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Case L23

Judges: AM Donovan Ch

LC Voumard M

Court:
No. 2 Board of Review

Judgment date: 20 April 1979.

L.C. Voumard (Member): The dispute responsible for these references concerns (a) the manner in which dividends received by an individual who is a resident of Australia, from a company that is resident in the United Kingdom, should be treated in the recipient's Australian income tax assessment, and (b) the assessability or otherwise in that assessment of related ``tax repayments'' received from the U.K. Revenue. The expression ``tax repayments'' may not be particularly accurate in the circumstances, but it has the merit of convenience.

2. It was not possible for the taxpayer to be present at the hearing, but through his representative he submitted a sworn statement. It was a mixture of argument and statements of alleged fact. The Commissioner was unwilling to concede the correctness of all matters alleged as fact, and accordingly the statement was admitted (Exhibit B) only on the basis that it could not be taken as establishing the facts involved. The hearing was adjourned to enable the parties to agree a statement of facts; this they did, and the agreed statement became Exhibit C. Save that the expression ``the taxpayer'' has been submitted for his name, that statement read as follows:

``1. At all material times (the taxpayer) was a British subject.

2. Between 28 May 1973 and 11 July 1976 (the taxpayer) resided in Australia.

3. Between 28 May 1973 and 11 July 1976 (the taxpayer) did not have any place of abode in the United Kingdom.

4. The United Kingdom Inland Revenue Certificates on pages 34 to 36 of (the taxpayer's) sworn statement (dated 28 June 1978) as altered by the United Kingdom Inland Revenue letter (dated 29 April 1977) on page 37 of the statement, set out what the Commissioner understands to be the United Kingdom treatment of what was thought to be (the taxpayer's) United Kingdom dividends.

5. Under the provisions of United Kingdom income and corporation tax legislation, (the taxpayer) was entitled to tax credits amounting to Stg. 405.82 (A$693.09) in respect of the amounts received by him, during the year ended 30 June 1975, from companies resident within the United Kingdom.

6. Under the provisions of United Kingdom income and corporation tax legislation (the taxpayer) was entitled to tax credits amounting to Stg. 351.39 (A$573.13) in respect of the amounts received by him, during the year ended 30 June 1974, from companies resident within the United Kingdom.

7. In the year ended 30 June 1975 (the taxpayer) received amounts of Stg. 809.18 (A$1,381.86) from companies resident within the United Kingdom.

8. In the year ended 30 June 1974 (the taxpayer) received amounts of Stg. 786.71 (A$1,284.16) from companies resident within the United Kingdom.

9. Under the provisions of United Kingdom income and corporation tax legislation the aggregate of the amounts received (received in the three years ending 5 April 1976 by (the taxpayer) from companies resident in the United Kingdom) and the associated tax credits (to which (the taxpayer) was entitled) were chargeable to United Kingdom income tax in the relevant United Kingdom year of assessment.''

3. The taxpayer's case was based on these facts and on the arguments contained in Exhibit B, to which of course careful attention has been paid. To the extent that the dispute raised questions of U.K. law, I have read the relevant statutory provisions and formed my own opinion as to their meaning. Neither the taxpayer nor his representative addressed oral argument to the Board. The Commissioner's representative was very helpful, not only in his presentation of the Commissioner's case, but also in the manner in which he put aspects of the taxpayer's case.

4. Very briefly, the taxpayer claimed that the amounts of U.K. dividends to be treated as assessable income in his Australian returns for the years ended 30 June 1974, and 30 June 1975, were the amounts arrived at by adding to the actual amount received each year (Exhibit C, para. 7 and 8 respectively)

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the amount of the corresponding tax credits referred to in ibid., para. 5 and 6 - that is, he argued (broadly speaking) for assessment on a ``grossed up'' basis. He further claimed to be entitled to a credit in his Australian assessments in respect of the U.K. tax charged against him in respect of those grossed up amounts and objected against the Commissioner's determinations of credits which denied his claims. The entitlement to these claims, he argued, arose out of the provisions of the Income Tax (International Agreements) Act 1953 and the U.K.-Australia double tax agreement appearing as the First Schedule thereto; alternatively, the entitlement to credits was claimed to arise out of sec. 45 of the Income Tax Assessment Act. The Commissioner, on the other hand, argued that it was only the actual amount of the dividends received that was assessable, and that there was no entitlement to credit in respect of U.K. tax. The Commissioner further claimed, and the taxpayer denied, that the sum of $212 to be described in para. 5(b)(2) was assessable income.

