Smith v Federal Commissioner of Taxation

48 CLR 178

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(Judgment by: RICH J)

Smith
v Federal Commissioner of Taxation

Court:

Judges: Gavan Duffy CJ and Evatt J

Rich JStarke J, Dixon J and McTiernan J

Subject References:
Taxation and revenue
Income tax
Resumption of land
Compulsory sale
Profit distributed as dividend
Dividend not assessable income
Subsequent amending legislation

Legislative References:
Income Tax Assessment Act 1922 (Cth) No 37 - s 16(b)(i)
Income Tax Assessment Act 1930 (Cth) No 50 - s 6(b)
City of Brisbane Improvement Act 1916 (Qld) (7 Geo V No 24) - ss 3, 7, 8, 17

Hearing date: SYDNEY 9 August 1932; 10 August 1932; 18 August 1932;
Judgment date: 18 August 1932

Sydney

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Judgment by:
RICH J

This is a taxpayer's appeal under s. 51 (6) of the Income Tax Assessment Act 1922-1930 from a decision of the Board of Review. The proceedings came before me pursuant to Rule 13 of Order LIA. and at the request of both parties I referred the matter to be argued before the Full Court. The question before the Board arose under the third and last proviso of s. 16 (b) (i.) of the Income Tax Assessment Act 1922-1927, which makes a general exception to the rule that the assessable income of any person shall include in the case of a member of a company profits credited, paid or distributed by the company. The proviso is as follows: "Provided also that where a dividend or bonus is paid wholly and exclusively out of the profits arising from the sale of assets which were not acquired for the purpose of resale at a profit a member or shareholder shall not be liable to tax on that dividend or bonus." The taxpayer as a shareholder participated in a distribution by a company of profits said to arise from the compulsory sale of assets which were not acquired by the Company for the purpose of resale at a profit. The question arose under this provision before the amendment effected by s. 6 (b) of No. 50 of 1930. The Board considered the question whether the expression "arising from the sale of assets" covered the involuntary realization of property as a result of compulsory acquisition, but decided against the taxpayer upon the ground that the dividend had not been paid by the Company wholly and exclusively out of the profits from the realization. This decision proceeded upon the view that certain expenses incurred by the Company in order to establish itself in new premises in lieu of those taken compulsorily ought to be thrown against the purchase-money or compensation received. The character of these expenses was imperfectly explained by the evidence before the Board. But, if we were confined to the materials before it, I should have great doubt as to the propriety of the allocation of the disbursements. But upon the further evidence given before me it is quite plain that the profits relied upon by the Company cannot be reduced by attributing the expenses in question to capital account. The case is thus restricted to the question whether the word "sale" in the proviso as it stood before the amendment of 1930 includes compulsory sale. I must confess that if it had not been for the subsequent amendment I should not have hesitated in giving an affirmative answer. Sale is not a word of precise technical import. In many contexts the essential idea it conveys is an agreement to transfer property for a valuable consideration. Often the valuable consideration intended is restricted to money. In other contexts agreement is not of the essence of the conception but the conversion of property into money or its realization is the notion sought to be expressed. Ever since the Lands Clauses Consolidation Act 1845 the alienation of property accomplished under its provisions has been regarded as an instance of sale. The very title under which the subject is discussed in legal compilations is compulsory purchase.

