Commissioner of Taxation (Cth) v Blakely

The commissioner assessed the respondent to income tax in respect of a "dividend" received by the respondent from the company. The commissioner treated £5,000 as having been received by way of return of paid-up capital. The balance he treated as representing the profits of the company. The respondent's share of that balance (after adjustment in respect of taxes payable by the company but not recorded in the accounts of the company) was £2,165, of which the respondent was treated as entitled to three-fifths, namely £1,299. This amount, it is contended for the commissioner, is a dividend paid to him by the company out of profits derived by the company and is therefore claimed to be taxable under s. 44 (1) of the Income Tax Assessment Act 1936-1942.

The respondent objected to the assessment and the objection was referred to a Board of Review which, relying upon Commissioner of Taxation (N.S.W.) v. Stevenson [1] , set aside the assessment. The commissioner now appeals to this Court and Kitto J. has stated a case whereby the opinion of the Full Court is sought upon the question whether the sum of £1,299 was rightly included by the commissioner in the assessable income of the respondent by reason of s. 44 (1) or s. 47 of the Income Tax Assessment Act 1936-1942. If this question is answered in the affirmative it will be necessary to answer a further question, viz., whether the respondent is entitled to any and what rebate under the provisions of s. 107 of that Act.

The Commonwealth Income Tax Assessment Act 1936-1942, s. 47, expressly makes provision with reference to distributions by the liquidator of a company. Section 47 (1) is as follows: - "Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid up capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it." The commissioner, however, cannot rely upon this provision in the present case because the company was not wound up and no distribution was made by any liquidator. The commissioner relies upon s. 44 (1) of the Act, which is in the following terms: - "(1) The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall, subject to this section - (a) if he is a resident - include dividends paid to him by the company out of profits derived by it from any source." Section 6 of the Act provides that " "paid" in relation to dividends includes credited or distributed". Section 6 also provides - " "Dividend" includes any distribution made by a company to its shareholders, whether in money or other property, and any amount credited to them as shareholders, and includes the paid-up value of shares distributed by a company to its shareholders to the extent to which the paid-up value represents a capitalization of profits; but does not include a return of paid-up capital or a reversionary bonus on a policy of life-assurance."

The contention of the commissioner is that the amount of £1,299, which was calculated after making full allowance for return of capital, represents profits derived by the company. This sum, it is argued, was distributed by the company to persons who were in fact its shareholders, either in money or in other property, and was therefore a dividend within the meaning of the Act, and formed part of the assessable income of the respondent shareholder.

In Stevenson's Case [1] shareholders possessed themselves of the assets of a company, realized them, paid its debts, and retained the balance. An attempt was made to put the company into liquidation after the payments had been made to the shareholders, but necessary formalities were not observed, and the result was that there was no lawful liquidation of the company in accordance with the New South Wales Companies Act. The commissioner sought to tax the shareholders upon such portion of the moneys which they received as represented the profits as distinct from the capital of the company. The Income Tax (Management) Act 1928 N.S.W. defined "dividend" (so far as relevant) as including profit. Section 11 of the Act provided that the assessable income of any person should include (b) in the case of a member or shareholder (other than a company) of a company which derived income from a source in the State all dividends (with an immaterial exception) "credited, paid or distributed to the member or shareholder from any profit derived from any source by the company". It was held by the court that income tax was not payable under this Act in respect of that portion of the moneys received by the shareholders which represented the profits of the company. The New South Wales Act did not tax distributions made in a regular liquidation; that is, the rule in Inland Revenue Commissioners v. Burrell [2] applied. It was held that the general words of the Act in s. 11 should not be construed as applying to an irregular liquidation where, as it was held, what was paid to a shareholder did not represent a profit detached from a share which continued to exist as a piece of property, but really represented a distribution "in retirement or extinguishment of the share interest itself". In other words, it was held that what was paid to the shareholders represented not the proceeds of property but the property itself, so that, as the property, as a share, ceased to exist, there could be no dividend thereon or income derived therefrom. Thus an irregular liquidation was placed upon the same footing for the purposes of tax payable under the New South Wales Act as a regular liquidation. As Evatt J. said, there was a de facto liquidation, and the substance of the matter was that the shareholders received the same share of the company's assets as they would have received in a valid winding up.

