Griffiths Hughes Pty Ltd v Federal Commissioner of Taxation

(1951) 84 CLR 13
25 ALJ 434
9 ATD 316

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(Decision by: Williams J)

Between: Griffiths Hughes Pty Ltd
And: Federal Commissioner of Taxation

Court:

Judges:
Williams JDixon J
McTiernan J
Webb J
Fullagar J
Kitto J

Subject References:
Taxation (Cth)

Judgment date: 2 June 1950

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Decision by:
Williams J

The following written judgment was delivered by: -

These are appeals by Griffiths Hughes Proprietaries Ltd., a company incorporated in the United Kingdom, from its assessment for war-time company tax in respect of the accounting periods ended 30th June 1941 and 30th June 1942. The appeals are from a decision of the Board of Review which confirmed the assessments of the respondent. The appeals come to this Court under s. 196 of the Income Tax Assessment Act 1936- 1940 which is one of the sections incorporated in the War-time (Company) Tax Assessment Act 1940-1942 by s. 34 of the latter Act. Under s. 196 there must be a question of law involved in the decision of the Board before this Court has jurisdiction to entertain the appeal. It was not contended that there was not such a question on these appeals. (at p15)

In order to state the question it will be necessary shortly to set out the material facts. The appellant is a holding company within the meaning of s. 3 of the War-time (Company) Tax Assessment Act with two subsidiary companies, E. Griffiths Hughes Ltd., a company incorporated in the United Kingdom, and E. Griffiths Hughes Pty. Ltd., a company incorporated in Australia. On 28th November 1941 the appellant duly elected under s. 17 of the Act to have its subsidiary companies treated as branches of the holding company. Section 17 (1) is in the following terms:

"A holding company may elect, in the manner and within the time prescribed, to have all its subsidiary companies treated as branches of the holding company and thereupon those subsidiary companies shall, for all the purposes of this Act, be treated as branches of the holding company and no separate assessment shall be made in respect of any of those subsidiary companies."

War-time company tax is imposed upon the amount by which the taxable profit as defined by the Act derived by any company exceeds the percentage standard. The taxable profit of a company is its taxable income of the accounting period less certain deductions. The percentage standard is an amount equal to the statutory percentage (in this case five per cent) of the capital employed or deemed to be employed during the accounting period. The capital employed is ascertained in accordance with s. 24 of the Act. The manner in which this section works has been discussed in Warner Bros. First National Pictures Pty. Ltd. v. Federal Commissioner of Taxation (1945) 72 CLR 134 and Bankers and Traders' Insurance Co. Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR 39 , and I shall not repeat what was there said. The capital in question is the commercial capital of the company and one of the assets constituting that capital can be the goodwill of the company. Section 24 (2) (e) of the Act provides, however, that where the asset is goodwill which has not been purchased by the company, the value of the asset shall be taken to be nil. (at p16)

In ascertaining the capital employed of the taxpayer in each of the accounting periods with which these appeals are concerned, the respondent valued the goodwills of the holding company and its subsidiaries at nil. The taxpayer objected to this, and the question whether the respondent was right was the question at issue before the Board of Review, and the question which the Board decided in favour of the Commissioner. The question of law on these appeals is whether on the evidence the Board of Review could have reasonably come to this decision. The true construction of s. 17 of the Act is also involved in this decision. (at p16)

A short history of the three companies is that the first company to be incorporated was E. Griffiths Hughes Ltd., which was incorporated apparently in 1912 and carried on in England for many years prior to 1934 the business of a manufacturing chemist and thereby established an extensive and profitable business in many parts of the world including Australia in its manufactured products, particularly in Kruschen Salts and to a lesser degree in Radox Bath Salts. The holding company was incorporated in 1934 and acquired the whole of the issued shares of E. Griffiths Hughes Ltd., the consideration being the payment to the shareholders in that company of E.1,000,000 pounds and the allotment to them credited as fully paid of 1,500,000 ordinary shares of 1 pound each (less seven subscriber's shares) in the capital of the holding company. At the time of this purchase the total of E. Griffiths Hughes Ltd.'s tangible assets exceeded the total of that company's outside liabilities by E.410,140 pounds. The difference between that amount and the amount of E.2,499,993 pounds, which the holding company paid for the shares in the operating company is E.2,089,853 pounds, or A.2,612,325 pounds, and it is claimed that this was the value of the goodwill of E. Griffiths Hughes Ltd. in 1934. (at p17)

