Shell Co of Australia Ltd v Federal Commissioner of Taxation

(1949) 78 CLR 439
23 ALJ 370
9 ATD 21

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(Decision by: Latham CJ)

Between: Shell Co of Australia Ltd
And: Federal Commissioner of Taxation

Court:

Judges:
Latham CJRich J
Dixon J
McTiernan J
Webb J

Subject References:
Income tax (Cth)

Judgment date: 4 August 1949

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Decision by:
Latham CJ

The Shell Company of Australia Limited in the year ending 31st December 1943, which was the accounting year of the company for income-tax purposes in Australia, carried on business in Australia and the United Kingdom. English and Australian legislation provides for a rebate in the amount of tax payable in each country in order to avoid double taxation. The effect of the joint operation of the provisions is that the taxpayer pays tax on the amount of income taxable in both countries at the higher of the rates applicable in those countries. In each country a rebate is allowed.

The amount of rebate depends upon the relation of the Commonwealth rate of tax to the British rate of tax. The Commonwealth rate of tax is ascertained by dividing the total amount of income tax by the amount of the total taxable income. Income tax in Australia includes ordinary income tax and (in the case of a company which has a taxable income of more than 5,000 pounds) super tax, and also a further tax upon undistributed income ascertained in the manner prescribed by Part IIIA. of the Income Tax Assessment Act 1936-1944 - ss. 160A. to 160E. For the purpose of ascertaining this income taxes "paid" (or, at the option of the company, taxes "payable") in the year of income are deducted. Thus the amount of these taxes enters into the calculation of the rebate allowed in Australia. A war-time (company) tax is imposed upon the taxable profit of a company as defined in the War-time (Company) Tax Assessment Act 1940-1944. "Taxable profit" is defined in the Act as meaning the amount remaining after deducting from the taxable income of the accounting period as assessed under the Income Tax Assessment Act - "(a) the income tax payable in respect of that taxable income," and certain other amounts. Thus the amount of war-time (company) tax is affected by the amount of income tax payable in respect of taxable income of the year. (at p447)

The company paid income tax (ordinary tax, super tax and further tax) in Australia in respect of the income of the year ending 31st December 1943. The taxable income was A2,380,011 pounds. It also paid income tax on part of this income in the United Kingdom. A rebate of tax amounting to E354,616 pounds was allowed in the United Kingdom and a rebate of A199,700 pounds was allowed in Australia. (at p448)

The commissioner then treated the rebate of 199,700 pounds as having reduced the amount of income tax payable by the company which could be deducted for the purpose of ascertaining the undistributed income upon which the company was assessable to further tax. He re-assessed the company to further tax, increasing the amount of tax by 8,700 pounds. The commissioner also amended the assessment of war-time (company) tax. He again treated the rebate of 199,700 pounds as reducing the amount of income tax payable by the company, and therefore as increasing the taxable profit of the company, with the result that the war-time (company) tax was increased by 112,698 pounds. The company has objected to the amended assessment to war-time (company) tax - but that objection is not before this Court in these proceedings. The subject matter of this appeal is the assessment to further tax under the Income Tax Assessment Act, the question being whether the commissioner was entitled to regard the rebate of 199,700 pounds as reducing the amount of tax paid or payable for the purposes of assessment of further tax. (at p448)

The case stated shows that in respect of the relevant year, namely, the year ending 31st December 1943, the company was assessed under the Income Tax Assessment Act 1936-1944 to ordinary income tax and super tax in an amount of 832,084 pounds. (at p448)

In respect of the taxable profit of the company during the same period the company was assessed to war-time (company) tax in a sum of 169,128 pounds. For the purpose of ascertaining the taxable profit of the company the amount of ordinary income tax was deducted from the taxable profit of the company: see War-time (Company) Tax Assessment Act 1940-1944, s. 3 -

"'taxable profit' means the amount remaining after deducting from the taxable income of the accounting period as assessed under the Income Tax Assessment Act -

