Douglass v Federal Commissioner of Taxation

45 CLR 95

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(Judgment by: Evatt J)

Between: Douglass
And: Federal Commissioner of Taxation

Court:

Judges: Rich J
Starke J
Dixon J

Evatt JMcTiernan J

Subject References:
TAXATION AND REVENUE
INCOME TAX
DEDUCTIONS
Tax paid on profits
Shareholder entitled to rebate

Legislative References:
Income Tax Assessment Act 1922 (Cth) - s 16(b)(i); s 16(b)(iii); s 23

Hearing date: 16 April 1931
Judgment date: 11 May 1931

Melbourne (heard in Sydney)

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Judgment by:
Evatt J

Events have happened which entitle the taxpayer to the rebate mentioned in the last proviso to s. 16 (b) of the Income Tax Assessment Act 1922-1927. And the question in dispute is the ascertainment of "the amount of tax paid by the company on that part of the said dividends ... which is included in his taxable income." Most of s. 16 (b) is directed to the question-what is the assessable income of a company shareholder to include: as a rule, dividends credited, paid, or distributed are to be brought into account in such assessable income, but there are certain exceptions and qualifications.

Now the "taxable income" is the "assessable" or gross income minus all deductions allowed by the Act (s. 4). When dividends help to make up the total represented by "assessable income," what part of such dividends is included in the remainder left after deducting the allowed sums from the assessable income? For that remainder is the "taxable income."

The precise problem in figures or amounts is what "part" of PD11,830 (the dividends) is "included in" PD13,574 (the taxable income from property). The Commissioner answers the problem by working out a proportion sum based on the assumption that certain deductions. which bear no relation to the earning or production of any particular item of the taxpayer's assessable income, should be allocated ratably to each part of the taxpayer's total assessable income; and the amount of dividends should then be debited with and diminished by the amount representing their proportionate part of the selected deductions.

This answer of the Commissioner may be stated in the formula:

Rebate varies as Dividends (1 - Selected Deductions - Assessable Income)


It will be seen that, on this basis, in proportion as the selected deductions diminish, the taxpayer's rebate will increase; and as the selected deductions increase, so will the rebate diminish. In the present case, the result of the formula is to fix the rebate on the sum of PD11,760 (to the nearest PD1), which is PD70 less than the amount of the dividends.

In my opinion there is no justification in the language of the section for the adoption of the official formula. In the first proviso to the same section of the Act, the Legislature used appropriate words where a rule of three calculation was intended. And I do not see how it can be said that "that part" of PD11,830 included in PD13,574 is "about PD11,760."

What "part" of (say) PD50 is "included in" (say) PD1,000? I think that, arithmetically, the answer is: the whole of the PD50. And if the question is, what part of PD1,000 (dividends) is included in PD1,000 (taxable income)-the answer still is: the whole of the PD1,000.

There may occur a case where the dividends making up part of the assessable income are themselves greater in amount than the taxable income. The problem then in figures is (say) what "part" of PD1,100 is included in PD1,000 a lesser sum?

There seem to be three possible answers:

(1)

the PD1,100 (the greater sum) may, in a sense, be included in the PD1,000 (the lesser sum) because the latter figure represents a remainder from a figure which exceeded PD1,100 but also included it. The PD1,100 is thus included in account in the PD1,000.

(2)

Ascertain by how much the taxable income is increased by reason of the inclusion of the dividends in the assessable income. This calculation cannot be made without other calculations, and depends to a great extent upon the quantum of deductions.

(3)

A third method is to have regard solely to the two figures PD1,000 and PD1,100. How much of the greater sum is included in the lessor. The whole is greater than its part, but the question is: what "part" of the whole is "included in" the part? The answer might well be that the proportion of the whole included in its part, is measured by the part itself. How much of PD1,100-what part of it-is included in PD1,000? The answer would be: PD1,000 of the PD1,100. This view would secure a rebate to the taxpayer based upon the whole amount of dividends included in the assessable income, but so that such amount of dividends could never exceed the amount of taxable income itself.

Criticism of any one of the alternative views is possible because of the vagueness of the language employed in the section. But it is unnecessary to express a preference for any view. For in any event the taxpayer succeeds in this appeal.

I am of opinion that that that "part" of PD11,830 (dividends) which was included in PD13,574 (taxable income) is the whole of the PD11,830, and the appellant is entitled to a rebate upon such sum.