John Langley Webb v The CMR of Taxation

30 CLR 450
BC2200023

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(Judgment by: Knox CJ, Gavan Duffy, Starke JJ) Court:

Judges:
Knox CJIsaacs
Higgins

Gavan Duffy
Starke JJ

Hearing date: 8-11 May
Judgment date: 22 June 1922

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Judgment by:
Knox CJ
Gavan Duffy
Starke JJ

At an extraordinary general meeting of the members of the Broken Hill South Silver-mining Co No Liability (hereinafter called the old Company), held on the 30th day of August, 1918, it was resolved to reconstruct the Company, and a scheme of reconstruction was submitted to the meeting and approved. Such scheme provided ( inter alia ) that --

(a)

A new Company, to be called "Broken Hill South Ltd" (hereinafter called "the new Company"), should be formed and incorporated in Victoria, with a capital of £ 800,000 divided into 800,000 shares of £ 1 each, and such new Company should acquire from the old Company, as on and from the first day of July, 1918, the whole of the undertaking and assets of the old Company except its uncalled capital and a sum sufficient to enable the old Company to repay to its fully paid-up shareholders the sum of 10s. 6d. per share, being the amount of capital paid up in excess of that paid up on the contributing shares.

(b)

The new Company should allot to the old Company or its nominees 800,000 fully paid-up shares in the new Company, such number being equivalent to four of such shares for each share in the old Company.

(c)

The new Company should undertake and free the old Company from all its debts and liabilities.

(d)

The new Company should pay all costs and expenses of and carrying into effect of the scheme and of the winding up of the old Company.

(e)

The old Company should in due course and when free from debt be wound up voluntarily and its assets distributed amongst its shareholders in specie so that each fully paid-up shareholder in the old Company would receive 10s. 6d. for each fully paid-up shares, as per para ( a ), and each shareholder in the old Compny, whether paid up or contributing, should receive four fully paid-up £ 1 shares in the new Company in respect of each share in the old Company.

On the 31st day of August, 1918, subsequent to the incorporation of the new Company, an agreement was entered into between the old Company and the new Company for the sale and transfer to the new Company as on the 30th day of June, 1918, of all the undertaking, property and assets of the old Company (except as aforesaid). In effect the old Company sold and transferred to the new Company, as on and from the 30th day of June, 1918, the whole of the old Company's undertaking, assets and property (save as aforesaid), for the following considerations, namely:

-- As part of the consideration for the said sale, the new Company

(1)

undertakes to pay, satisfy and discharge all the debts, liabilities and obligations of the old Company whatever, including the liability to pay all or any portion unpaid of either or both of the dividends which might be declared by the old Company, as provided in cl 2 of the agreement; and

(2)

to perform and fulfil all contracts and engagements binding on the old Company, and to keep the old Company, its liquidator and contributories indemnified against all such debts, liabilities, obligations, contracts and engagements, and against all actions, proceedings, costs, damages, claims and demands in respect thereof.

As a further part of the said consideration, the new Company agreed to pay all the costs, charges and expenses of or incidental to the carrying into effect of the said scheme, and (if and when the old Company winds up) all the costs, charges and expenses of or incidental to the winding up and dissolution of the old Company (including the remuneration of the liquidator), and to indemnify the old Company, its liquidator and contributories, against all actions, proceedings, costs, claims and demands in respect thereof.

The residue of the said consideration was the allotment and issue to the old Company or its nominees of 800,000 shares in the new Company (inclusive of the shares taken by the subscribers of the new Company's Memorandum of Association), of one pound each, credited as fully paid up. The agreement states that no part of the said consideration is payable for goodwill.

On the 27th day of September, 1918, the old Company resolved to wind up voluntarily, and to distribute its assets amongst its shareholders in specie so that each fully paid up shareholder should receive 10s. 6d. for each fully paid-up share, and each shareholder, whether paid up or contributing, should receive four fully paid-up £ 1 shares in the new Company in respect of each share he held in the old Company.

On the 5th day of October, 1918, the old Company and its liquidators requested the new Company to allot to the persons on the register of the old Company, on the 27th day of September, 1918, as nominees of the old Company, and in satisfaction of the consideration mentioned in the said agreement, 800,000 fully paid shares of £ 1 each in the capital of the new Company for each share held in the old Company. On the 11th day of October, 1918, the directors of the new Company allotted the said 800,000 shares (except certain shares which had already been allotted to directors to qualify them for so acting), in accordance with the said agreement and request. The scrip for the said shares was subsequently prepared and handed to the liquidators of the old Company, who distributed it amongst the shareholders in that Company.

The appellant was registered as the holder of 500 fully paid shares in the old Company, and as such became entitled to the allotment of 2000 fully paid shares in the new Company, and these shares were allotted to him accordingly. The appellant made a return in respect of his income for the year ending 30th June, 1919, but did not include as part of such income the shares received from the new Company or any of them, or any amount (save and except dividends for the year ending 30th June, 1918), as representing profits or bonus credited or paid to him by the old Company. The Commissioner of Taxation assessed the appellant in respect of the income shown in such return, and subsequently issued an amended assessment whereby an amount equal to 57 per cent. of the face value of the said shares in the new Company received by the appellant from the liquidator of the old Company was included as taxable income.

