Commissioner of Taxation (Cth) v Angus - [1961] HCA 18 - HCA 1961 case summary — Zoe

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Commissioner of Taxation (Cth) v Angus

[1961] HCA 18

High Court of Australia|1961-04-14|Before: Windeyer JJ, Menzies J

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Source facts

Court

High Court of Australia

Decision date

1961-04-14

Before

Windeyer JJ, Menzies J

Source

Original judgment source is linked above.

Judgment (54 paragraphs)

[1]

High Court of Australia Dixon C.J. Fullagar, Kitto, Menzies and Windeyer JJ. Commissioner of Taxation (Cth) v Angus [1961] HCA 18

[2]

This is an appeal by the Commissioner of Taxation from a decision of a Board of Review. Under an order made in pursuance of s. 18 of the Judiciary Act 1903-1959 the appeal was argued before the Full Court. The question raised for decision by the taxpayer, who resides in Australia, is whether certain of her income derived from Singapore falls within the exemption given by s. 23 (q) of the Income Tax and Social Services Contribution Assessment Act 1936-1954 Cth. Subject to certain conditions s. 23 (q) exempts from income tax income derived by a resident from sources out of Australia where that income is not exempt from income tax in the country where it is derived. Of the conditions one is material. It is contained in par. (a) of a proviso but as the meaning of the whole proviso is in question it is better to state its effect in full. It provides that par. (q) shall not apply to exempt any income unless (a) where there is a liability for payment of income tax in the country where that income is derived - the Commissioner is satisfied that the tax has been or will be paid; or (b) where the outgoings incurred in producing that income exceed that income - the Commissioner is satisfied that the tax would have been paid in the country where it is derived if the income had exceeded the outgoings. The ultimate source of the income in question in the present case consisted in the distribution by way of dividend of the profits of a company incorporated and resident in Singapore derived out of Australia. The liability to income tax, or to state it more correctly in the terms employed by s. 23 (q), the non-exemption from income tax in the country where it is derived depends upon the Income Tax Ordinance of the Laws of the Colony of Singapore, edition of 1955, being chap. 166. The Ordinance closely resembles the Malayan Income Tax Ordinance 1947-1953 dealt with by the Full Court in Hughes v. Federal Commissioner of Taxation [1] and the Ceylon Income Tax Ordinance dealt with by Menzies J. in Federal Commissioner of Taxation v. Brohier [2] . The taxpayer received the dividends directly from the company making the distribution. But she was not a shareholder: she was in fact a beneficiary in the estate of the shareholder on the register who had died some years earlier and she received the dividends under a direction by the executors to the company to send the dividends directly to her. Had she been a shareholder she could not have claimed the protection of s. 23 (q) for the dividends, because sub-s. (1A) of s. 44 of the Assessment Act, which was inserted by Act No. 11 of 1947 to overcome the effect of the decision of this Court in Reid v. Federal Commissioner of Taxation [1] , provides that the operation of sub-s. (1) of s. 44 shall not be affected by the provisions of par. (q) of s. 23. Now s. 44 governs the liability of dividends to income tax and sub-s. (1), so far as material, provides that the assessable income of a shareholder in a company (whether the company is a resident or non-resident) shall, subject to the section, if he is a resident include dividends paid to him by the company out of profits derived by it from any source. Had she been the shareholder the result would have been that the dividends received by the taxpayer from the company must have been included without regard to s. 23 (q) but, if it had not been for our decision under the parallel Malayan Ordinance in Hughes' Case [2] that result might not have been unsatisfactory to the taxpayer. For the result might have meant the crediting of an amount of Malayan tax under s. 45 of our Assessment Act; but it could not do so because the decision declared that the conditions laid down by s. 45 were not satisfied by the course prescribed by the Ordinance, which enabled the company, if the company so chose, to retain a proportion of the tax paid by the company on the profits and provided in any case for the setting off by the Malayan tax authorities of the same proportion against the liability of the shareholder for Malayan tax. As it happened both the taxpayer in her return and the Federal Commissioner of Taxation in his assessment at first treated her as a shareholder and accordingly pretermitted any question under s. 23 (q) and by reason of Hughes' Case [2] gave no credit under s. 45; and by consequence the Commissioner in his assessment allowed a deduction of the tax from the assessable income in arriving at the taxable income. But when it was seen that the taxpayer was not actually a shareholder, so that in terms sub-s. (1A) of s. 44 could not apply, the taxpayer fell back on s. 23 (q) and that of course meant that the deduction of the tax from the assessable income would not on that footing be allowable.

