Federal Commissioner of Taxation v. Tadcaster Pty. Ltd.Judges:
Supreme Court of Western Australia
The history of this matter is this. An objection was lodged by Tadcaster Pty. Ltd. (``Tadcaster'') against assessment of an additional tax payable in accordance with Div. 7 of Pt. III of the Income Tax Assessment Act 1936 and Amendments (``the Act''), in respect of income derived by the company during the year 30 June 1973, notice of which was issued on 4 February 1976. After considering the objection the Commissioner allowed it in part and amended the assessment accordingly. Notice of such amended assessment was issued on 18 August 1976. Tadcaster being dissatisfied with the decision of the Commissioner through its solicitors requested in writing that the decision be referred to a Board of Review for review. After hearing the reference the Board decided to allow Tadcaster's claim and the assessment was further amended accordingly. The Commissioner being dissatisfied with the decision of the Board allowing the appeal has brought the matter before me by way of appeal on the following grounds:
``(A) The Board erred in fact and in law in holding that the dividend of $161,550 paid by the Respondent on 26 April 1974 was not a `prescribed dividend' within the meaning of that expression in sec. 103AA(1) of the Income Tax Assessment Act;
(B) the Board erred in law in holding that
ATC 4317the sum received by the non-resident private company, International Systems Nederland BV (hereafter referred to as `ISNBV'), was not dividend income;
(C) the Board erred in holding that the dividend paid by the Respondent was not derived by a non-resident private company for the purposes of sec. 103AA(1) of the said Act;
(D) the Board erred in law in accepting that the mere inter-position of Trustees between the Respondent and ISNBV precludes the application in the present case of sec. 103AA of the said Act;
(E) alternatively, without prejudice to the foregoing, the Board should have held that, to the extent of an amount of $68,528, the dividend paid by the Respondent was a `prescribed dividend' within the meaning of that expression in sec. 103AA(1) of the said Act;
(F) the Board should have held that additional tax under sec. 104 of the said Act was properly assessed for the purposes of Div. 7 of the said Act on an undistributed amount of $68,528;
(G) the Board should have upheld the amended Div. 7 assessment based on income derived by the Respondent during the year ended 30 June 1973.''
The above grounds clearly involve a question of law. The facts giving rise to the dispute were the subject of a ``memorandum of facts'' agreed upon both before the Board and before me. The memorandum stated as follows:
``MEMORANDUM OF FACTS
1. CSIL was incorporated in Canada on or about 1 April 1969. All preferred and common shareholders were at that time Canadian residents.
2. On or about 27 May 1969, Mr. C then a Canadian citizen and resident, transferred (a particular franchise for a particular area of Australia) to CSIL in exchange for 60.6% of the common shares.
3. (Omitted as not subject to agreement).
4. Mr. C. came to Australia on a temporary basis in July 1969 to establish the operations of the franchise in Australia. He has remained in Australia since that time and is now an Australian resident for the purposes of the Income Tax Assessment Act but still remains a Canadian citizen.
5. The original franchise operations in Australia were conducted through S Pty. Ltd., a (locally) incorporated company, the shares in which were then held by Mr. C and Mr. M (an Australian resident) upon trust for CSIL.
6. In April 1972 an `A' class share in S Pty. Ltd. having discretionary dividend rights, was allotted to CSA Pty. Ltd., which was also a wholly owned subsidiary of CSIL, and a dividend was declared on that `A' class share in favour of CSA Pty. Ltd.
7. In February 1973 the affairs of the Group were rearranged in order to minimise the effect of the then recently introduced Canadian Capital Gains Tax, and CSIL was liquidated and the assets (which comprise(d) inter alia the franchise and the shares in S Pty. Ltd. and CSA Pty. Ltd.) were transferred to a Dutch company, ISNBV. ISNBV is a wholly owned subsidiary of a Netherlands Antilles Company, CSINV.
8. In April 1973 Messrs. C and M acquired the two issued shares in the taxpayer, T Pty. Ltd., in trust for ISNBV. (The appropriate declarations of trust were dated 27 April 1973, by them, Messrs. C and M respectively became bare trustees of the shares and all dividends to accrue thereon, upon trust for ISNBV, and bound themselves to transfer, pay and deal therewith as ISNBV should direct.)
9. The taxpayer acquired the one `A' class share in S Pty. Ltd., from CSA Pty. Ltd. in April 1973 and a dividend of $161,550.00 was declared by S Pty. Ltd. to the taxpayer in respect of that share.
10. Prior to December 1973 endeavours had been made to procure a public float of the Group in Canada and a Prospectus for shares in CSINV was lodged with the Ontario Securities Commission on 1 November 1973.
11. The Prospectus was withdrawn in March 1974 on account of the
ATC 4318deterioration in the North American equity market and no shares were allotted on the basis of the Prospectus.
12. In April 1974 a dividend of $161,550.00 was declared by the taxpayer in favour of Messrs. C and M being the registered holders of all of the issued shares in the taxpayer.
