Evans v Deputy Federal Commissioner of Taxation (South Australia)

55 CLR 80
1936 - 0213B - HCA

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(Decision by: Starke J)

Between: Evans
And: Deputy Federal Commissioner of Taxation (South Australia)

Court:

Judges: Rich J

Starke JDixon J
Evatt J

Subject References:
Taxation and revenue
Income tax
Shareholder in company
Profit arising from sale of assets
Purpose of original acquisition
Mining company
Acquisition of leases by nominees
Subsidiary companies
Enlargement of capital
Distribution of shares
Capital or income
Distribution of surplus assets
Appreciation

Legislative References:
Income Tax Assessment Act 1922 (Cth) No 37 - s 16(b)(i)(1); s 16(b)(i)(2)

Hearing date: ADELAIDE 11 September 1935; 12 September 1935; 13 September 1935
Judgment date: 13 February 1936

MELBOURNE

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Decision by:
Starke J

The Income Tax Assessment Act 1922-1930 exempts from income tax dividends, bonuses or profits or the face value of bonus shares distributed by a company among its members or shareholders except as provided under s. 16 of the Act (s. 14 (1) (m)).  Section 16 provides that the assessable income of any person shall include, in the case of a member, shareholder, depositor or debenture-holder of a company ... dividends, bonuses or profits ... credited paid or distributed by the company to a member or shareholder who is a resident-out of profit derived by the company from any source ... Provided ... that where the company distributes any of the profits arising from the sale ... of assets which were not acquired for the purpose of resale at a profit, the profits so distributed shall not be assessable income to the member or shareholder.  

Guinea Gold No Liability was incorporated in South Australia.  Its objects included the acquisition of mines and mining interests in New Guinea and elsewhere; the conduct of mining operations; the formation and floating of companies to develop its mining interests; the sale and disposition of its property; and the division of any of its property in specie amongst its members.  The original capital of the company was PD2,000, divided into 2,000 shares of PD1 each, but this, by September 1926, was increased to PD50,000, divided into 50,000 shares of PD1 each.  It issued to its vendors 12,513 shares at par; to subscribers who paid PD1 per share in cash, 19,700 shares; and to other subscribers who paid a premium of PD1 per share, 17,787 shares.  The cash subscriptions therefore amounted to PD55,274.  The company acquired certain properties on the Bulolo Creek in New Guinea, above a rocky gorge, which have been referred to as the upper leases.  Mining operations were carried on by the company upon these properties, which had been acquired for that purpose.  They were worked as sluicing claims, and about PD48,000 was spent upon them.  About June 1929 the company disposed of these properties to a company called New Guinea Goldfields Ltd  for PD2,000 in cash and 90,000 shares in that company.  The shares were worth about 5s. 6d. each.

Guinea Gold No Liability also established an air service in connection with its mining operations; it expended about PD10,100 upon aeroplanes, plant, and accessories.  The aeroplanes and plant were acquired for the use of the company, and not for the purpose of resale at a profit.  A company called Guinea Airways Ltd  was formed, which about the year 1927 took over the service and plant, giving as a consideration therefor 10,100 shares paid up to PD1.  Mining properties were taken up for or on behalf of Guinea Gold No Liability on the Bulolo Creek below the rocky gorge, and they were known as the lower leases.  It was thought at one time that the leases might be worked as a sluicing proposition, but they turned out to be a dredging proposition.  The company had not the capital to work them, and at an early stage gave an option to the Territory Investment Company Ltd  for three months of incorporating a company to acquire and work the leases.  But the Territory Company was unable to float such a company, and the option fell through.  About June of 1930 these leases were disposed of to the Placer Development Company Ltd  for PD50,000 in cash and a share consideration.  The sum of PD30,000 was paid in cash, and the balance was deferred, by consent.  

The learned Chief Justice of the Supreme Court of South Australia found that these lower leases were acquired for the purpose of resale at a profit:  "So far (from) the evidence showing that these properties were acquired for the purpose of being worked by Guinea Gold No Liability, and not for the purpose of resale at a profit, it seems to me clear that the company never had any hope of being able to work them, and that its intention was to dispose of them to other companies for a cash or share consideration as soon as its title to them was assured."  This finding has been challenged, and the burden of displacing it is upon the appellant.  The substantial and dominant purpose, if not the sole purpose, of the acquisition must be "resale at a profit."  The chairman of directors of Guinea Gold No Liability deposed that when the company acquired the leases it did not acquire them for the purpose of reselling at a profit-that was never considered; the leases were acquired for the purpose of getting gold out of the ground.  But the company's capital was quite inadequate for the purpose, and from the beginning the necessity for the formation of some incorporated body for the purpose of acquiring and working the leases was recognized, and the general terms of its flotation, and of the consideration in cash and shares that should go to Guinea Gold No Liability was discussed and settled.  Ultimately the company did dispose of the leases to the Placer Development Company for the consideration already mentioned.  The subsequent acts of the company are relevant evidence of its intention or purpose in acquiring the leases.  In my opinion, the finding of the Chief Justice was open upon the evidence, and I am by no means satisfied that he came to an erroneous conclusion.  It is not the function of an appeal Court to substitute its conclusions of fact for those of a trial Judge whose duty it is to determine the facts, unless satisfied that he is wrong (Powell v  Streatham Manor Nursing Home; ^[F1] Grant v Australian Knitting Mills Ltd , in Privy Council). ^[F2]  

On 16th September 1929 Guinea Gold No Liability distributed amongst its shareholders the 90,000 shares received from the New Guinea Goldfields Ltd , and 10,000 of the shares received from Guinea Airways Ltd  in the proportion of nine of the former and one of the latter for every five shares held in Guinea Gold No Liability.  In August of 1930 Guinea Gold No Liability distributed amongst its shareholders 10s. per share in cash, portion of the money received from the Placer Development Company.  The balance-sheet of Guinea Gold No Liability disclosed as at 28th February 1930 a general reserve of PD52,906 12s. 6d., and the details of the reserve account are recorded in the books of the company-how it was formed and how dealt with.  The following is a copy:  

Reserve Account for the year ended 28th February 1930.

