Esquire Nominees Ltd as Trustee of Manolas Trust v Commissioner of Taxation

Esquire Nominees Ltd as Trustee of Manolas Trust v Commissioner of Taxation - [1973] HCA 67 - HCA 1972 case summary — Zoe

[9]

Before and during the year of income a company known as Manolas Pharmacy Pty. Ltd., which was incorporated in the Northern Territory, carried on business in Australia. During the year of income the ordinary shares in that company were held by, or on trust for, members of the Manolas family and there were in addition twenty-five redeemable preference shares which were held by another company, Mitchell Holdings Pty. Ltd., which was also incorporated in the Northern Territory. Until immediately before 28th April 1969 the shareholding in the latter company comprised fifty-one redeemable preference shares held by Forum Holdings Ltd. and forty-nine ordinary shares held by W.B. & H. (N.T.) Nominees Pty. Ltd. and it now appears, in the light of the decision in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1] , that Mitchell Holdings Pty. Ltd. was a public company for the purposes of Div. 7 of Pt III of the Act. However, the decision of Windeyer J. in Casuarina Pty. Ltd. v. Federal Commissioner of Taxation [2] , which the Full Court affirmed, was not given until 25th August 1970 and before that date the status of companies in the position of Casuarina Pty. Ltd. was a matter of contention. Early in 1969 Messrs. Wilson, Bishop, Bowes and Craig, who were advisers to the Manolas family, formed the belief that the Deputy Commissioner would assess Mitchell Holdings Pty. Ltd. as a private company, as indeed the Deputy Commissioner did on 11th April 1969. If that assessment had withstood challenge, the result would have been that Mitchell Holdings Pty. Ltd. would have been liable for Div. 7 tax unless it had made a sufficient distribution before 30th April 1969, but if it had made a distribution, the shareholders would have been liable to tax on the dividends they received. The accountants discussed with Mr. Kerry George Manolas, who appears to have been an influential member of the family, whether they should rely on a challenge to the assessment being successful or take other action to escape from the dilemma in which they would find themselves if the challenge should fail, and it was decided to adopt the latter alternative.

[39]

The Commissioner, on the other hand, denied that s. 7 (1) governs the matter. In his submission, s. 7 (1) is merely declaratory and does no more than re-state the position brought about by other sections of the Act, and in particular by s. 23 (r), which provides that "income derived by a non-resident from sources wholly out of Australia" shall be exempt from income tax. The purpose of s. 7 (1) in the Commissioner's submission, was to extend to the Territories mentioned provisions of a machinery kind - such parts of the Act as, for example, provide for returns, assessments, appeals, the calculation of tax and the enforcement of penalties - and the proviso introduced by the word "but" was included, out of an abundance of caution, to prevent the subsection from being given a construction that would treat income derived by a resident of a Territory from a source within a Territory as assessable income. According to the Commissioner, the case comes within s. 44 (1) (b) of the Act, which is rendered applicable by Div. 6 of Pt III of the Act. Section 95 defines, for the purposes of that Division, "the net income of a trust estate" to mean "the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions, except the concessional deductions " and except certain other deductions which need not be mentioned. Section 99, under which the assessment in the present case was made, provides in effect by sub-s. (2) inter alia that where there is no part of the net income of the trust estate to which any beneficiary is presently entitled, the trustee is liable to pay tax on that net income as if it were the income of an individual and were not subject to any deduction. In Union-Fidelity Trustee Co. of Australia Ltd. v. Federal Commissioner of Taxation [1] , it was held that income derived by the trustee of a trust estate from sources outside Australia is not taxable under s. 99, notwithstanding that the trustee is resident in Australia. Shortly stated, the ground for this decision is that by s. 95 the net income of the trust estate is to be calculated as if the trustee were a taxpayer in respect of that income, but not as if he were a taxpayer whose residence is known, that is, not as if he were a resident. Since, in the case of a non-resident, only income derived from an Australian source is assessable, s. 99 taxes only so much of the total income of the trust estate as is derived from Australian sources. The members of the Court in that case, in contrasting the position of residents with that of non-residents, referred to s. 25 which deals with assessable income generally, but in the present case, where we are concerned with dividends, the provision applicable is s. 44 (1) which, so far as it is material, provides as follows:

