High Court of Australia|1946-06-07|Before: Rich J, Latham CJ

The application of this proposition to the precise items of gain I have enumerated was not brought out very clearly, or perhaps at all, during the argument. I should prefer to be in a position of deciding the ultimate question in respect of each item, namely whether it should, or should not, be excluded under s 23(q) in ascertaining the taxable income. But that we are not asked to do and it appears to be assumed on both sides that the materials which they placed before Rich J are inadequate for the purpose.

Further, the parties have agreed upon a form of declaration which they desire to have substituted for the first declaration made by Rich J. His Honour's declaration said -

"That the business and operations from which the Appellant derived its profit were carried out in part in Australia and in part in the United Kingdom, and that for the purposes of s 23(q) of the the income of the Appellant is derived in part from sources out of Australia."

That seems to me to be correct, but not to carry the matter very far. However, for some reason I have not grasped, the taxpayer, the appellant, seems to have considered that the words "in part" did not provide for items of revenue like interest and dividends derived altogether from England, items excluded from the assessment as finally amended. We were told that the parties were agreed in the substitution of the following declaration -

"that the appellant company derived its profit from its business and operations partly from sources exclusively in Australia, partly from sources exclusively in the United Kingdom, and as to the remainder from a source partly in Australia and partly in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the profit of the company which was derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in the United Kingdom."

I suppose that we ought to make this substitution by consent. It is in the light of the substituted declaration that we are asked to say that the income from trading in England in shares in English companies was exclusively derived from a source in the United Kingdom. But s 23(q) does not use the word "exclusively" and it uses the word "source" only in the opening clause, "income derived from sources out of Australia". I think that the parties are entitled to have it decided, assuming the materials are sufficient, whether given "income" is derived from sources out of Australia and that question I am prepared to consider and, if possible, decide in reference to each of the items of income I have enumerated. But it is a single though complex question whether "that income is not exempt from income tax in the country where it is derived", and I

am not prepared to embark on the hazards which may attend declarations of right based on an attempt to split it up into supposed components some or one only of which are to be submitted for decision.

I regard it as clear that the second, fifth and sixth of the foregoing items are credits arising from sources out of Australia.

The fifth has no connexion with Australia. The shares in the two English companies appear to have been purchased and resold in England without reference to any Australian ingredient except that the assets of each company comprised holdings in Australian companies.

In the sixth case there was a dealing in England with an option or options. The fact that the options were over shares in a Victorian company does not seem to me enough to bring the source of the credit into Australia.

The second item, the supposed enlargement of value by reason of the exchange of shares in one English company for those in another seems, prima facie, to be remote from a source in Australia and there are no facts to show otherwise.

The first of the above mentioned items depends on somewhat different considerations. The shares disposed of were in the capital of an Australian company. The credit in question is the gross value set upon the consideration obtained for them in England. The consideration arose in England from a transaction in England and if attention is confined only to the amount so obtained an Australian source is not readily discernible. But suppose an attempt is made to dissect the amount obtained in the hope of finding how much of it represents the value attached to the Australian shares out of England and how much to the "operation" of the company in England and the consequent creation of a market there for the shares. If such a dissection could be made, it might be said that only the second part was attributable to Great Britain. But to make such an attempt at dissection is really to construct an English trading account in respect of this block of shares and to deduct from the amount obtained the value of the shares as at the time they were appropriated to the English trade. To do so deserts the hypothesis of the parties that we are concerned only with assessable income, if adherence to that hypothesis really matters under s 23(q). But what may be more important, it is the first step in the process adopted by the General Commissioners in England. If the second step were taken of treating the Australian shares as having a par value, it would seem that this transaction would show no English profit, and then, I think, it might plausibly be urged that none of the profits were "not exempt from tax" in the United Kingdom. About these

matters there is hardly enough information before us to enable us to deal with them, and, although prima facie the supposed enlargement of assets arose in England, I do not think that we are on safe enough ground to make a declaration binding the Commissioner to reassess upon the basis that none of the gain of the first item arose from sources in Australia.

These observations are applicable in substance to the fourth item and to the third, though the amount of the latter is so small that it might be neglected among such high figures involving so many difficulties.

There are some minor matters to be disposed of raised by the notices of appeal and cross-appeal.

(1) The third declaration contained in the order states that the profits made from the realization of shares in English companies etc were derived partly from a source within and partly from a source outside Australia. It is contended that this declaration should be restricted to realizations in Australia of such shares and that it was so intended. One transaction by which English shares were realized in Australia was pointedly drawn to the attention of Rich J and the declaration may indeed have been directed to it, though it is true that the date given for it seems to show that it fell outside the accounting period. But, in any case, the views I have expressed make it right to limit the declaration to realization in Australia.

(2) The second paragraph of the second declaration refers to s 28 of the Income Tax Assessment Act. As at present advised I am not prepared to hold that the shares were "trading stock" within the meaning of Div 2, sub-div. B, ss 28-31, though this does not necessarily mean that the principles of accounting embodied in those provisions are themselves altogether inapplicable. At the same time it is proper to remark that some of the facts of the case do suggest the possibility of a question whether the share manipulations of the taxpayer company ought to have been treated as a source of income before realization in money and, perhaps even then, whether they should have been so treated before a clear detachable surplus arose or a profit was acknowledged in a final manner 20 .

