Commissioner of Taxation (NSW) v Hillsdon Watts Ltd [1937] HCA 13;

Commissioner of Taxation (NSW) v Hillsdon Watts Ltd [1937] HCA 13; - HCA 1937 case summary — Zoe

[8]

Income which is received by a person may be the result of a whole series of operations conducted in different countries. When it becomes necessary to determine what are the sources of the income it is a mistake to concentrate attention on "the final stage" in the operations which actually brings in the money which constitutes the gross income (Commissioners of Taxation v. Kirk[8]). In that case the Judicial Committee of the Privy Council considered a provision of the New South Wales Land and Income Tax Assessment Act of 1895 which charged tax upon incomes derived from lands of the Crown held under lease or licence issued by or on behalf of the Crown or arising to any person from any sources whatsoever in New South Wales. The Act also provided that no tax should be payable in respect of income earned outside the Colony of New South Wales. Certain Broken Hill mining companies - (a) extracted ore from the soil; (b) manufactured it into a merchantable product; (c) sold the product; and (d) received the moneys arising from the sale. It was held that, notwithstanding that the finished products were sold exclusively outside New South Wales, the companies derived income which was subject to tax under the provisions mentioned. It was said that all the four operations mentioned were necessary stages which terminated in money and that the income was the money resulting less the expenses attendant upon all the stages. It was pointed out that English cases such as Sulley v. Attorney-General[9] and Grainger & Son v. Gough[10] dealt with the question of exercising a trade and not with the question of the sources from which the profits were derived. The decision in Kirk's Case[11] was that income was earned from the two processes of extracting the ore from the soil and manufacturing it into a merchantable product. The decision therefore rendered it necessary to determine what part of the income could properly be attributed to processes carried on within New South Wales. As already stated, the decision lays down the principle that where income is the result of a whole series of operations conducted in different countries and it becomes necessary to determine what are the sources of income, it is a mistake to concentrate on the final stage which actually brings in the money.

[15]

When the commissioner does this he should not, in my opinion, estimate hypothetical profits at any stage independently of the actual profit at the final stage. He should take the actual profit as his basis and assign some portion of it to a source in New South Wales. It is doubtless the case, as a general rule, that the treatment or packing of goods in a particular manner increases the value of the goods so that a profit may have been made in the treatment and packing - the profit being the difference between the cost of creating the added value and the amount of the added value. Where a business involves dealing with goods in this way, market prices may provide a standard which makes it possible to estimate the net added value and to regard it as income derived in the place where the treatment and packing take place. But this will not always be the case, and it may be that no profit at all can be attributed to the treatment and packing. I have said that "a profit may have been made." I use this expression advisedly, because, if there is no room for the existence of such a profit in the final result, that profit cannot be regarded as a real profit derived from the operations of treating and packing. If, for example, the goods were ultimately sold at a loss, I conceive that it could not be contended that nevertheless income had been derived from intermediate operations such as growing or manufacturing or treating or packing or transporting. The question of the source from which the income comes can only arise if there really is taxable income (being gross income less a smaller cost of producing it) which is available for theoretical distribution among various sources. If there is no such income in the final result, no question arises as to the derivation of portions thereof. Thus, in my opinion, an unrealized profit at one stage of a series of operations, which operations culminate in sale, is in the strict sense never in itself taxable as income. It is easy to imagine a case where, at the time of despatch from Australia, goods appear to include an unrealized profit, but where they are ultimately lost or destroyed or sold at a loss. In such a case any hypothetical profit is also destroyed, because it can come into real existence only as part of an actual profit which enters into taxable income. In the case of Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd.[13] there were very special findings of fact that the goods exported could not have been sold in Australia for home consumption or for exportation, and that no value existed in the goods at the moment of exportation beyond the cost of production. The decision in Angliss' Case[14] depends entirely upon these findings. There are no such findings in this case and there is no evidence upon which such findings could be supported. In my opinion, therefore, the decision in Angliss' Case[15] has no direct bearing upon the decision which ought to be given in this case.

[19]

The appeal and cross-appeal depend upon the construction of sec. 28 of the Income Tax (Management) Act 1928 of New South Wales. Two classes of transaction are involved. The production in the State of plants and seeds and their sale in and outside the State are part of the business carried on by the taxpayer. But another part of the business is the importation of Kentia palm seeds and their subsequent re-sale abroad for shipment from Sydney on c.i.f. & e. terms and conditions. The business was carried on in Sydney and in both cases sales abroad were effected by cable and correspondence. Each side claims that neither case is one for apportionment under the provisions of sec. 28. The taxpayer claims that the sales for export from New South Wales constitute a source of income exclusively outside the State. The Commissioner contends that they constitute a source of income exclusively in the State. Sec. 28 is not well drawn. It is not enough that the transaction should fall within pars. (a), (b) or (c). It is not governed by the section unless it also can be truly said of it that it is a source not exclusively in the State. Then by its reference to the source of the same income in the State and the source outside the State the section shows that the draftsman regarded a larger source as capable of separation into two or more subsidiary sources of income. This confusion of terms makes the section a little difficult to construe and apply. But its obvious purpose is to overcome the difficulty of assigning income arising from transactions extending out of the State in some of their steps or stages to a locality either in or out of the State. This court has many times faced the difficulty in the absence of such a section, e.g., Mount Morgan Gold Mining Co. Ltd. v. Commissioner of Income Tax (Q.)[16]; Dickson v. Commissioner of Taxation(N.S.W.)[17]; Commissioner of Taxation (W.A.) v. D. & W. Murray Ltd.[18]; Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd.[19]. I think that, wherever a series of steps is necessarily taken before the income they are designed to produce arises in the hands of the taxpayer and some of these necessary steps take place abroad and the others within the State, sec. 28 applies. It is in this sense that the section uses the expression "source of any income not exclusively in the State." I regard both transactions now in question as of that description. For these reasons I agree in the conclusion of the majority of the Supreme Court. But I do not think that the form in which the order is drawn up is a desirable one. So far as material it does no more than "uphold" the appeal from Maxwell J. as to the "non-partnership transactions." This makes it necessary for those who are to apply the order to discover what are "non-partnership transactions" and leave them at large as to the next steps to be taken. I think there should be a declaration to the effect that the income of the taxpayer derived from buying and selling Kentia palm seed for resale in and export to other States and abroad and its income derived from the production of nursery plants and seeds in New South Wales and their sale in or for export to other States and abroad should be apportioned under the provisions of sec. 28 of the Act. With that declaration I would set aside the assessment and remit it to the commissioner to enable him to make the apportionment so that the taxpayer may then have the reassessment reviewed if it wishes to do so.