The appellant being dissatisfied with such amended assessment, lodged notice of objection thereto in writing, and the question for our consideration is whether he is liable to be assessed in respect of the said last-mentioned amount as claimed by the Commissioner, or at all, by reason of the allotment to him of such shares.

Let us first consider whether the shares distributed constituted income apart from any statutory provision. If the old Company had detached any part of its profits and distributed that part among shareholders, the portion received by each shareholder would have become part of the income of such shareholder, but until such detachment every shareholder's interest in the whole of the undistributed assets of the Company remained part of his capital. There was no such detachment in this case, but it is said that what was done constituted a payment or crediting to the shareholders of profits of the Company within the meaning of s 14 ( b ) of the "Income Tax Assessment Act." We think it did not. Nothing was either paid or credited to the shareholders, because they neither received any specific sum of money in currency, nor did they obtain the benefit of any such sum by way of credit entry, set-off, or other statement of account. Nor was the distribution of "profits" within the meaning of s 14 ( b ). In our opinion, the words "profits credited or paid" in that sub-section mean moneys detached from the assets of the Company suitable for distribution to the shareholders. On distribution such moneys become their income in contradistinction to their interest in the remaining assets of the Company which continue to be their capital. In this case there was no detachment. The real transaction permitted the shareholders to retain their interest in the assets of the old Company, which constituted their capital, but enabled the old business to be carried on under a new constitution.

None of the cases cited to us are precisely in point. But The Commissioners of Inland Revenue v Blott , (1921) 2 AC 171, rests, in its final analysis, upon the view that the shareholders' interest in the profits of a Company does not become their income unless severed from the capital funds of the Company, and liberated and released to them. "In the present case," says Viscount Finlay, at p 195, "the bonus or so-called dividend was not severed from the capital; on the contrary, it was added to it." Again, in Pool v Guard an , & c ., Co , 38 T.L.R 177, Sankey, J, adopted the same principle, though he held that there was in that case such a severance of assets from the capital funds of the Company which assets were liberated and released to the shareholders. And a much earlier case -- Tennant v Smith , (1892) AC 150 -- had suggested (at p 156) that if assets in the form of substantial things of money value capable of being turned into money were handed over or liberated to a person, they might represent money's worth, and be taxable as income.

The crux of the present case lies in the question whether the shares handed over to the shareholders were or were not severed from the capital funds of the Company, and liberated to the shareholders as profits or income. These shares were acquired in consideration of a transfer of a mixed mass of assets representing partly subscribed capital and partly accumulated profits of the Company. In point of fact, these assets were not distinguished, in the transaction between the old and the new Company, as capital or income. Much stress was also laid upon the fact that the distribution of the shares was made in the winding up of the Company. Consequently, it was insisted, there was and could be no severance of the profits of the Company from its capital funds, but a mere distribution of the surplus assets of the Company or of what remained of the capital funds of the Company after satisfying creditors and other proper claims. In this connection the opinions of Viscount Haldane, in Blott's Case , (1921) 2 AC, at p 183; and of Scrutton, LJ, in the same case, (1920) 2 KB (C.A.) 657, at pp 675-6, were referred to. The argument is strong, but we must not forget that the distribution in the case before us was in fact made pursuant to a scheme of reconstruction passed during the life of the Company.

Again, the cases of Bouch v Sproule , 12 AC 385, and of Re Hassall, Knowles v The Ballarat Trustees, Executors and Agency Co ., 22 ALR 431 , and Fisher v Fisher , 23 ALR 318 , in this court, were relied upon as establishing that the distribution of the shares in the present case could not be treated as a distribution of income. All these cases related to the rights of tenants for life and remaindermen; but Blott's Case certainly applies the principle of Bouch v Sproule to cases arising under the Income Tax Acts of Great Britain. Knowles's Case and Fisher's Case do, however, in our opinion, cover the present case in principle. Swan Brewery Co Ltd v The King , (1914) AC 231, was relied upon by the Commissioner, but since Blott's Case we must treat this case as a decision upon the special words of a particular Statute, and in no wise contravening the general principle. We prefer, in the case before the court, to rest our decision upon the principle itself rather than upon any decided case.

Applying that principle, then, we find that there was in fact no detachment or severance of the profits of the Company from its capital funds, and no liberation of profits of the Company, in money or in money's worth, to the shareholders, because (1) the old Company did not detach any portion of the assets transferred to the new Company from its capital funds. Such of the assets of the old Company as were transferred to the new Company passed over as a mixed mass, and a great part may have been acquired out of profits made by the Company. Still, as Viscount Haldane said in Blott's Case (at p 180) --

There is no doubt that the money in question formed originally part of the profits made by the Company on which it was liable to pay income tax. It is quite another question whether these profits as such ever reached the ... shareholders as income.

(2)

The substance of the scheme was reconstruction, and not distribution of profits in money or in money's worth. The object and result of the transaction was to reconstitute the Company, retain the profits in a new Company, and carry on business as before. The method adopted did not, as in Blott's Case , "capitalise" the profits, that is increase the capital, of the old Company; but reconstruction, though not a legal but a commercial term, is a well recognised and lawful expedient for preserving and transferring the business of a Company, not to outsiders, but to another Company, consisting substantially of the same shareholders, with a view to its being continued by the transferee Company -- see Halsbury's Laws of England , under title "Companies," p 584, para 1007; Palmer's Company Precedents (11th ed ), Part I., p 1431).

In our opinion, the answer to the question submitted should be "No"