Australasian Scale Co Ltd v Commissioner of taxes (Queensland)

53 CLR 534
(1935) 41 ALR 353
(1935) 3 ATD 171

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(Judgment by: EVATT AND McTIERNAN JJ)

AUSTRALASIAN SCALE v COMMISSIONER

Court:

Judges: Rich J
Starke J
Dixon J
Evatt J
McTiernan J

Subject References:
Constitutional law
Inter-State trade and commerce
Constitution (Cth), s 92
Taxation and revenue
Income tax
Foreign company
Profits made within State
Statutory provisions
Proportion of total profits
Profits unable to be satisfactorily determined
Opinion of Commissioner

Legislative References:
Income Tax Act 1924 (Qld) (15 Geo V No 34) - s 14(4)(iv)

Hearing date: 10 April 1935; 11 April 1935;
Judgment date: 30 April 1935

MELBOURNE

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Judgment by:
EVATT AND McTIERNAN JJ

This appeal from the Full Court of the Supreme Court of Queensland has been brought pursuant to special leave. The main question in issue is whether s. 14 (4) (iv.) of the Queensland Income Tax Act of 1924 is repugnant to s. 92 of the Commonwealth Constitution, which provides that trade, commerce and intercourse among the States shall be absolutely free.

Section 14 (4) (iv.) applies to "foreign" companies, that is, companies whose head or principal office, or whose principal place of business is out of Queensland. Its main provision is that the taxable income of foreign companies liable to assessment shall be "the amount of the profits made by the company in Queensland plus any expenses and charges which are not allowable deductions under this Act." But the sub-section goes on to declare that, if the amount of such profits "cannot in the opinion of the Commissioner be otherwise satisfactorily determined" the Commissioner may assess the taxable income at a sum "which bears the same proportion to the total profits made by the company as the sales made in Queensland bear to the total sales made by the company, or, if there are no sales, in the same proportion as the total revenue derived from Queensland bears to the total revenue derived by the company." To the amount so arrived at by the Commissioner, certain other sums are to be added.

The third and last part of the sub-section is as follows:"If the Commissioner is satisfied that this information cannot be obtained or is not satisfied that the profits returned disclose the true state of affairs, he may assess the taxable income of the company at a sum equal to seven pounds ten shillings per cent of the total sales made in Queensland, or, if there are no sales, at a sum equal to seven pounds ten shillings per cent of the total revenue derived from Queensland."

Over a long period of years, the Courts throughout Australia have been required to deal with the difficult problem of attributing to one State or territory a proportionate part of the income or profits of a person or company who carries on business in more than one State or territory, the problem arising from the fact that a particular legislature has made the subject matter of taxation income or profits made within, or arising from, sources in its own territory. Many illustrations of the resulting difficulties of apportionment are to be found in the decided cases, all of which were discussed recently in Federal Commissioner of Taxation v W. Angliss & Co Pty Ltd ^[F10] .

It is to this very problem that s. 14 (4) (iv.) is addressed. The Legislature decided to render subject to taxation the amount of the profits made by a foreign company in Queensland. But it was perceived that difficulties would arise in ascertaining the precise amount of such profits. If the difficulties proved so considerable that the profits could not in the Commissioner's opinion be "otherwise satisfactorily determined," the formula set out in the second paragraph of s. 14 (4) (iv.) is to become operative. That formula requires the ascertainment of the total profits of the company and the fixing of such proportion of those total profits as is represented by the ratio which the company's Queensland sales bears to its total sales or, if there are no sales, by the ratio which the company's Queensland revenue bears to its total revenue.

It is contended by the respondent that the application of the formula places an unlawful burden on trade and commerce among the States. At first sight, the contention appears fanciful, because there does not appear to be any relation between such trade and commerce and the ascertaining of the subject matter of taxation by reference to the formula. But the argument is that, in the case of sales, the result of adopting a formula is this: that, if the amount of a company's sales in Queensland increases, there will be an increase in the subject matter of taxation. But this is a very inaccurate way of expressing the true position. No doubt, in the case of a foreign company which is conducting sales in Queensland, some of such sales may be made in the course of trade and commerce among the States, just as they may be made in the course of domestic or overseas trade. It follows that, if every other transaction of sale is excluded from the calculation or is treated as irrelevant, an increase in the company's sales in Queensland will tend to increase the ratio of total sales which has to be ascertained under the formula. But this argument overlooks the fact that, even upon the assumption already mentioned, the increase in the ratio which results from an increase of the inter-State sales in Queensland will not be directly proportionate to the increase of such sales; it also overlooks the fact that inter-State sales by a foreign corporation in other States of the Commonwealth have to be taken account of in the denominator, not in the numerator, of the fraction which represents the required ratio. The last mentioned fact shows that increases in the inter-State trade of the foreign company in States other than Queensland will tend to reduce, and not to increase, the subject matter of taxation if recourse must be had to the formula of s. 14 (4) (iv.).

