Shell Co of Australia Ltd v Federal Commissioner of Taxation

(1949) 78 CLR 439
23 ALJ 370
9 ATD 21

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(Judgment by: Dixon J)

Between: Shell Co of Australia Ltd
And: Federal Commissioner of Taxation

Court:

Judges: Latham CJ
Rich J

Dixon JMcTiernan J
Webb J

Subject References:
Income tax (Cth)

Judgment date: 4 August 1949

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Judgment by:
Dixon J

This case concerns the inter-relation of the further tax upon a public company's undistributed income with the provision relieving against double taxation which for the future has been superseded by Part IIIB. of the Income Tax Assessment Act 1936-1948. What we are called upon to decide is at bottom the question in what order of priority s. 159 and s. 160C. of the Act of 1936-1944 are to be applied in ascertaining the final state of the account between a company and the Commissioner of Taxation in respect of taxation upon the company's profits or income. Section 159 provides for a rebate of tax to a taxpayer part of whose income has been taxed under the law of the United Kingdom and under the law of the Commonwealth. The relief from double taxation afforded by the rebate is based upon the assumption that the taxes to be borne by the taxpayer on the income under the Income Tax Assessment Act are ascertained and are paid or are due or payable. On this basis a rebate is calculated, which, when added to relief granted in the United Kingdom pursuant to a reciprocal arrangement between the governments of the two countries, should result in the final burden of the taxpayer being limited to the total amount of the taxes of the country whose imposition is the higher. (at p454)

Section 160c. relates to the calculation of that portion of the taxable income of a company which has not been distributed in dividends for purposes of the so-called further tax imposed on the undistributed income of public companies. For this purpose the undistributed income is ascertained according to the principle that from the taxable income of the company there should be deducted the dividends paid thereout, certain losses and the taxation borne by the income. (at p454)

The commissioner claims that to give effect to the policy of this provision as well as to the language in which it is expressed it is necessary to take into account the rebate given by s. 159 and to treat it as reducing the amount of the deductible taxes before you can find the undistributed income. On the other side the taxpayer says you must fix finally the amount of the further tax upon the undistributed income and, to that end, the undistributed income itself, before you can know what ought to be the rebate. Stated in another way it is the contention of the commissioner that only the net amount required for taxation should be deducted in ascertaining the distributable fund in the hands of the company taxed as undistributed profit; it is the taxpayer's contention that the rebate is an adjustment made after its total ultimate liability in two countries for the relevant taxes has been determined for the purpose of relieving it of the consequence of double taxation and that the rebate cannot be an integer in determining what is its total tax liability. (at p455)

The taxes which are deductible from a company's taxable income for the purpose of arriving at its undistributed income liable to further tax include ordinary income tax, super tax and war-time (company) tax of the Commonwealth and also the taxes upon the income payable abroad, though not, of course, the further tax itself. But into the calculation of the amount of the rebate the further tax enters, while the war-time (company) tax does not. Section 160C. in dealing with further tax gives the taxpayer a choice as to the deduction of ordinary income tax and super tax and war-time (company) tax. The choice is between on the one hand deducting from the taxable income of the accounting period those taxes which he pays during the accounting period and on the other hand deducting the taxes payable in respect of the income of the accounting period. The choice does not extend to taxes abroad, or when there was State income tax, to State taxes. In those cases the taxpayer must deduct what he pays during the accounting period, and of course, taxation he pays during an accounting period can only have been assessed in respect of the income of past years. (at p455)

In the present case the taxpayer company elected in favour of deducting the Federal taxes that were payable in respect of the income of the accounting period instead of the Federal taxes that were paid during that period. (at p455)