(3) The sixth ground of appeal seeks to have the value of the shares in the English companies brought into account at nil. The object is, of course, to throw as much of the profit as possible into

England in the hope of securing exemption for it under s 23(q). On the view I have expressed this ground cannot be acceded to.

(4) Upon the cross-appeal the only other matter calling for reference is ground (c) of which an amended text was handed up. The ground is rather pointed at a passage in the reasons of Rich J than to any part of his Honour's order. The use of the words "assessable income" in the declaration sought causes some difficulty, having regard to what follows, but, in any case, I think we ought to make no declaration upon the lines of this revised ground of appeal, the practical meaning and effect of which is not clear to me.

(5) Lastly, the appellant complained of the exercise by the learned judge of his discretion in respect of costs. His Honour directed that there should be no order as to costs. In the view the learned judge took of the case, I cannot see why this was not an admissible view of what was just in respect of costs. Nor do I think that the variations of the decree that I would make should lead us to adopt a different view as to the costs of the hearing before Rich J. Moreover, I would allow the parties to abide their own costs of this appeal from his Honour's order.

(1) By consent vary the first declaration in the order appealed from by substituting therefor the paragraph set out in ground (1) of the notice of appeal.

(2) Vary the second declaration in the order by omitting the second paragraph thereof.

(3) Vary the third declaration in the order by inserting the words "in Australia" after the word "realization" and before the words "of shares".

(4) Vary the order by adding a seventh declaration to the effect that (a) the income or gain alleged to have arisen from the exchange mentioned in par 26 of the admissions of fact (Ex. B), of 124,498 shares in Great Boulder Mining & Finance Ltd for the same number of shares in Commonwealth Mining & Finance Ltd; (b) the income or gain arising from the surplus produced by the sale mentioned in par 34(i) of the said admissions of fact of shares in Commonwealth Mining & Finance Ltd and Great Boulder Mining & Finance Ltd; (c) the income or gain arising from the transaction mentioned in par 35 of the said admissions of fact; were derived by the appellant company from sources out of Australia within the meaning of s 23(q) of the Income Tax Assessment Act 1936.

(5) Vary the order that the assessment be set aside and the consequent order for remission for re-assessment by substituting an order that the decision of the Commissioner upon the objections be

set aside and that the objections be remitted to the Commissioner for re-consideration and re-determination conformably with this order.

Otherwise subject to the foregoing variations confirm the order appealed from and dismiss the appeal and cross-appeal.

No order as to the costs of the appeal and cross-appeal.

I agree with the order formulated in the reasons for judgment of my brother Dixon and with his reasons.

WILLIAMS J. The origin of this appeal and cross-appeal is an amended assessment of the appellant company by the respondent for income tax under the Income Tax Assessment Act 1936 (Cth). The assessment which was made on 19 March 1942 is in respect of the company's taxable income derived during the period 1 November 1935 to 31 October 1936. This period was adopted by the appellant and accepted by the respondent in lieu of the financial year 1 July 1935 to 30 June 1936.

The appellant appealed to this Court under s 197 of the Act. The appeal came on for hearing before Rich J who made an order of an interlocutory nature on 23 June 1944 and a final order on 8 October 1945. By the final order he made six numbered declarations and ordered that the assessment be set aside and the matter remitted to the respondent to be dealt with under the Income Tax Assessment Act and also for re-assessment of the appellant's taxable income consistently with this order. The appeal and cross-appeal are against portions of this final order.

The evidence before his Honour consisted of a large number of admissions relating to dealings of considerable complexity. But it is common ground that the present assessment cannot stand and that there will have to be a re-assessment in some form so that I do not propose to discuss the facts in any detail.

The appellant is incorporated in Australia and is, therefore, a resident taxpayer within the meaning of the Act. Prior to the year of income it acquired a number of properties in Western Australia which, as his Honour said, were supposed to contain minerals. It caused twenty-seven subsidiary companies to be incorporated in Western Australia and sold and transferred certain of these properties to each of these companies, the consideration being the allotment of fully paid shares in the subsidiary companies. It then sold the shares in the twenty-seven Western Australian companies to seven English companies, the consideration being partly cash £481,875, partly the allotment of fully paid shares of a nominal value of £1,075,000, and partly options to acquire further shares in these

companies to the nominal value of £1,247,500. The amount of money expended by the appellant to the date of the transfer of the shares in the Western Australian companies to the English companies in respect of acquiring and maintaining and, in some instances, developing these mining properties and incorporating the former companies was £119,251.1.10.

The admissions state that the appellant "kept two separate accounts in respect of its transactions with each English company called `Property Sale Account' and `Share Acquisition Account'. To the respective `Property Sale Accounts' were charged in respect of the shares in each Western Australian subsidiary company all expenditure which the company had made at any time up to the time of the sale thereof in connexion with the mining properties and in the incorporation of the subsidiary companies and on the credit side of the account were placed the cash consideration from and share consideration taken at par or market value in the English companies. To the respective `Share Acquisition Accounts' on the left hand side were placed the number of shares and options received as part of the consideration and in the money column was inserted the par or market value of the shares; no money value was put upon shares under option unless and until the options were exercised. All the shares received were fully accounted for; options however in some cases were not exercised but simply ceased to exist."