5. Certain concessions were made as to some of the amounts involved.

  • (a) Year ended 30 June 1974:
  • A unit trust distribution amounting to $144.18 had originally been treated as a dividend. On ascertaining that it was not a dividend, the Commissioner conceded that sec. 23(q) of the Income Tax Assessment Act applied to exempt it from tax, and that the amount of $144.18 was to be excised from the assessable income. The taxpayer for his part conceded that an amount of $61.78, being the amount of a U.K. tax credit referable to that distribution should be excised from the amounts in respect of which he claimed to be entitled to a tax credit in his Australian return.
  • (b) Year ended 30 June 1975:
  • (1) Unit trust distributions amounting to $358.74 were conceded, for the same reasons as before, to be not assessable income. Likewise, the total amount of the relevant tax credits was reduced by $184.50.
  • (2) The taxpayer had received a repayment from the U.K. Revenue of $246, which the Commissioner had treated as fully assessable. But as $34 of it was now agreed to be referable to the exempt amounts of unit trust distributions, and was thus refundable by the taxpayer to the U.K. authorities, the adjusted sum the assessability of which was in dispute became $212.

The effect of the concessions described above in item (a) and item (b)(1) is reflected in the figures shown in the statement of agreed facts, but as no amended assessments to give effect to them, or to the excision of the $34 described in item (b)(2), had issued prior to the Board hearing the matter, they will be dealt with in the order the Board will make regarding these references.

6. The taxpayer's primary claim was based on the contention that sec. 13(1) of the Income Tax (International Agreements) Act 1953, and the related U.K.-Australia double tax agreement (art. 19(2)), required that the U.K. dividends be assessed on a grossed up basis, with credit for U.K. tax. Section 13(1) reads:

``Where United Kingdom tax is payable in respect of a dividend paid by a company that, for the purposes of that tax, is resident in the United Kingdom, the amount of that dividend shall, for the purposes of this Act and the Assessment Act, be deemed to be the amount in respect of which, under the law of the United Kingdom, the company is required to account for and pay tax.''

(Emphasis added.)

7. To determine whether sec. 13(1) applies requires an examination of the U.K. law, beginning with the Finance Act 1965 (U.K.). That Act imposed on companies a corporation tax in respect of a company's own profits. It also required companies to deduct income tax at the standard rate from dividends distributed to their shareholders, and to account to the Revenue authorities for the income tax so deducted. The income tax on dividends was the subject of Schedule F and other provisions contained in sec. 232 of the Income and Corporation Taxes Act. Prior to amendments enacted in 1972, that section read:

``232(1) The Schedule referred to as Schedule F is as follows:

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    `Schedule F.

  • 1. Income tax under this Schedule shall be chargeable for any year of assessment in respect of all dividends and other distributions in that year of a company resident in the United Kingdom which are not charged under any other Schedule and are not specially exempted from income tax, and for purposes of income tax all such distributions shall be regarded as income, however they fall to be dealt with in the hands of the recipient.
  • 2. Income tax under this Schedule for any year of assessment shall be charged in respect of any distribution made in the year on such sum as, after deduction of income tax thereon at the standard rate, equals the amount or value of the distribution after any deduction of income tax actually made; and, subject to any enactment to the contrary, the distribution shall be deemed for purposes of income tax to represent income, of an amount equal to that sum, on which income tax has been borne by deduction:
  • Provided that in the case of preference dividends the tax chargeable and the amount of income represented by the dividends shall be determined by reference to the fixed gross rate of dividend.'

(2) Where, in any year of assessment, a company resident in the United Kingdom makes any distribution, not being a payment of interest other than yearly interest nor a payment in respect of which deductions or repayments of income tax may fall to be made under section 204 of this Act...the company shall, under this subsection, and in accordance with Schedule 9 to this Act, account for and pay income tax in respect of the distribution at the standard rate for that year.