[28]

In my opinion the basis of these rival contentions is a mistaken view of the purpose and operation of sec. 28 (1). In the absence of such a provision, when a single profit is recovered as a result of operations which extend beyond the political boundary of the taxing State, the profit must be considered as arising on one side of the boundary rather than another. If it is possible to ascertain how much of the profit is obtained although in an unrealized form at successive stages of the operations, the sum realized may be dissected and separate parts of it attributed accordingly to the places where the respective stages of the operations are completed. If this cannot be done and the total profit recovered is an inseparable whole obtained as the indiscriminate result of the entirety of the operations, the locality where it arises must be determined by considerations which fasten upon the acts more immediately responsible for the receipt of the profit (See Commissioner of Taxation (W.A.) v. D. & W. Murray Ltd.[20]; Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd.[21]). The purpose of sec. 28 (1) appears to me to be to place within the determination of the commissioner, subject to the Court of Review, the apportionment of profits contained in moneys recovered as the result of operations not absolutely confined to the State, whether or not, apart from that sub-section, it would be possible to dissect the profit and to trace part of it to an unrealized or unconverted profit obtained in one territory, while other parts were attributable to operations in another territory. It is true that the expression "the source of any income" is used in sec. 28 (1), and in legislation containing no provision for apportionment this expression has been considered to be satisfied by ascribing the whole profit to one locality. But the figurative expression "source of the income" is vague and indefinite. In sec. 28 (1) itself the expression is again employed and in what must necessarily be a varying sense. For the sub-section first speaks of the source, that is, the one source, not being exclusively in the State, and then speaks of a source within and another outside the State. Again, according to the definition of income in sec. 4 "any source in the State" is enough to bring the income within the Act. In spite of the difficulty caused by the use of the word "source," I think sec. 28 (1) should be interpreted as I have stated.

[42]

In the Full Court of New South Wales there was a difference of opinion as to the operation of this section. Jordan C.J. was of opinion that it did not prescribe a new criterion for determining the source of income; but where it is determined independently of the section that income has a "multiple source" because of the matters set forth in sec. 28, this section provides for the apportionment of the income between its source inside the State and its source outside the State. The learned Chief Justice reached the conclusion that the source of the respondent's income gained in both transactions was exclusively in New South Wales. Davidson J. rebutting the view that despite sec. 28 the question must still be determined whether for any reason the source of the income is or is not exclusively within the State said: "But the reasons stated in the section itself are so comprehensive that it is difficult to imagine any other and it would appear that when they do exist it is assumed that there is a dual source of income." The Chief Justice observed that the legislation was silent as to this result which Davidson J. ascribes to necessary intendment. Jordan C.J. said: "It provides for the apportionment of income between its source in the State and its source outside the State whenever the income having a multiple source is derived inter alia by reason of the purchase of any goods in the State and their sale outside the State or by reason of the making of contracts outside the State and their performance in the State: but it does not say that whenever such transactions occur some part of any profit derived by them must be deemed to be derived from a New South Wales source and some from a source outside New South Wales." How fragmentary the legislation in this view would be is demonstrated by what according to the Chief Justice follows from such a construction: "It leaves the question whether in any particular case there was in fact any profit referable to the New South Wales element or to the foreign element in the transaction to be determined as one of fact." The vexed character of such a question, in the view of Street J., who substantially agreed with Davidson J., would render it a very likely assumption that the legislature would take into consideration the question of laying down its own criteria. His Honour said: - "The determination of such a question without any such legislative guidance in view of the complexity is one which must present many difficulties and in which one would expect to find close refinement of reasoning by different courts in different cases. The question has been a vexed one for many years and the courts have encountered great difficulties in dealing with it." After a close examination of the section Street J. found in it strong implications supporting this very reasonable supposition of legislative intention. Referring to sec. 28 (1) (d) his Honour said: - "The section is peculiar in that 1 (d) is an ejusdem generis clause, leaving its exact application at large, but obviously designed to meet cases similar to those dealt with in the three preceding sub-sections. It is peculiar to find such a clause in an Act of Parliament, and to my mind its use carried the implication that the legislature intended to prescribe a complete and exhaustive criterion which would enable it to be determined in every case whether income was to be deemed to be derived exclusively from a source within the State or whether there was a source both within and without the State."

At a glance

Court

Decision date

Before

Source

Judgment (64 paragraphs)

Commissioner of Taxation (NSW) v Hillsdon Watts Ltd [1937] HCA 13; (1937) 57 CLR 36 (23 March 1937)

Parties

Legislation Cited (2)

Cases Cited (1)