It is common ground that in acquiring these shares first in the Western Australian companies and then in the English companies, the appellant was engaged in the business of trading in shares.

Section 25(1) of the Act provides that the assessable income of a resident taxpayer shall include the gross income derived directly or indirectly from all sources whether in or out of Australia which is not exempt income. Section 23(q) provides that income derived by a resident taxpayer from sources out of Australia, where that income is not exempt from income tax in the country where it is derived, shall be income which is exempt from income tax.

The appellant was finally assessed upon a taxable income of £191,700. This sum includes a number of items which can be classified under four heads:

(1) The principal item is a profit of £150,168.18.4. It consists of three credits less a number of debits. The credits are £196,875, £9,516.1.8 and £62.10.0. In July 1936 the appellant acquired 550,000 shares of 5s each in the capital of one of the English companies, Commonwealth Mining & Finance Ltd These shares were allotted in settlement of the appellant's claims against this company under previous contracts by which this company agreed to allot shares to

the appellant in exchange for shares in some of the Western Australian companies. The appellant credited the relevant share acquisition account with the market value of these shares, namely 9s per share which, plus exchange, amounted to £196,875. During the year of income the appellant sold 200,000 of these shares at this market value to Kookaburra Investments Ltd for fully paid shares of £1 each in that company, and the remaining 150,000 shares at the same value for fully paid shares in Austmac Investments Ltd Kookaburra Investments Ltd and Austmac Investments Ltd were two subsidiary investment companies which the appellant had incorporated in England. No profit was therefore made upon the sale of shares in one English company to the other English companies. The profit was made upon the sale of shares in a Western Australian company to an English company. The credit of £9,516.1.8 resulted from an exchange of 124,496 shares in another of the seven English companies, Great Boulder Mining & Finance Co Ltd, for shares in Commonwealth Mining & Finance Ltd The credit of £62.10.0 was a profit made on the sale of shares in one of the Western Australian companies to another of the seven English companies, Anglo Australian Gold Development Ltd.

(2) The sum of £22,213.10.8. This credit resulted from dealings in shares in three further subsidiary companies, namely Lalla Rookh Gold Mines Ltd, Comet Gold Mines Ltd, and King of Creation Gold Mines Ltd These are three further companies which the appellant caused to be incorporated in Australia. During the year of income the appellant transferred some further mining properties which it had acquired in Western Australia to Lalla Rookh Gold Mines Ltd and Comet Gold Mines Ltd in exchange for fully paid shares. In each case the appellant entered in its books to the credit of an account styled "Capital Appreciation by Exchange of Assets Account", the amount by which the par value of these shares exceeded the amount which the appellant had expended in acquiring the properties. The appellant then sold these shares in England. It sold the shares in Lalla Rookh Gold Mines Ltd which it had acquired for £A42,000 to an English company, Meekatharra Gold Mines Ltd, for £E42,000, placing the difference in exchange, £10,500, to the credit of the capital appreciation account. It sold the shares in Comet Gold Mines Ltd which it had acquired for £A60,000 to a number of English companies for the same sum. It also sold some further mining properties to King of Creation Gold Mines Ltd for £A25,000 which it had acquired in Western Australia at a cost of £19,000. It credited an account styled "Capital Appreciation by Exchange of Assets" account with an amount of £5,498.6.1, being the difference between these two sums less other

expenses amounting to £A501.13.11. The appellant also subscribed for 40,000 shares of £1 each in the capital of this company, and sold these shares to another Australian company, Day Dawn Gold Mines Ltd, for £A40,000. The balance of profit from all these transactions after making a number of deductions was £22,213.10.8. The order of Rich J contains two declarations, Nos 4 and 5, relating to the transactions with Lalla Rookh Gold Mines Ltd and Comet Gold Mines Ltd They declare that the appellant made no profit out of the transfer of the mining properties to these companies in exchange for shares, and that there should be deducted from the profits derived from the transactions with the English companies in respect of the shares the sums expended by the appellant in acquiring the relevant mining properties, together with any incidental expenses.

(3) The balance of profit on two dealings classified in the appellant's books as operations outside Australia and described as "Share dealing £6,597.12.11" and "Mephan Ferguson £2,500". It appears from the admissions that the sum of £6,597.12.11 should be £6,285.2.11 and that this is the balance of profit which the appellant derived in the year of income from buying and selling in England other shares in the seven English companies after setting off losses due to the fall in the market value of shares which it held in other English companies. The appellant derived the profit shown as "Mephan Ferguson £2,500" by acquiring an option to purchase shares in a Victorian company known as Mephan Ferguson Pty Ltd for £E8,000 and selling this option to a further subsidiary company which it had incorporated in England for £E10,000. The sum of £2,500 represents the difference in Australian pounds between these two sums.

(4) The balance of profit and loss account on income earned in Western Australia, £8,184. The source of this profit is exclusively in Australia.

It is difficult to state the exact amount under the third and fourth heads. They are approximately the same and together constitute the difference between the addition of the amounts under the first two heads and the sum of £191,700.