This analysis of the formula reinforces the fact which first impression conveys, viz., that the formula of s. 14 (4) (iv.) is devised without any reference to inter-State trade and commerce. In order to obtain a fair comparison of the foreign company's Queensland activities with the totality of its business activities, sales are selected as a method of comparison, and, failing sales, a comparison of revenue is to be made; and the formula is only to be used as a matter of last resort, when the Commissioner is satisfied that otherwise it will not be possible to determine in any satisfactory way the profits made in Queensland. It follows that the adoption of such formula cannot be regarded as infringing in the slightest degree upon s. 92 of the Commonwealth Constitution.

Finally, it was contended that the third portion of s. 14 (4) (iv.) is an infringement of s. 92 because, under it, the taxable income of the company is fixed at 7 per cent of the total sales made in Queensland, or, if there are no sales, the total revenue derived from Queensland. It was argued that this provision imposes a direct burden upon inter-State trade. It is unnecessary to examine this provision further in the present case, because it has not been applied and it is clearly severable. But it should be emphasized that the provision applies only where essential information cannot be obtained by the Commissioner, or where the Commissioner is not satisfied that the profits returned disclose the true state of the company's affairs. In other words, the provision takes its place in the statutory scheme as a mere proviso to meet a very special class of case. There is certainly no intention to burden that part of the company's inter-State trade which is conducted in the State of Queensland, and any effect upon such trade which the adoption of the provision produces may fairly be described as casual and accidental.

It was argued on the cross-appeal that the answers given by the Full Court to questions 6 and 8 of the special case were erroneous. In the first place, it was held by the Full Court that the decision of the Commissioner of Taxes as to whether the profits of the appellant could not be satisfactorily determined otherwise than by the adoption of the statutory formula, was open to review by the Court of Review. The better opinion is that such a decision was not open to review. The principal object of s. 14 (4) (iv.) was to meet the difficulty involved in allocating to Queensland that part of the total profits of the company which should be properly attributed to its business activities in that State. Accordingly, the Commissioner was made the final judge in determining whether recourse should be had to the formula. In a general sense, the Commissioner's decisions are open to objection and appeal, but the particular matter as to which he gives a decision has to be examined in order to ascertain from the legislative scheme whether the general rule applies to that matter.

The other point to which the cross-appeal relates is question 8 of the special case. The Full Court held that if the Court of Review was of opinion that if, by the adoption of the formula in the second part of s. 14 (4) (iv.), the assessment resulted in the inclusion of profits made out of Queensland within the subject matter of taxation, the assessment could, and should, be set aside. The Full Court was greatly impressed by the argument that invalidity would attach to s. 14 (4) (iv.) if by any chance profits made out of Queensland were included in the assessment as a result of applying the formula. It must be conceded that the adoption of the formula makes it possible that the subject matter of taxation will include profits not confined to those made within Queensland itself. But the Queensland Legislature is clearly entitled to impose an income tax upon foreign corporations doing business in Queensland, without being limited by any rigid doctrine of territorial competence to the profits made in Queensland alone. The Full Court referred to several cases dealing with this problem of territorial competence, but they do not appear to have considered such cases as Commissioner of Stamp Duties (N.S.W.) v Millar ^[F11] ; Trustees, Executors and Agency Co v Federal Commissioner of Taxation ^[F12] , and Colonial Gas Association Ltd v Federal Commissioner of Taxation ^[F13] . In those cases the problem was fully discussed. So long as the Legislature of Queensland in its taxation measures is seen to be legislating for the peace, order and good government of the State of Queensland no additional restriction based upon mere territorial considerations should be placed upon its constitutional powers.

The appeal should be dismissed and the cross-appeal allowed.