[6]

It is necessary to go now to the Singapore Income Tax Ordinance. By the terminology which the Ordinance employs a taxpayer's net income to be taxed is called the chargeable income, not as we call it the taxable income. The chargeable income of a company is taxed at the rate of thirty per cent: that rate applies also to the chargeable income of a non-resident person and moreover to the chargeable income of a trustee and an executor (s. 43). The identity of the rates in all three cases is rather a coincidence or accident; it has not always been so. A company resident in the Colony of Singapore is entitled (but not bound) to deduct from the amount of any dividend paid to a shareholder tax at the rate paid or payable by the company (subject to an irrelevant qualification) on the chargeable income of the year of assessment within which the dividend is declared (s. 44 (1)). Western Investments Ltd. had in fact made a deduction on account of tax. In other words it had not declared a "tax free" dividend. Without such a deduction the dividend paid to the taxpayer would have been %5B169,572.91. A company, whether making such a deduction or not, was bound upon payment of the dividend to furnish the shareholder with a certificate setting forth the amount of the dividend paid to the shareholder and the amount of tax which the company has deducted or was entitled to deduct in respect of the dividend (s. 44 (2)). The company furnished such a certificate or certificates to the taxpayer showing that %5B50,193.58 had been deducted. As a shareholder receiving dividends from a company registered and carrying on business in Singapore the taxpayer would be liable to include them in her chargeable income under the Ordinance. But as a beneficiary receiving the same moneys from a trust in Singapore holding the shares she was equally liable to include them in her chargeable income. At first she returned the dividends in the former character but later she corrected that and attributed them to the latter character. The taxation authorities in Singapore said that it made no difference. Now although she was bound to return the amount representing the dividends as part of her chargeable income, her liability to tax was met by a provision of the Ordinance which so far as material said that any tax (a) which a person (a word including a company) has deducted from any dividend or is entitled to deduct from any dividend under the provision already quoted; (b) applicable to the share to which any person is entitled in the income of a trust, should, when such dividend or share is included in the chargeable income of any person be set off for the purposes of collection against the tax charged on that chargeable income. (sec. 46). In the foregoing provision it seems clear enough that par. (b) describes an alternative case and means to refer to any tax applicable to a share of income of a trust as another subject of set-off. The liability of the taxpayer to tax upon the amount paid to her as dividends was in fact met or absolved by "the set-off for the purposes of collection" of the amount deducted from the dividend by the company. Nay more, for it chanced that by reason of a relief to which she was entitled from her full tax upon her chargeable income she obtained a right to a refund of part of the tax. Her chargeable income in fact included other items as well as the amounts representing the dividends of the company, and when the relief was calculated the operation of the set-off was to leave a balance in her favour. The tax authorities in Singapore made the refund.

[9]

It is hardly necessary to say that the problem arises from the particular solution which the Singapore Ordinance gives of the difficulty which confronts every system of taxation of knowing how to deal with profits earned by companies and trusts but distributed to individuals who enjoy the full use of them, particularly if the tax upon the individuals is graduated. It may be remarked that speaking generally the tax upon the individual under the Singapore Ordinance is graduated but it so happens that a flat rate of thirty per cent is imposed upon the income of a resident abroad. It is a mere coincidence that the flat rate was at that time the same as the flat rate imposed upon companies. When the rates differed the operation of the Singapore system of set-off could be seen more clearly because the amounts set off were unequal. That is of course the case more often than not when the shareholder is a resident liable to a tax upon the graduated scale. The relief which is conceded by the Ordinance to a non-resident taxpayer if he is a British subject (s. 47) has a similar operation in bringing about in inequality in the tax which a company may deduct and the tax for which the shareholder is or may be liable. In this way it can be seen that the Ordinance takes the course of exposing the dividends received by a shareholder and income received by a cestui que trust including of course a non-resident shareholder or cestui que trust to tax in their hands but giving the shareholder and the cestui que trust a right to set off the tax payable in respect of those dividends or that income by the company or trustee. The identity of the subject of the tax is substantially maintained. The company is entitled to deduct from the amount of the dividend paid to the shareholder tax paid or payable by it on the chargeable income of the year within which the dividend is declared and it is the tax which has been or might have been so deducted which is set off (s. 44 (1) and s. 46 (a)). In the case of a trust it is the tax applicable to the share of income that is set off. (s. 46 (b)). That means thirty per cent for a trustee or an executor, a word defined to include any person administering the estate of a deceased person. (s. 43 (b): s. 2). Under this machinery the conclusion seems necessary that the income received by Mrs. Angus, the taxpayer, was exposed to Singapore tax and therefore was not exempt from income tax in the country where it was derived.