The taxpayer is a company incorporated in the United Kingdom, where presumably its residence is to be found. At all events the income it derived from Australia was included in the income as assessed to United Kingdom income tax for the year ended 5th April 1945. The assessment appears to have been based on the accounting period of twelve months ending 31st December 1943, which is that with which the case before us is concerned. Included in the assessment was an amount of income amounting to Stg. 1,418,467 pounds which was included in the Australian assessment. Upon this amount United Kingdom tax was levied at the rate of 10s. in the pound, but pursuant to the Finance Act 1920 (10 & 11 Geo. V. c. 18) as amended by the Finance Act 1927 (17 & 18 Geo. V. c. 10) Schedule 5 II., relief was granted of half the tax or at the rate of 5s. in the pound. As a result the United Kingdom tax borne was 354,616 pounds 15s. In Australia, before the rebate granted under s. 159 was brought into account, assessments of the same income had been made, and amended, which fixed upon the taxpayer the following liabilities for tax: -

These formed the Federal taxes payable in respect of the income of the accounting period to be deducted from the taxable income in ascertaining the portion of the income of the taxpayer that had not been distributed in dividends: see s. 160C. (5). To the figure of 1,001,212 pounds it was necessary to add a sum of 18,206 pounds for State taxation paid during the accounting period and a sum of A50,822 pounds representing an amount paid within that period for United Kingdom tax: see s. 160C. (1). These additions brought the total to be deducted on account of taxes payable or paid to 1,070,240 pounds. In dividends 1,000,000 pounds had been distributed. The difference between the total of these two sums and the taxable income, 2,380,011 pounds, was 309,771 pounds and this amount formed the portion of the taxable income of the company which had not been distributed as dividends for the purposes of s. 160B., which provides for the levy of the further tax. The rate of further tax was 2s. in the pound. An assessment was made accordingly upon the taxpayer company for further tax in an amount of 30,977 pounds. (at p456)

Armed with these figures the commissioner turned to the claim for a rebate under s. 159. The purpose of insuring that between the two countries the taxpayer shall be exposed to an ultimate burden no greater than the total amount of taxation of the country making the higher imposition is effected by each country relinquishing to the taxpayer such a rebate or measure of relief that when the two are combined they will equal the total amount of taxation of the country making the lower imposition. On the Australian side, when as in the present case the Commonwealth rate is not greater than the British rate, the rebate granted by the Commonwealth is obtained by applying to the income doubly taxed a rate which represents the excess of the Commonwealth rate over half the British rate. "Commonwealth rate" is an expression with a defined meaning. It means the rate ascertained by dividing the total amount of the income tax paid or payable by the taxpayer (after the deduction of all rebates other than the rebate granted by s. 159) by the amount of the total taxable income in respect of which the tax paid or payable under the Income Tax Assessment Act has been charged for that year: s. 159 (3) (a). It will be noticed, and it is a point of no small importance, that the further tax forms part of the income tax making up the total amount of income tax paid or payable for the year by the taxpayer. In this case the figures making up the total tax are: -

(at p457)

The taxable income is 2,380,011 pounds.

Accordingly, in terms of the definition the Commonwealth rate is

863,061 / 2,380,011


in the pound or 87.0309 pence. As the British rate is 10s. in the pound the excess of the Commonwealth rate over half the British rate is 27.0309 pence. The amount doubly taxed, as already stated, is Stg. 1,418,467 pounds, which is A1,773,084 pounds. Applying the rate of 27.0369d. to this figure, a rebate is produced of 199,701 pounds. The taxpayer company claims that here the matter ends. It is the final item in the account for the year between the commissioner and the company where it should be placed to the company's credit. But this was not the commissioner's view. He at once treated the grant of the rebate of 199,701 pounds by way of relief against double taxation as a reason for re-opening the assessment to further tax. He amended the assessment, under s. 170, notwithstanding that where there has been a full and true disclosure of all the material facts no amendment increasing the liability of the taxpayer in any particular can be made except to correct an error in calculation or a mistake of fact. It is hard to see any such error or mistake, but no objection has been taken by the taxpayer on that score. The amendment made consisted in reducing by 199,701 pounds the amount of the deductions previously made from the taxable income on account of ordinary income tax (713,334 pounds) and super tax (118,750 pounds) which amounted together to 832,084 pounds.