The facts of the present case correspond very closely with the facts in Stevenson's Case [1] , except that in the present case the parties concerned did not even make an attempt to observe the provisions of the Companies Act in relation to liquidation. Stevenson's Case [1] was followed in Thornett v. Federal Commissioner of Taxation [2] .

1. (1937) 59 C.L.R. 80. 2. (1937) 59 C.L.R. 80. 3. (1938) 59 C.L.R. 787.

It is contended for the commissioner that under the applicable Commonwealth Act it is irrelevant to inquire whether moneys (or other property) received by a shareholder represent "the fruit" of the share, the "detachment" of which leaves the share standing as a piece of property. It is argued that the only question which arises under the Commonwealth Act is whether what was received represented profits of the company. Such receipt may or may not represent a profit to a shareholder; for example, a shareholder may have paid a full market price for his shares, representing the estimated value not only of the capital assets of a company, but also of a shareholder's interest in undistributed profits of the company. But that fact would be immaterial to the liability of the shareholder to pay tax on dividends received in respect of such shares. In the case of a company which is a going concern all dividends paid as such represent the fruit of the share and under the Commonwealth Act are taxable as income in accordance with s. 44. But it is contended for the commissioner that under the relevant provisions of the applicable statute they are made taxable only because what the shareholder has received is a profit of the company and not because they represent something detached from the proprietary interest of a shareholder which is represented by his share. I agree with the argument for the commissioner that the criterion of assessability under s. 44 is not whether what is received by a shareholder is income to him in the sense of something detached from his capital asset consisting in his shares: the relevant question to ask is whether what is received comes from the profits of the company. Here, what was got or taken by the shareholders did come in part from the profits of the company. But this fact does not conclude the case in favour of the commissioner.

For the respondent it is contended, in the first place, that there was no distribution of the money in question. It was argued that distribution involves apportionment between several recipients, and that where all the assets of the company in a mass went to one person or to two persons as joint owners there was no distribution of anything. In my opinion the word "distributed" in s. 6 should not be construed in this narrow manner. If money or assets are passed out by a company to a shareholder or shareholders they should, in my opinion, be regarded as distributed by the company. The argument for the respondent would lead to surprising results. There might, for example, be only one preference shareholder in a company. He would be entitled to all dividends upon preference shares. It appears to me that it would be absurd to hold that because he was the only shareholder nothing had been distributed to him.

It is further argued, however, that what the respondent and his wife took was not received by them as shareholders. In fact they appropriated the assets simply because they were shareholders, and it was only because they were shareholders that they could even suggest that they had any right to the assets.

But, in my opinion, an appropriation by shareholders of the assets of a company by their own act cannot be regarded as a distribution by the company. The shareholders would be subject to estoppels inter se, but this would not alter the fact that the company did nothing. It did not make any distribution of anything to anybody. The shareholders took, and wrongfully took, the assets of the company.

I cannot agree that this action of the shareholders resulted in the extinguishment of their shares in the company. They remained shareholders after they took the assets. They were entitled to all the rights of shareholders. Meetings of shareholders and directors could have been held, and if, for example, some unexpected asset had come to the hands of the company, the company would have been entitled to deal with it. Further, after the shareholders took the assets, but before they had discharged the liabilities of the company, it was the company which still owed its debts. If the shares had not been fully paid up a creditor would have been able to put the company into liquidation and the shareholders would have become contributories. But all these considerations leave untouched, in my opinion, the conclusion that no distribution was made by the company itself. There was a mere appropriation of the property of the company by the shareholders - an appropriation which completely ignored the provisions of the Companies Act.

I am therefore of opinion that no part of what was received by the respondent can be described as a dividend paid to him by the company, although part of it does represent profits derived by the company.

The commissioner is, in my opinion, really seeking to tax the respondent upon the basis of what the company ought to have done if the law contained in the Companies Act had been observed, and not upon the basis of what the shareholders of the company have in fact done. The position is that all the creditors of the company have been paid, and the shareholders are quite satisfied with the position as it now stands. There is no-one left, except the commissioner, to complain of anything, and the commissioner has no claim against the company, which has paid all tax due. The Companies Act, s. 295 (6), provides that where a company has been dissolved the company or any member or creditor thereof who feels aggrieved by the company being struck off the register may at any time within fifteen years after the name of the company has been struck off apply to the Supreme Court for an order for restoration of the name of the company to the register. I have some difficulty in understanding how a non-existent company can make any application to a court. But no member or creditor of the company feels aggrieved by anything, and accordingly this provision is not applicable.

