Jolly v Federal Commissioner of Taxation [1934] HCA 66

Jolly v Federal Commissioner of Taxation [1934] HCA 66 - HCA 1934 case summary — Zoe

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Act 1918). When a company declares a tax free dividend, it is regarded, at any rate for many purposes, as dividing profits sufficient in amount to pay a gross dividend which, after deduction of tax, will leave the net amount at which the dividend is expressly declared. In Gold Fields American Development Co. v. Consolidated Gold Fields of South Africa, Tomlin J. said (1) : - * It remains to consider what is the effect of payment of a dividend free of tax. I think that such a dividend is one of such an amount as after the deduction of the proper rate of tax leaves the rate of interest specified available for the shareholder. Where the shareholder is liable to super-tax he must return the gross amount of the dividend, and that amount will vary with the amount in respect of tax, which has not been received by the shareholder from the company. The amount not so received is the amount of the tax on the gross dividend, and is in my opinion in substance and in fact deducted by the company within the meaning of rule 20." (See, too, Attorney-General v. Ashton Gas Co. (2), per Buckley J.; affirmed, Ashton Gas Co. v. Attorney- General (3).) The question whether the amounts representing British tax deductible in respect of the dividends forms part of the assessable income of the taxpayer derived during the year ending 30th June 1921 is governed by the provisions of sec. 14 (6) of the Commonwealth Income Tax Assessment Act 1915-1921. These provisions direct that the income of any person shall include dividends, profits, or bonus, credited or paid to any member or shareholder of a company which derives income from a source in Australia. If the company also derives income from a source outside Australia, a proportionate part of the dividend is excluded from the Common- wealth assessment. No provision allows a deduction from the assessable income of any tax paid or borne in Great Britain, but sec. 12a provides for a rebate of tax of a character similar to the telief allowable in Great Britain when Dominion tax is paid in respect of profits there brought into charge. The taxpayer has made no objection to the manner in which the Commissioner has proportioned the dividends or applied sec. 124. The question is whether upon a

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King (1).) But there are many expressions of a contrary view or views. Sometimes it appears to be considered that the immunity attaches only to dividends representing or attributable to profits or gains which have borne full tax before distribution. Sometimes deduction of tax from the dividend seems to be regarded as essential condition of the shareholder's freedom from direct ass ment in respect of the dividend. As it is well established that a tax free dividend should be treated as a dividend of a larger amoun' reduced by deduction of tax, it is not easy to see why express deduction should be material to the shareholder's liability to direct assessment in respect of the dividend ; compliance by the company with the requirement, now statutory, that it should exhibit upon the dividend warrant the gross and net amounts can scarcely be the criterion. Be this as it may, in Scottish Union and National Insurance Co. v. New Zealand and Australian Land Co. (2), Viscount Cave expressed the view that if preference shareholders did not bear the full deduction of tax but received the benefit of Dominion relief obtained by the company, they would probably be liable to direct assessment for the difference in tax. In Hamilton's Case (3), Romer L.J. says: "It a company should declare a dividend without deducting tax then it seems to me that the shareholder would himself be assessable to tax in respect of the dividend he had received." (Cf. per Lawrence LJ. (4), per Lord Hanworth M.R. (5), and per Scrutton L.J. (dissenting) in Bradbury's Case (6); per Romer L.J. in Newmann's Case (7),) Possibly these views have been influenced by rules 19 and 21. At any rate, when Atkin J. in Brooke v. Commissioners of Inland Revenue (8) said: " If the payee has not paid income tax by allowing the deductions, as by the appropriate sections he is compelled to do, it is difficult to see how he escapes paying income tax on the net sum that comes into his hands," he had actually before him a case arising under the provisions now contained in those rules. The question: whether the shareholder obtains immunity from taxation by direct assessment if, and only if, he suffers a deduction in respect of tax from the dividend, appears to me to be of some importance in

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made should be considered dividend or profit credited or paid to the shareholder within the meaning of sec. 14 (b) of the Common- wealth Income Tax Assessment Act 1915-1921. Unless this be so, I think the remaining incidents of the relation of the shareholder to the gross amount, actual or notional, of the dividend are against the view that the excess over the amount he receives is credited or paidtohim. That excess the company is by law entitled to withhold whether it is included within, or excluded from, the amount of the dividend expressly declared. When the company retains such a sum, it forms part of its general funds and is applicable accordingly, The fact that it specifies in its declaration of dividend a larger sum or rate than it in fact pays, does not seem of importance. In point of law it incurs no liability to the shareholder by doing so for any amount except the net sum after the deduction. Whether it be correct or not, that before sec. 7 of the Finance Act 1931 the company was authorized to make a deduction from dividends out of profits on which the company paid no tax (see per Romer L.J. in Newmann's Case (1)), it is clear that deduction of tax did not operate by way of set-off or otherwise to discharge any liability for any sum paid by the company for tax. There is no appropriation to or for the use of the shareholder ; nothing done by the company on his account or for his use. If it be true that the shareholder's immunity from direct assessment depends upon his suffering a deduction from dividend, all that can be said is that, by making the deduction, the company ipso facto discharges or absolves the shareholder from a direct; liability to the Crown for tax in respect of the dividend. I do not think that in the peculiar situation in which the shareholder stands this would be enough to constitute a credit to him of the profits within sec. 14 (b) as construed in Webb's Case (2) and James's Case (3). The destruction or prevention of the shareholder's lability to tax would be a consequence ensuing from the deduction as a result of an express provision of positive law, a statutory phenomenon, and not a discharge by payment or appropriation of money for the purpose. The money would not be credited to the

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Judgment (122 paragraphs)