Commissioner of Taxes (Victoria) v Nicholas
59 CLR 230(Judgment by: Evatt J)
Commissioner of Taxes (Victoria)
v Nicholas
Judges:
Latham CJ
Rich J
Starke J
Evatt JMcTiernan J
Subject References:
Taxation and revenue
Income tax
Bonus shares
Assessable income of shareholder
Legislative References:
Unemployment Relief Tax (Assessment) Act 1933 (Vic) (No 4171) - the Act
Income Tax Act 1935 (Vic) (No 4309) - the Act
Judgment date: 25 March 1938
Perth
Judgment by:
Evatt J
Since the judgments of the House of Lords in Inland Revenue Commissioners v Blott [F56] and Inland Revenue Commissioner v Fisher's Executors [F57] , as explained by the Privy Council in Commissioner of Income Tax, Bengal v Mercantile Bank of India Ltd [F58] , it must be taken that the Swan Brewery Case [F59] , is to be regarded "as having been primarily based on the distribution of the new shares being `advantages' within the meaning of the particular Act under consideration" [F60] . In Blott's Case [F61] Lord Sumner had said that the Swan Brewery Case [F62] did not turn on the special definition of dividend in the taxing statute of Western Australia" [F63] ; but, so far as it did not turn on such definition, so far as it "regarded the transaction as involving, in substance, a distribution of accumulated profits among shareholders and a repayment by them to the company" [F64] , it cannot be treated as a correct or permissible analysis of the whole transaction of capitalizing profits with a view to the issue of bonus shares.
From the final interpretation of the Swan Brewery Case [F65] as resting on the single word "advantage," certain conclusions inevitably follow. The definition of "dividend" in the West Australian Act included "every profit, advantage or gain intended to be paid or credited to or distributed among the members of the company." Having regard to such definition, it is a necessary inference from the Swan Brewery decision, as authoritatively explained, that from the mere capitalization of profits and the proportionate allocation to shareholders of the increased capital no "profit" or "gain" is "paid" or "credited" or "distributed" to any shareholder of the company.
It is equally clear that, in such circumstances, it is not possible to postulate a priori that any "dividend" is "paid" or "credited" or "distributed." A shareholder, as Viscount Haldane said, "is not entitled to claim that the company should apply its undivided profits in payment to him of dividend. He cannot sue for such a dividend until he has been given a special title by its declaration" [F66] . In such a capitalization, to use Viscount Finlay's words describing the Blott transaction, "instead of his getting any dividend, or anything in the nature of a dividend, the fund which might have been divided was impounded to increase the capital of the business" [F67] . Or, as Lord Russell of Killowen has said, "moneys which had been capable of division by the company as profits among its share- holders have ceased for all time to be so divisible, and can never be paid to the shareholders except upon a reduction of capital or in a winding up" (Hill's Case [F68] ).
These considerations are of decisive relevance in the construction of s. 4 of the Unemployment Relief Act 1933 and of the proviso to s. 2 (1) (g) of the Income Tax Act 1935, where the charging words are "any dividend, interest, profit or bonus credited, paid or distributed to" the shareholder. In neither case is the word "advantage" used. The use of the word "bonus" operates, in my view, against the commissioner because in Australia in 1933 and 1935 the word "bonus share" had become an accepted part not only of business but of income-tax language; but it was not used.
The formidable array of authority is to be regarded as finally settling what was once a vexed question, leaving it to the legislatures concerned to employ clear language in order to attach to the transaction of capitalizing profits and issuing bonus shares a resulting liability in the shareholder to pay income tax upon what can never be regarded as a true income receipt. Faced with the authorities, the commissioner pins all his faith to James v Federal Commissioner of Taxation [F69] . But in that case the court did not decide that in each and every case where shares in a company are capitalized and are issued to shareholders as fully paid there must always and of necessity be a "crediting" to each shareholder of a dividend. That would have been a simple and effective way of determining the general principle involved, without any precise examination of the manner in which the dividend was "credited" to each shareholder. On the contrary, Knox C.J. finds as a fact that there was a "crediting" [F70] . Gavan Duffy J. and Starke J. said: "On the cases, it may be established that the profits were not paid or released to the shareholders; but it is clear, we think, that these profits were credited to the shareholders" [F71] .
An equally cautious approach to a question of fact seems to be indicated by Rich J. [F72] . Isaacs J. also emphasised "the actual crediting of PD3,168 in the share register" [F73] . Affected by the overwhelming weight of subsequent authority, Knox C.J. and Gavan Duffy J., in Executor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxation (S.A.) [F74] , said of a similar transaction in which a formal declaration of bonus was included in the machinery of capitalization:"In other words, did the transaction amount to a crediting, payment or distribution to the said James Henry Gibbon of a dividend, bonus or profits, or to a distribution by the company to him of the paid-up value of shares representing the capitalization of profits of the company? If the former, the respondent is entitled to succeed; if the latter, the appellant." If the same two learned judges were right in regarding the draftsman of the 1925 Act as reasonably familiar with the Blott controversy and as having employed in an incometax Act the phrase "dividends, bonuses or profits ... credited, paid or distributed to the ... shareholder" as antithetical to the distribution of paid-up shares representing the capitalization of the company's profits, a similar attitude is imperative today, when, for the first time in Victoria, as stated at the Bar, an attempt is made to use precisely similar language for the purpose of bringing into charge the paid-up value of bonus shares.
In the present case the facts stated in the special case negative, or at least do not establish, any actual "crediting" to the taxpayer of any sum of money whatsoever. According to the resolution the transaction was that of "distributing bonus shares" out of reserve account. During argument an attempt was made to extract an admission from learned counsel that there must have been some other material facts which are not stated in the case. He very properly declined to make any such admission, and in any event the court is confined to the facts as stated. They show that there was no "crediting" such as took place in James' Case [F75] . If it took place, it must have taken place upon some date. When did it take place? I received no answer to this question. The conclusion is that the company refrained from declaring any dividend or "crediting" it to a shareholder. Then it is said: "Oh, you should have followed the form prescribed by Palmer." The taxpayer says:"What if the form was never followed? Even if the company can compel me to pay for the `bonus' shares, what has that to do with the commissioner?" Here, everything that took place took place with the consent of all the shareholders, the intention was not to liberate profits or credit them at any stage of the transaction, but to conduct the whole affair as one of capitalization and detention of undivided profits. I entirely agree with the observation of Mann C.J. that "if on the other hand it be true that the company in this case has exceeded its powers under the Companies Acts (the point has not been argued) I do not know that the commissioner's case will be advantaged thereby" [F76] . Because, if a company purports to issue "bonus shares" as fully paid and there remains in law a liability to pay on each share, how can there be any distribution of "dividend, interest, profit or bonus"?
In the result the opinion of the majority of the Supreme Court should be affirmed. It is not too much to ask that, if the Victorian legislature is really desirous of making the receipt of bonus shares the occasion of the shareholders' liability to income tax (which is to be doubted), it should follow the example of other Australian legislatures and make its intention plain. If the present transaction is examined "in substance," there has been nothing in the nature of an income receipt by the shareholder. If it is examined "step by step," I fail to see any step which brings the shareholder within the words of the statute. This court should loyally accept the authoritative exposition by the Privy Council of the Swan Brewery Case [F77] , and that exposition, in my opinion, concludes the matter in the taxpayer's favour.
The appeal should be dismissed.
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