Cadbury-Fry-Pascall Pty Ltd v Federal Commissioner of Taxation [1944] HCA 31

Cadbury-Fry-Pascall Pty Ltd v Federal Commissioner of Taxation [1944] HCA 31 - HCA 1944 case summary — Zoe

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rate for the purposes of s. 104 or s. 105 of the Assessment Act. Thus, the purported assessment under s. 104 would increase the tax pay- able by the appellant beyond the rate authorized by the Income - Tax Act 1939. [He referred to Commissioner of Stamp Duties - (W.A.) v. West Australian Trustee, Executor & Agency Co. Ltd. (1); Commissioner of Stamps (W.A.) v. West Australian Trustee, Executor & Agency Co. Ltd. (2).] Section 104 cannot be regarded as itself imposing a tax; the result would be a contravention of s. 55 of the Constitution. Taxation must be imposed in clear and unambiguous terms. [He referred to Attorney-General v. Milne (3); Greenwood - v. Smith F. L. Smidth & Co, (4).] As to the appeal relating to 1934, the material provision is s. 318 of the Assessment Act of 1922-1934, and the relevant Act is the Income Tax Act 1934. The 1934 tax Act is in the same position as that of 1939, inasmuch as it declared = no rate for the purposes of s. 318 of the Assessment Act (which isin substantially the same terms as s. 104 of the subsequent Assessment 2 Act), and, having regard to s. 55 of the Constitution, s. 31B cannot : be treated (any more than s. 104 of the later Act) as itself imposing : a tax. Eager K.C. (with him Coppel), for the respondent. Sections 104 and 105 are applicable cumulatively and not alternatively, and the Commissioner was not bound to elect in respect of one or other of them. The appellant's argument that shareholding companies are excluded from s. 104 is not tenable. If it were correct, trustees and partnerships would also be excluded, and there is no room for the suggested implication from s. 105 in this regard. There is no reason why s. 104 should not be given its literal meaning, and in that meaning it is applicable to the present case whether or not 8. 105 is also applied. The Income Tax Assessment Acts are not Acts imposing taxation within the meaning of s. 55 of the Constitution, and they do not contain any provisions which contravene s. 55: See Stephens v. Abrahams (No. 2] (5). However, the Income Tar Act 1939 (and likewise the Act of 1934) incorporated the provisions of the relevant Assessment Act and in that way imposed and declared the taxes defined in the Assessment Act : See Federal Commissioner of Taxation v. Munro (6); Osborne v. The Commonwealth (7). {He

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describes as a sufficient distribution of its income had been made. The second case is stated in two appeals against assessments relating to the income year ending 30th June 1939. The Commis- sioner assessed the company first under the ordinary provisions of the Income Tax Assessment Act 1936-1939 applying to all com- panies, and the company paid the flat rate of tax, 24 pence in the pound, imposed by the Income Taw Act 1939. Then the Commis- sioner assessed the company under s. 105 of the Act, claiming a tax of £8 5s. 9d. The Commissioner then further assessed the company under s. 104 of the Act, claiming £1,998 12s., credit being given for the sum of £8 5s. 9d. paid under the previous assessment. The company raises the same objection as in the other case, namely, that no tax is imposed on the company by the sections under which it was assessed (in this case ss. 104 and 105 of the Income Tax Assess- ment Act 1936-1939) or by any other statutory provision, and, more particularly, that there is no authority to require a company to pay any tax calculated by reference to rates applicable to individual persons. It is also contended that only s. 105 is applicable, and not s. 104, and, further, that, if both sections are applicable, the Commis- sioner must elect between the sections and, having already assessed under s. 105, could not then assess under s. 104. The company further contends that the assessment under s. 104 was an amended assessment and that s. 170 (3) prevents any amendment of the previous assessment so as to increase the liability of the taxpayer because the company had made a full and true disclosure to the Commissioner of all the material facts necessary for its assessment before the earlier assessment was made, and there was no error in calculation or any mistake of fact, which is required by the section in order to justify the amendment of an assessment in such cireum- stances. It will be most convenient to consider first the case relating to the income year ending 30th June 1939. The Income Tax Assessment Act 1936-1939, s. 104 (1), is in the following terms : - "Where a private company has not, before the expiration of nine months after the close of the year of income, made a sufficient distribution of its income of the year, the Commissioner may assess the aggregate additional amount of tax which would have been payable by its shareholders if the company had, on the last day of the year of income, paid the undistributed