It is contended for the appellant that either by the joint operation of the purchase of all the shares in E. Griffiths Hughes Ltd. by the holding company and its election under s. 17 of the Act, or alternatively by this election alone, the holding company purchased the goodwill of E. Griffith Hughes Ltd., that the value of the Australian goodwill in the accounting periods was 182,340 pounds, and that the respondent and the Board should have allowed this sum as part of the capital employed in these periods. If the goodwill was so purchased and this is its proper value the taxable profit of the taxpayer in the two periods would not exceed the percentage standard and both assessments should be set aside. The contention can be divided into two parts

(1)

was any goodwill so purchased within the meaning of s. 24 (2) (e) of the Act, and

(2)

if it was, what was its value in the accounting periods.

The second part only arises if the first part is answered in favour of the taxpayer and need only be dealt with in this event. (at p17)

One thing is clear and that is that although the holding company, by virtue of its shareholding in E. Griffiths Hughes Ltd., could have wound up the latter company and acquired its assets including its goodwill, it never exercised this power and allowed the latter company to continue in business as the operating company. In April 1931, E. Griffiths Hughes Ltd. had caused a new company to be incorporated in Australia, called Radox Ltd., and it has always held all the shares in this company. In October 1939 Radox Ltd. changed its name to E. Griffiths Hughes Pty. Ltd. and this company has carried on business under this name in Australia since this date. The business of the Australian company has been to manufacture and sell Radox bath salts. E. Griffiths Hughes Ltd. has been the registered holder in Australia since 1912 of the trademark "Kruschen" and since 1940, in addition to the manufacture of Kruschen salts in England and their sale in Australia, has by its agents been manufacturing Kruschen salts in Australia although part of the materials used in the manufacture still continue to be imported from England for this purpose. (at p17)

There is no doubt that E. Griffiths Hughes Ltd. and E. Griffiths Hughes Pty. Ltd., particularly the former company had in the accounting periods a valuable goodwill in Australia, and there is no doubt that in 1934 the former company had a valuable goodwill in Australia. But nothing occurred in 1934 which amounted to a purchase by the appellant of the goodwill of E. Griffiths Hughes Ltd. The appellant simply purchased the shares in this company and nothing more, and a shareholder has no proprietary interest either at law or in equity in the assets of the company. The present facts are altogether different from those adjudicated upon in Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR 257 . In that case the taxpayer was a new company formed for the purpose of bringing about an amalgamation between two existing companies, Sun Newspapers Ltd. and S. Bennett Ltd., by winding up those companies and acquiring their assets. Two methods were open to accomplish this object

(1)

for the new company to purchase the assets of the existing companies, and

(2)

for the new company to purchase all the shares in the existing companies and then to wind them up and take a transfer of their assets in specie in satisfaction of its rights as a shareholder.

The second method was adopted and carried out so that the new company acquired the assets of Sun Newspapers Ltd. including its goodwill before the accounting period, and it was held that in these circumstances, giving the word "purchase" the wide meaning of anything that is acquired for money or moneys worth, the new company had purchased the assets of Sun Newspapers Ltd. including the goodwill. That case does not therefore assist the contention of the appellant that it purchased the goodwill of E. Griffiths Hughes Ltd. in 1934 in the slightest degree. It is clear, in my opinion, that the appellant never did purchase this goodwill at any time or in any sense. The appellant never did any business itself. It remained a purely holding company, and a company that does no business is not a company which has a goodwill. The goodwill remained throughout an asset of E. Griffiths Hughes Ltd., as the appellant must have intended that it should when it allowed that company to continue to be the operating company instead of winding that company up and going into business itself. (at p18)

The appellant can only possibly succeed if on the true construction of s. 17 an election effects a fictional sale of the Australian assets of the subsidiary companies to the holding company. The holding company might then be deemed to be the purchaser of the Australian goodwills of its subsidiaries, and their values might then have to be brought into account as part of the capital employed of the taxpayer. But in my opinion this is not the true construction of s. 17. The section is, as Mr. Holmes said, purely a bookkeeping section. It does not effect any transfer of assets from the subsidiary companies to the holding company in fact or in fiction. The subsidiary companies are only to be treated as branches of the holding company for the purposes of the Act, so that all the companies shall be assessed for war-time company tax as one company instead of each company being separately assessed. The purposes of the Act were to ascertain whether companies were making what the legislature considered to be excessive taxable profits on the capital employed in war-time, and to impose an additional tax on these profits.