This short statement is enough to show that the sum of £191,700 comprises income as to which there is an exclusively Australian source and an exclusively English source, and as to which there may be a dual source in Australia and England. There is no dispute that to the extent to which the source of the profit is in England it is income derived by the appellant which is not exempt from income tax within the meaning of s 23(q). There is also no dispute that where shares in the Western Australian companies were sold under contracts made in England for cash payable there or for shares in

English companies the profit was derived partly from a source in Australia and partly from a source in England. But there is a dispute whether profits made by the sale or other disposition of English shares in England acquired in exchange for shares in Western Australian companies have a dual or exclusively English source.

The method of bookkeeping adopted by the appellant (which the respondent appears to have accepted for the purposes of the assessment) was to credit the par or market value of the shares which it acquired in the seven English companies and to debit the amount which it had expended upon the mining properties sold to the Western Australian companies whose shares were acquired by the English companies. As and when the shares were allotted it credited the gain to an account in its books styled "Appreciation of Capital by Exchange of Assets Account". But it is not now disputed that the appellant was engaged in the business of trading in shares, so that this gain was not an increase of capital value but a trading profit. A profit can in some instances be attributed partly to the country where the property sold originates or is situate at the date of sale, and partly to its sale in another country. The shares in the Western Australian companies were locally situate in Western Australia. Rich J attributed a dual source to the profit made by the sale of these shares in England to the English companies, and against this finding there is no appeal. But Mr Kitto has submitted that a dual source must also be attributed to any profit made by the subsequent sale of the shares in the English companies. He contended that the exchange of shares in the Western Australian companies for shares in the English companies was all part of one profit-making scheme to sell the mining properties for cash in England, and that the formation of the companies in Western Australia and in England was mere machinery to effect this purpose. But there is, in my opinion, no sufficient evidence of such a connected purpose. The appellant was keeping its accounts on an annual basis. This was the proper course to adopt in order to comply with the Act. The question under the Act is "What is the income of the company in the particular year of assessment, and it must be answered by applying its relevant provisions as best they can be applied" 21 . It showed the shares in the English companies when allotted as a gain, and charged against this gain the expenses of acquiring the relevant mining leases, and subsequent expenses. The balance of gain, if any, was a profit from a dual source. It thus

acquired shares in English companies on English registers or, in other words, property situated in England. It was then in the same position with respect to these shares as any other person to whom shares in these companies had been allotted. Any profit from a sale of these shares in England would be derived exclusively from an English source.

It appears from the admissions that the General Commissioners for the City of London held that the appellant was carrying on a trade in the United Kingdom and was assessable on the profits arising from such trade. But they also held that the profits which were assessable were the profits received from the sale of the shares in the Western Australian companies to the English companies, and that in calculating such profits the par value of the Western Australian companies' shares must be deducted as the cost to the appellant of the purchase of such shares. It was then agreed that as a result of this finding the assessments fell to be discharged.

The appellant has therefore not been called upon to pay any income tax in England on profits derived either partly or exclusively from a source in the United Kingdom. But this does not mean that if there had been a balance it would not have been taxable. In determining whether there was a balance the Commissioners did not accept the method of bookkeeping adopted by the appellant, but held that they were bound to give effect to the legal results which ensure where a company agrees to allot fully paid shares as consideration for the purchase of an asset. In such a case the company gives up the right to call upon the allottee to pay an amount in cash equal to the par value of the shares and "the value at which the company is content to accept the property must be treated as its value as between itself and the shareholder, whose liability is discharged by its means" 22 "A payment is an effective payment in money's worth if the consideration given by way of payment is something which is bona fide regarded by the parties to the payment as fairly representing the sum which the payment is to discharge" 23 "When fully paid shares are properly issued for a consideration other than cash, the consideration moving from the company must be at the least equal in value to the par value of the shares, and must be based on an honest estimate by the Directors of the value of the assets acquired" 24 . The cost to the company is therefore the par value of the shares, and it would seem to follow

that the vendor must be taken prima facie to have received property of the same value. Accordingly, in British South Africa Co v Commissioner of Income Tax the vendor was credited with the par value of the shares for income tax purposes. This approach of the General Commissioners is entirely consistent with at least three decisions of the Court of Appeal 25 . If these cases are applicable, it cost the Western Australian companies over £3,000,000 to purchase the mining properties from the appellant. The Western Australian companies could not have lawfully agreed to allot their shares as fully paid unless the directors were bona fide of opinion that the mining properties were of this value. The appellant had up to this stage only spent £52,836.5.8 in acquiring and maintaining the mining properties and incorporating the Western Australian companies. After the companies had been incorporated the appellant continued to keep the same account of such expenditure and to charge it against the value of the shares in the English companies into which the shares in the Western Australian companies had been transmuted. This caused the amount to increase to £119,251.1.10. Upon the view taken by the General Commissioners, therefore, the appellant transferred shares of the value of over £3,000,000 to the English companies as consideration for the payment of £481,875 cash, the allotment of shares at par of the value of £1,075,000 and the grant of the options. The English companies could not have lawfully agreed to allot shares of this par value unless their directors bona fide believed the assets were worth this consideration. The shares in the Western Australian companies, so far as they were paid for by the allotment of shares in the English companies, cost the English companies at least £1,075,000, and the appellant must be taken prima facie to have parted with assets of at least the same value. If the shares in the Western Australian companies are to be accounted for at their par value, the English shares must have cost the appellant more than this amount. The General Commissioners must have reached this conclusion. They must have considered that there were in law three separate transactions: (1) the acquisition by the appellant of the mining properties; (2) the sale of these properties for shares in the Western Australian companies; and (3) the sale of shares in the Western Australian companies to the seven English companies. On this basis the profit was made when the appellant managed to acquire mining properties which rose in value to such an extent that the directors of

the Western Australian companies could bona fide believe that they were worth over £3,000,000.