But the position disclosed by the facts in this case shows that perhaps some further provisions are required to prevent persons evading the revenue laws by disregarding the provisions of the Companies Act with respect to liquidation. In this case, as the shareholders have taken the property of the company without any transfer to them by the company, it may be that the commissioner could interest the Registrar-General and invite him to act under ss. 297 and 299 of the Companies Act to recover the property of the company of which the respondent and his wife have assumed the disposition. But it is not one of the functions of this Court upon this case to determine whether steps can be taken to revive the company for the purpose of requiring, not the company itself, but the shareholders in the company, to discharge taxation liabilities which would have existed if the law had been observed.

In my opinion, upon the facts as stated in the case, the first question should be answered - No; that is to say, no part of the sum of £1,299 was rightly included by the commissioner in the assessable income of the respondent. The second question in the case requires an answer only in the event of the first question being answered in the affirmative. Therefore no answer is required to the second question.

In my opinion question (a) in the case stated should be answered that no part of the sum of £1,299 was rightly included by the commissioner in the assessable income of the respondent taxpayer by reason of s. 44 (1) or of s. 47 of the Income Tax Assessment Act 1936-1942 or at all. Question (b) is asked contingently upon a contrary answer being given to question (a) and therefore does not arise and should not be answered.

I have had the advantage of reading the reasons prepared by Fullagar J. and agree in them.

This is a case stated by Kitto J. in an appeal by the Commissioner from a decision of the Board of Review. The case is concerned with income derived by the taxpayer during the financial year ended 30th June 1942. The taxpayer's objection was upheld by the Board of Review.

A company named Bob Blakely Pty. Ltd. was incorporated on 1st July 1936 under the Victorian Companies Act 1928. In 1941 the name of the company was changed to Bob Blakely Transports Pty. Ltd. The company purchased from the respondent and his wife a business of produce merchants and transport agents, which they had previously carried on. The consideration for the transfer was the allotment of 3,000 fully-paid shares to the respondent and 2,000 fully-paid shares to his wife. From the incorporation of the company until its dissolution the respondent and his wife were the only shareholders and the only directors.

The company carried on business and made profits. No dividends, however, were declared, and additional income tax under Div. 7 of Part III. of the Income Tax Assessment Act, as amended from time to time, was paid in respect of these profits. On 30th June 1941 a sum of £2,520 was standing to the credit of the company's profit and loss appropriation account. The balance sheet of the company at that date showed the assets of the company as of a total value of £9,849. Goodwill was shown at £2,479, while external liabilities totalled £2,329. The difference of £7,520 equalled the total of paid-up capital, £5,000, and the balance of £2,520 standing to the credit of profit and loss appropriation account.

On 15th August 1941 a deed of partnership was executed between the respondent and his wife whereby they agreed to become partners in the business of transport agents and produce merchants. Without any resolution of the company or of the directors, and without any other formality, the company on 19th August 1941 ceased to carry on business, and thereafter the respondent and his wife carried on in partnership under the deed the business which the company had previously conducted. They took possession of the company's tangible assets, collected and retained the debts owing to it, and discharged all its external liabilities. The bank account of the company was transferred into the name of the partnership on 30th October 1941, and about the same time the registration of the company's motor vehicles was transferred into the name of the partnership. No action was ever taken to put the company in liquidation in accordance with the provisions of the Companies Act 1938, and no liquidator was appointed in pursuance of those provisions. On 5th September 1941 the Registrar-General was notified that the company had ceased to carry on business on 19th August 1941. On 26th July 1944 the Registrar-General caused to be published in the Government Gazette , in pursuance of s. 295 (5) of the Act, a notice, publication of which had under that section the effect of dissolving the company. On 12th February 1943 the respondent and his wife sold the assets of the partnership business, including goodwill.