When s. 17 allows a holding company to treat its subsidiaries as branches for the purposes of the Act, it does not mean that the subsidiary companies are to be treated as disincorporated and their separate entities merged in that of the holding company. Each company still remains a separate company for the purposes of the Income Tax Assessment Act and each company is still entitled to deduct from its taxable income ascertained under that Act the items defined by s. 3 of the War-time (Company) Tax Assessment Act in order to ascertain its taxable profit. But the business carried on by the subsidiary companies are to be treated as part of the business of the holding company so that the taxable profits if any of each company, having been separately ascertained, are to be added together and treated as the taxable profit of the holding company, and the capitals employed of each company, having been separately ascertained, are to be aggregated and treated as the capital employed of the holding company. The holding company is then only liable to be assessed for war-time company tax if the total taxable profit exceeds the statutory percentage on the total capital employed.

The conception of one company carrying on business not on its own account but as the mere agent or branch of another company is by no means novel: Smith, Stone & Knight Ltd. v. Birmingham Corporation [1939] 4 All ER 116 and the cases there cited: In re Coutinho Caro & Co. (1918) 2 Ch 384. The position that would arise where one or more of the companies has no taxable income but makes a loss in the accounting period was not argued and I express no opinion upon it, but it would seem to be consistent with the scheme of the Act that such a loss should be deductible from the taxable profits of the other companies. The section does not cause the goodwill of any of the companies to become an asset which has been purchased unless any of the companies has a goodwill which that company has in fact purchased.

The appellant has never purchased the Australian goodwill of E. Griffiths Hughes Ltd. for it has never purchased any of the assets of that company but only purchased its shares. Nor have the subsidiary companies ever purchased any Australian goodwill, for they never purchased the goodwill of any existing Australian business but commenced from scratch and their present goodwill is attributable and attributable only to the progress which they have since made in their respective businesses. (at p20)

In my opinion therefore the Board did not come to a decision not reasonably open on the evidence. On the contrary, it came to the only decision which was reasonably open on the evidence. (at p20)

For these reasons I must dismiss the appeals with costs. (at p20)

From that decision the appellant appealed to the Full Court of the High Court. (at p20)

G. E. Barwick K.C. (with him N. H. Bowen), for the appellant.

For present purposes, the holding company holds the whole of the shareholding of the operating company, E. Griffiths Hughes Ltd., the English company, and that company holds the whole of the shareholding in the Australian company, so that by virtue of the definition of "holding company" in s. 3 of the War-time (Company) Tax Assessment Act 1940-1942, the holding company, indirectly through the operating company, controlled the Australian company. Thus both the operating company and the Australian company were subsidiaries, by definition, of the taxpayer, the holding company. The question which arises is: How is s. 24 of the War-time (Company) Tax Assessment Act to be operated in the case of a non-resident holding company which has elected to treat its subsidiaries as branches? One way of determining that question is to use the holding company's balance sheet for the purpose of taking out the items (a), (b) and (c) of s. 24 (2) of the Act, not seeking to make any adjustments of them upwards or downwards by the use of par. (d) and sub-s. (1), and regarding (iii) as not requiring any deduction in respect of common capital in respect of the investment in the subsidiary company. That results in an aggregate sum.