The result of this approach is that the appellant made no balance of profit upon the sale of the Western Australian shares to the English companies, and that no English income tax became payable. The provision in s 25 of the Income Tax Assessment Act that the assessable income of a taxpayer shall include gross income which is not exempt income indicates that income is not exempt from tax in the country where it is derived within the meaning of s 23(q) if it is income subject to tax in that country, although it may escape tax in part or in whole because of the deductions allowable there 26 . In re-assessing the appellant for income tax the respondent must, therefore, treat any income derived wholly or partly from a source in England as exempt income and only assess the appellant upon income derived wholly or partly from a source in Australia.

I shall now proceed to discuss the grounds raised in the notice of appeal and cross-appeal. There is no appeal from the fourth, fifth and sixth declarations. The grounds of appeal are six in number. The first ground proposes that a certain declaration shall be substituted for the first declaration made by Rich J. His Honour declared "that the business and operations from which the appellant company derived its profit were carried out in part in Australia and in part in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the income of the company is derived in part from sources out of Australia". But it is clear that during the year of income the appellant made profits from sources exclusively in Australia and in England as well as from this dual source. It is therefore proposed that the following declaration shall be substituted:

The respondent does not object to this substitution. There is, as I have said, no dispute that any profits made out of the sale of the Western Australian shares to the English companies have a dual

source, and that these profits, to the extent to which they were derived from a source in the United Kingdom, are exempt income under s 23(q). I can therefore see no reason why this declaration should not be substituted for the present declaration.

The second declaration contains two sentences. The first sentence is "That in ascertaining the profits derived from the sale of the shares in the twenty-seven Western Australian subsidiary companies the value of the consideration paid in English shares should be brought into account, and for that purpose s 21 of the Income Tax Assessment Act 1936 is applicable". Neither party objected to this sentence, but there was considerable argument as to the application of s 21. This section provides that where, upon any transaction, any consideration is paid or given otherwise than in cash the money value of that consideration shall, for the purposes of the Act, be taken to have been paid or given. The sentence defines the manner in which part of the consideration received by the appellant as vendor from the English companies as purchasers is to be estimated. It declares in effect that the appellant must be deemed to have received as such consideration a sum equal to at least the par value of the English shares. It does not define the manner in which the value of the property sold by the appellant to the English companies is to be estimated. This is presumably because it seems to have been agreed between the parties that this is represented by the sum of £119,251.1.10. The assessment was made on this basis, and in this particular was not objected to. Section 190 of the Act limits the appellant to the grounds stated in the objections. This value is the foundation of the two declarations numbered 4 and 5 made by Rich J, and against these declarations there is no appeal. It accords, as I have said, with the appellant's books 27 .

The second sentence is as follows: "That the operations of the appellant amounted to the carrying on of a business for the purposes of s 28 and corresponding enactments, and that shares and options formed trading stock within the meaning of that section and of s 31 and corresponding previous enactments." Part III, Div 2, sub-div. B, of that Act, which relates to the opening and closing entries for trading stock, includes the carrying on of any business. The definition of "trading stock" in s 6 includes anything acquired or purchased for the purpose of sale or exchange, and is therefore wide enough to include any personal property acquired or purchased for these purposes. In Craddock v Zevo Finance Co Ltd

the Master of the Rolls said that shares should be regarded as the stock in trade of a company which is trading in shares. It is submitted by the author of Stroud's Judicial Dictionary that stock in trade comprises all such chattels as are acquired for the purpose of being sold or let on hire in a person's trade. Shares have been held to be goods, wares or merchandise 28 . Property in chattels personal may be either in possession or in action. Shares in a company are personal chattels which are not in possession and are therefore choses in action 29 . Section 29 refers to the value of livestock and each article of other trading stock. Section 31 refers to the value of each article of trading stock (not being livestock). An article can mean a separate thing, whether material or immaterial. The respondent does not object to the sentence because, in his opinion, it adds nothing to and subtracts nothing from the operation of the first sentence. I think that this is right. I am also inclined to think, without finally deciding the point, that shares are trading stock within the meaning of the sub-division. The sub-division in any event merely prescribes sound accountancy practice. I would therefore retain the second sentence.

