Federal Commissioner of Taxation v Brohier

(1959) 103 CLR 632
33 ALJR 341
12 ATD 132

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(Judgment by: Menzies J)

Between: Federal Commissioner of Taxation
And: Brohier

Court:

Judge:
Menzies J

Subject References:
Income tax (Cth)

Judgment date: 4 November 1959

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Judgment by:
Menzies J

In this appeal, the Commissioner as appellant and the taxpayer as respondent both complain of a decision of the Board of Review No. 2 which allowed to some extent the taxpayer's objections to assessments for the years ended 30th June 1952 and 30th June 1953. The questions which arise are whether the taxpayer was entitled to any credit under s. 45 of the Income Tax and Social Services Contribution Assessment Act 1936-1953 (Cth) and, if so, to what credit was he entitled in each year. The Board decided that he was entitled to a credit in each year and against this part of its decision the Commissioner appeals; the Board also decided that for the year 1952 the credit allowable was 993 rupees and not 3,307 rupees as claimed by the taxpayer, and for the year 1953 the credit allowable was 185 rupees and not 894 rupees as claimed by the taxpayer. The taxpayer is dissatisfied with this part of the Board's decision. (at p634)

The taxpayer, a resident of Australia since 1948, was during the years in question a shareholder in a number of companies resident in Ceylon, where he himself had lived before coming to Australia. In the year ended 30th June 1952 the dividends declared by the Ceylon companies in which the taxpayer was a shareholder in respect of his shares totalled 10,471 rupees (equivalent to 993 pounds), but the amount received by the taxpayer by way of dividends was 3,307 rupees less because each company, as it was entitled to do, deducted and retained tax in accordance with the provisions to be mentioned later. In the following year the corresponding figures were 3,642 rupees (335 pounds) and 894 rupees. The tax was so deducted and retained pursuant to ss. 43 (1) and 43 (1A) of the Ceylon Income Tax Ordinance, which provided that every resident company should be entitled to deduct tax at specified rates from the amount of any pecuniary dividend becoming payable to a shareholder during a year of assessment.

In each year each company, in accordance with s. 43 (2) of the Ordinance, issued to the taxpayer, together with the dividend warrant or cheque, a statement showing

(a)

the gross amount which, after deduction of the tax appropriate thereto, correspond to the net amount actually paid;

(b)

the rate and the amount of tax appropriate to such gross amount; and

(c)

the net amount actually paid.

For each year, the taxpayer made in Ceylon his own return for income tax purposes. For the year ended 31st March 1952 the total income returned was 16,087 rupees, including gross dividends. Upon this taxable income there was assessed tax at 18% - 2,895 rupees; but from this there was deducted for relief under s. 45 (2) of the Ordinance 1,266 rupees, leaving as net tax due 1,628 rupees. For the next year the corresponding figures were, for taxable income, 11,971 rupees; tax, 2,154 rupees; relief under s. 45 (2), 1,161 rupees; net tax due, 993 rupees.

The foregoing figures appear in the notices of repayment issued by the Ceylon Income Tax Office to the taxpayer. The taxpayer received notices of repayment rather than notices of assessment, because in each year he produced to the Ceylon Income Tax Office the statements obtained under s. 43 (2) as aforesaid, showing the aggregate of the deductions of tax made by the companies paying him dividends during the preceding year. For the year ended 31st March 1952 the notices of repayment showed that during the year ended 31st March 1951, 3,974 rupees had been deducted as aforesaid, and this was described as "tax paid at source in the year ended 31st March 1951". The corresponding figure for the year ended 31st March 1953 was 3,307 rupees, described as "tax paid at source in year ended March 31, 1952". In each case it will be noticed that what had been deducted exceeded the net tax due and the difference between the deduction and the net tax due for the year 1952 was 2,345 rupees, and for the year 1953, 2,313 rupees. These amounts were described as "tax repayable" and the notice of repayment in each case contains the statement that the sum shown as tax repayable was being refunded to the taxpayer. It is clear that in Ceylon the taxpayer was regarded as entitled to the refunds that he received as aforesaid, but, having regard to the second proviso to s. 84 of the Ordinance which deals with refunds of tax paid in excess, it was not clear to me under what authority the refunds were made. In these circumstances, it was agreed by the parties as follows:

"Under s. 84 of the Ceylon Ordinance, if it is proved to the satisfaction of the Ceylon Commissioner by a claim duly made in writing within three years of the end of a year of assessment that any person has paid tax by deduction or otherwise (within the meaning of the Ceylon Ordinance) in excess of the amount with which he was properly chargeable for that year, that person is entitled to have refunded the amount so paid in excess.... The use of the word 'set-off' in section 43 (3) and (5) and section 44 (3) does not deprive the taxpayer of the right of refund of such excess."