[44]

However, in my opinion it does not follow that s. 7 (1) can have no application to the present case. The proviso to that subsection does present some difficulties of construction, but it is widely expressed, and if given the full meaning of which its words are capable it would at least have the effect that the provisions of s. 17 of the Act, that income tax is levied and shall be paid upon the taxable income derived during the year of income by any person, whether a resident or a non-resident, do not apply to any income derived by a resident of the Territories mentioned in s. 7 (1) from sources within those Territories. In effect, s. 7 (1) declares that the income to which it refers is not liable to tax. It is difficult to see any valid reason for declining to give effect to this declaration of the intention of the Legislature. Counsel for the Commissioner referred to the decision in Parke Davis & Co. v. Federal Commissioner of Taxation [2] , where it was held that the specific provisions of s. 44 (1) (b), as to dividends, fulfil and carry out the general policy expressed in s. 23 (r) and that the latter provision must be read with the former, which gives it specific effect. I find it difficult to regard s. 44 (1) (b) as elucidating and giving effect to the general policy of s. 7 (1), or to hold that s. 7 (1) cannot be given an operation independent of s. 44 (1) (b). The provisions of s. 7 (1) appear to me to be intended to override the other provisions of the Act, redundant though some of them may then be. I therefore consider that under the Act the appellant has two alternative arguments open to it. The appellant will succeed if it is held that it was a resident of Norfolk Island and that the income in question was derived by it from sources within Norfolk Island. Equally the appellant will succeed if it is held that the dividend paid to it by Mitchell Credits Ltd. was not paid out of profits derived by that company from sources in Australia, and in that event it will be irrelevant where the appellant is resident. However, in the present case, it is perhaps only an academic question whether s. 7 (1) affords an exemption from liability to tax in cases to which it applies, for the circumstances are such that the appellant cannot escape under s. 7 (1) if it is liable under s. 44 (1) (b). If it is right to hold that the dividend paid to the appellant by Mitchell Credits Ltd. was paid out of profits derived by that company from sources in Australia, so that the appellant is caught by s. 44 (1) (b), the same reasoning would lead to the conclusion that the income derived by the appellant was not derived from sources in Norfolk Island, so that the appellant, even if a resident of Norfolk Island, could not bring itself under the protective mantle of s. 7 (1). If the dividend received by the appellant does not answer the description contained in s. 44 (1) (b), the appellant is not liable to tax under s. 99 and has no need to invoke s. 7 (1). It therefore seems unnecessary to decide whether the appellant is a resident of Norfolk Island for the purposes of the latter sub-section. However, that question has been fully argued and may be briefly dealt with, and it is convenient to deal with it.

[47]

In the present case the appellant was incorporated in Norfolk Island and had its office there. All the directors resided in Norfolk Island. All the A class shareholders who were natural persons were residents of Norfolk Island and it seems proper to conclude that the other A class shareholder, Myee Ltd., was also a resident. All meetings of the company and of the directors were held in Norfolk Island. The business of the company was to act as trustee on Norfolk Island. These facts strongly support the conclusion that the appellant was a resident of Norfolk Island. However, the Commissioner, relying particularly on the decision in Unit Construction Co. Ltd. v. Bullock (Inspector of Taxes) [3] , that it is the actual place of management of a company and not the place where it ought to be managed which fixes its residence, submitted that the directors of the appellant merely carried out directions given to them by Messrs. Wilson, Bishop, Bowes and Craig, and that the actual management and control of the appellant company was in Australia. It was said that at all relevant times the activities of the appellant were confined to acting as trustee of a number of settlements all of which had been set up on similar lines as a result of instructions received from Messrs. Wilson, Bishop, Bowes and Craig, and that the administration of the trusts of the settlements followed a general pattern which had been laid down in advance by that firm. The extent of the influence of the accountants was shown by the fact that they would not infrequently prepare in detail the agenda of a meeting of the directors of the appellant or of the company itself. These facts, according to the Commissioner, showed that in reality the activities of the appellant were directed from Australia. I am unable to accept this argument. As I have already indicated, it is obvious that what the appellant did in relation to the Manolas Trust was done in the course of carrying out a scheme formulated in Australia and that Messrs. Wilson, Bishop, Bowes and Craig not only communicated to the appellant particulars of the scheme but advised the appellant in detail of the manner in which it should be carried out. But if it be accepted that the appellant did what Messrs. Wilson, Bishop, Bowes and Craig told it to do in the administration of the various trusts, it does not follow that the control and management of the appellant lay with Messrs. Wilson, Bishop, Bowes and Craig. That firm had no power to control the directors of the appellant in the exercise of their powers or the A class shareholders in the exercise of their voting rights. Although it is doubtless true that steps could have been taken to remove the appellant from its position as trustee of one or more of the trust estates, Messrs. Wilson, Bishop, Bowes and Craig could not control the appellant in the conduct of its business of a trustee company. The firm had power to exert influence, and perhaps strong influence, on the appellant, but that is all. The directors in fact complied with the wishes of Messrs. Wilson, Bishop, Bowes and Craig because they accepted that it was in the interest of the beneficiaries, having regard to the tax position, that they should give effect to the scheme. If, on the other hand, Messrs. Wilson, Bishop, Bowes and Craig had instructed the directors to do something which they considered improper or inadvisable, I do not believe that they would have acted on the instruction. It was apparent that it was intended that the appellant should carry on its business of trustee company on Norfolk Island. It was in my opinion managed and controlled there, none the less because the control was exercised in a manner which accorded with the wishes of the interests in Australia. The appellant was, in my opinion, a resident of Norfolk Island.