The original assessment of the respondent in respect of income derived during the year ended 30th June 1942 was issued on 6th January 1944. At a later date the Commissioner issued a notice of amended assessment, whereby he added to the respondent's assessable income a sum of £1,299 as income from property. The notice stated that the assessment had been "amended on account of inclusion of final dividends from Bob Blakely Transports Pty. Ltd." It is unnecessary to consider the steps by which the Commissioner calculated the sum of £1,299. It is sufficient to say that that is the sum which the Commissioner regards as representing that proportion of the respondent's share of the total value of the assets taken over from the company by the partnership which he regards as representing accumulated profits of the company.

There was some discussion during argument as to the precise legal effect of the various steps which were taken between the formation of the partnership and the dissolution of the company, and which I have outlined above. I do not think it is necessary to inquire what the exact position was at each stage. The formalities required by the Companies Act 1938 for the protection of creditors and shareholders were not observed. But all the creditors of the company were in due course paid, and the only shareholders were Mr. and Mrs. Blakely themselves. The creditors having been paid, there was nobody who could challenge, or seek to undo, what was done, and it seems to me that in the end the partners received from the company, and became owners of, all the assets of the company, the interest of each corresponding to his or her shareholding interest in the company.

The Commissioner's argument may be stated shortly thus. When you look at the relevant balance sheet of the company, you see that the assets received by the shareholders represent in part capital originally paid up and in part accumulated profits of the company. What was received by each shareholder, therefore, represents in part profits made by the company, and to the extent to which it does represent those profits it is assessable income in his or her hands. To ascertain the extent to which what was received represents profits, it is necessary, of course, to make an apportionment. The method of apportionment adopted by the Commissioner is not challenged as such, but his argument is attacked at its foundation. It is said that what was received does not possess at all the character of income in whole or in any severable part.

Apart from some statutory provision dealing specially with the case, it is well settled that distributions to shareholders in the liquidation of a company cannot be treated as income in any part, however clear it may seem that what the shareholders are receiving represents in part profits made by the company in the past. The position was put shortly by Scrutton L.J. in Inland Revenue Commissioners v. Blott [1] , in a passage quoted by Pollock M.R. (as he then was) in Inland Revenue Commissioners v. Burrell [2] . Scrutton L.J. said: - "A company is liquidated during the year of assessment, and the liquidator returns to the shareholders, (1) their original capital, (2) accretions to capital due to increase in the value of the assets of the company, (3) the reserve fund of undivided profits in the company, (4) the undivided profits of the last year of assessment. Heads (3) and (4) will have paid income tax through the assessment of the company; but it appears to me that none of the heads will be returnable to super tax as assessment; they are not income from property, but the property itself in course of division." Pollock M.R. added: "No doubt this opinion was expressed obiter in the course of the judgment, but I agree with it". Atkin L.J. and Sargant L.J. were of the same opinion. The same view was applied in Webb v. Federal Commissioner of Taxation [3] , a case decided under the Commonwealth Income Tax Assessment Act 1915-1918. In that case there had been a "reconstruction", which involved a transfer of all the assets of an old company to a new company and the issue of shares in the new company to shareholders in the old company. The assets of the old company represented, to a very large extent, accumulated profits. It was held that no part of the shares in the new company represented income in the hands of the recipients. In a joint judgment Knox C.J., Gavan Duffy J. and Starke J. said [1] : - "If the old company had detached any part of its profits and distributed that part among shareholders, the portion received by each shareholder would have become part of the income of such shareholder, but until such detachment every shareholder's interest in the whole of the undistributed assets of the company remained part of his capital." It followed, of course, that what was received by a shareholder on a distribution of assets in satisfaction and extinguishment of the interest represented by his share was capital in his hands and not income.

1. (1920) 2 K.B. 657, at p. 675. 2. (1924) 2 K.B. 52, at p. 64. 3. (1922) 30 C.L.R. 450. 4. (1922) 30 C.L.R., at p. 461.