To ascertain, as required by Bankers and Traders' Insurance Co. Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR 39 , whether that is capital employed in Australia, the ex-Australian employment is determined, prima facie, by finding the ex-Australian assets and the remainder is capital employed. Section 24 (3) is inapplicable because of the election. A second way is to take (A) item (a) of s. 24 (1) from the consolidated balance sheet of the holding company and subsidiaries; (B) the paid up capital of the holding company; (C) item (b), that is, the consolidated accumulated profits of the holding company and subsidiaries and branches - item (c), though taken from the same consolidation, would be only the reserve of the holding company because it is on the issue of the principal capital. It is not sought in this computation to make any adjustment through (d) and (i) of what is really item (b). An upward or downward movement by the use of (e) or (i) is not sought; (ii) is inapplicable and (iii) does not call for any deduction because now, by reason of the consolidated balance sheet, there is not any capital invested in any subsidiary, it is all one concern.

Having got the aggregate the Bankers and Traders' Case (1946) 73 CLR 39 is applied by ascertaining what is the ex-Australian employment of capital. The ex-Australian net assets are taken and that gives the net sum. In each of those instances goodwill or lost capital, whichever it may be, is not regarded as apportionable, and so the whole of the difference is claimed as capital employed. As an alternative on that point, if the true view be that the employment of the goodwill is apportionable as between Australia and ex-Australia, then in the evidence the method of apportionment is spoken of. If the capital be above 150,000 pounds then there is no tax. On the only material before the Court there would be 182,340 pounds of goodwill referable to this country. The third way of presenting the matter is that the items for s. 24 (1) (a), (b) and (c) are taken from the holding company's account alone, the taxpayer's account alone. That being a holding company, there is a very small profit, there is a reserve of some 125,000 pounds created out of premiums on issued capital and there is 2,500,000 pounds capital assets consisting predominant in the shareholdings now in the subsidiaries.

So there are not any assets in the accounts of the company to which (d) or (i) would apply except in that way. To add the amounts of capital employed together is to deny the whole basis of the statute, which provides that on election there is only one taxpayer and one capital employed. The Commissioner has left those subsidiaries as separate operating taxpaying companies, taken their separate capitals employed, added them together, and added together their income from taxable profits, so as to arrive at the result. It is not the correct view that although the subsidiaries are to be treated as branches, they must be regarded as retaining their entire, distinct, corporate entity and their separate accounts, separate capital, & c. Applying, in the first instance, s. 24 to the balance sheet of the holding company, there should be taken the first item (a) 2,500,000 pounds, that is the capital paid up in money. The accumulated profits should be 4,446 pounds; the reserves out of premiums on shares would be 25,000 pounds. In the first method there would not be any use for (d), because there was not any question of any asset in the balance sheet that required adjustment one way or the other, according to the section.

So that the only question that arises in the first way of putting the matter is whether, having in mind the election, s. 24 (3) could be used and then could be deducted the capital invested in the subsidiary, which is now to be treated as a branch. In Carpenters Investment Trading Co. Ltd. v. Federal Commissioner of Taxation (1949) 79 CLR 341 there was a question whether a dividend should be included or whether there should be brought into account on election, profit of the subsidiary. Upon an election the branch becomes part of the business of the taxpayer and the taxpayer cannot logically be regarded as having a shareholding in his own business. The effect of the election is to remove the indirectness of the ownership of the assets and to make them notionally direct (Carpenters Investment Trading Co. Ltd. v. Federal Commissioner of Taxation (1949) 79 CLR, at p 350). In the application of s. 24 to the case of a holding company which has elected to treat its subsidiaries as branches, it is not possible to make a deduction under s. 24 (1) (iii) because by hypothesis the investment in the subsidiary must be ignored.

The first way of approaching this matter is whether on the material shown the whole of the capital except the amount of the value of the actual tangible Australian assets must be deemed to be employed outside Australia. The question is, following the decision in the Bankers and Traders' Case (1946) 73 CLR 39 , is it shown that all but 7,000 pounds - the Commissioner's figure - of the capital was employed outside Australia? To get that position on the figures the Commissioner would have to treat the gross value of the assets abroad as representing capital employed abroad, not the net value. The next step is to regard the whole of the goodwill of the company as representing capital employed outside Australia. The net assets must be taken. There are Australian assets and ex-Australian creditors, and the right step is to take the net assets as representing the employment of capital abroad. The first contention on s. 24 (1) (a) is limited to 2,500,000 pounds; under s. 24 (1) (b) there is taken 4,446 pounds, which is the balance in the profit and loss account at the commencement of the accounting period; under s. 24 (1) (c) there is taken as share premium account in the balance sheet, 25,000 pounds; and the operation of s. 24 (1) (d) is excluded simply because, in point of fact, there is nothing in the balance sheet to which it could apply.

