Commissioner of Taxes (Victoria) v Nicholas
59 CLR 230(Judgment by: Latham CJ)
Commissioner of Taxes (Victoria)
v Nicholas
Judges:
Latham CJRich J
Starke J
Evatt J
McTiernan J
Subject References:
Taxation and revenue
Income tax
Bonus shares
Assessable income of shareholder
Legislative References:
Unemployment Relief Tax (Assessment) Act 1933 (Vic) (No 4171) - the Act
Income Tax Act 1935 (Vic) (No 4309) - the Act
Judgment date: 25 March 1938
Perth
Judgment by:
Latham CJ
This is an appeal from a decision of the Full Court of the Supreme Court of Victoria relating to the liability of the respondent to pay tax under the Unemployed Relief Tax (Assessment) Act 1933 and the Income Tax Act 1935 of Victoria. The former Act, s. 4, provides that for the purposes of the Act
"(a) in the case of any person who is a member or shareholder of a company registered in Victoria-any dividend interest profit or bonus credited paid or distributed to him by the company from any profit derived in or from Victoria or elsewhere by it ... shall be deemed to form part of the assessable income of that person."
The Income Tax Act of 1935, s. 2 (g), contains a similar provision for the purposes of that Act, under which a special tax on income is imposed. The question is whether the taxpayer became liable to taxation under these Acts by reason of the issue to him of certain shares by a company-Lorraine Investments Pty Ltd -in which he is a shareholder. The company had transferred profits from the profit and loss account to a reserve fund, and it was decided to capitalize PD350,000 of the reserve fund. The nominal capital of the company was increased by the creation of 400,000 new shares of PD1 each. On 29th August 1934 the company in general meeting passed the following resolution: "Resolved to transfer the amount of PD150,000 to reserve account and to distribute bonus shares out of reserve account to the full amount to credit of this account, viz., PD350,000."
On 25th September the directors of the company passed the following resolution:
"Resolved to allot the following shares in furtherance to resolution of shareholders: 50,001-260,000 to G. R. Nicholas; 260,001-400,000 to the trustees of Betty, Lindsay, Nola and Hilton."
The resolutions were carried in the presence of and with the consent of all the shareholders, and journal entries and ledger account entries were made in the books of the company to give effect to the resolutions mentioned. Shares were allotted in accordance with the resolutions, and share certificates for 210,000 fully-paid-up shares were made out in the name of, and given to, the taxpayer. No separate share register was kept, except in the form of butts of the company's share-certificate book. Upon these butts it was recorded that the certificates for the fully-paid-up shares had been issued. It is agreed that the 210,000 shares were at all material times of a value of PD210,000.
The question which the learned County-Court judge stated for the opinion of the Supreme Court is as follows: "Should the assessment of taxable income for the purposes of (1) special tax and (2) unemployment relief tax have included the said amount of PD210,000?"
The Full Court of the Supreme Court, by a majority (Mann C.J. and Macfarlan J., Gavan Duffy J. dissenting), answered this question in the negative.
The relevant sections of the statutes deal with dividends, interest, profits or bonuses. Unless that in respect of which the taxation is sought to be imposed falls within one or other of these categories, the sections do not apply. Next, the dividends etc must be either credited, paid or distributed to the shareholder. It is not necessary that money should be paid. If anything which otherwise falls within the terms of the sections is credited or distributed, the sections will apply. Finally, the sections provide that what is credited, paid or distributed must come from profits derived in or from Victoria or elsewhere by the company.
The term "payment" plainly covers a payment of money by the company to a shareholder. In this case, however, there was no actual payment of any sum of money. The term "distribution," whether or not it includes the payment of money, is wide enough to cover other benefits received from the company by a shareholder, for example, a distribution of assets other than money. The term "crediting" relates to something of which the shareholder receives the benefit in account with the company, even if there is no actual payment or distribution of anything to him. The question which arises in this case is whether, when profits are first capitalized and are then appropriated to meet the liability on shares which are distributed to the shareholders in proportion to their holdings, the special statutory provisions operate to impose a liability upon the shareholders.
The leading case in this branch of the law is Inland Revenue Commissioners v Blott [F1] . There it was held that in such circumstances the shares were not "income" of the shareholder who received them. In that case a bonus was declared out of current annual profits. Shares credited as fully paid up were issued in satisfaction of the bonus. It was held that the distribution was a distribution of capital and not of income. The profits were converted into capital and were not paid away to the shareholders. They were retained by the company and applied "in paying up the capital sums which shareholders electing to take up unissued shares would otherwise have to contribute" [F2] . The shareholders were given "shares instead of a bonus" [F3] . If the question in the present case were whether the shares were income in the ordinary sense and independently of any special statutory extension of the definition of income, Blott's Case [F4] , in my opinion, would compel an answer in the negative.
But the statutes under which the question arises provide that any dividend or bonus or profit credited to a shareholder from the profits of a company are taxable. The shares in this case were issued as fully paid up. They were treated as fully paid up. The shareholder received the benefit in account of a credit of the amount of the liability on the shares. Unless there were such a credit and that credit were effective, the shareholder would be liable for the full amount of PD1 per share. The operation of capitalization of profits and issue of shares which was intended by the shareholders is possible only if the shareholders are credited with the full amount of the original liability on the shares. In Blott's Case [F5] the shareholders equally received a credit, but the statute did not purport to tax such a credit.
The distinction between a statute such as that considered in Blott's Case [F6] ("total income from all sources") and the statutes now before the court ("profits or bonuses paid credited or distributed from the profits of the company") was explained by this court in James v Federal Commissioner of Taxation [F7] . The procedure followed by the company in that case does not appear to me to be distinguishable in any material particular from what was done in the present case. It was resolved in James' Case [F8] that profits be distributed among the shareholders by allotting shares in satisfaction of a bonus declared. The share register showed the shares issued to the taxpayer as paid up to 10s. per share. It was unanimously held that the amount of 10s. was taxable as being a dividend, bonus or profit credited to the taxpayer. Isaacs J. quoted what he had said in Webb v Federal Commissioner of Taxation [F9] , at pp. 478, 479: "The legislature, as it appears to me, has by the word `credited' sought to reach cases where, through a member or shareholder who has not been `paid' the dividend or bonus, there has been credit in the company's books imputed to the share he holds" [F10] . Isaacs J., after referring to the process of capitalizing profits, declaring a dividend or bonus, and issuing shares in satisfaction of the bonus, said: "The Australian Act, unlike the English Act, does not always wait till the end of the process: it also sometimes seizes an intermediate operation" [F11] , that is, the operation of crediting the shareholder with the amount which he would otherwise be liable to pay upon his new shares. In James' Case [F12] the credit was made in the share register [F13] .
So, in the present case there is a crediting (as a matter of book-keeping) by the insertion of the entry upon the butt of the share certificates which shows that the share are fully paid up, and there is a crediting (as between creditor and debtor) in the transaction which that entry records. Shares issued by a company must be paid up in money or in money's worth. Either these shares are fully paid up or they are not paid up at all. The taxpayer contests the matter upon the basis that he is the holder of the shares as fully paid up. He has not paid for them in money or money's worth unless the operation of entering his name as the holder of fully-paid-up shares represents a crediting to him of the amount for which he would otherwise be liable.
In my opinion James' Case [F14] is in this court conclusive authority in favour of the appellant, and therefore, in my opinion, the appeal should be allowed, the order of the Supreme Court should be set aside and the question asked in the case should be answered in the affirmative in relation to both statutes.