[10]

But another somewhat difficult problem arises under the proviso to s. 23 (q) set out at the beginning of this judgment. In terms it says that par. (q) shall not apply to exempt any income unless one or other of the two conditions it sets out is satisfied. The second condition, that lettered (b), can have nothing to do with this case and if it be right that the application of par. (q) is excluded unless one or other condition is fulfilled, the question is whether the condition lettered (a) can be said to apply or to be fulfilled. Condition (a) says where there is a liability for the payment of income tax in the country where that income is derived, the Commissioner is to be satisfied that the tax has been or will be paid. Condition (b) deals with the case where the outgoings incurred in producing the income exceed that income and requires that in that case the Commissioner shall be satisfied that the tax would have been paid if the income had exceeded the outgoings. It would seem that it was supposed that the two conditions would cover the whole ground. Yet reflection will show that they do not. For example the income might exceed the outgoings yet by so little that the minimum amount of taxable income in the country abroad is not reached. It may be that what the proviso meant to say is that where case (a) occurred the Commissioner must be satisfied of payment and where case (b) occurred he must be satisfied that payment of tax otherwise would have been made and that it meant to say nothing as to the application of par. (q) where neither case (a) or case (b) occurred but par. (q) on its terms was nevertheless applicable. The proviso is not expressed in a form which grammatically carries this meaning. To begin with not only the "unless" but also the prohibitive words are outside the two conditions. But in spite of the manner in which the proviso is constructed it may be found possible as well as proper to interpret it in that sense. However that may be, it is clear enough that condition (a) should not be narrowly construed. The liability for payment of income tax should be understood to include every description of liability which would be sufficient to make it true that the income was not exempt from payment of income tax in the country where the income is derived and the word "payment" should correlatively be construed as covering every kind of discharge of that liability which in that country was accepted as the equivalent of payment. After all what condition (a) is aiming at is ensuring that the foreign tax liability relied upon to bring the case within s. 23 (q) will be discharged. In the present case the discharge is by a statutory set-off which is a reality. An understanding of the machinery provided by the Ordinance shows it is a reality; witness the refund of part of the tax.

[21]

Section 44 provides that every company which is resident in the Colony shall be entitled (it does not say "required") to deduct from the amount of any dividend paid to any shareholder tax at the rate paid or payable by the company. Section 29 (which seems curiously out of its appropriate place in the Ordinance) provides that the income of a person from a dividend payable by a company liable to tax shall, where such tax has been deducted therefrom, be the gross amount before making such deduction. Section 46 is another very awkwardly expressed section, but, so far as material, it provides that (a) any tax which a company has deducted or is entitled to deduct from any dividend under s. 44, and (b) any tax applicable to the share to which any person is entitled in the income of a trust, shall, when such dividend or share of income is included in the chargeable income of any person "be set off for the purposes of collection against the tax charged on that chargeable income". It is to be noted that, whereas the deduction of tax by a company from a dividend is expressly provided for, and it is also expressly provided that, where a company has deducted tax, the shareholder must return the gross amount of the dividend, there are no corresponding express provisions relating to trustee and beneficiary. The Ordinance, however, appears to contemplate that, if a trustee has to pay tax, he may deduct the amount thereof from a share of income which he pays to a beneficiary. Any tax so deducted may then be "set off" under s. 46, when the beneficiary includes in his chargeable income (as he would apparently have to do under s. 35 (12)) the gross amount of his share of income. Although they are not expressly worked out in precisely the same way, it would appear that the position as between trustee and beneficiary and the position as between company and shareholder are substantially the same. One speaks, of course, with diffidence in dealing with an unfamiliar statutory instrument, but this would appear to be so.

[43]

Although the payments were made to her directly by the company and purported to be dividends, the taxpayer was entitled to the money in question by virtue of the will of her father, C. F. F. Wearne, who died on 23rd July 1944, under which she was entitled for life to a one-third interest in the income of the trust fund constituted by the residuary estate of the testator, which fund in 1955 consisted of 406,973 shares in Western Investments Ltd. It is stated in the statement of agreed facts that the taxpayer's two brothers, who with her were life tenants of the trust fund, were at all times material executors and trustees of the will of the father, but it seems likely that by the time with which we are concerned they were no more than trustees of the fund in question. The shares still stand in the share register of the company in the name of the deceased. The payments in question were made to the taxpayer directly upon the direction of the trustees to the company, which was a family company in which the only other shares issued were two, one held by each brother. What the company did instead of paying the dividends to the trustees - as in strictness it should have done - was to divide them equally into three and pay one portion to each life tenant. Although it is necessary to recognize that the taxpayer was not a shareholder in the company and that what she received was in her hands part of the income of the trust estate and not dividends paid to a shareholder, there is no doubt that the income in question was derived from Singapore where the trustees were resident, and if s. 23 (q) of the Income Tax and Social Services Contribution Assessment Act can apply at all, the matter for determination thereunder is whether that income was exempt from income tax in Singapore. The Board of Review rejected a submission made on behalf of the Commissioner that s. 23 (q) had no application and concluded that because the income was not exempt from tax in Singapore it was exempt here. It is from that decision that the Commissioner appeals.