Stamp duty is levied upon the assurance of property as a conveyance or transfer on sale (Commissioners of Inland Revenue v Glasgow and South-Western Railway Co ^[F1] ), where it was not even argued that the conveyance did not answer this description. In Mason v Stokes Bay Pier and Railway Co ^[F2] Wood V.C. (as he then was) said: "In this case the amount to be paid had been settled by the award, and a parliamentary contract had been made which could be enforced in this Court at the instance of either vendor or purchaser ... after notice given and the price fixed, the relation of the parties, as vendor and purchaser, was as fully constituted as in the case of a formal and regular agreement." And Swinfen Eady J. (as he then was), in In re Cary-Elwes' Contract ^[F3] , said: "It is well settled that in cases of compulsory purchase, after notice to treat and ascertainment of the price, a contract is established, enforceable in a Court of Equity, and with regard to which both vendor and purchaser can enforce specific performance (Adams v London and Blackwall Railway Co ^[F4] ; Regent's Canal Co v Ware ^[F5] ). Following these decisions, it was held by Jessel M.R. in In re Pigott and Great Western Railway Co ^[F6] that as specific performance of the contract, as a contract of purchase and sale, or sale and purchase, may be enforced, all the ordinary rules apply, unless you find some statutory enactment in the way." Many references will be found to the relationship establishment by notice to treat and ascertainment of the purchase-money in which it is called a quasi-contract, e.g., per Lord Watson in Tiverton and North Devon Railway Co v Loosemore ^[F7] , at p. 501, and as a purchase, e.g., by Lord Bramwell ^[F8] . It is true that the Queensland statute under which the land was taken from the Company does not proceed by notice to treat but by a Gazette notice of acquisition. Perhaps in England the procedure by notice to treat produced a greater similarity in conveyancing practice to the completion of a voluntary sale, but the difference is not material in considering whether agreement is an essential element in the connotation of the word "sale," or whether it is capable of including alienation of property for a money sum, when the alienee alone possesses freedom of action; see per Lord Macnaghten in Williams v Permanent Trustee Co of New South Wales ^[F9] , at p. 252, where he says: "It is a compulsory purchase just as much in the one case as in the other." The common speech of lawyers in Courts of Equity justifies the assertion that the word is capable of the more extensive meaning, and the only question remaining is whether in this statute it should receive the more restricted construction. The subject with which the statute is dealing points unmistakably in the direction of the more extended meaning. It is directed to the discrimination between income profits and capital profits, but the object is to leave dividends derived from income or trading profits arising from the disposal of stock-in-trade and the like subject to tax and to exclude from taxation dividends derived from money into which property has been converted although not acquired for the purpose of resale. Broadly the distinction is between the recovery of fixed capital and circulating capital, and the detachment therefrom of the surplus over expenditure. The fact that the fixed capital is recovered by a compulsory conversion as distinguished by a voluntary conversion of the asset into money is quite irrelevant to the purpose of the Legislature. When trading stock was requisitioned in war time no one considered that the trader should exclude the proceeds paid to him by the Government from his profit and loss account; and I have no doubt that the ordinary accountant would put the sums down amongst the trader's "sales." Further, it is probable that the Commissioner would consider the transaction as a resale within the meaning of the present proviso. But the difficulty remains that the Legislature has, after the date of the transaction now in question, made an amendment of the proviso by, amongst other things, introducing the words "or compulsory resumption for public purposes." Further, the provision making the amendment is, by s. 26 (5) of No. 50 of 1930, to apply to assessments of the financial year beginning on 1st July 1930 and subsequent years. From this it is argued that an alteration in the law has been made to take effect prospectively, thus amounting to a legislative acknowledgment that "sale" did not cover compulsory sale. Argument from subsequent legislative exposition of prior statutes is always hazardous. In this case the amendment at least shows clearly that the wider interpretation of the word "sale" gave effect to the policy of the enactment. All that can be logically inferred from the amendment is that the Legislature supposed that by its previous choice of expressions it had failed in its attempt to give effect to that policy. But no judicial decision existed to inspire that belief, which must have arisen either from apprehension or from a course of administrative practice. It is for the Courts to ascertain the meaning expressed in the enactments of Parliament, and, though no doubt the enactments of a subsequent Parliament may be a source of enlightenment, they can only control their actual meaning by declaratory provision. The Act of 1930 is far from being declaratory. It justifies no more than an inference that the Legislature regarded its previous statement of its intentions as open to so much doubt that a restatement was necessary.

For these reasons I am of opinion that compulsory acquisition is included in the word "sale" in the proviso to s. 16 (b) (i.).

The appeal should be allowed with costs.