Thus there is the total of (a), (b) and (c); no application, in fact, in this case on this submission of (d) and (i); no application of (ii), and (iii) is not useful to exclude shareholding in capital invested in the subsidiaries. Lost capital is treated as capital employed (Bankers and Traders' Insurance Co. Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR, at pp 57, 58, 61-63; Federal Commissioner of Taxation v. Adelaide Electric Supply Co. Ltd. (1950) 83 CLR 413 , at pp 417, 423.

A deduction in relation to the capital in the subsidiaries cannot be made under (iii). That is the right step to take to ascertain whether any of that capital is employed ex-Australia. The residue should be treated as employed in Australia including all lost capital. For the purpose of applying the decision in the Bankers and Traders' Case (1946) 73 CLR 39 regard should be had to the net assets abroad. A question which arises is: Has it been shown that the whole of that capital which is said to be represented by goodwill was employed abroad? Section 17 should be construed as relating to subsidiaries which would otherwise be subject to the Act, but if not so construed, and they were all brought in, s. 24 (1) (ii) would probably exclude their assets from the capital of the company. Upon the ascertainment of the balancing figure representing the difference between the aggregate sums found by the use of s. 24 and the value of the external assets, it cannot be said in point of law or fact in this case, that none of that capital was used in Australia, that is if it be designated goodwill it cannot be said that none of the goodwill was employed in Australia.

The idea of s. 17 is that a holding company is one which, having the ownership, has chosen to own the assets of the subsidiary as it were by derivation through shareholdings, or, in other words, it has chosen that legal structure for the control of the assets of the subsidiary. The whole scheme of s. 17 is to allow the holding company to reverse in some sense the deliberate policy it has adopted of holding the assets of the subsidiary by election through the holding of them, and if it holds them by holding the shares, one of the purposes of not having and not operating the local assets by doing it through holding companies may very well be to put itself beyond the reach of local tax as far as possible. The second way the matter may be approached is to treat the balance sheet as the consolidated balance sheet bringing the three balance sheets into harmony in one consolidated sheet eliminating items like the holding, subsidiaries, & c.

There should be taken the paid up capital, shown in the sheet as 2,500,000 pounds; the share premium account - the capital reserve - 13,634 pounds; the general reserve, 180,000 pounds; the profit and loss balance at the opening period, 6,917 pounds; and the reserve in respect of assets in certain European countries, 35,550 pounds; the total of these items being 2,761,101 pounds. By so doing there would have been done the sum of (a), (b) and (c) of s. 24 (1) in relation to the consolidated balance sheet. Nothing is brought in under (d) and there is nothing that can be taken out under s. 24 (1) (i), nothing to which s. 24 (1) (ii) applies. Section 24 (1) (iii) has no application, and the sole problem remaining is whether there was any ex-Australian employment of that sum of 2,761,101 pounds. It cannot be said that the sum, the net assets, was not employed in Australia, or that it was wholly employed outside Australia. If it was not wholly employed outside Australia then the employment of capital in that intangible area cannot be apportioned in that way and there is not any room for any apportionment. (at p24)

The third way of approaching the matter is that if, contrary to the above submissions, the shareholding in the subsidiary should be deducted under s. 24 (1) (iii) then the appellant is entitled to treat the goodwill as included under s. 24 (1) (d), in the first place, for its full purchase price of 2,089,000 pounds sterling or, alternatively, for the aliquot portion of it, said to be referable to the Australian goodwill, namely 182,000 pounds approximately. In the event only of s. 24 (1) (iii) being operated against the appellant, to deduct the amount of the investment in the subsidiaries, the argument is that upon election the separate corporate entity or existence of the subsidiaries must be disregarded and their assets regarded as assets directly owned by the taxpayer. By s. 17 the holding company is allowed to treat the matter as if it had originally acquired the shares rather than merely the shares of the company which holds the assets. The taxpayer purchased the goodwill (Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR 257 ). (at p24)

