Blankfield v. Federal Commissioner of Taxation.

Judges:
Stephen J

Court:
High Court

Judgment date: Judgment handed down 20 October 1972.

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Stephen, J.: In this appeal by the taxpayer from a decision of the Board of Review disallowing an appeal against his assessment to tax for the year of income ended 30 June 1968, the taxpayer contends that the Commissioner's inclusion in his assessable income of the amount of a dividend paid by a South African company, is erroneous.

The position of the taxpayer, who appeared in person, is somewhat unusual. He was until 1962 a resident of South Africa. Early in that year, his wife and two sons and other relatives emigrated to Australia and, after several trips to Australia, he also formed the intention of emigrating to this country. He took up permanent residence in Australia late in 1962 and notified the South African authorities accordingly.

There then existed and still exists in South Africa statutory restrictions upon the export of currency and assets out of that country; according to the taxpayer the effect of these restrictions, as applied to his case, is that since shortly after his emigration he has not only been unable to have remitted to him either his South African capital assets, in the form of shares and credit balances in bank accounts, or any dividends and interest derived from them but has also found that during his numerous subsequent visits to South Africa he has not been permitted to use those capital assets or the income derived from them even for the payment of indebtedness incurred by him to South African residents while in South Africa.

In those circumstances he contends that he ought not to be assessable in respect of the dividend here in question, paid by a South African company and which has never left South Africa, because he has neither received it in any real sense nor is able to obtain any benefit from it at least at the present time.

The dividend in question amounts to the sum of $52 and was declared on shares held in the South African company, Selected Mining Holdings Ltd. It is not in dispute that in the relevant year of income a dividend was declared on those shares entitling the holder to the sum of $52 but the taxpayer contends that on two distinct grounds he is not liable to have that dividend included in his assessable income pursuant to sec. 44(1) of the Income Tax Assessment Act. Sub-section (1) of that section, so far as is presently relevant, provides that the assessable income of a shareholder in a company shall, if he be a resident, include dividends paid to him. The taxpayer contends both that he is not properly to be regarded as a shareholder in relation to Selected Mining Holdings Ltd. or, if he is, that the dividend in question was not ``paid to him''.

Before examining these contentions, upon which the success or failure of this appeal must depend, I should refer briefly to a distinct argument urged by the taxpayer; namely that he was not the owner of the shares or, for that matter, of the dividends declared on them. He contended that so extensive are the powers which, lawfully or unlawfully, the South African authorities have asserted in respect of these shares that there remains to him no such rights as might properly be classed as ownership. He describes himself as being deprived of the whole benefit of the shares, as indeed appears to be the present position, and argues that whatever nominal interest he might have in the shares is wholly illusory. However, the taxpayer's liability to Australian income tax in respect of the dividend in question does not depend upon any general concept of his ownership of the shares in question but rather upon whether he is, in respect of them, the shareholder and whether there has been a payment to him of the dividend. The legislation does not employ the concept of ownership as an indicia of liability and it will not advance the taxpayer's case to enquire as to the extent to which, if at all, it is appropriate to describe him as owner of these shares.

I am satisfied on the evidence that the taxpayer is a shareholder for the purposes of sec. 44(1) of the Act in relation to the relevant shares. The word ``shareholder'' is defined in sec. 6(1) of the Act as including a member and the taxpayer's own evidence suggests that he still remains the registered holder of these shares and a member of Selected Mining Holdings Ltd. Certainly the taxpayer has not satisfied me that he is not the shareholder in relation to these shares.

It appears from the evidence of the taxpayer that a holding company in which he

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was personally interested held the relevant shares in that company for many years before his emigration and that at some stage before he left South Africa those shares were transferred to him by that holding company so that he became the shareholder in respect of them.

It was said that the South African authorities had, and may have exercised a power to cause the shares to be transferred to a third party, in this case the Standard Bank of South Africa. Certain regulations of the Republic of South Africa entitled Exchange Control Regulations 1961 were in evidence before me but these, as the parties agreed, throw little light upon the legal situation. However the taxpayer said in evidence that, as he understood the position, an application would have to be made to a South African Court and an appropriate order obtained before any shares standing in his name could, without his concurrence, be transferred to another party and that he was not aware of any such application having been made in relation to his shares in Selected Mining Holdings Ltd. Accordingly I reject the submission that, on the evidence, the taxpayer is not now the holder of these shares.

The second ingredient necessary to make the amount of the dividend assessable in the taxpayer's hands is that it should be paid to him.