The taxpayer's Australian income tax return showed gross dividends from the Ceylon companies in which he was a shareholder together with the following note: "Ceylon income tax at the rate of 18% will be paid on these dividends (Australian rebate requested accordingly)". The rebate referred to was, no doubt, a set-off under s. 45, but this, for the two years in question, the Commissioner refused to allow. Instead, he included as part of the taxpayer's assessable income the gross dividends less 18%, which was, as the taxpayer's note indicates, the rate of Ceylon tax with which the taxpayer was chargeable on his taxable income which included the dividends. It is to these assessments that the taxpayer objected. Upon the hearing of his objections, the Board of Review decided that, in the circumstances, the taxpayer was entitled to a credit under s. 45, but decided further that the credit allowable was not the aggregate of the amounts of tax deducted by the various companies from the dividends as they were paid, but the tax assessed and paid by the taxpayer in the years ended 30th June 1952 and 1953, being, as the Board has found, 993 rupees for the first year and 185 rupees for the second year. (at p636)

The basis of the Board's decision was that the deduction by the Ceylon companies from the dividends which they paid to the taxpayer was not the payment of tax for which the taxpayer was personally liable under the law of Ceylon in respect of those dividends but - and this is the part of its decision in favour of the taxpayer - that the taxpayer was personally liable to pay income tax in Ceylon including tax at 18% upon his gross dividends and that when in the calculation of the refund to which the taxpayer was entitled either under s. 43 (3) or s. 84, the aggregate of the amounts which the companies had deducted from dividends was reduced by the income tax which the taxpayer was personally liable to pay, it was proper to say that the taxpayer paid tax; that the tax paid was in respect of dividends which he received from the Ceylon companies; and that the taxpayer was, under the law of Ceylon, personally liable to pay that tax. In this way the Board decided that a credit under s. 45 had been established. (at p636)

I agree with the Board that what was deducted by the Ceylon companies from the dividends declared was not tax for which the taxpayer was personally liable in respect of the dividends. What the Ceylon Ordinance did was to impose income tax upon the taxable income of a company: ss. 20 (11B) and 20A. For each year of assessment commencing on or after 1st April 1951, it seems that the rate was 30%, but before that date it was 28%. The Ordinance also authorized a company paying a pecuniary dividend to deduct tax therefrom. As I follow s. 43, the deduction permitted was 28% for the year 1952 and 30% for the year 1953, although, in passing, I notice that the figures I have set out previously do not accord strictly with these rates. The precise figures are, however, not of importance. The companies deducted 28% or 30% of the gross dividends and in the next year the taxpayer received by way of refund what had been deducted, less tax at 18% upon his taxable income reduced by what is called relief under s. 45 (2) of the Ordinance. In these circumstances, it is apparent that what was deducted was not tax payable by the taxpayer in discharge of a personal liability under the law of Ceylon to pay tax in respect of gross dividends. The only personal liability of the taxpayer was as he himself indicated in his Australian returns, viz., to pay tax at the rate of 18% on the gross dividends or, rather, on his taxable income including gross dividends. The taxpayer's claim to have as a set-off under s. 45 of the Act the deductions made by the various Ceylon companies no doubt stems from the use by the taxing authorities in Ceylon of the phrase "tax paid at source" to describe the deductions, but the shorthand description used in Ceylon cannot be regarded as giving what was deducted a particular character for the purposes of s. 45 of the Australian Act.

Perhaps the clearest way to demonstrate this is to point out that deductions under s. 43 of the Ordinance are not compulsory; they are permissive, whereas s. 45 of the Australian Act is concerned with payments of tax for which the taxpayer was personally liable under the law of Ceylon. It is apparent, moreover, that whereas the deductions were 28% or 30% of the dividends paid, the rate of taxation payable by the taxpayer was 18% of his taxable income. (at p637)

Since the Board gave its decision, this Court has decided Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 , which confirms the correctness of the first part of the Board's decision, that is, that the taxpayer was not entitled to a set-off of the amounts which the Ceylon companies deducted from his dividends in the years in question. Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 was decided in relation to the Income Tax Ordinance 1947 of the Federation of Malaya, and although there are differences between that Ordinance and the Ceylon Ordinance, their general similarity leaves no room for doubt that, in the light of that decision, the deductions authorized by s. 43 of the Ceylon Ordinance have not the character of the payment of tax which the taxpayer was liable to pay in respect of the dividends paid to him. Furthermore, as will appear later, Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 denies that for the purposes of s. 45 of the Australian Act, the taxpayer is entitled to treat himself as having received the gross dividends. The fact that what was deducted by Malayan companies under the Malayan Ordinance could not be regarded as part of the dividends paid to Hughes for the purposes of s. 45 was treated as decisive against his claim to be entitled to a set-off under s. 45, and I see no escape from a like conclusion here. (at p637)