The third declaration was made in answer to the question whether profits made from the realization of English shares or options over English shares received as part consideration for shares in the twenty-seven Western Australian subsidiary companies are liable to federal income tax where such shares or options were realized in Australia. His Honour declared that the profits made from the realization of shares in English companies and options over such shares received as part of the above consideration were derived partly from a source within Australia and partly from a source outside Australia, and the question what part is derived from these sources is a matter to be determined by the Commissioner, subject to review and appeal under the provisions of the Income Tax Assessment Act 1936. The declaration, unlike the question, is not limited to sales in Australia. The appellant now asks that the declaration should be so limited but this is not agreed to by the respondent. It is unfortunate that the appellant did not approach his Honour in order to ascertain whether, as appears probable, these words were omitted by accident. The declaration could then have been amended under the slip rule, O XXVII, r 9. I believe that his Honour must have intended that the declaration should coincide

with the question. I have already expressed the opinion that profits made by the appellant on the sale in England of shares in English companies are derived exclusively from a source in England. I would therefore amend the declaration by adding the words "in Australia".

Three further grounds of appeal remain to be considered. They are grounds 2, 6 and 7. Ground 2 is "That his Honour should have declared that the income derived by the appellant company in the tax year ended 31 October 1936 by trading in England in shares in English companies whether such shares were acquired in return for shares in the Australian companies or otherwise or in other property not situated in Australia was derived exclusively from a source in the United Kingdom and is not liable to income tax under the legislation of the Commonwealth if that income so derived is not exempt from income tax in England." Ground 6 is "That his Honour should have declared that the cost of the shares in the seven English companies acquired by the appellant company in return for shares in the 27 Western Australian companies was Nil." Ground 7 is "That his Honour was in error in making no order as to costs and that his Honour should have ordered the Commissioner of Taxation to pay the appellant company's costs of the appeal."

For the reasons already given, I agree with ground 2 as a general proposition. But I also consider that the declaration claimed is couched in too general terms and that any declaration that is made should have specific reference to the evidence. The income taxed by the respondent has already been classified under four heads. Of the items included in this classification I am of opinion that the sum of £9,516.1.8 under the first head and the items under the third head were derived exclusively from a source in England and are not exempt from income tax in England, and that the appellant is entitled to a declaration to this effect.

In support of the sixth ground it was said that the amount of money expended by the appellant in acquiring the shares and other consideration from the English companies was £119,251.1.10, and that since it had received from these companies a greater amount in cash namely £481,875, the £1,075,009 worth of shares must have cost it nothing. But I agree with the General Commissioners that there were in law three separate transactions. The cost to the appellant of the whole of the consideration received from the English companies was the value of the shares in the Western Australian companies. The shares in the English companies have been valued for the purposes of the assessment as fully paid shares. It must therefore be taken that these companies received from the appellant property which their directors could honestly, and not colourably, consider a fair equivalent for the release of the appellant from its obligations to

pay for the shares in cash. There is nothing on the face of the contract to show that the consideration was illusory or only of sufficient value to pay for the shares in part. If there was, or the facts were sufficiently plain, it might be proper to treat the shares as unpaid or only partly paid without setting the contracts aside 30 . But this could only be done in proceedings between the shareholder and the company, and the effect of doing so would be to destroy or reduce the value of the shares as a profit for income tax purposes. I would therefore refuse to make this declaration.

The seventh ground complains of his Honour's order as to costs. It is true that the appellant achieved a considerable success upon the appeal, and that in the exercise of his discretion another judge might have made an order in its favour. But his Honour exercised his discretion judicially. He evidently regarded the appeal as one of divided success. Other cases are not of much assistance as a guide to the exercise of a discretion in any particular case, but it is to be noted that, under similar circumstances in Re Crossman dec'd 31 , Finlay J made the same order. An appeal against this order was dismissed by the Court of Appeal in In re Crossman 32 which, however, allowed the appeal on the merits. The House of Lords in Inland Revenue Commissioners v Crossman 33 restored the order of Finlay J, including his order as to costs. In my opinion no sufficient ground exists for interference with the exercise of his Honour's discretion.

Of the grounds taken in the notice of cross-appeal, grounds (a), (b) and (d) were not pressed. The respondent applied to substitute the following paragraph for ground (c): That his Honour should have held that the assessable income of the taxpayer company to be apportioned for the purposes of s 23(q) of the Act was the difference between the cost to the taxpayer company of the shares in the Western Australian companies acquired by it plus expenditure in relation thereto incurred by it prior to the sale thereof and the total sum ascertained by adding to the cash portion of the considerations received for the sales of the shares in the twenty-seven Western Australian companies the money value, as at the respective dates of the said receipts of the shares rights and options forming the balance of the said considerations together with the profits mentioned in declaration 3 of the order herein.

Mr Weston did not object to a declaration in the form of this paragraph omitting the words italicized. For the reasons already given I am of opinion that if this declaration were to be made these words should be omitted.

Grounds (e) and (f) relate to that part of the order under appeal by which the assessment was set aside and a re-assessment ordered. It was contended that the Court has no power to set aside an assessment and that Rich J should have ordered that the assessment be remitted to the respondent for amendment. Section 199 provides that the Court hearing the appeal may make such order as it thinks fit and may by such order confirm, reduce, increase or vary the assessment. It was contended that the initial generality of the section is limited by its subsequent explicitness, so that the jurisdiction of the Court is confined to confirming, reducing, increasing or varying the assessment. A casual glance at the Commonwealth Law Reports is sufficient to show that orders setting aside assessments have been frequently made. The power conferred upon the Court to make such order as it thinks fit is expressed in the most general terms and is clearly intended, in my opinion, to bestow upon it the most ample authority to mould its order to meet the circumstances of any particular appeal.