Both in Burrell's Case and in Webb's Case there had been a formal liquidation complying with the relevant Companies Act. But the same principle was applied in Commissioner of Taxation (N.S.W.) v. Stevenson [2] , where, as in the present case, the assets of a company were distributed to shareholders without any formal liquidation. That case arose under the Income Tax (Management) Act 1928 N.S.W.. The assets of a company consisted of the freehold and goodwill of a hotel and certain undistributed profits. The property was sold, and, after payment of all the company's debts, one of the directors, with the approval of the others, distributed the proceeds and the other moneys of the company among the shareholders in proportion to their holdings. Actually, after the distribution had been completely made, a meeting was held which purported to pass a resolution for voluntary liquidation and to appoint a liquidator, but it would appear that notice of this meeting had not been duly given in accordance with the articles. It was held by a majority of this Court that no part of the money received by any shareholder was income in his hands. In a joint judgment Rich, Dixon and McTiernan JJ. [3] stated the general principle thus: - "In a liquidation the excess of assets over external liabilities is distributed among shareholders in extinguishment of their shares. The shareholders, in other words, as contributories receive nothing but the ultimate capital value of the intangible property constituted by the shares. The res itself ceases to exist. The profits are not detached, released or liberated, leaving the share intact as a piece of property. There is no dividend upon the share. There is no distribution of profits because they are profits. The shareholder simply receives his proper proportion of a total net fund without distinction in respect of the source of its components and he receives it in replacement for his share. Both in the British and American systems of taxation such a transaction is acknowledged to be of a capital nature and to involve no receipt of income". A little later [1] their Honours considered the question whether it made any difference that the distribution had been made without complying with the relevant provisions of the Companies Act. They said [2] : - "In our opinion the fact that the distributions were not authorized by law does not operate to make any part of the sum distributed taxable." That fact did not affect the character of the receipt, which character had been indicated in the passage [3] which I have quoted above. Stevenson's Case [4] was applied in Thornett v. Federal Commissioner of Taxation [5] , a case which arose under the Commonwealth Income Tax Assessment Act 1922-1929.

1. (1937) 59 C.L.R. 80. 2. (1937) 59 C.L.R., at p. 99, 3. (1937) 59 C.L.R., at pp. 103, 104. 4. (1937) 59 C.L.R., at p. 103. 5. (1937) 59 C.L.R., at p. 99. 6. (1937) 59 C.L.R. 80. 7. (1938) 59 C.L.R. 787.

That a due proportion of receipts of the nature in question could be brought into charge by special statutory provision is not open to question. Nor would such an artificial extension of the notion of income involve a contravention of s. 55 of the Constitution: cf. Colonial Gas Association Ltd. v. Federal Commissioner of Taxation [6] . It was accordingly argued for the Commissioner that the legislation relevant to the present case did, on its true construction, bring into charge a proportion of the value of the assets received or "taken over" by Mr. and Mrs. Blakely, and that the present case was therefore not covered by Stevenson's Case and Thornett's Case.

The Act relevant to the present case is the Income Tax Assessment Act 1936-1942. I understood Mr. Tait, for the Commissioner, to maintain in the first place that the Commonwealth Act had since 1936 adopted, with regard to the taxation of the income of companies and their shareholders, a basic principle different from that which had found expression in the earlier Acts. He said, if I followed him correctly, that the present scheme was to tax the profits of a company in the hands of its shareholders, whereas the Acts in question in Stevenson's Case and Thornett's Case set out to tax the income of the shareholder as such. I do not think that anything can be made of any such general proposition, which seems to represent a conclusion rather than a premiss. The relevant Act must simply be construed according to ordinary principles, and we must see whether it does, so construed, subject to tax that which was held not to be taxed under the legislation considered in Stevenson's Case and Thornett's Case.

Section 47 of the Income Tax Assessment Act 1936-1942, which corresponds to s. 16B of the Act which applied to Thornett's Case, was obviously designed to tax distributions in the liquidation of a company to the extent to which they represented undistributed profits of the company. It is, however, limited in terms to distributions "by a liquidator in the course of winding up the company", and what is envisaged seems clearly to be the normal process of winding up, compulsory or voluntary, which is prescribed by the Companies Act of each State. Here there was no liquidator and no winding up in the sense contemplated by the Victorian Companies Act 1938. There was simply a handing over of assets by a company to its shareholders, who subsequently discharged the company's debts. The word "liquidator" is defined by s. 6 of the Assessment Act as meaning "the person who, whether or not appointed as liquidator, is the person required by law to carry out the winding up of a company". But in the present case there was no person in that position, and in any case, as I have said, there was no winding up in any real sense. It is not, in my opinion, possible to bring the case within the terms of s. 47.

