John v Commissioner of Taxation

[1989] HCA 5

High Court of Australia|1977-04-14|Before: Gaudron JJ, Yeldham J

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Source facts

Court

High Court of Australia

Decision date

1977-04-14

Before

Gaudron JJ, Yeldham J

Source

Original judgment source is linked above.

Judgment (73 paragraphs)

[1]

The application of s. 260 to arrangements entered into for the purpose of reducing tax liability has proved to be a matter of some difficulty. That difficulty is readily understandable. In the first place, the section has to be applied in a context in which for a long time certain specific taxation advantages have been expressly permitted. In some cases those advantages have been permitted to effectuate economic policy or to encourage particular types of investment. Secondly, s. 260 effects a fictitious annihilation of contracts, agreements and arrangements. It does not proceed to substitute an alternative basis on which tax should be calculated. Of course, in some cases the annihilation of a legal form will itself reveal a basis for the calculation of tax. Federal Commissioner of Taxation v. Gulland [28] was such a case. There the annihilation of the arrangements in question revealed the source of income as the personal exertions of the taxpayer respondents in the same form as had existed prior to the arrangements which were held to offend s. 260.

[2]

The Commissioner's reliance on s. 260 was directed to the annihilation of so much of the contracts, agreements or arrangements made by the Malindi partnership with respect to the shares in the five Compinge companies as enabled the dividends credited in payment of the bonus shares issued by the companies to be treated as an outgoing or taken into account in calculating the profit or loss involved in the transactions. Presumably, although this was not made explicit in argument, the objective was to treat the issue of bonus shares as not having happened and the sale of the original and bonus shares in the five Compinge companies as a sale of original shares. It is a simple matter to treat the arrangements made by Malindi as void to the extent of the issue and sale of the bonus shares and therefore as though they had not happened. However, that would not reveal the taxable situation for which the Commissioner contends. Rather, it would reveal a loss many times greater than claimed, for the sale price of the bonus shares greatly exceeded the sale price of the original shares. Thus it is necessary to take the further step of treating the original shares as having been sold at the price at which the original and bonus shares were sold. That step involves a hypothetical reconstruction of the Compinge transactions. That is not something authorized by s. 260.

[56]

It is one thing to describe as a dividend an amount which, but for s. 6(1), is not a dividend; it is another to treat the amount as though it is income actually received by or made available for disposition by the shareholder. Yet the proposition underlying the judgments of Barwick C.J. and Menzies J. in Curran's Case [31] , is that the shareholder is entitled to treat the amount credited by the company as though it had been paid by the shareholder as the purchase price of the bonus shares and that that payment must be taken into account in ascertaining the taxable income of the shareholder derived from share trading. With great respect, I am unable to accept that proposition. The fact is that the shareholder in Curran's Case did not incur expenditure (other than the original purchase price) in acquiring his bonus shares. As Gibbs J. pointed out [32] , the shareholder "was never entitled to receive in cash his proportion of the capitalized profits". It is only upon and by reason of the company's capitalizing of assets theretofore available for distribution that a shareholder acquires any entitlement to a benefit from the company and that benefit is not a right in respect of the assets capitalized but a right to the allotment of shares representing the increase in capital. The only dividend to which a shareholder thus becomes entitled is a dividend to be satisfied by the issue of shares. The shareholder's proportionate interest in the company's total assets remains unchanged, but some revenue assets become capital assets and the enlargement of capital is represented by a corresponding increase in issued shares. As a shareholder incurs no further expenditure in acquiring bonus shares, there is no reason to treat the amount credited in payment of the bonus shares as an allowable deduction. The only provision to which a claim for allowance of a deduction might be referred is s. 51 and that section has no application when there is no loss or outgoing in fact incurred by a taxpayer. With respect, I agree with the reasons of Stephen J. in dissent in Curran's Case [33] , to which the reasoning of Barwick C.J. and Menzies J. provides for me no satisfying answer. A proposition similar to that accepted by their Honours had been advanced and rejected by a unanimous court in McRae v. Federal Commissioner of Taxation [34] , in a case where the taxpayer's assessable income was said to include profit arising from the carrying out of a profit-making scheme.

