London Australia Investment Co Ltd v Commissioner of Taxation

London Australia Investment Co Ltd v Commissioner of Taxation - [1977] HCA 50 - HCA 1977 case summary — Zoe

[15]

The company was an investment company, the primary object of its investment activities being to produce dividend income which it could distribute to shareholders. In order to produce this income, the appellant invested in a number of shares in listed public companies in Australia from which it hoped or expected it could immediately or within a reasonable time obtain a dividend yield of four per cent or better. Dividend yield here means return on shares calculated as a percentage of their market value. The total of the company's investment holdings was known as its share portfolio. Certain considerations governed the makeup of the appellant's share portfolio. One was the holding of an adequate number of shares in any company in which an investment was made so that adequate supervision of the assets of the appellant could be ensured. Another consideration governing the makeup of the company's share portfolio was a requirement that shares held should be readily marketable so that they could be disposed of in the event that a change of investment became necessary or desirable. It was an aspect of marketability that investments should be made in companies, the market value of whose shares were not likely to decline. Another consideration was that a proportion should be kept in the holding between various companies and the appellant aimed at not permitting any one holding to exceed about five per cent of its total investment. Another consideration was the earning yield of the companies in whom investment was made. It was desirable that companies in which shares were held should have current earning yields of one and one and a half to two times dividend yield so that dividends were adequately covered. A result of this investment emphasis and policy was that the appellant was always interested in growth potential of shares and Helsham J. was satisfied that the company was interested in shares with growth potential in the sense that that expression was defined by Mr. Harper as "potential for growth in income from dividends". His Honour realized that growth potential looked at in this way was very much the same thing as potential for increasing in market value. He discussed this aspect and concluded [36] :

[40]

what was recovered through the sale of the shares was circulating capital, and what ultimately was not recovered was a loss on revenue account just as any excess would have been an income profit: cf. Punjab Co-operative Bank Ltd., Amritsar v. Income Tax Commissioner, Lahore [47] ; Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [48] ; Australasian Catholic Assurance Co. Ltd. v. Federal Commissioner of Taxation [49] ; Commissioner of Taxation v. Commercial Banking Co. of Sydney [50] . The cases referred to are some of what may be described as the "banking" and "insurance" cases, upon which naturally the Commissioner relies quite strongly on this appeal. But there is a significant difference between a banking or insurance business which involves investment activity and the course of investment activity in the instant case. The nature of a banking or insurance business, as part of its putting of money as circulating capital to use, involves not only occasional acquisition of property in satisfaction of advances, as in the situation to which Kitto J. was referring, but also and more commonly the purchase and sale of various kinds of property whereby moneys which are obtained as part of the business but which form no part of the original capital structure of the bank or insurance company, or of that structure enhanced by accumulated net profits, are put to use short term or long term. All profits arising from that activity are profits of the business of banking or insurance. At any time and from time to time the property acquired may need to be sold, in whole or in part, to meet the requirements of the banking or insurance business and the hope and expectation is that in the meantime not only will the property have earned income but that it will have risen in value. The scale of activity coupled with the source of the funds leads to the inference that a purpose or intention of the acquisition is eventual resale at a profit. But in so far as the original capital or that capital enhanced by accumulated profits is laid out in investments in property and not in the business activity of banking or insurance, the investments will have the character of capital and profits or losses on a sale thereof will not be profits of the business of banking or insurance. The banking and insurance cases thus do not provide an answer to the question which arises in the instant case. The source of moneys for the activities of the appellant company is not money of a kind which can be described as circulating capital. It is essentially investment and reinvestment of moneys which were originally part of, or which were added out of capital profits to, the capital structure of the appellant. 1. (1969) 118 C.L.R. 529, at p. 537. 2. [1940] A.C. 1055, at p. 1072. 3. (1946) 73 C.L.R. 604, at pp. 608, 614. 4. (1959) 100 C.L.R. 502. 5. (1927) 27 S.R. (N.S.W.) 231.

[41]

Though the findings of Helsham J. certainly preclude a conclusion that shares were acquired and disposed of for a primary or dominant purpose of profit making, he did not conclude that there was no purpose at all in a relevant sense, when the shares were respectively acquired, of resale at a profit. I am not sure that he found it necessary to direct his mind to this question. Rather, he was satisfied to rely upon the scale of the activity as itself constituting the business. I do not think that a conclusion on scale by itself provides the answer; but it is very important evidence tending to show a business of acquiring and disposing of shares and it was some evidence from which a purpose of thereby making a profit might be inferred. It was for the appellant to rebut the latter inference. In my opinion it has not done so. It has in its favour the very important circumstance that the source of the funds was the subscribed capital of the company. But this is only part of the evidence. The evidence taken as a whole strongly supports a conclusion that a purpose or intention or expectation implicit in the carrying into effect of its investment policy was that shares acquired would be resold if and when an occasion arose which would make it desirable so to do and an element of desirability was that there would be greater financial benefit in disposing of the shares at an enhanced value than in retaining them. The fact that enlargement of dividend income was the dominant purpose does not gainsay the existence of a concurrent purpose of resale if and when that resale would throw up a profit which could be used to enlarge the dividend income. The massive scale of the activities in the years in question practically compels the inference that the investment policy was one which in its inception and throughout the course of carrying it into effect would in the expected state of the rising market require frequent and regular realizations of shares whenever they rose in market price before dividends from them were increased.

[44]

It remains to consider one argument upon which counsel for the commissioner relied. They contended, in effect, that even if the position be accepted that the course pursued in the administration of the Trust cannot properly be described as the carrying on of a business of stock-jobbing, still it amounted to a business of making profits of various kinds for the certificate holders, and that the selling of rights, and the buying of securities and re-selling them at prices in excess of cost, were part and parcel of the sum of activities by which those profits were made. In such a situation, counsel submitted, cases such as Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income Tax, Lahore [54] and Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation [55] show that the whole of the profits realized, even though some part of them would otherwise be of a capital nature, are to be regarded as income. To accept this argument, however, would be to ignore the evidence already mentioned, which is inconsistent with the notion that the activities of the managers, or of the managers and the trustees together, were different in kind from those in which trustees normally engage who hold a portfolio of shares with power to vary investments from time to time as they consider the interests of the beneficiaries require. According to that evidence, the moneys in question arose, not (as in the cases cited) from transactions forming incidents in the conduct of a business or a profit-making scheme, but from transactions effected in the course of performing a fiduciary duty to preserve for beneficiaries as far as practicable the assets comprising the trust fund and any increments in the value of those assets which might appear from time to time to be in jeopardy. The case therefore differs fundamentally from the cases relied upon by counsel for the commissioner. 1. (1954) 90 C.L.R. 598. 2. (1954) 90 C.L.R., at p. 610. 3. (1954) 90 C.L.R., at pp. 611-612. 4. [1940] A.C. 1055. 5. (1946) 73 C.L.R. 604.

At a glance

Court

Decision date

Before

Source

Judgment (46 paragraphs)

Parties

Cases Cited (1)