The main argument for the Commissioner was based on s. 44 (1) of the Act, read in the light of the definitions of the word "dividend" and the word "paid" in s. 6. Section 44 (1) provides that the assessable income of a shareholder in a company shall (a) if he is a resident, include dividends paid to him by the company out of profits derived by it from any source, (b) if he is a nonresident, include dividends paid to him by the company to the extent to which they are paid out of profits derived by it from sources in Australia. It is par. (a) that is relevant here. Section 6 provides (omitting matter irrelevant to the present case) that the word "dividend" includes any distribution made by a company to its shareholders, whether in money or other property, and any amount credited to them as shareholders, but does not include a return of paid-up capital. Section 6 also provides that the word "paid" in relation to dividends includes credited or distributed. The argument was that in the present case there had been a distribution made by a company to its shareholders in property other than money, and that the effect of s. 44, read with the definitions, was to include in the assessable income of the shareholders so much of what was distributed as represented profit of the company and to exclude so much as represented a return of paid-up capital.

It is true that the Act under which Thornett's Case (which applied Stevenson's Case) was decided was in different terms from those of the Act now under consideration. That Act was the Act of 1922-1929, s. 16 (b) (i) of which provided that the assessable income of any person should include, in the case of a member or shareholder of a company which derives income from a source in Australia, dividends, bonuses or profits credited paid or distributed to the member or shareholder from any profit derived from any source by the company. The Act contained no definition of the word "dividend". Section 44 (1) of the Act of 1936-1942 first appeared as s. 16AA of the Act of 1922-1934. It was inserted by the Act of 1934, which also added to s. 4 of the Act then in force a definition of the word "dividend". It provided (omitting matter not here relevant) that the word "dividend" should mean any distribution made by a company to its shareholders, whether in money or other property, out of its profits. The Act of 1936 omitted from the definition the words "out of its profits" and added the words "but does not include a return of paid-up capital". The words "out of profits" were still retained, in s. 44 (1). It is unnecessary to consider in detail the terms of the New South Wales Act under which Stevenson's Case was decided. It is sufficient to say that it was indistinguishable in effect from the Commonwealth legislation considered in Thornett's Case.

Now it is possible that, when the Commonwealth legislation assumed in 1936 the form which it has since retained, it was intended to cover, and was believed to cover, such cases as Stevenson's Case and Thornett's Case. I should seriously doubt this myself. One would have expected such a result to be sought rather through the medium of s. 47 than through the medium of s. 44, and s. 47 would seem to be unnecessary if s. 44 has the meaning contended for. But, if this was the intention behind the new form which the legislation took, I think that the draftsman missed, as I think the argument for the Commissioner in this case misses, the whole point of the decisions in Stevenson's Case and Thornett's Case - and, for that matter, in Burrell's Case. And I do not think that the Act of 1936-1942 brings into charge any part of what the taxpayer received in this case.

I would not be prepared to deny that there was a "distribution" in this case. There was clearly a "distribution" in Stevenson's Case. But the point in this case is, as it was in Stevenson's Case, as to the nature of the receipt. There was not a distribution of profits, or a distribution out of profits. What was received was capital. There was no detachment or severance from the funds of the company of money or other assets as representing a profit made by the company. There was simply a realization of a share investment (per Starke J. in Thornett's Case [1] ). "The shareholders receive nothing but the ultimate capital value of the intangible property constituted by the shares The shareholder simply receives his proper proportion of a total net fund without distinction in respect of the source of its components, and he receives it in replacement for his share" (per Rich, Dixon and McTiernan JJ. in Stevenson's Case [2] ). There is, in my opinion, nothing in the Act which gives the character of income to this receipt, which was according to general principles a capital receipt.

1. (1938) 59 C.L.R., at p. 799. 2. (1937) 59 C.L.R., at p. 99.

In my opinion the decision of the Board of Review was correct. Question (a) in the case stated should be answered "No". It is unnecessary to answer question (b).