[59]

The appellant's trading account would not reveal the real situation if it brought in at no value shares which were in fact valuable, because the amount which it would then show as income would include the value which the shares possessed when they were first brought into stock. The case may be compared with that of a trader who takes into his trading stock articles which he received by way of gift or under a bequest. Cases of that kind not falling within s. 36 of the Act may be rare, but they can be envisaged. In such a case an account will not reveal the true result of the trading unless those articles are brought in at an appropriate value, e.g., market selling value. If the account showed that the articles cost nothing, the result would be to increase the amount of the trader's profit or decrease the amount of his loss by the value of the gift or bequest and in effect to make the trader pay income tax on the gift or bequest. The only practicable way of reaching a true result in a case of that kind would be to bring the articles into the account at an appropriate value as though they had been purchased, and there is no provision in the Act that would require any different approach. For the purpose of ascertaining taxable income, the trading account of a taxpayer who is carrying on a business must contain only items of assessable income and items of allowable deductions as those terms are defined in the Act. There are some provisions of the Act, notably s. 26(a) as it then stood, which require the ascertainment of a profit as a step towards determining assessable income. But, as Dixon J. pointed out in New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation [37] , in an observation that applies as well to the 1936 Act as to the 1922 Act, "generally speaking, the gross receipts on account of revenue must be taken into the assessable income and therefrom the deductions allowed by the Act must be made and no others". In the ordinary case, the commercial profit which emerges from the carrying on of a business corresponds with the difference between assessable income derived from the business and allowable deductions incurred in carrying it on, so that it produces no distortion of the taxpayer's true liability to treat the commercial profit as taxable income. But it is inconsistent with the scheme of the Act to construct an account containing unallowable deductions and to take the resultant profit or loss as a measure of the taxpayer's liability. A value of trading stock "as though [it] had been purchased" is not an allowable deduction. 1. (1974) 131 C.L.R., at p. 419. 2. (1974) 131 C.L.R., at p. 421. 3. (1938) 61 C.L.R. 179, at p. 206.

[64]

There is said to be an anomaly in leaving the value of bonus shares out of account in calculating the taxable income derived from a share trading business. Bonus shares which are trading stock and which are not paid for wholly and exclusively out of the profits mentioned in s. 44(2) attract the operation of s. 44(1), so that the par value of such bonus shares is assessable income. If those shares are sold, so the argument runs, the receipt of the purchase price is added to the trader's assessable income; if they are held at the end of the year of income, their value (ascertained under s. 31) is taken into account in calculating the trader's assessable income pursuant to s. 28. An anomaly is said to arise if tax is imposed on both the par value of the bonus shares and the sale price or end-of-year value. To avoid the supposed anomaly, counsel for the Commissioner submitted that, where the par value of bonus shares is assessable income, it is right to allow the amount credited in payment for them to be deducted. This would doubtless remove the supposed anomaly but I see no warrant for holding that the amount credited is a loss or outgoing when the dividend falls under s. 44(1) but not where it falls under s. 44(2). In neither case is there a loss or outgoing. Of course, as Stephen J. pointed out in Curran's Case, the supposed anomaly is theoretical rather than practical. Even if there be an anomaly, it is not appropriate to postulate a doctrine unsupported by the Act to avoid it. It is not necessary to demonstrate that the true construction of the Act does not produce anomalies. It would be surprising, in so complex a piece of legislation, to find that no anomalies were produced. If there be an anomaly, it arises because s. 44(1) brings into the net of assessability an amount - the par value of bonus shares - which is money's worth but not money and the sale of the bonus shares converts the money's worth into money. The source of the anomaly may indicate a solution, if there be a solution.

[67]

Should Curran's Case be followed even though, in my respectful opinion, it was wrongly decided? There are powerful considerations against overruling Curran's Case which should be mentioned. First, many taxpayers - the partners in Malindi amongst them - have acted in reliance upon the correctness of that decision. However, if Curran's Case is now overruled, the Commissioner may not be able to reopen assessments to tax which were issued in reliance on that decision provided the taxpayer has made a full and true disclosure of all material facts: see s. 170(3) of the Act and as amended in 1986. Never the less the possibility of affecting some tax liabilities arising from transactions entered into in reliance on Curran's Case cannot be ruled out. If the case were overruled prospectively that possibility would be excluded. If this Court has jurisdiction to overrule past decisions prospectively that jurisdiction has not hitherto been exercised: the subject was mentioned by Mason J. in Babaniaris v. Lutony Fashions Pty. Ltd. [42] and by Toohey J. in Trident General Insurance Co. Ltd. v. McNiece Bros. Pty. Ltd. [43] . There was no argument upon that question in this case and it would not be right to assume the existence of such a jurisdiction. Next, the authority of Curran's Case was conceded in London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation [44] , though it has not otherwise been adopted as a ground for decision in any case. It has been referred to, but distinguished, in similar cases in other courts: see, e.g., Insomnia (No. 2) Pty. Ltd. v. Commissioner of Taxation [45] and on appeal to the Full Federal Court (unreported, 17 February 1987). Again, the effect of the decision has been modified by the Parliament which, four years after the decision, enacted s. 6BA (see Income Tax Assessment Amendment Act 1978 Cth, s. 3) with effect from 16 August 1977. Section 6BA has been amended by a succession of later Acts. Acknowledging that this Court has not adopted any very definite rule to govern the exercise of its power to overrule earlier decisions, the considerations mentioned make the overruling of Curran's Case an option with undesirable consequences.