[51]

The Legislature in using the word "source" meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact. This statement has been accepted as correct, and as applicable to similar statutory provisions, in a number of cases in this Court of which one of the earliest is Studebaker Corporation of Australasia Ltd. v. Commissioner of Taxation (N.S.W.) [3] and the most recent is Federal Commissioner of Taxation v. Mitchum [4] . The same test has been applied by the Judicial Committee (Liquidator, Rhodesia Metals Ltd. v. Commissioner of Taxes [5] ) and by the Court of Appeal in New Zealand (Commissioner of Inland Revenue v. N.V. Philips' Gloeilampenfabrieken [6] ). Although in Commissioner of Taxation (N.S.W.) v. Freeman [7] some doubt was expressed as to the meaning of the phrase "practical, hard matter of fact", in my opinion the two adjectives were inserted not for the purposes of empty rhetoric but to emphasize that the question is to be decided in accordance with the practical realities of the situation without giving undue weight to matters of form, and not by the application of absolute rules of law. The position was authoritatively stated in Federal Commissioner of Taxation v. Mitchum by Barwick C.J. [8] with whom Menzies and Owen JJ. concurred [9] , as follows: The conclusion as to the source of income for the purposes of the Act is a conclusion of fact. There is no statutory definition of "source" to be applied, the matter being judged as one of practical reality. In each case, the relative weight to be given to the various factors which can be taken into consideration is to be determined by the tribunal entitled to draw the ultimate conclusion as to source. In my opinion, there are no presumptions and no rules of law which require that that question be resolved in any particular sense. I would further respectfully agree with the remarks made by Rich J. in Tariff Reinsurances Ltd. v. Commissioner of Taxes (Vict.) [1] some of which were repeated in Federal Commissioner of Taxat on v. United Aircraft Corporation [2] : We are frequently told, on the authority of judgments of this court, that such a question is "a hard, practical matter of fact". This means, I suppose, that every case must be decided on its own circumstances, and that screens, pretexts, devices and other unrealities, however fair may be the legal appearance which on first sight they bear, are not to stand in the way of the court charged with the duty of deciding these questions. But it does not mean that the question is one for a jury or that it is one for economists set free to disregard every legal relation and penetrate into the recesses of the causation of financial results, nor does it mean that the court is to treat contracts, agreements and other acts matters and things existing in the law as having no significance. 1. (1918) 25 C.L.R. 183, at pp. 189-190. 2. (1921) 29 C.L.R. 225, at p. 233. 3. (1965) 113 C.L.R. 401. 4. [1940] A.C. 774, at p. 789. 5. [1955] N.Z.L.R. 868, at pp. 873, 883, 888, 896. 6. (1956) 30 A.L.J., at p. 48. 7. (1965) 113 C.L.R. 401, at p. 407. 8. (1965) 113 C.L.R., at p. 409. 9. (1938) 59 C.L.R. 194, at p. 208. 10. (1943) 68 C.L.R. 525, at p. 538.