13. Messrs. C and M held the shares in trust for ISNBV and accordingly withholding tax at the rate of 30% of that dividend in the sum of $48,465.00 was paid. Had the reconstruction referred to above not taken place withholding tax would have been calculated at the rate of 15% on the amount of the dividend.
14. The balance of the dividend, the sum of $113,085.00, was paid or credited to ISNBV.
15. The interest of Mr. C in ISNBV is 60.6% and the proportion of the dividend attributable to his interest is $68,528.00. The remaining 39.4% is attributable to persons who are residents in Canada.
16. The only asset of the taxpayer is one `A' class discretionary dividend share in S Pty. Ltd. upon which no dividends have been received since April 1974.
17. Section 103AA (scil. of the Income Tax Assessment Act) enacted in its present form on 11 November 1973, but with effect from 26 October 1973, being the date upon which the proposed legislation was first announced by the then Treasurer.''
In amplification of para. 8 certified copies of the declarations of trust were produced and made exhibits but the paragraph concisely states their effect. A further matter arose during the hearing concerning para. 14 as to the precise manner in which the sum of $113,085 was paid or credited to ISNBV. Subsequent to the hearing I was informed by the solicitors for the respondent that it admitted payment of the balance of the dividends totally, $113,085 was made by telegraphic transfer by CSA Pty. Ltd. to ISNBV and that sum did not actually pass through the hands of the two trustees. It is now necessary to turn to some of the relevant provisions of the Act.
By sec. 105A, dividends that are ``prescribed dividends'' are included among those dividends which are not taken into account in determining whether a private company has made a sufficient distribution and sec. 103AA defines a ``prescribed dividend'' for the purposes of Div. 7. So far as relevant that section reads:
``(1) Subject to this section, a dividend is a prescribed dividend for the purposes of this Division if the dividend -
- (a)... was derived on or after 26 October 1973 by a company that -
- (iii) was not a resident of Australia; and
- (iv) was a private company in relation to the year of income of that company in which the dividend was derived; and
- (b) was paid by a company that -
- (i) was a resident of Australia; and
- (ii) was a private company in relation to the year of income of that company in respect of which the dividend would, but for this section, be taken into account in ascertaining whether the company had made a sufficient distribution.
(3) Where sub-section (1)... applies to a dividend or a part of a dividend (which dividend or part of a dividend is in the following provisions of this section referred to as a `relevant dividend'), so much of that relevant dividend as is required to be disregarded by virtue of sub-section (4) is not a prescribed dividend for the purpose of this Division.''
Subsection (4) of sec. 103AA lists various circumstances in which all or part of the relevant dividend is to be disregarded and not treated as a prescribed dividend. The Board in its reasons for judgment set out how the Commissioner had treated the dividend pursuant to the provisions of the section as follows:
``4. As a result of the partial allowance of the taxpayer's objection, the Commissioner eventually treated $93,022 of the total dividend of $161,550 as not being a prescribed dividend. (The $93,022
ATC 4319was made up of $48,465, being the amount of the dividend applied in payment of dividend withholding tax at the rate of 30% - sec. 103AA(4)(da) - and $44,557, being so much of the dividend as was attributable to residents of Canada - sec. 103AA(4)(a)). The balance of the dividend, $68,528, was treated by the Commissioner as remaining a prescribed dividend that was not to be disregarded by virtue of sec. 103AA(4)(c) or any other provision. This was the amount attributable to Mr. C's 60.6% interest in the non-resident private company ISNBV and, as stated, Mr. C was a resident of Australia. The consequence of these factors was that the Commissioner declined to take the amount of $68,528 into consideration in ascertaining whether the taxpayer had made a sufficient distribution, and by notice dated 18 August 1976, amended the assessment to additional tax pursuant to Div. 7 to base it on an undistributed amount of $68,528.''
