Federal Commissioner of Taxation v Miller Anderson Ltd

73 CLR 341
1946 - 0404A - HCA

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(Judgment by: STARKE J)

Between: Federal Commissioner of Taxation
And: Miller Anderson Ltd

Court:

Judges: Latham CJ

Starke JDixon J

Subject References:
Taxation and revenue
War-time company tax
Accumulated profits
Averaging of accumulated profits over accounting period

Legislative References:
War-time (Company) Tax Assessment Act 1940 No 90 - s 24

Hearing date: ADELAIDE 20 September 1945; 21 September 1945; 24 September 1945
Judgment date: 4 April 1946

SYDNEY

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Judgment by:
STARKE J

Cases stated pursuant to the War-time (Company) Tax Assessment Act 1940, the Income Tax Assessment Act 1936-1941, and the Judiciary Act 1903-1940.

The main question is whether a sum of PD13,107 in round figures standing to the debit of "Profit and Loss Appropriation Account to 31st January 1935" in the books of the company on 1st February 1940 and on 1st February 1941 respectively, should be taken into account in computing the capital of the company employed in the accounting periods which ended on 31st January 1941 and 1942 respectively.

That depends upon the construction of s. 24 of the War-time (Company) Tax Assessment Act 1940-1941.

"The Profit and Loss Appropriation Account to 31st January 1935" in the books of the company shows a debit balance of PD13,107 in round figures, which was not carried forward into the profit and loss appropriation accounts of succeeding years. But a new profit and loss appropriation account described as "Profit and Loss Appropriation Account from 1st February 1935" was opened, which at 31st January 1941 showed a credit balance of PD20,548 in round figures. These two separate profit and loss appropriation accounts were rendered necessary in order to carry out an agreement between preference and ordinary shareholders, providing that profits from 1st February 1935 were to be used in a particular way.

The Commissioner claims that the amount of PD13,107 carried forward and at debit of the "Profit and Loss Appropriation Account to 31st January 1935" should be deducted from the sum of PD20,548 standing to credit of "Profit and Loss Appropriation Account from 1st February 1935" in ascertaining the capital employed by the company in the accounting period of twelve months which ended on 31st January 1942.

The War-time (Company) Tax Assessment Act 1940, s. 24, provides "the capital employed in any accounting period shall, for the purposes of this Act, be ascertained by adding the following amounts, namely: ... (b) accumulated profits, averaged over the accounting period, including amounts standing to the credit of the Profit and Loss Account at the commencement of the accounting period but not including any profit of the accounting period."

Accumulated profits are simply profits that are amassed or collected and not distributed, including, as the Act prescribes, amounts standing to the credit of the profit and loss account of the company.

A profit and loss account is, as Griffith C.J. said in Meares v Acting Federal Commissioner of Taxation ^[F20] , at p. 372, "an account showing the transactions of the business adventure during a given period," but as a matter of book-keeping, the account may be kept as a continuous account bringing forward the amounts of profit or loss, the result of operations extending over a number of successive periods. It is not the form of the company's accounts that determines its accumulated profits, but the true result of its operations. To say that the accumulated profits of the company at the commencement of the accounting period in this case were PD20,548 because that amount stood as at 31st January 1941 at credit of the "Profit and Loss Appropriation Account from 1st February 1935," although the company had incurred a loss of PD13,107 by the end of the balancing period in 1935, which was carried forward in a special "Profit and Loss Appropriation Account to 31st January 1935" for certain business purposes of the company, requires demonstration both as a matter of fact and of law. It was said that the sum of PD13,107 was capital that had been lost and should not therefore be taken into account in ascertaining the accumulated profits of the company. But the argument is untenable, for no part of that sum was written off capital or otherwise, but was carried forward in a special account as a trading loss. And the contention that the Act itself prescribes that the sum of PD20,548 standing to credit of the company in its "Profit and Loss Appropriation Account from 1st February 1935" must be treated as capital employed by the company in the relevant period, is equally untenable. The Act contemplates the ascertainment of profits that have been accumulated over an indefinite period and does not preclude the ascertainment of that amount by means of a continuous account of operations extending over any number of successive years. The cases of Hooper & Harrison Ltd (in Liquidation) v Federal Commissioner of Taxation ^[F21] , Sharp, Stevenson & Hare Pty Ltd v Federal Commissioner of Taxation ^[F22] , Stodart v Deputy Federal Commissioner of Taxation ^[F23] , and some other cases were referred to upon the argument of this case, but were decided under other Acts in different language and do not conflict, I think, with anything that has been said. Indeed, the present section appears to have been enacted in its present form to meet some of those decisions or the opinions expressed in them.

The subsidiary questions raised by question 2 do not require elaboration, for the questions and the answers to them explain themselves.

The balance sheets and profit and loss accounts of the company from 1st January 1935 disclose a credit balance as at 31st January 1940 of PD6,020 after dividend distributions, including a dividend of PD2,400 on preference shares for half-year to 31st July 1940. But if the sum of PD13,107 were debited against this sum the accounts would disclose a debit balance of PD7,087. Now the accounts of the company for the year which ended on 31st January 1941 disclose a profit of PD14,528 or, taking into account the debit of PD7,087, a credit balance of PD7,441 or the accumulated profits of the company which in truth were amassed in the year which ended on 31st January 1941. The directors recommended and the company in general meeting resolved that various dividends amounting to PD10,075 be payable on 31st March 1941 out of the profits of the year ended on 31st January 1941. Those profits, as already stated, were PD14,528, but that excludes the debit balance of PD7,087 which would have appeared in a continuous account of profit and loss the result of operations over a number of successive years. The profits in hand were short by PD2,634 of the amount required to meet the dividends, but it is clear, in these circumstances, that the sum of PD7,441, so far as it would go, was necessarily used in meeting the dividend for the year ended 31st January 1941. The sum of PD7,441 is averaged over the accounting period as explained in question 2 (c) (ii).

The case stated in relation to the assessment for the accounting period of twelve months which ended 31st January 1941 involves the same considerations, but the figures are not identical.

The questions in both cases should be answered as follows:

(1)

Yes;

(2)(a) and (b)

No;

(2)(c)(i) and (ii)

Yes.