Evans v Deputy Federal Commissioner of Taxation (SA) [1936] HCA 2

Evans v Deputy Federal Commissioner of Taxation (SA) [1936] HCA 2 - HCA 1936 case summary — Zoe

[48]

Assuming that the reserve account must be taken into consideration, it does not disclose " profit " of the company available for dividend except as to the item of £41,500 surplus on the sale of the upper leases. The item of £17,787 premiums on share issues, although available for dividend. was not a profit of the company (Commissioner of Income Tax (Q.) v. Bank of New South Wales (1) ). The writing up of the Guinea Airways shares was not a profit of the company, because it was not realized. The company did not derive the profit from these shares, because they were handed over in specie. The persons, if any, who derived the profit were the shareholders who received them. The writing up of the Guinea Gold South and Guinea Gold Central shares was not a profit, because it was not realized. It was merely an estimate of what might possibly be received in the future from Placer Development Company Ltd. Assuming that the reserve account does show " profits" in the sense of an excess of capital assets over liabilities, they are capital profits and are more correctly described as surplus assets than as " profits derived by the company," and as surplus assets they are entirely outside the scope of the Income Tax Assessment Act which deals with income, not with capital. Where, therefore, the Act uses the word " profit," the word means " revenue profit," not capital profit (McLachlan v. Commissioner of Taxes (2) ). 'The scheme of sec. 16 (b) is to tax the revenue profits of companies in the hands of the shareholders. It does not contemplate the taxing of capital profits of the company in the hands of the share- holders. The proviso to sec. 16 (b) (i) merely contains a definition of what is a revenue profit. That the word " profit" as used in see. 16 (b) (i) means a" revenue "' profit as opposed to the appreciation in value of a capital asset, is emphasized by the history of the legislation (Webb v. Federal Commissioner of Taxation (3); West Derby Union v. Metropolitan Life Assurance Society (4) ). Assuming, however, that a * capital profit" is intended to be taxed under sec. 16 (b), the dividend must be paid out of a profit derived by the company. A profit is not derived merely by the writing up of the

[55]

of Taxation v. Clarke (1); Dickson v. Commissioner of Taxation (N.S.W.) (2); Mount Morgan Gold Mining Co. Ltd. v. Commissioner of Income Tax (Q.) (3)). There is express indication that "* dividends, bonuses or profits" in sec. 16 (b) (i) are intended to include accretions in respect of fixed assets, as otherwise the third proviso would not benecessary. As the " revaluation " appears in sub-sec. (ii) (1), but does not appear in the third provi: (i), it follows by contrast that a dividend, bonus or profit credited, paid or distributed out of profit disclosed by a revaluation is intended by the Legislature to be taxable although the asset revalued may be a fixed asset (South Brisbane Gas and Light Co. Ltd. v. Hughes (4); McNeil v. Federal Commissioner of Taxation (5); Federal Commissioner of Taxation v. Dixon (6) ). Of all " profits,' therefore, only those (if any) which are shown by the appellant to be within the third proviso to see. 16 (6) (i) will be non-assessable. The '* purpose " of not being acquired for resale at a profit must be established by the appellant (Isles v. Federal Commissioner of Taxation (7) ). If the evidence shows that the purpose was cither to resell or work as subsequent inquiries or tests might favour, the purpose of reselling is present and is not negatived. To be within the proviso that purpose must be rejected at the time of acquisition. 90,000 shares in New Guinea Goldfields Ltd. and 10,000 shares in Guinea Airways Ltd. were distributed at the direction of the directors of the company under article 38. As a consequence these must be deemed to be * profits arising from the business of the company " mentioned in article 76, unless the appellant has proved the contrary. The reserve account shows what those profits are. The total profit could be distributed in cash or in specie. In either case the result is the same. That the profits are in part distributed by shares associated with the earning of part of the profit is an accident. The shares represent money's worth instead of money. As to the Guinea Airways shares, the profit shown in the reserve account is not on the sale to Guinea Airways but the increase

[75]

Guinea Gold No Liability was incorporated in South Australia as a mining company on 11th May 1926. It was formed as a result of communications received from a prospector who was carrying on his operations on the Bulolo River in the Mandated Territory of New Guinea. He had sent reports to his attorney under power that there existed, along the river, large areas from which a high return of gold could be obtained by sluicing or dredging. The natural features of the country divided the areas into two parts, Below a gorge the river ran through flats which were considered most suitable for dredging. None of this area had been pegged out. Above the gorge deposits existed which in fact were not suitable for dredging, but were valuable for sluicing. Part of this area had been applied for and leases had been granted, one at least of which - the prospector had acquired. In a memorandum which, before the formation of the company, was circulated among those who were invited to join it, the distinction between the two fields was drawn. The upper section was described as a matter of simple surface working then being exploited by sluicing, and the lower as one of straight- forward dredging. The greater extent of the latter was explained, and the announcement was made that, if it commended itself to the experts, the prospector was ready to offer, as an adjunct to the lower section, the lease he had already acquired in the upper section. A working option for six months from the registration of the company was given by the attorney under power over the lease in the upper section. The promoters of the company decided to send a mining engineer to New Guinea to report upon the field, and, in the mean- time on the day of registration a radio was sent to the prospector urging him to peg out immediately the best of the lower alluvial land " on behalf of the interested " pending the arrival of the expert. The latter left a week later armed with numerous powers of attorney to enable him to take up leases in the names of the company's nominees.

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of any of its property in specie amongst its members. The original capital of the company was £2,000, divided into 2,000 shares of £1 each, but this, by September 1926, was increased to £50,000, divided into 50,000 shares of £1 each. It issued to its vendors 12,513 shares at par; to subscribers who paid £1 per share in cash, 19,700 shares ; and to other subscribers who paid a premium of £1 per share, 17,787 shares. The cash subscriptions therefore amounted to £55,274. The company acquired certain properties on the Bulolo Creek in New Guinea, above a rocky gorge, which have been referred to as the upper leases. Mining operations were carried on by the company upon these properties, which had been acquired for that purpose. They were worked as sluicing claims, and about £48,000 was spent upon them. About June 1929 the company disposed of these properties to a company called New Guinea Goldfields Ltd. for £2,000 in cash and 90,000 shares in that company. The shares were worth about 5s. 6d. each. Guinea Gold No Liability also established an air service in connection with its mining operations ; it expended about £10,100 upon aeroplanes, plant, and accessories. The aeroplanes and plant were acquired for the use of the company, and not for the purpose of resale at a profit. A company called Guinea Airways Ltd. was formed, which about the year 1927 took over the service and plant, giving as a consideration therefor 10,100 shares paid up to £1. Mining properties were taken up for or on behalf of Guinea Gold No Liability on the Bulolo Creek below the rocky gorge, and they were known as the lower leases. It was thought at one time that the leases might be worked as a sluicing proposition, but they turned out to be a dredging proposition. The company had not the capital to work them, and at an early stage gave an option to the Territory Investment Company Ltd. for three months of incorporating a company to acquire and work the leases. But the Territory Company was unable to float such a company, and the option fell through. About June of 1930 these

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Judgment (164 paragraphs)