(3) Where a company is liable under subsection (2) above to account for income tax in respect of any payment made by it, and the company is not otherwise entitled to deduct income tax from the payment, the company on making the payment shall be entitled under this subsection to deduct out of it an amount equal to the income tax for which it is liable to account in respect of the payment; and as against any person entitled to the payment the company shall be aquitted and discharged of so much money as is represented by the deduction, as if that sum had been actually paid.

(4) Where a company makes any payment which is subject to deduction of tax by virtue of subsection (3) above, then if the recipient so requests in writing the company shall furnish the recipient with a statement in writing showing the gross amount of the payment, the amount of tax deducted and the actual amount paid.

The duty imposed by this subsection shall be enforceable at the suit or instance of the person requesting the statement.''

8. As the effect of these provisions was that the shareholder receiving a dividend was treated as having received the amount he did receive, grossed up by the amount of tax deducted by the paying company (which accounted to the Revenue for that amount), it naturally followed, and sec. 13(1) in effect enacted, that for Australian purposes the amount of the recipient's assessable income was that grossed up amount. It also followed that, by art. 19(2) of the relevant agreement, credit was to be given in the Australian assessment in respect of the U.K. tax.

9. But, the Commissioner argued, that position was changed after 5 April 1973. After that date, Part V of the Finance Act 1972 (U.K.) introduced a system of ``advanced corporation tax'' and tax credits in lieu of the system briefly described in para. 7 of these reasons. For the years before us, the main features of the new system, so far as relevant, were these:

  • (a) A U.K. resident company making a qualifying distribution after 5 April 1973, is itself liable to pay an amount of corporation tax (called ``advance corporation tax'') at a rate which is fixed from time to time. The tax is payable on an amount equal to the amount or value of the distribution ( Finance Act 1972, sec. 84(1) and (2)), and the rate is expressed as a fraction of that amount. ``Distribution'' includes ``dividend'' ( Income and Corporation Taxes Act (1970) U.K. sec. 233).

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  • (b) Advance corporation tax so paid by a company is to be set off against the company's own liability to corporation tax on its income ( Finance Act 1972, sec. 85(1)). The limitation on the amount to be set off, which is expressed in sec. 85(2), is not relevant for present purposes.
  • (c) An individual recipient of a dividend, if he is resident in the U.K., is entitled to a tax credit, which is to be equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the year in which the distribution is made ( ibid., sec. 86).
  • (d) Although sec. 86 in terms limits the availability of the tax credit (in relation to individuals) to those who are resident in the U.K., sec. 98 of the Finance Act 1972 ensures that a person such as the present taxpayer is entitled to the credit to the same extent as if he were resident in the U.K.
  • (e) A natural person ``who is entitled to a tax credit in respect of a distribution may claim to have the credit set against the income tax chargeable on his income...or on his total income for the year of assessment in which the distribution is made and, where the credit exceeds that income tax, to have the excess paid to him'' ( ibid., sec. 86(4)).
  • (f) Section 87 of the Finance Act 1972 made major alterations to the Schedule F and other provisions contained in sec. 232 of the Income and Corporation Taxes Act, and set out in para. 7 above. Section 87 is in these terms:

``87(1) This section shall have effect for the year 1973-74 and subsequent years of assessment.

(2) For the Schedule F set out in subsection (1) of section 232 of the Taxes Act there shall be substituted -

    • `Schedule F.

    • 1. Income tax under this Schedule shall be chargeable for any year of assessment in respect of all dividends and other distributions in that year of a company resident in the United Kingdom which are not specially excluded from income tax, and for the purposes of income tax all such distributions shall be regarded as income however they fall to be dealt with in the hands of the recipient.
    • 2. For the purposes of this Schedule and all other purposes of the Tax Acts any such distribution as aforesaid in respect of which a person is entitled to a tax credit shall be treated as representing income equal to the aggregate of the amount or value of that distribution and the amount of that credit, and income tax under this Schedule shall accordingly be charged on that aggregate.

(3) No distribution which is chargeable under the said Schedule F shall be chargeable under any other provision of the Income Tax Acts.