For the Commissioner, reliance was placed both upon the definition of ``paid'' in sec. 6(1) of the Act and upon the terms of sec. 19 of the Act. Section 6(1) contains a definition of ``paid'' as follows -

```paid' in relation to dividends includes credited or distributed.''

In the present case it appears to me that this definition of ``paid'' in no way assists the Commissioner. There is here, on the evidence, no suggestion of the company having credited the taxpayer in its books with the amount of the dividend nor has there been any distribution in specie by the company in his favour. What has happened is, instead, that there has been an outright payment by the company, no doubt effected by cheque, of the amount of the dividend to a bank in some way identified with the taxpayer.

Section 19 of the Act was also relied upon by the Commissioner as making sec. 44(1) applicable to the present case. Section 19 provides as follows -

``19. Income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalised, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs.''

It is to be noted that sec. 19 speaks in terms of the deriving of income and operates to deem income to have been derived in certain circumstances. It does not. I think, affect the operation of sec. 44(1), which is not concerned with the derivation of income but rather with the designation as assessable income of those receipts which take the form of dividends paid to a taxpayer. For that reason I am of the view that sec. 19 adds nothing to the Commissioner's argument based upon sec. 44(1). The Commissioner sought also to call in aid sec. 19 independently of sec. 44(1) and to rely upon it as rendering the dividend assessable income under sec. 25(1)(a). This is, however, a quite distinct argument which only becomes material if the Commissioner should fail upon his primary contention based upon sec. 44(1).

In my view, without the aid of sec. 6(1) or sec. 19 and basing his case upon sec. 44(1) alone, the Commissioner was correct in assessing the dividend to tax in the hands of the taxpayer on the footing that it was a dividend paid to him as shareholder.

The facts appear to be that the amount of this dividend has been paid by Selected Mining Holdings Ltd. to the credit of an account maintained in South Africa at the office of the Standard Bank of South Africa. That bank had long been the bank of the taxpayer but once he ceased to be a resident of South Africa his account or accounts with that bank were, as he described it, ``blocked'' and there are now maintained by that bank in respect of the taxpayer two distinct

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accounts, each blocked, an income account and a capital account. It is into the blocked income account that this dividend was paid. As previously mentioned the taxpayer has little or no control over or access to moneys in this account but the bank does, from time to time, inform his South African accountants of the amounts standing to the credit of this account. It is in those circumstances that the question arises whether the dividend was ``paid to him'' within the meaning of sec. 44(1).

The position was described by the taxpayer in the course of his answers to two questions in cross-examination; he said:

``I had a separate account with the Standard Bank before I emigrated: that was blocked and to the blocked account they are now debiting and crediting various items without any reference to me, without any signature, without my being consulted in any way.''

and again

``It is a matter of administrative convenience that the exchange control authorities of the Reserve Bank nominate one of the commercial banks and usually the one where the person who migrates has his funds. They advise that bank immediately to block the account and then carry on under instructions from the Reserve Bank or the exchange control authorities.''

That this ``blocked'' account still remains the taxpayer's account, in the sense that he has title to moneys standing to its credit, is shown by his evidence that should what he regards as a vendetta against him by the South African exchange control authorities come to an end, as it may, the income in the blocked account would be released to him; in other words, the account would cease to be blocked and could once again be operated on by him.

Again the taxpayer's account of his efforts to use some blocked funds in one of the blocked accounts to set up a trust fund for the children of his deceased brother point in the same direction. He spoke, accurately enough no doubt, of negotiations with the authorities ``with a view to seeing if they would release some of my blocked funds'' for this purpose; in the outcome his application was refused, he being told that ``the funds were frozen and blocked and that was that''. It seems clear that the funds were regarded as his but that he was denied the right to use them.

The taxpayer is still continuing his negotiations with the authorities, as yet without success, in an endeavour to obtain the right to deal with the amount standing to the credit of the blocked income account. He is apparently taxed in South Africa on income credited to that blocked income account on the footing that it is his income and assessable to South African tax accordingly and he has not sought to challenge this view in South Africa, believing it to be ``a waste of time''.

Moneys paid to the bank and credited to the blocked income account accumulate there until they reach a certain sum when they are then placed by the bank on fixed deposit bearing interest, which interest is in turn credited to the blocked income account. What the taxpayer described as the normal pattern, as he knew it, applicable to the accounts of former residents of South Africa was for them to be allowed to transfer abroad income as it accrued; his treatment, he said, was abnormal for reasons which he could not explain other than by reference to the discriminatory exercise against him of wide discretionary powers vested in the authorities.

The foregoing goes far to establish that the moneys standing to the credit of the blocked income account are his moneys and that it is his power to deal with them rather than his title to them that is restricted. On this view of the facts the dividend moneys here in question must be regarded as having been paid to the taxpayer when paid to the bank and credited to the blocked income account.

The taxpayer tendered in evidence before me a letter of recent date addressed to him from the bank in which he was advised that -

``In terms of Exchange Control Regulations regarding your Non-Resident Blocked Accounts, we regret to advise that you are precluded from drawing income which accrues in respect of dividends declared on any of these shares.''

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This provides additional evidence of his title to dividends and of the fact that it is only his power to withdraw dividend moneys paid into the bank which is restricted.

It is the taxpayer in these proceedings to satisfy me that the Commissioner's assessment is erroneous in so far as it treats the dividend as assessable. I am not so satisfied; the evidence has rather produced in my mind the contrary view. The fact that, as is apparently the case, the taxpayer cannot, because of the actions of the South African authorities, draw on the blocked income account is irrelevant to the question of liability to Australian income tax.

I accordingly dismiss this appeal with costs.