with by the first proviso. For instance, the words "the rate of tax" refer back to the expression in the first proviso "the rate of tax payable by him on income from property, if the dividends, bonuses, profits or shares are included." The expression "the said dividends, bonuses and profits" refers back to the words in the first proviso "where the dividends, bonuses, profits or shares referred to in sub-paragraphs (i.) or (ii.) of this paragraph have been distributed out of profits upon which any company has paid or is liable to pay tax under the provisions of any Income Tax Act which comes into operation after the thirtieth day of June one thousand nine hundred and twenty-three."
Indeed, the second proviso is based upon the hypothesis or condition expressed in the clause in the first proviso introduced by the word "where," and unless this is remembered the meaning of the second proviso may not be readily understood. Finally, the words "in his taxable income" with which the second proviso ends refer to a money sum; by the definition contained in s. 4 "taxable income" means "the amount of income remaining after all deductions allowed by this Act have been made."
It follows that, when the proviso directs that a rebate shall be allowed "of the amount of tax paid by the company on that part of the said dividends," etc, "which is included in his" (the taxpayer's) "taxable income," it means that so much of the dividends included in the shareholder's assessable income pursuant to sub-par. (i.) of par. (b) of s. 16 which have been distributed by the company out of profits upon which it has paid or is liable to pay tax as is included in his taxable income must be ascertained, and the tax paid by the company upon that amount of such dividends must be allowed as a rebate. This necessitates an ascertainment of that amount of the dividends which remains in the taxable income. The taxable income is the net balance of the assessable income which is left after all the deductions are made therefrom.
The dividends may, and usually will, be only one of many items of revenue which together compose the assessable income. The apparently simple statement of the provision, therefore, conceals the difficult problem of how, in the net sum obtained by subtracting a number of items from a gross sum itself composed of many items, it is possible to find portion of one of the items of the gross sum.
The Commissioner has attacked the problem by distributing the deductions from the gross sum ratably over the items which compose the gross sum after throwing out such deductions as are so associated with particular items of the revenue that the deductions ought to be attributed to such items. While I sympathize with him in his attempt to solve a problem which he did not shirk, but courageously faced, in spite of the fact that its nature and difficulty seem to have escaped the attention of the draftsman who otherwise must surely have expounded and expanded his meaning, I cannot think that he has supplied the key. The object of the Legislature was to avoid double taxation, and to make some just allowance of the tax already paid or payable when profits which had borne or were liable to bear tax fell again to be taxed. When the provision speaks compendiously of "that part of the . . . dividends ... and profits ... included in" the shareholder's "taxable income," it appears to me more consistent with the general intention to treat it as referring to the sum by which the taxable income is increased by reason of the inclusion of the dividends among the items which compose the assessable income.
Upon the facts of this case the result of this view is that the taxpayer is entitled to a deduction of tax at the rate of 1s. in the PD1 paid by the company calculated on the whole amount of dividends which have been included in his assessment.