J. D. Holmes K.C. (with him J. D. O'Meally), for the respondent. Section 14 (e) of the Act would seem to suggest that the holding company, which had no taxable property, was not a company which could elect under s. 17. The two things which have to be determined are the relation of the percentage standard to the capital employed, and the ascertainment of the taxable profit. There is not any more reason to go to s. 24 to work out capital employed than to go to s. 3 to work out taxable profit. If resort is had to s. 3 to work out taxable profit then there is every reason for following the course indicated in the Court below and obviously followed by the Commissioner, that is to say, a course of doing four sums by treating the holding company and each subsidiary company separately in the first place, and the fourth sum is the aggregation of the result of treating them separately. In that way it is still possible to perform what is required by the Act and treat the holding company and its subsidiaries as branches. The warrant for doing that is to be found in the way in which "taxable profit" is to be ascertained by reference to the definition of that expression in s. 3.

The introductory words to that definition have to be made to do service in all the types of cases to which the Act applies. "Taxable profit" is arrived at by doing a series of subtractions. The primary sum from which the subtractions are to be made is the taxable income as assessed under the Income Tax Assessment Act. There is not any provision in that Act, nor in this Act, for notional assessments of notional incomes. The first sum to be deducted is the income tax payable in respect of that taxable income. There is not any authority in the Income Tax Assessment Act to assess the taxable income of a notional assessable income. There would be an assessment of the taxable income of each company and the deductions can be made from them. The sum must be done in two or three parts in ascertaining taxable income. When an election is made under s. 17 the correct way to treat the subsidiary companies as branches is to ascertain the taxable profit of the taxpayer in that way and then to add together the results.

The position in Carpenters Investment Trading Co. Ltd. v. Federal Commissioner of Taxation (1949) 79 CLR 341 was that the Commissioner did not admit the whole of the dividend because he regarded some dividends as having been derived from a trading activity in shares; the dispute really was as to the amount of the deduction. It is agreed that the subsidiary companies are not disincorporated, so that the Act applies to the ascertainment of taxable profit in the way submitted. Capital employed under s. 24 should be ascertained in this case by doing not one sum but four sums. The capital employed in Australia is to be ascertained by applying s. 24 to each company separately and then aggregating the net results. That method produces the correct result. The choice of election under s. 17 is with the taxpayer, but once having been made he is held to it. Losses are not ignored but are accounted for in the taxable profit for the particular year. It is disputed that upon an election being made under s. 17 a loss in the branch has to be taken into account as a deduction of profit in the head company.

The Act is really an excess profits tax Act. It is clear from the words of some of the sub-sections in s. 24 that when the capital employed is being ascertained a separate sum is done in respect of each company, but the accounts of the companies are not combined because in some of those sub-sections one is directed to not the notional accounts that have been constructed out of the activities of the company but the accounts of the company for the purpose of determining the figure. Not only is the Act workable in the way put, but the indications are that that is the way in which the appropriate sums are required to be done. There was not any transfer of the good will to the holding company. No transfer could take place because it was only the transfer of the results of the three sums referred to. There was not any purchase and there was not an amalgamation as in Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR 257 . Whatever the expression "treated as a branch" may mean there was not any notional liquidation of assets and, therefore, there was not any purchase.

It follows that the Court below was correct in its decision on that matter. If there was a transfer of goodwill then s. 24 (4) applies. On the facts the holding company had only shares in the operating company as its assets. As such it was a channel for dividends, it had no independent trading activities of its own. The beneficial interest in the property is the beneficial interest of the shareholders (Osborne v. The Commonwealth (1911) 12 CLR 321 , at p 365; Curzon Offices Ltd. v. Inland Revenue Commissioners [1944] 1 All ER 606 ). That principle applies when construing the words "held on behalf of" in s. 24 (4). The shares in the operating company are held on behalf of the same persons who hold the shares in the holding company. Therefore s. 24 (4) would apply as if there had been a transfer of the goodwill from the operating company to the holding company. That is put as an alternative. The value of the goodwill employed in Australia was left in such a state that it was not possible to make a finding that the figure which had been suggested, 180,000 pounds, was the correct figure.