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In the present case, the Commissioner first made an assessment under s. 105 on 25th June 1941 of £8 5s. 9d., and subsequently made a further assessment under s. 104 on 5th February 1942 of £1,998 12s. The appellant has appealed against both assessments, and it becomes necessary to express an opinion upon the proper construction of the sections. Section 104 does not, I think, raise any difficulty. In order to determine what additional tax the company has to pay under this section, the respondent must take the actual shareholders in the company as appearing in its register of members on the last day of the year of income in question, whatever beneficial interests these shareholders have in the shares. He must then ascertain what aggregate additional income tax these share- holders would have had to pay if the company had distributed to them by way of dividend the undistributed income referred to in the section. This aggregate is the amount for which the company can be assessed under the section. In the present case, the Commis- sioner made this assessment on 5th February 1942. He should have ascertained the additional tax which each of the four share- holders referred to in par. 9 of the case would have had to pay, but, as the three individuals were trustees for Cadbury Bros. Ltd., he made the assessment on the basis that this company was the only shareholder. This was admittedly wrong but no objection has been taken to the assessment on this ground. But some of the shareholders in a private company might be trustees of their beneficial interest, and as beneficiaries who are presently entitled to a share of the income of a trust estate and not under any legal disability and not their trustees are the taxpayers, a notional distribution to trustees would not in such a case cause them to become notionally liable to pay any additional tax, or the company through them to become liable for any additional tax under s. 104. Further, where a beneficiary is under a legal disability and the trustee is liable to be assessed, the trustee is only liable to be assessed on the net income of the trust estate as if it were the income of an individual, whereas

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the beneficiary might derive income from other sources, so that the additional tax which the trustee would become notionally liable to pay on behalf of the beneficiary would be less than the additional amount which the beneficiary would become liable to pay if the amount of the notional dividend was added to the rest of his taxable income. Partnerships which hold shares in companies become registered members of companies in various ways. In Buckley on the Companies Acts, 11th ed. (1930), at p. 56, it is stated : - "A partnership firm is not a ' person', and the partners in a firm have no right as such to be registered as members in the firm name, Partners in a firm may, however, be joint members; and, semble, if under the constitution of the partnership it be within the authority of one partner to accept shares so as to bind the firm, the acceptance of shares by one partner and registration of the shares in the firm name may render all the partners joint holders of the shares." Assuming that partners were registered as joint holders of the shares, s. 104 would only cause the company to become liable for additional taxation on the basis that the amount distributed was appropriated between the partners in equal shares, whereas the beneficial interests of the partners might be unequal, and, moreover, the Act provides for the assessment of partners upon their individual income, including their interests in a partnership, A company and not its shareholders is the legal and beneficial owner of its shares, The Income Tax Assessment Act 1936, s. 46 (1), provides, so far as material, that a shareholder shall be entitled to a rebate in his assess- ment of the amount obtained by applying to that part of the dividends which is included in his taxable income a rate equivalent to - (a) the rate of tax payable by him on income from property ; or (b) the rate of tax payable by companies for the year of tax, whichever is the less. If a private company had paid a dividend to a share- holder which was another company, the latter company would not have had to pay any income tax on that dividend, so that the payment of a notional dividend out of the undistributed income to a company under s. 104 would likewise not have produced any additional tax under that section on the undistributed income of the private company. But the Income Tax Assessment Act 1939, s. 3, provides that s. 46 of the Principal Act is amended by inserting in sub-s. 1, after the word " shareholder," the words " (other than a company which is a non-resident)." After this amendment a non-resident company which was a shareholder in a private company would have to pay income tax upon a dividend on its shares at the flat rate applicable to companies, so that, in respect of a notional dividend upon the shares out of the undistributed income, the private company would be assessed for the same amount under s. 104,

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Prior to the amendment of s. 46 of the Principal Act by s. 3 of the Act of 1939, there was also no difficulty where the company owned the shares beneficially, because the notional dividend was not subject to any tax in its hands under s. 104, and additional tax on the whole of the dividend could be calculated under s. 105, After this amend- ment, tax would have to be calculated under s, 104 upon a notional dividend to a non-resident company. But until s. 46 of the Principal Act was further amended by s. 4 of the Income Tax Assessment Act (No. 2) 1940, the respondent in calculating the tax payable upon this notional dividend when it was distributed to persons in accord- ance with s. 105 would have had to allow as a rebate the amount already calculated upon it in the hands of the interposed company under s. 104, and I assume that this was done in the present case in arriving at the amount of £8 5s. 9d. Section 4 of the Act of 1940 provides that s. 46 of the Principal Act is amended (a) by omitting sub-s, 1 and inserting in its stead the following sub-section : - "(1.) Subject to this section, a shareholder, being a company which is a resident, shall be entitled to a rebate in its assessment of the amount obtained by applying to that part of the dividends included in its taxable income" the amounts therein mentioned. Since the amendment introduced by this section it would appear that, where a company is a shareholder in a private company, tax has first to be calculated under s. 104 on the amount of the notional dividend at the flat rate applicable to companies, and has then to be calculated under s. 105 as though the whole amount of the dividend had been distributed to persons without any deduc- tion in respect of the tax already calculated under s. 104. But, if there had been an actual dividend, the interposed company, which had paid income tax on the amount of the dividend at the existing flat rate for companies, could at most have distributed to persons the balance of the dividend after deducting the sum required to pay the tax, and the persons would then have had to pay tax on the balance and not the full amount of the dividend. It would appear, therefore, that private companies, in respect of parts of their undis- tributed income notionally distributed to shareholders who are companies, may now have to pay more tax than would be payable

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Court

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Before

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Judgment (251 paragraphs)

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