[57]

In reaching its conclusion, the Court in Nathan v. Federal Commissioner of Taxation [2] , found some support in the judgments of the Court of Appeal in Gilbertson v. Fergusson [3] , a case which has since been overruled by the House of Lords in Canadian Eagle Oil Co. Ltd. v. The King [4] . However, it seems to me that in overruling the earlier decision the House of Lords did not reflect adversely on the statements which this Court in Nathan v. Federal Commissioner of Taxation [5] , regarded as opposed to the view that the place of the share, rather than the place where the profits were earned, constitutes the source of the dividend. In Gilbertson v. Fergusson [3] , the London agency of a foreign banking company was assessed to tax on the full amount of dividends paid in London to shareholders resident in London, and the Court of Appeal decided (to adopt the summary given by Lord Russell of Killowen in Canadian Eagle Oil Co. Ltd. v. The King [6] ) that "since those dividends were payable out of the general earnings of the bank, which were composed partly of profits made in the United Kingdom (which had already been taxed under Case 1 of sch. D) and partly of profits made elsewhere, the agency should only be assessed under s. 10" (of the Income Tax Act 1853 U.K.) "on so much of the dividends as were paid out of the profits made elsewhere than in the United Kingdom". Their Lordships held that this decision of the Court of Appeal was not in conformity with the income tax statutes of the United Kingdom. As Viscount Simon L.C. pointed out [7] , the Court of Appeal proceeded upon two errors; first, they acted upon a concession made by the revenue, in accordance with the view then prevailing but since declared to be wrong, that a company charged with paying tax under sch. D in respect of profits accruing to it in the United Kingdom was assessed and paid the tax as agent on behalf of its shareholders, and secondly, it was assumed that there was a general principle to be applied in construing the Income Tax Acts that tax is not to be payable twice over by the same person in respect of the same thing. The decision in Canadian Eagle Oil Co. Ltd. v. The King [1] established that under the English legislation a charge is imposed on dividends payable in respect of the shares of a foreign company, "without any reference to the sources of that company's income" (per Viscount Simon L.C. [2] ) and that the charge is not abated in proportion as the income is itself chargeable or not chargeable to British income tax. It is apparent that their Lordships were not called on to decide what was the source from which the dividends arose, and they had no need to discuss, and did not discuss, those passages in the judgments in Gilbertson v. Fergusson [3] , that suggest that if it is necessary to find the source of the dividend, it will be found where the profits were made.

[64]

to be authority for the proposition that, as a "practical, hard matter of fact" - whatever that expression may mean - though not as a matter of "legal concept", the place where a company earns its profits may be said to be the source from which a taxpayer, entitled by way of dividend - and upon such conditions as the articles of the company may prescribe - to participate in the company's profits, derives his dividend receipts. Their Honours offered some criticism of Nathan's Case [2] , but said that the views expressed therein have, however, been acted upon on a number of occasions, and then went on [1] : But we do not understand Nathan's Case [2] to decide that the locality where a company derives the profits from which it pays dividends must be regarded exclusively as the source of a shareholder's dividend receipts. If it does, it is, it seems to us, in conflict with the reasoning in such cases as Canadian Eagle Oil Co. Ltd. v. The King [3] , and Inland Revenue Commissioners v. Reid's Trustees [4] . The latter case was decided on the basis that dividends declared by a South African company and transmitted to a shareholder resident in the United Kingdom were "income arising from possessions out of the United Kingdom". And we can see no reason why, if dividend income can be said to arise from the shares in respect of which the dividends have been paid, the shares themselves should not be regarded as the immediate source of the dividends. Such shares, although intangible property, may be said to have a location and there is no reason in principle why the place where they are located and where the rights to which they give rise may be enforced should not be regarded as the place from which the shareholders' dividends are derived. In the present case it is clear that those shares of Placer which were registered on Bulolo's Australian register were situated in Australia (Brassard v. Smith [5] ; R. v. Williams [6] , and Treasurer of Ontario v. Blonde [7] ). They constituted items of property situated in Australia and Placer's right to receive dividends in respect of them sprang directly from their ownership. In these circumstances we are of opinion that it is proper to regard the place where they were located as the direct or immediate source of the relevant divided payments even if Nathan's Case [2] requires the conclusion that the place where Bulolo earned its profits should, perhaps paradoxically, be regarded as their indirect or ultimate source. They added that the words "directly or indirectly", which in Nathan's Case [1] were said to be of great importance, may furnish some ground for drawing a distinction between an immediate source, on the one hand, and an ultimate source on the other; and that they could see nothing inconsistent with this conclusion in the reasoning of the Judicial Committee in Liquidator, Rhodesia Metals Ltd. v. Commissioner of Taxes [2] , nor anything unreal in the view that the same income may be derived from a number of territorial sources. 1. (1918) 25 C.L.R. 183. 2. (1921) 29 C.L.R. 134. 3. (1956) 30 A.L.J. 42. 4. (1956) 30 A.L.J., at p. 48. 5. (1918) 25 C.L.R. 183. 6. (1918) 25 C.L.R. 183. 7. (1956) 30 A.L.J., at p. 48. 8. (1918) 25 C.L.R. 183. 9. [1946] A.C. 119. 10. [1949] A.C. 361. 11. [1925] A.C. 371. 12. [1942] A.C. 541. 13. [1947] A.C. 24. 14. (1918) 25 C.L.R. 183. 15. (1918) 25 C.L.R. 183. 16. [1940] A.C. 774.