The arguments in the first and second methods addressed to the Court on behalf of the appellant are not covered by the notice of objection and therefore are not open to the appellant. Sections 185 and 190 (a) of the Income Tax Assessment Act, made applicable by s. 34 of the War-time (Company) Tax Assessment Act, mean that the taxpayer must give a complete and perfect statement of his grounds of objection (R. v. Deputy Commissioner of Taxation; Ex parte Copley (1923) 30 ALR 86 , at p 87; Molloy v. Federal Commissioner of Land Tax (1938) 59 CLR 608 ). The question before the Board of Review and the Court below related entirely to goodwill. The two arguments are directed to the inclusion of a different figure, and not one relating to goodwill. In regard to the balance sheet of the English holding company the Commissioner put the figure of the capital employed as "nil". There should be added together the 2,500,000 pounds of issued capital; 25,000 pounds on the share premium account, and 4,446 pounds from the profit and loss figures.

Applying par. (iii) of s. 24 (1) 2,499,993 pounds should be taken from the total of that sum, namely, 2,529,446 pounds, which leaves 29,453 pounds. Whether any of that 29,453 pounds was capital employed in Australia in respect of the company was decided by the Commissioner in the negative. There was not any evidence that any of that sum was employed in Australia, nor as to where it was employed. The onus is upon the appellant to displace the Commissioner's finding (Trautwein v. Federal Commissioner of Taxation (1936) 56 CLR 63 , at pp 87, 88). If the matter be approached by the way suggested on behalf of the appellant ultimate goodwill will not be found, there is none in any account. It is common ground that the operating company never purchased any goodwill. The definition in s. 3 maintains the other companies because the sum as to taxable profit cannot be done without the existence of the other companies and in some cases the sum with respect to capital employed could not be done. The appellant's first and second arguments are based upon a fallacy. They assume that because the holding company is the taxpayer the accounts of it and its subsidiaries must be consolidated before s. 24 is applied. The fallacy is that in doing that the appellant has assumed that an election under s. 17 brings about a notional disincorporation of the subsidiaries.

That assumption is opposed to the words of the legislation. The proper approach to the question is to examine what has to be done under the Act in all types of cases. There not being a notional disincorporation for the purpose of carrying out this assessment, it is not necessary to perform any operations to s. 24 or to the accounts of the subsidiary companies. (at p27)

G. E. Barwick K.C., in reply.

The Court did not say in the Bankers and Traders' Case (1946) 73 CLR 39 that the onus was upon the taxpayer to affirmatively show the employment of capital, nor, having regard to Federal Commissioner of Taxation v. Adelaide Electric Supply Co. Ltd. (1950) 83 CLR 413 , did it intend to say so. (at p27)

(DIXON J. referred to Inland Revenue Commissioners v. Terence Byron Ltd. [1945] 1 All ER 636 , at p 640 (at p27)

The balancing sum cannot be apportioned. It works wholly everywhere, wherever the company operates, and it is unapportionable. The language of the objections taken is completely appropriate to the claim made in the first two submissions, namely, that having regard to subsidiary branches, the company - now only one in contemplation for tax purposes - has 2,000,000 pounds represented by goodwill, formulae, trade marks, & c., and it is claimed that that sum, or a substantial part of it, is employed in Australia. The grounds taken are not cut down by the argumentative statement which states precisely the argument put. The method suggested on behalf of the respondent, firstly, depends entirely on the use of s. 24 (1) (iii); secondly, almost stultifies itself when worked out; and, thirdly, gives no force to the words "treated as a branch". The purpose of s. 17 is to allow the actual relationship to be disregarded; the separate identity to be swept aside, and once that is done then the assets of the subsidiaries must be regarded as being assets of the holding company, not in the sense of a transfer from one entity to another, but the separation of their identity swept aside. It refers to an actual transfer and not a notional transfer. It is to prevent a company transferring at a figure and creating a new cost figure in the hands of the subsidiary which can be used to increase the capital employed. That section has no bearing upon the problem which is before the Court. The main submission is that s. 24 is applied to the accounts of the holding company, and the only use made of s. 17 in that regard is to prevent the use of s. 24 (1) (iii) against the appellant; secondly, when ascertaining ex-Australian employment of capital, the assets of the subsidiary should be treated as assets of the holding company and the situation there regarded accordingly.

Cur. adv. vult.