(4) Subsections (2) and (3) of the said section 232 (which require a company resident in the United Kingdom to deduct and account for income tax in respect of distributions made by it) shall cease to have effect.

(5) Where in any year of assessment the income of a person, not being a company resident in the United Kingdom, includes a distribution in respect of which that person is not entitled to a tax credit -

  • (a) no assessment shall be made on that person in respect of income tax at the basic rate on the amount or value of the distribution;
  • (b) that person's liability under any assessment made in respect of income tax at any such higher rate as is mentioned in section 31(1)(b) or the Finance Act 1971 on the amount or value of the distribution or on any part thereof shall be reduced by a sum equal to income tax at the basic rate on so much thereof as is assessed at any such higher rate; and
  • (c)...

(6)...''

10. Both parties drew comfort from different provisions in this section. The taxpayer relied upon para. 2 of Schedule F to

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support his claim that the former grossing up procedure still applied for Australian purposes; the Commissioner saw subsec. (4), with its repeal of sec. 232(2) which prior to this had specifically obliged a company making a distribution ``to account for and pay income tax'' in respect thereof, as supporting his claim that the system formerly in force no longer applied. I agree with the Commissioner's view.

11. Having regard not only to the repeal of sec. 232(2) and (3), but also to the nature of advance corporation tax (as a tax payable by a company, to be set off against its own liability for corporation tax on its income); having regard to the requirements for returns to be lodged by companies making distributions and the provisions for assessments to be raised against such companies in respect of advance corporation tax (see generally Halsbury's Laws of England, Fourth Ed., Vol. 23, para. 1249 ff.), it is not possible, in my opinion, to say that the advance corporation tax is paid otherwise than by the relevant company as principal, to discharge its own obligations. More particularly, it does not seem to me that the company is required to account for and pay income tax in respect of the dividend distributed; rather is the making of a distribution the occasion on which there arises a liability to pay advance corporation tax, which is to be set off against the company's own liability to corporation tax. In those circumstances, I consider that sec. 13(1) of the International Agreements Act is not apt to apply to the altered U.K. law.

12. The taxpayer's written submissions emphasised that the U.K. system taxed the relevant dividends on a grossed up basis. But, in my opinion, that does not restore to sec. 13(1) the practical operation of which the changes wrought by the Finance Act 1972 have deprived it. The submissions also stressed that the U.K. authorities had made a repayment of tax to him in compliance with art. 19(1) of the U.K.-Australia double tax agreement (reducing thereby the U.K. tax on the dividends to the 15% maximum permitted by the agreement). This is consistent with the philosophy that seems to underlie sec. 86(4) of the Finance Act 1972 (see para. 9 of these reasons), but the fact remains that as far as the relevant dividends actually received from the U.K. companies were concerned, no U.K. tax at all was payable thereon by or on behalf of the taxpayer, whether directly or by way of deduction. There was an imputed tax credit, but that is a different matter. In the circumstances, I do not think that art. 19(2) of the U.K.-Australia double tax agreements can be relied on to support the claim for which the taxpayer contends.

13. Accepting, then, that after 5 April 1973, the changed U.K. system effectively discontinued the deduction of tax from dividends, what follows? The Commissioner submitted:

  • (a) that art. 8 of the U.K.-Australia agreement defines ``dividends'' to include any item which (with immaterial exceptions) in the case of Australia is, or is deemed to be, under the laws in for Australia relating to Australian tax, a dividend (art. 8(3)(b));
  • (b) that by sec. 44 of the Income Tax Assessment Act a shareholder's assessable income includes dividends paid (which includes ``credited'' - sec. 6) to him;
  • (c) that ``dividend'' in sec. 6 includes ``any distribution made by a company to any of its shareholders'' and ``any amount credited by a company to any of its shareholders'';
  • (d) that the only amounts that could be said to have been paid, credited or distributed to the taxpayer by the relevant U.K. companies were those amounts that he actually received; and
  • (e) that it was therefore only those amounts which constituted assessable income.

With this I agree.