[68]

I think that it would not be useful to institute a comparison between the provisions of the Commonwealth legislation and those of the New South Wales Income Tax (Management) Act 1936 as amended. It is enough to say that at one point in the complicated facts of Freeman's Case [1] a question did arise as to the source of a dividend, and that for the purposes of the expression used in the New South Wales Act, we thought that the fact that the dividend was derived from a share on a register in New South Wales showed that the source was in New South Wales. After citing a passage from the judgment in Commissioner of Taxation (N.S.W.) v. Freeman [3] , which I have already set out, Dixon C.J. continued [4] : It will be apparent from the emphasis placed on the word "exclusively" that the Court, in deciding Freeman's Case [1] was contemplating the possibility that a dividend may be attributed to different sources according to the character of enactment dealing with the matter and perhaps according to the facts, and that the Court did not intend to say that the only source to which a dividend could be imputed was the locality of the share. In the present case we are of opinion that the answer to the contention lies in the view we take of the relationship of s. 44 (1) (b) and s. 23 (r). The view we take of the relationship is that s. 44 (1) (b) is not cumulative upon and independent of s. 23 (r), but is carrying out s. 23 (r) and stating what, in the case of a dividend received by a non-resident, is the source for the purposes of s. 23 (r). If it were treated as cumulative and independent it would mean that in the case of a non-resident holding shares in an Australian company, assuming that for the purpose of s. 23 (r) so construed the share was regarded as the source of a dividend upon it, he would be liable to tax on dividends paid out of Australian profits if his shares were upon an Australian register of the company but not liable to such tax if his shares were upon a register kept in some place out of Australia by the company. The appellant in Parke Davis & Company v. Federal Commissioner of Taxation [1] , was in a position similar to that in which the appellant would have been in the present case if Mitchell Credits Ltd. had received its profits from Australia without the intervention of Pharmaceutical Investments Ltd., and the Court in that case had no need to consider the question as to the effect of s. 44 (1) (b) of the Act that now arises. However, the Court does seem to have taken the view that although for some purposes or in some circumstances the locality of the share may be regarded as the source of the dividend, it is not necessarily and for all purposes its source. 1. (1956) 30 A.L.J. 42. 2. (1959) 101 C.L.R. 521. 3. (1956) 30 A.L.J. 42. 4. (1958) 101 C.L.R., at p. 531. 5. (1956) 30 A.L.J. 42. 6. (1956) 30 A.L.J., at p. 48. 7. (1958) 101 C.L.R., at p. 532. 8. (1956) 30 A.L.J. 42. 9. (1959) 101 C.L.R. 521.