The taxpayer, in the course of an elaborate argument and with the aid of a number of documents not before the Board of Review - which I accepted as evidence and have considered - set out to show that in Ceylon the deduction that were made were regarded by those who administer the Ceylon tax laws as his tax paid at the source, and that Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 was therefore distinguishable. It does, I think, sufficiently appear that in Ceylon these deductions are regarded as tax paid at the source, but as I have already pointed out, this is not the question, and the way in which the Ordinance is administered in Ceylon cannot be decisive of what is now the question, namely, whether the deductions fall within the category of income tax for which the taxpayer was personally liable paid in respect of dividends abroad either directly or by deduction. The taxpayer exhaustively examined the Ceylon Ordinance and compared it with what was said in Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 of the Malayan Ordinance. There are no doubt differences, but I consider the differences are not material for present purposes, and therefore it is not necessary for me to consider them one by one. Perhaps the most important difference is that the Ceylon Ordiannce, unlike the Malayan Ordinance, makes the production of a statement given in accordance with s. 43 (2) a condition precedent to a set-off under s. 43(3). The absence of any such provision in the Malayan Ordinance was a matter for comment in Hughes' Case (1958) 98 CLR 345 . The presence of such provision in the Ceylon Ordinance does not, however, throw any light upon the character of the deductions made under s. 43 (1) or (1A). (at p638)

I turn now to the point upon which the taxpayer succeeded before the Board of Review, viz. that he was entitled to a set-off under s. 45 in respect of the tax actually assessed and charged against him and paid by him. Among the arguments for the Commissioner against this part of the Board's decision - for which the taxpayer himself showed no enthusiasm - it was contended that the taxpayer never became liable to pay income tax in respect of the dividends he received and that he never paid any such tax because at all times the deductions which the companies had made from dividends provided him with a refundable amount which prevented any liability for income tax ever arising. The Board rejected this contention and, as at present advised, I am disposed to think that it was right in doing so, and also in deciding that Ceylon law did impose liability for income tax upon the taxpayer in respect of his taxable income, including the gross dividends, and that he met this liability by deduction from what was refundable to him by reason of the deductions made by the companies paying dividends and of ss. 43 (3) and 84 of the Ordinance. I need not, however, come to any final conclusion on this matter nor consider whether the penultimate paragraph of the judgment of Kitto J. in Hughes v. Federal Commissioner of Taxation (1958) 98 CLR, at p 366 affords any support to the Commissioner's contention to the contrary, because there is another point upon which I think the Commissioner must succeed. The taxpayer is entitled to a set-off under s. 45 only where the dividend paid by the company abroad is included in Australian assessable income and tax has been paid abroad in respect of that dividend.

If the dividends with which I am concerned were, for the purposes of s. 45 of the Act, paid or credited at the gross amount and not the net amount, the taxpayer would be a step nearer to the credits that he claims in that it could then perhaps be said that the dividends paid by the companies abroad are included in the Australian assessable income; but it seems to me that Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 compels the conclusions that the only dividends paid for the purposes of s. 45 were dividends after deduction of tax pursuant to ss. 43 (1) and 43 (1A) of the Ordinance and that, in such circumstances, the case cannot come within s. 45. In Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 , Dixon C.J., McTiernan and Williams JJ. said: "Our opinion is that the claim fails in limine because the provisions of the Malayan ordinance which we have described do not involve a payment in full of the dividend declared by any of the Malayan companies. Adopting, as it seems, this view the commissioner, in his assessment, has included not the whole of each dividend, but that dividend less thirty per cent. He has, in other words, included the amount actually paid to the shareholder by the company and has refused to include the further thirty per cent which the company has deducted in pursuance of sub-s. (1) of s. 40 of the ordinance. It is plain, if this is right, as we think it is, that s. 45 (1) of the Assessment Act (Cth) has no application to the case; it cannot entitle the taxpayer to the credit he claims. It may be conceded that if the thirty per cent deducted, or on account of which the deduction is made, had been paid for or on behalf of the taxpayer or to satisfy a liability imposed on him as a Malayan taxpayer it might have been brought, if not within the natural meaning of the word 'paid', at all events within the extended meaning of the definition of that word. But under the Malayan ordinance the company pays its tax on its own behalf and not in a representative capacity. It is left to the company to deduct or not to deduct from dividends at the rate paid or payable by the company" (1958) 98 CLR, at p 353. Webb J. said:

"In other words, the ordinance operates so as to give to the company a right to a reduction of its income tax at the expense of the shareholder, who, if the right is exercised by the company, is given a corresponding credit by way of reduction of his income tax, not, however, as against the company, but as against the Malayan tax authority; and the documents brought into existence by the company implement these provisions of the ordinance. At no stage is any credit required, nor was any given, against the company, either by the ordinance or by the company in favour of the taxpayer; and so there was no payment by the company to the appellant in the extended sense contemplated by s. 6 (1), and the dividend for the purpose of s. 44 (1) (a) and s. 45 (1) (a) (i) was not the full amount declared by the directors of the company but was the amount actually paid to the appellant after deduction by the company of its Malayan tax" (1958) 98 CLR, at p 360.