The figures may be convenient for the purposes of accountancy, but the value of the shares in New Guinea Goldfields Ltd  was not PD90,000, but 5s. 6d. each, or PD24,750.  And the sum of PD41,500 among the credit entries represents the difference between PD90,000 and the sum of PD48,500 expended by the company on the leases.  The expenditure exceeded the value of the shares received by PD23,750, and there was no profit on the sale of the leases.  But there was nothing to prevent the company distributing surplus profit, and this, it is plain on the figures of the balance-sheet and the reserve account, is what the company purported to distribute.  Again, the transaction with the Guinea Airways Ltd  showed, on its face, no profit, for Guinea Gold No Liability had expended PD10,100 upon the service and received in return 10,100 shares paid up to PD1.  But it seems that in February 1930 the market value of the shares was PD2 each.  The credit item PD93,519 is a valuation of the interests of the Guinea Gold Co  in the leases transferred to the Placer Development Co  Ltd   The appellant, as a shareholder in Guinea Gold No Liability benefited in these distributions to the extent of 1,080 shares in New Guinea Goldfields Ltd , 120 shares in Guinea Airways Ltd , and PD300 in cash from the payment made by the Placer Development Co  Ltd  

The Commissioner included in the appellant's assessment to income tax for the financial year 1930-1931 the following items:  

 

But he allowed a rebate of 25.22 per cent or PD135 on these items based on the proportion that the profit he treated as exempt under s. 16 bore to the aggregate surplus shown in the reserve account.  The Commissioner also included in the appellant's assessment to income tax for the financial year 1931-1932 the sum of PD300 already mentioned, "dividend from the Guinea Gold No Liability," less a similar rebate amounting to PD78.  The assessments were upheld by the Chief Justice, but he did not agree with the calculation of the rebate but said that it was unimportant, for the error was in favour of the taxpayer, who now appeals to this Court.  

In my opinion, the inclusion of the value of the 1,080 shares in New Guinea Goldfields Ltd  at 5s. 6d. per share in the assessment was right.  These shares were part of the consideration given by the New Guinea Goldfields Ltd  for the upper leases.  These leases were not acquired by Guinea Gold No Liability for the purpose of resale at a profit, but for the purpose of working them.  Prima facie, any profit derived from the sale of these leases was not assessable.  As already stated, there was no such profit, and none was therefore distributed.  Yet the shares received from the Guinea Goldfields Ltd  were distributed, and it is insisted that the distribution was of capital assets and not of profits.  But the balance-sheet and the reserve account of February 1930 establish that the distribution was based on an estimated surplus of assets over liabilities, though it was made in September of 1929, and therefore on profit derived by the company (Midland Land and Investment Corporation Ltd , cited by Palmer, Precedents, 14th ed., Part I., pp. 814-815; Pool v  Guardian Investment Trust Co  Ltd). ^[F3]

Admittedly the estimated value of the Guinea Goldfields Ltd  shares was not PD90,000, but the other figures of the balance-sheet and reserve account disclose an ample surplus available for distribution.  It did not arise from the sale of the upper leases to the Guinea Goldfields Ltd , and must therefore have arisen from the general surplus.  The company distributed part of this surplus or profit amongst its shareholders, and the Guinea Goldfields Ltd  shares represented or formed part of this surplus or profit.  It was a distribution of profit, not in money but in money's worth.  The distribution, however, was not of any profit arising from the sale of the upper leases.  It is contended that the distribution was made from a conglomerate fund built up of items that are not assessable to income tax.  The argument has force in relation to the item PD17,787, premiums on shares, but the exemption in s. 16 is confined to profits arising from the sale of assets not acquired for the purpose of resale.  

In my opinion, the inclusion of the PD300 from the moneys received from the Placer Development Co  Ltd  was also right.  Accepting as I do the finding of the Chief Justice that the lower leases transferred to the Placer Development Co  Ltd  were acquired by Guinea Gold No Liability for resale at a profit, then the moneys received from the Placer Development Co  Ltd  and distributed among the shareholders of Guinea Gold No Liability are not within the exemption allowed in the proviso to s. 16.  And it was not, I think, a distribution of capital assets or moneys representing capital assets.  The accounts establish, in the case of the Guinea Goldfields Ltd  shares, that it was a distribution of estimated profits to shareholders under the main provision of the section.  The Guinea Airways shares stand in the same position as the Guinea Goldfields shares, but for one circumstance:  the evidence does not state explicitly the market value of the shares on the date of distribution, namely, 16th September 1929, though the reserve account of February 1930 records that they were "written up to market value at date of distribution."  But I do not recollect any suggestion that the value appreciated between September 1929 and February 1930.  It is unlikely that it did, and in any case the duty was upon the appellant to displace the assessment, which prima facie is correct (Act, s. 39).  

The appeal should therefore be dismissed.