[46]

The additional circumstances relied upon here were that in accordance with the Ordinance, the taxpayer's husband made to the Comptroller of Income Tax, Singapore, a return of his wife's income in which there was included, not the actual amounts which she had received from Western Investments Ltd., but the gross amount that she would have received had tax not been deducted in accordance with s. 44 (see s. 29) and that the tax assessed thereon was paid. The gross amount totalled 169,572 dollars as against the 119,379 dollars that the taxpayer received - a difference of 50,193 dollars. The tax payable upon the total income so returned (viz. 192,669 dollars) amounted to 49,602 dollars, but because of a credit of 54,122 dollars arising from the deduction of tax from dividends (including the 50,193 dollars deducted by Western Investments Ltd.), the taxpayer's husband received for the taxpayer a repayment of 4,520 dollars from the Accountant-General, Singapore. These figures, it was argued for the taxpayer, show that she paid tax in Singapore on the moneys received by her from Western Investments Ltd., because if those moneys had not been included in the husband's Singapore return, the repayment would obviously have been much higher than 4,520 dollars because, of the total income returned (192,669 dollars) not less than 169,572 dollars came from Western Investments Ltd. This was no doubt the case, and in the absence of complicating factors I would readily enough agree that Singapore law does impose a liability for tax upon a person in the situation of the taxpayer in respect of her Singapore income, including gross dividends, and that this liability is in most cases satisfied by deduction from what would otherwise be repayable to the taxpayer by reason of the deductions made by companies declaring dividends. The argument that the company's deductions prevented the taxpayer ever becoming liable to income tax is, I think, inconsistent with the fact that the repayment made to her was calculated by deducting "tax payable" (49,602 dollars) from "tax paid or deducted" (54,122 dollars). I do not regard the income upon which it was calculated that tax of 49,602 dollars was payable as not being brought to tax because there existed a credit of 54,122 dollars arising from deductions from company dividends. Had there been no tax, this amount would have been payable in full, but it was paid only to the extent of the difference between the credit and the tax payable. As to this, I adhere to the view that I expressed tentatively in Federal Commissioner of Taxation v. Brohier [1] , that what such an Ordinance does is to impose tax and provide for its payment by set-off. It is to be observed that under s. 46 of the Singapore Ordinance, tax deductions under s. 44 shall be set off for the purposes of collection against tax charged to the shareholder when the dividend has been included in chargeable income. This is hardly consistent with the idea that a sufficiently large deduction would prevent any liability for tax ever arising; rather the deductions pursuant to s. 44 provide a means for discharging the tax liability of those from whose dividends deductions have been made.

[50]

This brings me to the difficulty created by the circumstance that in Singapore the taxpayer was treated as a shareholder of Western Investments Ltd., whereas in fact she was not. Had the regular course been followed, dividends after deduction of tax would have been paid by the company to the trustees with a certificate in accordance with s. 44 (2) of the Ordinance. The trustees would then have included the gross dividends as part of their chargeable income (ss. 29, 35 (11)). The tax would have been levied on the chargeable income of the trustees in accordance with the provisions of s. 43, and if tax were payable the trustees presumably would have been entitled to a set-off under s. 46 and to repayment of the amount whereby what had been deducted exceeded the tax payable. The statutory income (which is the first step in the calculation of the chargeable income) of the taxpayer as a beneficiary would not, however, have been what she received from the trustees; it would have been one-third of the statutory income of the trustees (s. 35 (12)). This she would have received not as dividends, but as a share of a trust income. Her share would then be included in her husband's chargeable income (ss. 37, 38, 51); and any tax applicable to that share which had been paid by the trustees would be set off for the purposes of collection against the tax charged on that chargeable income (s. 46 (b)). I do not profess to understand fully just how this would have worked out in practice, but it does seem reasonably clear that under the Ordinance tax is payable by a beneficiary under a trust upon the share of the statutory income of the trustees to which the beneficiary is entitled and that under s. 46 (b) there would be some set-off, and presumably if the tax applicable to the share of a beneficiary were to exceed the tax chargeable upon the taxable income of that beneficiary, there would be some repayment. Had the regular course been followed, it would seem, therefore, that the income of the taxpayer in question would have been charged with tax in Singapore. In these circumstances it does not seem to matter that the income that the taxpayer received was brought to tax somewhat differently.