[73]

I hold further that the dividend paid to the appellant by Mitchell Credits Ltd. was paid out of profits derived by that company from sources in Australia within s. 44 (1) (b). I have already mentioned that the omission from s. 44 (1) (b) of the words "directly or indirectly", which qualify "derived" in s. 25, may be regarded as an indication that "derived" in s. 44 (1) (b) means "directly derived". Assuming that this is so, this does not mean that the section should be construed as though it included the word "directly" and as though that word had to be given its precise dictionary meaning. It may, however, mean that indirect modes of derivation which might be caught by the words of s. 25 are not within those of s. 44. The import of the words "directly" and "indirectly" in this context may be gleaned from the judgment in Lovell and Christmas Ltd. v. Commissioner of Taxes [1] , to which the Court in Nathan v. Federal Commissioner of Taxation [2] , referred. Where income has been derived from more than one source, it may in some cases be said to have been derived only indirectly from the remoter source, although in other cases it may be derived directly from both. In Dickson v. Commissioner of Taxation (N.S.W.) [1] , Higgins J. said that "the word "directly", as used in that case," (Lovell and Christmas Ltd. v. Commissioner of Taxes [2] ), "is not used in the sense of "immediately", but as contradistinguished from ancillary " Although Higgins J. dissented in that case, this observation does not seem opposed to the view of the majority. In that case income had been earned as a result of a series of operations including the recovery of gold in New South Wales, its realization outside New South Wales and the receipt of the proceeds, also outside New South Wales, yet it was held that part of the income was directly derived from a source in New South Wales (see particularly per Starke J. [3] ). An apportionment was necessary because some part of the income was attributable to sources not in New South Wales, but that situation does not arise here. Whatever meaning the word "directly" might have in qualifying the word "derived", it does not imply that there can be no step between the production of the profits and their receipt by the company (cf. the discussion of the effect of the source of "direct result" in Boiler Inspection and Insurance Co. of Canada v. Sherwin-Williams Co. of Canada Ltd. [4] ). Section 44 (1) (b) must have been framed in the contemplation of the complexity of many business activities and obviously it may often be necessary to use some intermediate agency to get the money representing the profits from their source into the company's coffers. In the present case, as I have said, the profits had only one source - the business operations in Australia - and the fact that in an attempt to disguise their real origins they were made to pass fleetingly through the accounts of Pharmaceutical Investments Ltd. did not mean that they were not directly derived by Mitchell Credits Ltd. from their source in Australia. It is obvious that in the present case, where the income of the appellant had no source within the Territory of Norfolk Island, no similar question can arise under s. 7 (1).

[111]

The income of the appellant [Esquire Nominees Ltd.] was received in the form of a dividend from Mitchell Credits Ltd. That company carried on no business of any kind, but itself received a dividend from Pharmaceutical Investments Ltd. The latter company went through the motions of borrowing and lending money, perhaps so that it might be said that it carried on business on Norfolk Island, but those transactions yielded no profit and the company was enabled to pay a dividend only because of the dividend which it received from Mitchell Holdings Pty. Ltd. The amount of $30,910.57, which the appellant ultimately received, came from the profits made by the conduct of a business in Australia and was passed on by Mitchell Holdings Pty. Ltd., through Pharmaceutical Investments Ltd. and Mitchell Credits Ltd., to the appellant. The only business operations which yielded the production of any income took place in Australia. Nothing that was done at the office of Mitchell Credits Ltd. or the office of Pharmaceutical Investments Ltd. in Norfolk Island produced one cent of the income that the appellant received or one cent of the profits out of which the dividend received by the appellant was paid. Notwithstanding the devices adopted to give the facts a specious appearance, the reality is that the source, and the only source, of the income derived by the appellant was in Australia. Similarly, the dividend paid to the appellant by Mitchell Credits Ltd. was paid out of profits derived by it from sources in Australia and from no other sources. I hold, therefore, that the income in question was not derived by the appellant from any source within Norfolk Island and that s. 7 (1) does not exempt the appellant from liability to tax. I hold further that the dividend paid to the appellant by Mitchell Credits Ltd. was paid out of profits derived by that company from sources in Australia The expression "sources in Australia" is to be found in s. 44 (1) (b) of the Income Tax Assessment Act. His Honour refers to that provision of s. 44.