The reduction brought the amount of these deductions down to 632,383 pounds. But, as will be recalled, there was also a deduction of war-time (company) tax amounting to 169,128 pounds. Now under the War-time (Company) Tax Act 1940-1944 (s. 3, definition of "income tax" and "taxable profit" par. (a) and s. 18) in the assessment of war-time (company) tax there is to be a deduction on account of ordinary income tax but not on account of super tax or further tax. Super tax, however, may form a rebate from the tax: s. 18. The commissioner in like manner recalculated the war-time (company) tax by bringing into account the rebate of 199,701 pounds to diminish the deduction of income tax. By doing so he increased the war-time (company) tax by 112,698 pounds. This figure he brought into the assessment of further tax on undistributed income that he was amending. He necessarily brought it in as an increase in the amount deductible on account of war-time (company) tax and added it to the former amount of 169,128 pounds, making the total deduction for that tax 281,826 pounds. The revised total deductions on account of Federal taxes (ordinary income tax, super tax and war-time (company) tax) thus became 914,209 pounds instead of 1,001,212 pounds, a diminution of the deduction by 87,003 pounds. At a rate of 2s. in the pound this meant an increase in further tax of 8,700 pounds 6s. (at p458)

Now the basis upon which the 199,701 pounds was taken into account as decreasing the deduction of ordinary and super tax was that it was a repayment, refund or recoupment, or a reduction, of these taxes. Yet if this was so at all, it was as much a repayment, refund, recoupment or reduction of the third of the three taxes taken into account in ascertaining the rebate, namely, the further tax itself. Why should the whole amount be thrown against ordinary income tax and super tax? If it is correct that the rebate is not a relief in gross because of double taxation but a definite repayment in reduction of the specific Federal taxes taken into account it must operate as a reduction of each and every pound of the taxes taken into account in calculating the rebate. In the same way, in recalculating the war-time (company) tax, what warrant was there for treating the whole 199,701 pounds as a reduction of ordinary income tax, as apparently was done? If the reasoning were accepted which gives the rebate such a character, surely it involves the consequence that a proportionate part of the rebate is attributable to the super tax and another proportionate part to the further tax. (at p458)

In the assessment in the United Kingdom of the income taxable in that jurisdiction, a deduction was made of the Australian wartime (company) tax at the sterling equivalent of A169,128 pounds. If that figure is to stand increased by 112,698 pounds in the Australian assessment to war-time (company) tax, namely, to 281,826 pounds, by reason of the commissioner taking the rebate of 199,701 pounds in to account, then it would seem that British tax should be re-assessed, that is if the law of the United Kingdom allows of the process. It is evident that such a re-assessment would lead to a reconsideration of the assessment of further tax and, if carried far enough, might require a reconsideration of the rebate not only because of the increase in further tax but because of the alteration of the amount of income doubly taxed. These consequences, however, of the re-assessment of war-time (company) tax and of further tax by taking the rebate into account need be mentioned only as illustrations of the impracticability of the adoption of such a course. (at p459)

There is a number of considerations which show that the calculation of the further tax must precede the calculation of the rebate and that the application of s. 159 is necessarily the final step. Section 160C. must be applied in priority and its operation must end before s. 159 can be used to ascertain the rebate. In the first place, the definition of "Commonwealth rate" in s. 159 (3) (a) is essential to the ascertainment of the rebate. Until all the factors upon which that definition depends are available the rebate cannot be determined. One factor is the total amount of income tax paid or payable for the year by the taxpayer. That factor cannot be obtained until, not only the ordinary tax and the super tax, but in the case of a public company the further tax on undistributed income, is ascertained. If the commissioner were right when the further tax was assessed there would be a preliminary ascertainment of the Commonwealth rate of tax, and the rebate might then be provisionally calculated. No sooner would the rebate have been granted than it would be necessary to re-assess the further tax. As soon as the further tax was re-assessed it would be necessary to recalculate the rebate in order to take the new amount of further tax into the calculation of the rebate. The consequent increase in the rebate would result in a second re-assessment of the further tax. So a never ending reciprocation would be set up between the operation of s. 159 (3) (a) and (5) and s. 160C. (5), a circulus inextricabilis. This is of course a reductio ad absurdum and should be enough to establish the priority in application of s. 160C. (at p459)