It is plainly necessary to set the assessment aside where a taxpayer is not liable to be assessed at all. Where a taxpayer is liable to be assessed but is taxed on a wrong principle, it is usually convenient and often necessary to re-assess de novo. That involves a setting aside of the existing assessment expressly or by implication. It was suggested that such an order created a danger of a taxpayer escaping liability through lapse of time under s 170. I can discover no such danger. In any event there is an order for a re-assessment and that is an order of a superior court. Such an order, even where made without jurisdiction, is not void but voidable and is binding upon the parties until set aside 34 .

The section confers upon the Court certain specific powers. If it dismisses the appeal it can expressly confirm the assessment although the dismissal would have this effect without an express order. But the process of assessment is so complex that the cases would be rare in which the Court could itself reduce or increase the amount of an assessment. It would generally be necessary to remit the matter to the Commissioner in some form in order that he should calculate the correct amount. There is no authority to do so specifically conferred by the section. It is thus necessary to the

effective operation of the section that the general words should be given their full natural grammatical meaning. The objection that his Honour had no power to set aside the assessment therefore fails.

But the result of doing so is that there is at present no assessment, and the re-assessment will be a new assessment. Section 201 provides that the fact that an appeal is pending shall not in the meantime affect the assessment under appeal and the tax may be recovered as if no appeal were pending. The appellant did not pay the tax assessed when it became due and payable and thereby incurred an additional tax of ten per cent per annum on the amount unpaid under s 207. If the assessment is set aside, and there is a re-assessment, the appellant will escape this additional tax. It would of course only have to pay additional tax upon the proper amount for which it should have been originally assessed. It will probably be found that in all the previous cases where assessments have been set aside the appellant had paid the tax when it became due and payable, so that the setting aside of the assessment would not have relieved him from any proper liability. The circumstance that additional tax has been incurred is, I think, a reason for not setting aside the present assessment. His Honour's attention does not appear to have been called to this unusual feature of this appeal.

In my opinion the assessment should be remitted to the respondent for amendment conformably with the order of this Court, or his decision on the objections set aside and the objections remitted to him for re-consideration and re-determination conformably with such order. I agree with Mr Weston that the appellant should have a right of appeal against the ratio of apportionment made by the respondent where there is a dual source, but objection 19 appears to be wide enough to protect the appellant in this respect.

Each party has partly succeeded and partly failed and I would make no order as to costs of the appeal and cross-appeal.

1. By substituting by consent the following declaration for the first declaration:

company which was derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in the United Kingdom."

2. By omitting in the second declaration the words from "That the operations" to the words "corresponding previous enactments" inclusive.

3. By inserting in the third declaration the words "in Australia" after the word "realization".

"7.(a) The income or gain alleged to have arisen from the exchange mentioned in par 26 of the admissions of fact (Ex. B), of 124,498 shares in Great Boulder Mining & Finance Ltd for the same number of shares in Commonwealth Mining & Finance Ltd.

(b) the income or gain arising from the surplus produced by the sale mentioned in par 34(i) of the said admissions of fact of shares in Commonwealth Mining & Finance Ltd and Great Boulder Mining & Finance Ltd were derived by the appellant company from sources out of Australia within the meaning of s 23(q)."

5. By substituting for the order that the assessment be set aside and that the matter be remitted to the Commissioner an order that the decision of the Commissioner upon the objections be set aside and that the objections be remitted to the Commissioner for re-consideration and re-determination conformably with this order.

Subject to the foregoing variations, order appealed from confirmed and appeal and cross-appeal dismissed.

Solicitors for the appellant, Wheatley & Son, Perth, by C Biggers.

Solicitor for the respondent, H F E Whitlam, Crown Solicitor for the Commonwealth.

2 [1940] HCA 9; (1940) 63 CLR 382.

4 [1937] HCA 13; (1937) 57 CLR 36.

6 See Commissioners of Taxation (NSW) v Meeks [1915] HCA 34; (1915), 19 CLR 568; Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax (Q) [1923] HCA 37; (1923), 33 CLR 76; Dickson v Commissioner of Taxation (NSW) [1925] HCA 29; (1925), 36 CLR 489.

7 See, eg, Bennett (Inspector of Taxes) v Marshall, [1938] 1 KB 591.

8 cf Commissioner of Taxes (Q) v Burke [1926] HCA 21; (1926), 38 CLR 314; Perrott v Deputy Federal Commissioner of Taxation (NSW) [1925] HCA 8; (1925), 40 CLR 450; Federal Commissioner of Taxation v Thorogood [1927] HCA 36; (1927), 40 CLR 454.

9 [1940] HCA 9; (1940) 63 CLR 382.