The argument which found favour before the Board on behalf of Tadcaster was this. It was not disputed that Tadcaster was a resident private company nor was it disputed that ISNBV was a non-resident private company, but it was said the subsection only applies where a dividend is derived by such a non-resident private company. In the facts of this case the dividend declared by Tadcaster had been derived as a dividend not by ISNBV but by Messrs. C & M the registered shareholders. What ISNBV derived was income that came to it by virtue of the trust in its favour and not a dividend that came to it by way of payment from the taxpayer. This argument was again put forward before me with specific reliance on the decision of the High Court in
F.C. of T. v. Angus (1961) 105 C.L.R. 489 and in particular Dixon C.J. at p. 498, Fullagar J. at p. 506 and Menzies J. at p. 515. In all these passages their Honours distinguish between a taxpayer receiving income in the form of a dividend by reason of being a shareholder as compared to a taxpayer receiving income from a trust estate the source of which income in the trustee's hands was by way of dividend by reason of the trustee being a shareholder. I will come back to this case later. For the Commissioner it was contended before me that the object and purpose of sec. 103AA would be defeated by the mere interposition of trustees between the taxpaying company and the beneficiary. The object and purpose of the section is described in CCH [Australian Federal Tax Reporter] Vol. 3 ¶54-705 as being aimed at curbing the use by Australian Private Company interests, of private ``repository'' companies in countries outside Australia to avoid Australian tax, by providing that a ``prescribed dividend'' within the terms of the section is not taken into account in determining whether or no a private company has made a sufficient or excess distribution - see sec. 105A(1). As originally enacted the section applied only to private repository companies in Papua New Guinea but in the same year the section was enlarged to encompass that type of company wherever it may be. If there were no authorities on the meaning of the word ``derived'' or upon the effect in law of the interposition of a trust between the source of the income and the ultimate beneficiary, I would have had little difficulty in reaching the view that ISNBV derived a dividend from Tadcaster within the meaning of the section. The ordinary meaning of the word derived would be sufficiently wide to cover the circumstances of this case even if it be assumed that the dividend was paid by Tadcaster to the trustees who in turn paid it to ISNBV (which apparently is not the case). It so happens, however, that there is a consistent line of Commonwealth and South African authority from the year 1897 which holds that where a taxing statute refers to ``income derived from'' property, the interposition of trustees between the property and the trust beneficiaries does not prevent the beneficiaries from saying that their income is still derived from the property: see an article in the Canadian Bar Review 1967 Vol. 45 p. 219 ``The Nature of the Trust Beneficiary's Interest'' by D.W.M. Waters. It is unnecessary for me to set out all these cases but particular reference is made to
Syme v. F.C. of T. (1914) A.C. 1013; In the matter of the Income Tax Act 1895 and 1896 22 V.L.R. 539;
Re The Income Tax Act (No. 2) 29 V.L.R. 525 and
Baker v. Archer-Shee (1927) A.C. 844 and particularly Lord Carson at p. 870. As against these authorities the respondent relies as I have said on F.C. of T. v. Angus and I now turn to that case.
In Angus's case it was claimed that certain income of the taxpayer was exempt income under sec. 23(q) upon the ground that it was derived from Singapore, that it was not exempt from income tax in Singapore and that the tax thereon had been paid in Singapore. These conditions were found by the majority to be satisfied in somewhat complex circumstances and it is not necessary for me to consider them. The relevant facts for the purpose of this appeal were that the taxpayer was entitled under the will of her father to one third of his residuary estate. Included in the latter were shares in a Singapore company. The shares continued in the name of the deceased's father in the company register but the company at the direction of the trustees paid one third of the dividends direct to the taxpayer less Singapore tax. The taxpayer claimed that the income was exempt income under sec. 23(q). If the income received by the taxpayer was a dividend received by her as a shareholder in the company then by virtue of sec. 44(1A) the dividends would be part of her assessable income unaffected by the provisions of sec. 23(q). That would have been sufficient to establish a liability in the taxpayer to Australian income tax, for sec. 44(1) provided that the assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall if he is a resident include dividends paid to him by the company out of profits derived by it from any source. Subsection (1A) expressly provides that the preceding subsection should not be affected by the provisions of sec. 23(q) and had been added in 1947 to overcome the decision of the High Court in
Reid v. F.C. of T. (1947) 73 C.L.R. 282. Angus's case therefore proceeded on the basis that the taxpayer did not receive the dividends as a shareholder in the company although the ultimate source of the income was the distribution of a dividend. The issue in the case was really whether the income in question was ``not exempt from income tax'' in Singapore. In
Patcorp Investments Ltd. v. F.C. of T. 76 ATC 4225 at p. 4241 Jacobs J. stated the effect of F.C. of T. v. Angus as follows:
``The principle stated in F.C. of T. v. Angus (supra) - that a beneficiary who is entitled to income which is the product of dividends is not thereby a shareholder - should be accepted as established law unless it can be said that it is clearly wrong.''
In Angus's case therefore the Court was looking at the character of the taxpayer, that is whether she was a shareholder or a beneficiary and not as to the question whether she had in whatever capacity derived a dividend. For myself I do not find Angus's case conclusive of the issues raised in this appeal in favour of the respondent.
In my view sec. 103AA directs the enquiry to ascertain whether in the circumstances of the case it can be said that a company not being a resident in Australia and being a private company has derived a dividend which was paid by a company that was a resident of Australia and a private company. It is to be noted that the section does not expressly state that the paying company must pay the dividend direct to the company which derives the dividend. In my view, in the circumstances of this case, assuming that the dividend was paid by Tadcaster to the Trustees who in turn passed it on to ISNBV, ISNBV obtained or got or acquired the dividend and thus derived it within the meaning of the section: as to the meaning of ``derived'' see
F.C. of T. v. Clarke (1927) 40 C.L.R. 246 per Isaacs A.C.J. at p. 260;
C. of T. v. Kirk (1900) A.C. 588 at p. 592;
Commr. of I.R. (N.Z.) v. N.V. Philips Gloeilampenfabriken (1955) N.Z.L.R. 868 at pp. 883-884.
I would therefore allow the Commissioner's appeal and dismiss the respondent's objection to the assessment except in so far as the Commissioner allowed it.