An attempt, however, was made to answer the argument by the use of the bracketed words in s. 159 (3) (a): viz. "(after the deduction of all rebates other than the rebate granted under this section)." It was said that once a rebate calculated under s. 159 had been deducted for the purpose of s. 160C. from the Federal taxes considered as deductions from taxable income under s. 160c. (1) or (5) so that the resulting undistributed income was increased and the tax thereon correspondingly increased, it would offend against the words "other than the rebate granted under this section" if the increased amount of further tax were used to recalculate the rebate. This argument appears to me simply to be a confusion. Nothing is deducted on the supposed second invocation or application of s. 159 (3) (a). More further tax is added - that is all. It is true that the increase in the further tax is the result of the decrease of a deduction under s. 160C. It is true that the decrease is caused by deducting from the deduction previously allowed from the taxable income under s. 160C. the rebate which under sub-s. (1) of s. 159 is calculated by means of sub-s. (3) (a). But that is nothing like a deduction of rebate from the tax paid or payable as a factor in the calculation directed by s. 159 (3) (a). In the next place it is proper to compare s. 27 of the Finance Act 1920 with s. 159. The comparison makes it plain that the two legislatures were making provisions which were intended to operate after the full liability of the taxpayer in respect of the income common to both fields of taxation had been completely ascertained.

At that point the legislation would apply and in effect relieve the taxpayer of the lower of the two liabilities, by the combined effect of rebates from both jurisdictions. It is at variance with the policy of the enactments for the very grant of the rebate itself to set the wheels of assessment revolving again. In the third place s. 159 (6) fixes the point from which time begins to run limiting the period for claiming the rebate and fixes it as the date upon which the tax in respect of which the rebate is sought became due and payable. That indicates that the rebate is the result of taxes finally imposed. The period limited is six years. Yet under s. 160C. (1) (iii.) the period for distributing the dividend is at most nine months after the close of the year of income, that is apart from any extension allowed because of the war. That is still another indication that rebates under s. 159 have nothing to do with s. 160C. Some years might well elapse before a rebate could be calculated and granted.

In the fourth place the rebate under s. 159 is not specifically related to any of the taxes involved. It is not a rebate in an assessment. There are many rebates to be made in a taxpayer's assessment because they are concerned with his liability to tax. See for example ss. 160, 160AA., 160AB., 160ABA., 160AE., 160AG., 160AH., and notice how s. 159 is excluded by s. 160AF.: see too s. 160AD. (a). The rebate under s. 159 is of an entirely different kind and is granted by way of relief because of the liability to several Commonwealth taxes and the British tax. It is intended as an equalization of what would otherwise be their combined effect. If the view were taken that the rebate related to Federal taxes specifically the difficulty, already mentioned, would arise of knowing how the rebate is to be apportioned among the several Federal taxes.

These considerations appear to me to be strong to show that the operation of s. 159 was intended to be ultimate and therefore postponed to the operation of s. 160C. in assessing further tax on undistributed income. But the strenth of the argument to the contrary is to be found in the language of s. 160C. (1) and (5). Section 160C. (1) (i) which represents the original form of the provision, authorizes the deduction of those taxes only which are "paid in the year of income" and it provides that the amount of the taxes so paid allowed as a deduction shall be less any refund received in the year of income of any tax to which the paragraph refers. This no doubt reflects a policy of allowing only the net amount of the tax by which the company's funds are depleted. The decision of the majority of this Court in D. & W. Murray Ltd. v. Federal Commissioner of Taxation ^[F2] and the view that prevailed in an equally divided Court in W. & A. McArthur Ltd. v. Federal Commissioner of Taxation ^[F3] are relied upon to show that a payment recouped is no payment. Section 160C. (5), which gives the election availed of by the taxpayer company in the present case, came in by an amendment of 1942 (No. 50). There the expression is "payable under this Act . . . in respect of the income." It is said, and no doubt with much truth, that sub-s. (5) did not mean to alter the description of things to be deducted beyond substituting at the election of the taxpayer taxes attributable to the income earned in, for taxes collected during, the accounting period. If a tax could not be considered paid when, though payment had been made, a rebate had afterwards been granted under s. 159, neither could a tax remain payable after such a rebate had been granted. (at p461)