[129]

The conclusion that a dividend paid to a shareholder whose shares were registered in Norfolk Island by a company incorporated, resident, and carrying on its only business in Norfolk Island out of its profits was not derived from a source within Norfolk Island is one with which I respectfully disagree. The critical finding which brought his Honour to this conclusion has already been stated. It seems to me, however, that in considering the source of a dividend the proper inquiry is not to ascertain where the production of wealth, to which it can ultimately be traced through other companies, took place. This would be too large an inquiry. Nor, at the other extreme, would I attribute the source of a dividend upon a share to the place where the share happens to be located, i.e. the place in which the register is kept upon which the share appears. To do so would be artificial. (See Nathan v. Federal Commissioner of Taxation [2] .) To determine the source of the dividend, it is, in my opinion, necessary to examine the situation of the company which pays it out of its profits, rather than by merely looking at the share register. The most material consideration is the place where the profit, out of which the dividend was paid, was made. A dividend is payable out of the profits of the company paying it, and, in the case of a holding company, this profit-making business may merely be the receipt of a dividend from another company. It is, for instance, well known that Utah Mining Australia Ltd. is presently a holding company and not an operating company. The fact, however, that it simply holds shares in Utah Development Co., an operating company from which it receives dividends which it distributes to its shareholders, does not signify that it does not itself carry on a profit-making business in Australia. If it were to happen that part of the profits of Utah Development Co. were earned outside Australia, I do not think it would follow that dividends paid by Utah Mining Australia Ltd. to its shareholders would be classified as derived in part from a source outside Australia. It is to be observed that s. 44 of the Act refers to dividends paid to a shareholder by a company "out of profits derived by it from any source". The words "derived by it" are of great significance and indicate, I think, that it is to the derivation of the profits by the very company which pays the dividend in question that attention must be directed, rather than to the derivation of profits at an earlier stage by an operating company which created the wealth without which there could have been no successive distribution of profits. The same notion of the source of income is, I think, present in s. 7 and where the income under consideration is a dividend. It is the profit-making business of the company paying the dividend that is the source of the dividend paid out of profits so made.

[160]

The Dutch company owns no property in New Zealand, and it has done nothing in New Zealand. It has no servants or agents in New Zealand, and, therefore, cannot do anything here. As was said by Sir John Latham, C.J., in Federal Commissioner of Taxation v. United Aircraft Corporation [7] : "a person who neither owns anything in a country nor does nor has done anything in that country cannot, in my opinion, derive income from that country" [1] . And be it noted that the learned Chief Justice made those remarks in reference to an Act which, like ours, contained references to "source" and "directly or indirectly". It must always be remembered that we are concerned with the source of the Dutch company's income - not with the source of its debtor's earnings. The interest on this loan is no doubt paid by the debtor out of moneys it receives from carrying on its business in New Zealand. But that is no concern of the lender. The Court of Appeal affirmed the judgment of the Chief Justice and in the cause of doing so Gresson J. said [2] : proper regard must be paid to the word "derived"; it should not be read as "received". The word "derived" means more than received; it connotes the source or origin, rather than the fund or place, from which the income was taken. It means flowing, springing, emanating from, or, as was said in Commissioners of Taxation v. Kirk [3] , arising from or accruing. To be a "source" of the income within the meaning of the subsection, it is necessary, I think, to look to the originating cause. It is not sufficient to ascertain the fund out of which the income was in fact paid, which is no more than the reservoir from which it was drawn. It is not whence it was paid, but why it was paid, that is the determining factor. The emphasis is not upon the receipt, but upon the derivation of the income. Consequently, it does not constitute the source within the meaning of the section that the money was drawn from or provided by the trading profits in New Zealand. The New Zealand company was free to obtain the funds with which to perform its obligation anywhere it chose, from deposits in England, if it had any, or from borrowing in England, or from the profits of its trading in New Zealand. That was a domestic matter. The money could "come from" any of these "sources". but none of them would be the source from which the Dutch company derived what it received as income. The combination of the words "derived" and "source" import, I think, some causative link. 1. (1938) 59 C.L.R., at p. 209. 2. [1955] N.Z.L.R. 868, at p. 876. 3. (1943) 68 C.L.R. 525. 4. (1943) 68 C.L.R. 525, at p. 536. 5. [1955] N.Z.L.R. 868, at p. 884. 6. [1900] A.C. 588, at p. 592.

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Judgment (168 paragraphs)

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