Federal Commissioner of Taxation v United Aircraft Corporation

68 CLR 525

---

(Judgment by: RICH J)

Between: FEDERAL COMMISSIONER OF TAXATION
And: UNITED AIRCRAFT CORPORATION

Court:

Judges: Latham CJ

Rich JWilliams J

Subject References:
Taxation and revenue
Income tax
Assessment
Foreign company
Income derived directly or indirectly from sources in Australia

Legislative References:
Income Tax Assessment Act 1936 No 27 - s 6; s 25(1)

Hearing date: MELBOURNE 3 June 1943; 14 June 1943; 11 October 1943; 12 October 1943
Judgment date: 6 December 1943

SYDNEY

---

Judgment by:
RICH J

The question for our consideration on this appeal is whether the sum of PD5,092, being the aggregate of the sums of PD1,559 0s. 4d. and PD3,533 17s. 3d. paid to the respondent company pursuant to s. 1 of article IV. of the agreement, is assessable to tax for the twelve months ended 30th June 1940.

The Income Tax Assessment Act 1936-1940 applies the criterion of territoriality to the assessment of the income of a non-resident company such as the respondent is, in the words "derived directly or indirectly from all sources in Australia" (s. 25 (1) (b)). The phrase "directly or indirectly" is related to the word "derived" and not to the word "sources" (per Evatt J., Federal Commissioner of Taxation v W. Angliss & Co Pty Ltd ^[F7] ). "Source" is not a technical term but, as the context shows, is used as a metaphorical expression. "Source" means not a legal concept, but something which a practical man would regard as a real source of income; "the ascertaining of the actual source is a practical hard matter of fact" (Overseas Trust Case; ^[F8] Liquidator Rhodesia Metals Ltd v Commissioner of Taxes, ^[F9] at p. 789). In the latter case Studebaker Corporation of Australasia Ltd v Commissioner of Taxation (N.S.W.) ^[F10] is cited by their Lordships without criticism. ^[F11] At an earlier date than the South African decision, Isaacs J., as he then was, anticipated these statements in the South African case in a passage in Nathan v Federal Commissioner of Taxation, ^[F12] which was subsequently adopted in Studebaker Corporation of Australasia Ltd v Commissioner of Taxation (N.S.W.). ^[F13] In Tariff Reinsurances Ltd v Commissioner of Taxes (Vict.) ^[F14] I explained how I understood the phrase in the following passage: "This means, I suppose, that every case must be decided on its own circumstances, and that screens, pretexts, devices and other unrealities, however fair may be the legal appearance which on first sight they bear, are not to stand in the way of the court charged with the duty of deciding these questions. But it does not mean that the question is one for a jury or that it is one for economists set free to disregard every legal relation and penetrate into the recesses of the causation of financial results, nor does it mean that the court is to treat contracts, agreements and other acts, matters and things existing in the law as having no significance." As the question to be determined in this case is a question of fact a decision on one set of facts is not binding and is often of little help on another set of facts. In Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation ^[F15] and Tariff Reinsurances Ltd v Commissioner of Taxes (Vict.) ^[F16] - cases which may, perhaps, be regarded as borderline cases-the court considered that, on the facts in each case, the contract should be regarded as the sole source of income and that therefore the locus of the contract was the locus of the source. But it does not follow that, in every case where a contract is one of the sources, the contract should be regarded as the sole source: Cf. Commissioner of Taxation v Cam & Sons Ltd, ^[F17] at p. 173-a case which contains an interesting discussion of the principles germane to the question in this appeal. The question then is whether the source of the sum in question is within Australia.

The facts are set out in the "mutual admissions of facts" and the annexures thereto and sufficiently summarized in the judgment of the Chief Justice and I shall not stuff the record by rehearsing them. It is, I think, necessary to emphasize the fact that at no material time has the respondent company owned or had any interest in any patents in Australia for or in respect of the licensed engines or spare parts referred to in the agreement annexed to the admissions: See clause 12 of the admissions. The terms, wherever occurring, of "licence," "licensed" and "royalties" are not referable to any patent. And there is no evidence implicating the respondent company in any agency or profit-sharing transaction or division of net earnings. It has no part nor lot in the Australian company's business. Although property exists in the plans and drawings, etc, supplied to the Australian company, the moneys in question, part of the consideration paid to the respondent company, cannot be regarded as derived from property used by the latter company or on its behalf in Australia. These moneys were derived not from the pieces of paper, but from the supply in America of the information recorded on the pieces of paper, information which was capable of being used in Australia or elsewhere. If a person purchased a car from another in New York on credit, with the intention of taking it to Australia and there using it as a taxi, the fact that he discharged his indebtedness out of the proceeds of his taxi business remitted by him from Australia would not make the moneys received in America by the seller moneys derived by him from property in Australia in any relevant sense. In the instant case the taxpayer received two sorts of payments, one obviously in respect of the contracts alone and things done under it in America, and the other in respect of things done under it in America and in Australia. The former payments are clearly not derived from a source in Australia. Their source may be regarded as substantially the contract. There would be no more justification for saying that their source was of Australian origin than for saying that an American shopkeeper who sells an Australian tourist an article in New York derives income from a source in Australia because the tourist paid for it out of income which he had received in Australia. It would make no difference if the shopkeeper gave him credit and he remitted the price from Australia. But in relation to the other payments which are called royalties the source as a question of fact should, I think, be regarded partly as the contract and partly things done in pursuance of the contract. These things included the handing over in America by the American company to the Australian company of property belonging to the American company; the user in accordance with the contract by the Australian company of this property or its rights in the same in Australia; the payment in America by the Australian company for the user in Australia of this property or the rights therein by that company. I am not prepared to draw from these facts the conclusion that the payment of the so-called royalties was a payment derived from a source in Australia. I think that the relevant facts, including the making of the contract, suggest that these payments had an American and not an Australian source. And the fact that moneys were called royalties or were to be paid into what was called a royalty account does not alter the character of the moneys or affect the source from which they came. And I might also add that, in my opinion, the facts I have referred to do not support any case for apportionment, as to which see Commissioner of Taxation (N.S.W.) v Hillsdon Watts Ltd, ^[F18] and cases there cited. It is also important to note that the plans-the property in question-had no fixed locality but were allowed to be in Australia by the American company for the purposes mentioned in the agreement for a definite period at the end of which, subject to any further agreement, they would return to their former habitation in America.

I consider that the reasoning in the numerous decisions of this Court on similar questions supports my judgment in this case.

For these reasons I am of opinion that the appeal should be dismissed.