14. The taxpayer argued that the tax credit to which U.K. law entitled him could not be ignored; that the amount of it had to be treated as part of the dividend, and assessed accordingly, being ``income attributable to a dividend''. This, he claimed, followed from sec. 6B(1)(a) of the Income Tax Assessment Act, which reads:

``(1) For the purposes of this Act, an amount of income derived by a person, not being a dividend paid by a company to the person as a shareholder in the company, shall be deemed to be attributable to a dividend -

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  • (a) if the person derived the amount of income by reason of being the beneficial owner of the share in respect of which the dividend was paid; or
  • (b)...''

With respect, I cannot agree with the taxpayer's view of this provision. In the first place, the section applies to ``an amount of income derived by a person, not being a dividend paid by a company to the person as a shareholder...'' I am far from persuaded that an imputed tax credit of the kind dealt with in sec. 86 of the Finance Act 1972 can properly be described as ``income'' for Australian purposes, at least in the absence from Australian legislation of some express provision such as is found in para. 2 of Schedule F. Secondly, the distinction drawn by sec. 6B(1) between a shareholder (that is, the person whose name is entered on the company's register of members - see
Patcorp Investments Ltd. & Ors. v. F.C. of T. 76 ATC 4225 ) and the beneficial owner does not appear capable of application to the present taxpayer, who as far as is known was both the legal and beneficial owner of the relevant shares, and to whom, therefore, the dividend was paid as a shareholder. And thirdly, the section is aimed at an altogether different situation. In
F.C. of T. v. Angus (1961) 105 C.L.R. 489 , the beneficial owner of a dividend was not registered as a shareholder in the company's register of members, and a claim that a dividend paid to her directly by an overseas company was exempt under sec. 23(q) of the Income Tax Assessment Act was upheld. It was to overcome the effect of this decision, and to ensure that a resident of Australia who derived dividends from an ex-Australian source through a nominee, or through a trustee, would not be entitled to the sec. 23(q) exemption, that amendments including sec. 6B were introduced. That section does not authorise or require income that is not itself a dividend to be treated as though it were, except in the case where a trustee, etc. is interposed between the company paying the dividend and the beneficial owner.

15. It follows from what has been said that the taxpayer's primary claim must be rejected. But in the alternative he argued that sec. 45 of the Income Tax Assessment Act entitled him to a credit. However, sec. 45 is expressed in very narrow terms. Subsection (1) sets out the prerequisites to entitlement to a credit. It reads:

``45(1). Where a dividend paid by a company which is a resident of a country outside Australia is included in the assessable income of any year of income of a taxpayer who is a resident of Australia, and the taxpayer has paid either directly or by deduction from the dividend income tax in respect of that dividend for which he was personally liable under the law of that country, the taxpayer shall, subject to sub-sections (6), (7) and (8) of this section, be entitled to a credit...''

16. I do not agree that this section achieves the result sought by the taxpayer. As indicated in para. 13 of these reasons, the only amounts of dividends included in the taxpayer's assessable income were the actual amounts received by him from the paying companies. And it cannot be said that in respect of those amounts the taxpayer, simply because the U.K. law entitled him to a tax credit, paid, either directly or by deduction from the dividends, income tax for which he was personally liable. As has been pointed out, the companies making the qualifying distributions had their own liability to pay advance corporation tax, and that liability was imposed upon them as principals, not as agents for their shareholders. When the amount of the advance corporation tax was paid over to the Revenue, the paying companies did nothing on behalf of their shareholders. It would be contrary to the fact to say that in some way the money paid over as advance corporation tax was first credited to shareholders and then applied by the company to discharge individual shareholders' tax liabilities (cf. the reasoning of Dixon J. in
Jolly v. F.C. of T. (1933) 2 A.T.D. 362 .

17. Section 45(1A) extends the sec. 45 credit to income attributable to a dividend (as defined in sec. 6B), but for the reasons given in para. 14 that provision does not advance the taxpayer's case.

18. My conclusion is, therefore, that the taxpayer's objections against the inclusion in his assessable income of no more than the

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amounts of U.K. dividends actually received by him during the years ended 30 June 1974 and 1975, and against the Commissioner's consequent refusal to allow any credit in the assessments in respect of the tax credits imputed by the Finance Act 1972 (U.K.) were correctly disallowed by the Commissioner. Consequently those decisions should be upheld.