(a)

the income tax payable in respect of that taxable income;

(b)

. . ." (at p448)

"Income tax" is defined in the same section as meaning the income tax imposed as such by any Act, but as not any tax assessed under Part IIIA. of the Income Tax Assessment Act. (at p448)

The company was also taxed in respect of the same income on portion of its taxable income which had not been distributed in dividends: Income Tax Assessment Act 1936-1944, s. 160B. in Part IIIA. Section 160C. provides that for the purpose of the further tax imposed on that portion of the taxable income of a company which has not been distributed as dividends, that portion shall be ascertained by deducting from the taxable income

(1)

all taxes which are paid in the year of income -

(a)

under Commonwealth Income Tax Acts;

(b)

under the War-time (Company) Tax Assessment Act;

(c)

under State or Territorial laws; and

(d)

in any country out of Australia in respect of income taxable in Australia - "less any refund received in the year of income of any tax to which this paragraph refers."

Section 160C. (5) allows a company to elect between deduction of income tax "paid" in the year of income (in accordance with the provision already quoted from s. 160C. (1)) and deduction of income tax "payable" under the Commonwealth Acts mentioned in s. 160C. (1). The appellant company elected for deduction of taxes payable in lieu of deduction of taxes paid. Further tax payable under Part IIIA. of the Act was assessed after allowing deduction of taxes payable and dividends distributed. The taxes deducted were income tax and super tax 832,084 pounds, war-time (company) tax 169,128 pounds, together with State taxes (less refunds) and United Kingdom income tax (less refunds) (s. 160C. (1) (i)), a total of 1,070,240 pounds. The taxable income as assessed was 2,380,011 pounds. The excess over the taxes deducted was 1,309,771 pounds. An amount of 1,000,000 pounds had been distributed as dividends and the balance of 309,771 pounds was assessed to further tax at 2s. in the pound - the tax amounting to 30,977 pounds.

The company was liable to pay United Kingdom income tax upon part of its income (E1,418,467 pounds = A1,773,084 pounds) derived during the accounting period and the amount of tax at the rate of 10s. in the pound was E709,233 pound s. The portion of the income common to Australia and the United Kingdom in respect of which this tax was charged was E1,418,467 pounds. (at p449)

The United Kingdom Finance Act 1920, s. 27, contains the English provisions for relief from double taxation. In accordance with those provisions the tax on the amount of E709,233 pounds was reduced by half, leaving a net amount of E354,616 pounds payable as tax in the United Kingdom. That amount was duly paid. (at p449)

The company then applied for the rebate to which it was entitled under Commonwealth law. The Income Tax Assessment Act 1936-1944, s. 159 (1), is the provision which is applicable in this case, the taxpayer having paid tax under the law of the United Kingdom, but not under the law of a State, on income derived from sources in Australia, and the "Commonwealth rate" being greater than half of the British rate. The British rate was, as already stated, 10s. in the pound. The Commonwealth rate was greater than 5s. (half of 10s.). The "Commonwealth rate" (s. 159 (3)) means the rate

"ascertained by dividing the total amount of income tax paid or payable for the year by the taxpayer (after the deduction of all rebates other than the rebate granted under this section) by the amount of the total taxable income in respect of which the tax paid or payable under this Act has been charged for that year. . . ."

Thus in order to ascertain the "Commonwealth rate" the amount of income tax and super tax paid in Australia (A832,084 pounds), together with the tax under Part IIIA. of the Act on undistributed income of the company (A30,977 pounds), amounting in all to A863,060 pounds, was divided by the amount of the total taxable income of the company, namely A2,380,011 pounds. The result of this calculation was that the "Commonwealth rate" was 87.0309d.; half the United Kingdom rate was 60d.; the difference between these rates was 27.0309d. The amount which had been taxed in both Australia and the United Kingdom was E1,418,467 pounds, equivalent to A1,773,084 pounds. The result of applying the "Commonwealth rate" to this sum was to produce a rebate of A199,700 pounds. This amount was in part applied to meeting tax liabilities of the company and the balance was paid to the company. The company contends that the whole matter of tax in relation to the year of income tax, that is ordinary income tax, super tax, further tax and war-time (company) tax, was ended at this point. (at p450)