11 cf Lovell & Christmas Ltd v Commissioner of Taxes (Vict), [1908] AC 46; Commissioner of Taxes (Vict) v British Australian Wool Realization Association Ltd, [1931] AC 234, at pp 254-255; Public Officer of Studebaker Corporation of Australasia Ltd v Commissioner of Taxation (NSW) [1921] HCA 13; (1921), 29 CLR 225; Commissioner of Taxation (WA) v D & W Murray Ltd [1929] HCA 21; (1929), 42 CLR 332.

12 Commissioners of Taxation (NSW) v Kirk, [1900] AC 588; Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax (Q) [1923] HCA 37; (1923), 33 CLR 76; Commissioner of Taxation (NSW) v Hillsdon Watt Ltd [1937] HCA 13; (1937), 57 CLR 36.

13 Associated Newspapers Ltd v Federal Commissioner of Taxation [1944] HCA 24; (1944), 69 CLR 257, at p 269; Federal Commissioner of Taxation v Henderson [1943] HCA 46; (1943), 68 CLR 29, at pp 39, 50; Federal Commissioner of Taxation v United Aircraft Corporation [1943] HCA 50; (1943), 68 CLR 525, at pp 529, 552; Robert Coldstream Partners v Federal Commissioner of Taxation [1943] HCA 33; (1943), 68 CLR 391, at p 400; Federal Commissioner of Taxation v Whiting [1943] HCA 45; (1942), 68 CLR 199, at p 209; New Zealand Flax Investments Ltd v Federal Commissioner of Taxation [1938] HCA 60; (1938), 61 CLR 179, at p 208; Gregory v Deputy Federal Commissioner of Taxation (WA) [1937] HCA 57; (1937), 57 CLR 774, at pp 778-779; Evans v Deputy Federal Commissioner of Taxation (SA) [1936] HCA 2; (1936), 55 CLR 80, at pp 103, 109; Jolly v Federal Commissioner of Taxation [1934] HCA 66; (1934), 50 CLR 131, at pp 151, 153; Federal Commissioner of Taxation v Standard Trust Ltd [1933] HCA 19; (1933), 49 CLR 609, at pp 622, 642; Stewart Dawson & Co (Vict) Pty Ltd v Federal Commissioner of Taxation [1933] HCA 4; (1933), 48 CLR 683, at p 692 (a land tax assessment); Smith v Federal Commissioner of Taxation [1932] HCA 44; (1932), 48 CLR 178, at p 191; Ruhamah Property Co Ltd v Federal Commissioner of Taxation [1932] HCA 42; (1932), 48 CLR 48, at p 56; Countess of Bective v Federal Commissioner of Taxation [1932] HCA 22; (1932), 47 CLR 417, at p 426; Kellow-Falkiner Pty Ltd v Federal Commissioner of Taxation (1928), 34 ALR 276, at p 281.

14 See, eg, the order of Rich J in Australian Mercantile Land & Finance Co Ltd v Federal Commissioner of Taxation [1929] HCA 8; (1929), 42 CLR 145, at p 154.

15 [1940] HCA 9; (1940) 63 CLR 382, at pp 431-432, 452, 470-472.

16 Levene v Inland Revenue Commissioners, [1928] UKHL 1; [1928] AC 217, at p 227.

20 See Commissioner of Taxes (Vict) v Melbourne Trust Ltd, [1914] AC 1001, at p 1011; Federal Commissioner of Taxation v Standard Trust Ltd [1933] HCA 19; (1933), 49 CLR 609; cf Federal Commissioner of Taxation v Thorogood [1927] HCA 36; (1927), 40 CLR 454.

21 British South Africa Co v Commissioner of Income Tax, [1946] AC 62, at p 79.

23 In re White Star Line Ltd, [1938] Ch 458, at p 476.

24 Osborne (Inspector of Taxes) v Steel Barrel Co Ltd, [1942] 1 All ER 634, at p 638.

25 In re Wragg; Osborne (Inspector of Taxes) v Steel Barrel Co Ltd; Craddock v Zevo Finance Co Ltd, [1944] 1 All ER 566.

26 Texas Co (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; (1940), 63 CLR 382.

27 Associated London Properties Ltd v Henriksen (Inspector of Taxes) (1944), 26 TC 46.

29 Colonial Bank v Whinney (1885), 30 Ch D 261; on appeal Colonial Bank v Whinney (1886), 11 AC 426.

30 Hong Kong & China Co Ltd v Glen, [1914] 1 Ch 527, at p 539; In re White Star Line Ltd, [1938] 1 Ch, at p 477.

34 Cameron v Cole [1944] HCA 5; (1944), 68 CLR 571.

(Income Tax Act 1936(Cth)

Income Tax Assessment Act 1941(Cth)

Tax Assessment Act 1936

Australia (Income Tax Assessment Act 1936

(Income Tax Assessment Act 1936

Income Tax Assessment Act 1922

Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation (1946) 180 CLR 9 [1946] HCA 65; [1946] ALR (CN) 572b; (1946) 20 ALJR 234 (7 June 1946)

Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation

At a glance

Court

Decision date

Before

Source

Judgment (111 paragraphs)

Parties

Legislation Cited (7)

Cases Cited (5)

Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation (1946) 180 CLR 9 [1946] HCA 65; [1946] ALR (CN) 572b; (1946) 20 ALJR 234 (7 June 1946)