19. The reasons given have not dealt separately with each and every point canvassed by the taxpayer in the grounds and the argument advanced in support of his objections. They have been considered, but do not affect the conclusion that the claims so far dealt with fail for the reasons given.

20. But one other matter was in dispute, relating to the year ended 30 June 1975. In that year the U.K. authorities made to the taxpayer what may be accurately described as a payment calculated by reference to advance corporation tax payable in respect of qualifying dividends received by him. In the interests of brevity, if not of complete accuracy, this will be referred to as the ``repayment'' or ``tax repayment''. As the imputed tax credit exceeded 15% of the amount of the aggregate of the dividends received by the taxpayer and the amount of the credit, the repayment was made to reduce the rate of U.K. tax to 15%, in apparent compliance with art. 8 of the U.K.-Australia double tax agreement. Originally the amount involved was thought to be $246, but as explained in para. 5(b)(2) of these reasons the figure now conceded to be correct is $212.

21. Although conceding that $34 of the $246 was not assessable, the Commissioner maintained that the $212 was income in the taxpayer's hands, was not exempt under sec. 23(q) and had therefore properly been included in the taxpayer's assessable income. It was said to be income because of the association between the dividend received and the repayment; that the association gave to the latter the same income character as the former. Put another way, the receipt of the repayment was incidental to the receipt of the dividend income, with the same consequence as before. It was also suggested that there was some element of recurrence about the repayment such as might impart to it a flavour of income.

22. There is no specific provision in the Income Tax Assessment Act which treats a repayment such as that in question as assessable income. It is not a dividend, for the payment was not made by, nor did it have any connection with or effect upon, either of the U.K. companies concerned. Hence sec. 44 cannot apply to it. Nor, by parity of reasoning with what has been said in para. 14, does sec. 6B apply to it. Nor is sec. 26A of the Income Tax Assessment Act applicable, because its requirement that the company paying the dividend ``deducted or was authorised to deduct income tax from the dividend'' was not satisfied. If, therefore, the repayment is to be assessable income, the amount of it must be shown to be ``income'' in the ordinary sense of the word. And in my opinion it cannot be so described, so that sec. 25(1) does not operate on it. To say, as the Commissioner said, that the repayment must have the same income character in the taxpayer's hands that the dividends themselves had, is to go too far. In Case B73
(1951) 2 T.B.R.D. 329 , this Board, as then constituted, had to consider a somewhat similar question, and after pointing out that there seemed to be no prior authority on the point, said in a joint statement of reasons (at p. 332): ``... we can only express our own opinion, which is that a refund of tax by one taxing authority, whether it be of tax paid upon direct assessment or by so-called indirect assessment or payment by deduction'' (or, one might add, a fortiori if it is an amount stemming from the imputed tax credit to which the present taxpayer was entitled under the U.K. legislation) ``is not, ipso facto, income within the general acceptation of that term for the purposes of another taxing authority''. I am not aware of, nor was the Board referred to, any subsequent authority casting doubt upon the principle thus expressed, and I respectfully adopt it in these reasons.

23. Although too much should not be made of it, it might be noted in support of the view just expressed that as the legislature, in sec. 26A, has seen fit to enact that in the circumstances described in that section such repayments shall be assessable income, the view is open that in circumstances not covered by that section they are not assessable income.

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24. The conclusion that the repayment of $212 is not assessable income makes it unnecessary to consider whether the amount was exempt from tax under sec. 23(q), and I accordingly express no view on that point.

25. For the reasons given above, I would:

  • (a) uphold the Commissioner's decisions on the objections to the 1974 and 1975 assessments so far as they relate to (i) the inclusion in the assessable income of those years of only the actual amounts received by the taxpayer as dividends from U.K. companies, and (ii) the denial of credits against the Australian income tax thereon;
  • (b) excise the sums of $34 and $212 from the taxpayer's assessable income of the year ended 30 June 1975, and to that extent allow his objection affecting that year; and
  • (c) by consent, and to give effect to the concessions set out in para. 5(a) and 5(b)(1) of these reasons, excise the sums of $144.18 and $358.74 from the assessable income of the years ended 30 June 1974 and 1975 respectively, and to that extent also allow his objections.

Claims allowed in part


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