The commissioner, however, treated the rebate of 199,700 pounds as reducing the amount of income tax payable by the company. It was treated by the commissioner as reducing the amount of ordinary income tax, and was not distributed over the several heads of tax proportionately. The result of so treating the rebate was to reduce the deduction allowable under the War-time (Company) Tax Act (see definition (already quoted) of "taxable income," s. 3) and therefore to increase the amount of "taxable profit," and therefore to increase the amount of tax. The amount of increase in war-time (company) tax brought about in this manner was, as already stated, 112,698 pounds. (at p450)

The commissioner also re-assessed the company to further tax under Part IIIA. of the Income Tax Assessment Act. Under s. 160C. (1) and (5) it was proper, in order to ascertain the amount of undistributed income, to deduct the taxes payable in the year of income. The commissioner contends that the taxes payable were the amount of tax (832,084 pounds) less the rebate of 199,700 pounds, that is 632,383 pounds. The war-time (company) tax had been increased by re-assessment by 112,698 pounds. The net result as reached by the commissioner was to increase the amount of undistributed profits by 87,002 pounds, the difference between 199,700 pounds and 112,698 pounds. The result was that the amount of further tax was increased by 8,700 pounds. The appeal is against the amended assessment in which this increase has been made. (at p450)

Section 160c. (1) (i) provides that taxes deductible for the purpose of ascertaining profits which have not been distributed are certain taxes "less any refund received in the year of income of any tax to which this paragraph refers". The commissioner contends that a rebate allowed under s. 159 is a "refund," with the result that the amount of taxes "payable" under the Income Tax Assessment Act is therefore reduced for the purposes of s. 160C. (1) (i). The result which is thus reached is that income tax and super tax are taken for the purpose of the amended assessment to further tax at 632,383 pounds, although the assessment to these taxes remains at an amount of 832,084 pounds - a tax which the company has paid. Also for the purpose of determining the Commonwealth rate in order to calculate the rebate under s. 159 the sum of 832,084 pounds has been taken as representing those taxes.

But for the purposes of wartime (company) tax the taxes deductible from the taxable profits of the company have been decreased by the amount of the rebate - 199,700 pounds. The result is that the company has received a rebate of 199,700 pounds, but, by reason of this rebate, the war-time (company) tax has been increased by 112,698 pounds, and further tax by 8,700 pounds, that is, in all, by 121,398 pounds. Thus the assessments which were the basis of the calculation of the rebate have been amended by reason of the rebate itself. If those assessments are taken to be correct as they now stand in their amended form, the total amount of income tax upon which the "Commonwealth rate" for the purpose of ascertaining the amount of rebate has been calculated was wrongly stated. The figure should have been 632,383 pounds, instead of 832,084 pounds, for ordinary and super tax, and it should have been 39,677 pounds instead of 30,977 pounds for further tax. Therefore, if the amended assessments are correct, the rebate should be recalculated. If this were done the whole process would begin again - a different amount as "refund" would be used in de termining the amount of further tax payable under Part IIIA. of the Act, and both further tax and war-time (company) tax would be re-assessed. Once again the basis of the calculation of rebate would be wrong and a new calculation would have to be made. This process would never end. No satisfactory argument has been presented which shows that the commissioner's view does not bring about this consequence and such a result is so extraordinary that an interpretation which brings it about should not be accepted unless no other view of the relevant legislative provisions is reasonably open. (at p451)