Kitto J. said:

"For these reasons I am of opinion that of the relevant dividends only the seventy per cent which the taxpayer actually received is included in his assessable income as dividends paid to him within the meaning of s. 44 (1), and that only that portion of them constitutes dividends paid by the companies within the meaning of s. 45 (1)". (1958) 98 CLR, at p 366.

These statements are, I think, conclusive in favour of the Commissioner upon this appeal. (at p640)

To avoid the conclusion I have just stated, the taxpayer sought to show that in contrast with what occurred in Hughes' Case (1958) 98 CLR 345 , companies in Ceylon do credit shareholders with gross dividends and not merely with the dividends less the tax deductions which they make by authority of s. 43. In a sense, no doubt, shareholders are credited with the gross dividends, even if only for the purpose of preparing the statement required by s. 43 (2). When the members of the Court in Hughes' Case (1958) 98 CLR 345 said that the shareholders were not credited with the gross dividend, they were referring clearly enough to the fact that the shareholder's right against each company declaring a dividend did not extend beyond the dividend less the amount deducted as authorized by the Ordinance, and that not only was there no payment by the company of the amount deducted, but there was no credit of the deduction in favour of the shareholder against the company. In this sense, which is the only sense in which the word "credit" is important, what was said in Hughes' Case (1958) 98 CLR 345 is true here as well. (at p640)

There is another consideration that points to the conclusion that the credit which the Board granted could not be allowed without some qualification. It is that whereas s. 45 of the Act gives a set-off only to the extent to which a taxpayer has, in the discharge of a personal liability, paid income tax in respect of dividends paid to him by a foreign company and included in his assessable income, the position in Ceylon is to treat what is deducted as available for the payment of any tax payable by the recipient of dividends, and any balance over and above that tax as refundable to the taxpayer. In such circumstances, not only are the deductions not payments of tax in respect of dividends, but even that part of the deductions that is eventually set off against the shareholder's own tax does not constitute in strictness payment of tax in respect of dividends. It seems to me that if there could be any credit at all under s. 45 in circumstances like the present, there would have to be some apportionment of a taxpayer's payment of Ceylon income tax in any case where his taxable income was not exclusively Ceylon dividends. (at p641)

The taxpayer, to show that what was deducted was paid as tax, advanced a number of other arguments, which I shall deal with shortly. It was said that by definition of "agent" in s. 2 of the Ceylon Ordinance, the companies in which he held shares were as agents to pay his tax; but that is not the case and that part of the definition of "agent" which treats any person through whom another is in receipt of income as an agent has no application to a company from which, and not through which, a shareholder is paid a dividend. In somewhat the same way, the taxpayer sought to use s. 36 of the Ordinance to show that the shareholders were to be identified with the company so that they could claim that what the company paid was paid on their behalf. It is only necessary to refer to s. 36 to see that it has nothing to do with the problems I have to decide. The various attempts which the taxpayer made to distinguish Hughes' Case (1958) 98 CLR 345 having failed, it follows that in accordance with that decision the taxpayer is not entitled to any credit under s. 45. (at p641)

It is to be observed, however, that in Hughes' Case (1958) 98 CLR 345 - as the quotations which I have already made show - it was said that the Commissioner followed the correct course in including as assessable income of the taxpayer only so much of the dividends as was paid to him by the various companies after the deduction of tax; and this was said notwithstanding that it appeared from the case stated that the taxpayer was entitled to and had received from the taxation office a refund of part of what had been deducted by the companies. In this case, the Commissioner did not follow the course that was subsequently approved in Hughes' Case (1958) 98 CLR 345 ; he included as assessable income the gross dividends less 18%, not less 30% or 28% as the case may be. Had the taxpayer objected to this, I would, in conformity with Hughes' Case (1958) 98 CLR 345 , have directed the re-assessment of his tax so as to include in his assessable income as dividends paid only so much of the dividends declared as was actually paid to him by the Ceylon companies, that is, the dividends less the tax deductions. This course is not open to me because of s. 190 (a) of the Act, but I have thought it proper to draw attention to this matter. (at p642)

In the result, I allow the appeal, but, because the law was already established by Hughes' Case (1958) 98 CLR 345 , the amounts of tax at issue are trifling and the assessments do treat as dividends paid something which was not paid, I have decided to make no order for costs. (at p642)