In further support of the conclusion that a rebate under s. 159 destroyed payment and payability alike in the case of taxes taken into account in calculating the rebate, the supposed policy of s. 160C. was vouched. That policy was said to be to leave no net revenue of a company out of further tax unless it was disbursed in dividends or taxes or applied to recoup losses. As a broad statement it may be so. But in my opinion the argument from policy is answered by the consideration that it is a policy concerned with arriving at the taxation which gives rise to the rebate, that is to say, to whatever extent the same taxable fund is taxed in the United Kingdom. It is anterior to the rebate.

The argument from the use of the words "paid" and "refund" is of a different kind. It is one to which great weight must be given. For it has recourse to the first duty of a court of construction, namely, to stick to the text and to give effect to the intention the words express. The argument, however, leaves out of account two very important factors. The first is that, however literal and narrow, and however inflexible a meaning may be given to the word "paid," however large a meaning may be given to the word "refund," nevertheless the rebate granted by s. 159 is of such a character as not readily to respond to the test which would result. In R. v. Federal Commissioner of Taxation; Ex parte Sir Kelso King ^[F4] the Court examined the corresponding previous provision and decided that the particular rebate fell completely outside the process of assessment to tax. It was considered that the rebate by way of relief from double taxation presupposed the complete ascertainment of the taxpayer's liability to tax. (at p462)

Though this decision goes no further than putting the rebate as something subsequent to and therefore outside the ascertainment of tax, it suggests the real nature of the rebate. The rebate is of course anomalous in its character because it arises from an attempt to compensate for the consequences of the exercise of a dual jurisdiction to tax the same fund. The association of the rebate with the Federal tax depends rather on causation than upon any question affecting liability. There is no factor in the calculation or ascertainment of Australian tax that gives rise to it. It is not connected with one Federal tax on income rather than another. When the rebate is applied to discharge the Federal tax outstanding, a payment is then affected. The amount of the assessment would not show a reduction, it would show a payment of tax. These are considerations which at least create a preliminary difficulty in saying that the grant of a rebate under s. 159 makes it no longer possible either to say that a tax already paid has not been refunded or to say that a tax unpaid is still payable, if the tax has entered into the calculation of the Federal rate. (at p462)

But there is a second answer to the argument. That answer is that the problem is not confined to the meaning of s. 160C. Sections 159 and 160C. must be reconciled. Plainly s. 159 presupposes that before it is invoked such provisions as s. 160C. have been exhausted. Almost as plainly when s. 160C. employs the words "paid," "refund" and "payable," it does not contemplate s. 159. These are general words directed respectively to the discharge of a liability to pay, to the refund of tax overcharged and to the existence of a liability. The considerations which point to the conclusion that the intention that s. 159 should be postponed in the order of the application of the provisions and s. 160C. should be applied in priority appear to be so much stronger than the intention to be found in the expressions referred to as to make it reasonably certain that they are inapplicable to a rebate under s. 159. For these reasons I think that the rebate of 199,701 pounds ought not to have been brought into account for the purpose of re-assessing the further tax under s. 160C. (5). (at p463)

In my opinion the questions in the case stated should be answered: - (1) Yes; (2) No; (3) Does not arise. (at p463)

The costs of the case stated should be costs in the appeal. (at p463)