In my opinion the difficulty disappears if the "rebate" under s. 159 is not regarded as a "refund" under s. 160C. (1) (i). The rebate provisions assume that the "total amount of income tax paid or payable for the year by the taxpayer" (s. 159 (3) (a)) has been ascertained. An amendment of assessment duly made will alter that amount. But that amount cannot be altered except by an amendment of the assessment. The calculation and allowance of a rebate under s. 159 does not involve any amendment of any assessment. The rebate is made upon the basis that the taxpayer is liable to pay ascertained amounts of tax in the United Kingdom and in Australia. To allow a rebate calculated upon that basis to bring about an alteration of the amount of tax paid or payable would destroy the basis of the rebate calculation and would, as already stated, commit the commissioner and the taxpayer to an infinite series of calculations. (at p452)

Section 172 provides that - "Where by reason of any amendment the taxpayer's liability is reduced, the Commissioner shall refund any tax over-paid." (at p452)

This section shows the nature of a refund. It is a repayment to the taxpayer of tax which he should not have paid. Such a repayment is a refund which is properly used to reduce the amount of taxes which can be deducted under s. 160C. (1) (i), but such a repayment is quite different from a rebate under s. 159. The "refund" is made because of a discovered absence of assumed liability; the "rebate" under s. 159 is allowed because of the presence of actual liability. Thus the rebate does not represent the refund of money not properly claimable as tax; it is an allowance made by the Treasury in accordance with the Act for the reason that the taxpayer had become liable to pay double tax. "Concessional rebates" allowable under s. 160 are quite different in character. Section 160 (1) provides that a taxpayer shall be entitled to a rebate in his assessment of tax of certain amounts. These rebates therefore reduce the amount of tax which is assessed and reduce the amount of tax "payable" - see s. 166. But no change is made in any assessment by the allowance of a rebate under s. 159: R. v. Federal Commissioner of Taxation; Ex parte Sir Kelso King ^[F1] . (at p452)

It was contended for the commissioner that the provisions of the Act properly interpreted did not bring about the result that there could be no end to the calculation and recalculation of rebates and to re-assessments. It was said that the argument that this was the case did not give adequate weight to the provision in s. 159 (3) (a) that the Commonwealth rate meant the rate ascertained by dividing the total amount of income tax paid or payable "(after the deduction of all rebates other than the rebate granted under this section) by the amount of the total taxable income." It was argued for the commissioner that the words in brackets meant that the rebate granted under the section, though not deductible in the calculation of the "Commonwealth rate," could be deducted, but once only, for the purposes of calculating further tax, with a consequential result in relation to war-time (company) tax. I was unable to appreciate this argument. The words in brackets are limited in their application to the calculation of the "Commonwealth rate," and have no relation to the process of assessment of tax under any of the provisions of the Act. My brother Dixon has dealt with this argument for the commissioner analytically and elaborately in his reasons for judgment and has given several answers to the contention. I cannot usefully add anything on this point to what he has so conclusively said. (at p453)

The questions submitted in the case are as follows:

"1.

In the assessment of the Appellant for further tax under Part IIIA. of the said Act in respect of its income for the year ended 31st December 1943, was the Appellant entitled under Section 160C. (5) to a deduction, as 'income tax payable under this Act' of the amount of 832,083 pounds 11s., being the amount of income tax and super-tax assessed as stated in paragraph 4 hereof?

2.

In the circumstances set out in this Case, was the Commissioner entitled under the provisions of the Income Tax Assessment Act 1936-1944, in making the last-mentioned assessment of further tax payable by the Appellant in respect of its income for the year ended 31st December 1943, to take into account the rebate of 199,700 pounds 5s. under section 159 referred to in paragraph 19 hereof, and thereby increase the further tax payable by 8,700 pounds 6s.?

3.

If No both to Question 1 and to Question 2, but the Commissioner was entitled to take any rebate or part of any rebate allowed under Section 159 into account in assessing the further tax under Part IIIA. of the said Act payable by the Appellant in respect of its income for the year ended 31st December 1943, how should the amount of such rebate or part of rebate be calculated and taken into account?" (at p453)

In my opinion the questions should be answered as follows: - (1) Yes; (2) No; (3) Unnecessary to answer. (at p453)