Squatting Investment Co Ltd v Commissioner of Taxation - [1953] HCA 13 - HCA 1953 case summary — Zoe

CTHHCA

Squatting Investment Co Ltd v Commissioner of Taxation

[1953] HCA 13

High Court of Australia|1953-04-13|Before: Kitto JJ, Williams JJ, Fullagar J

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Court

High Court of Australia

Decision date

1953-04-13

Before

Kitto JJ, Williams JJ, Fullagar J

Source

Original judgment source is linked above.

Judgment (59 paragraphs)

[1]

This matter comes before the Full Court on a case stated by the Chief Justice in an appeal by the Squatting Investment Co. Ltd. against its assessment to income tax on income derived by it in the year ended 31st December 1949. The calendar year is the company's accounting period for the purposes of the Income Tax Assessment Act 1936-1949. The appeal is concerned with certain sums received by the company during the accounting period in pursuance of the Wool Realization (Distribution of Profits) Act 1948.

[2]

The company is incorporated in Victoria, and carries on (inter alia) the business of a wool grower in New South Wales and Queensland. This business was carried on by it during the years 1939 to 1946 inclusive, and the wool grown by it in the seven "wool years" 1939/40 to 1945/46 inclusive was supplied for appraisement and acquired by the Commonwealth under the National Security (Wool) Regulations. These regulations were made by the Governor-General under the National Security Act 1939 in order to give effect to the "Wool Purchase Arrangement", which was made between the Government of the Commonwealth and the Government of the United Kingdom very shortly after the outbreak of war in September 1939. The effect of the Wool Purchase Arrangement, the main provisions of the regulations, the system of appraisement and the general course of dealing established under the regulations, the position which existed at the termination of hostilities in 1945 and the events which led up to the passing of the Wool Realization (Distribution of Profits) Act 1948, are examined and explained in the judgment of the Court in Ritchie v. Trustees Executors & Agency Co. Ltd. [1] . I also had occasion recently to examine these matters at length for a different purpose in Poulton v. Commonwealth [2] . For a general history of the vast undertaking involved I think it sufficient to refer, without repeating it, to what was said in Ritchie's Case [1] , and to the very clear exposition of details which is contained in the present case stated. It is necessary, however, in order that the questions now arising may be understood, to refer briefly to certain points in that history.

[8]

It will, I think, suffice if I summarise the effect of the Disposals Plan, so far as it related to Australian-grown wool, very much as I summarised it in Poulton's Case [1] . The stock of Australian-grown wool in the ownership of the United Kingdom at 31st July 1945 was transferred to the joint ownership of the United Kingdom Government and the Commonwealth Government, and was to be held and disposed of by a "Joint Organisation", which was to be incorporated as a private company in England and was to have an Australian subsidiary. The Australian subsidiary was the Australian Wool Realization Commission, which was constituted and incorporated by the Wool Realization Act 1945 (see s. 9 (1)). The United Kingdom and the Commonwealth were each to take up fifty per cent of the original capital, which was represented by the opening stock of Australian-grown wool. The opening stock was to be taken into account at its original cost less the amount standing to the credit of the divisible profits account. (As to the effect of this, see Ritchie's Case [2] .) Payment of the Commonwealth's share of the original capital was to be made in four annual instalments, but there was provision for each payment to be made out of current profits, if any. The ultimate balance of profit or loss was to be shared or borne equally by the United Kingdom and the Commonwealth. With regard to the wool year 1945/46 (described as the "interim period") it was agreed that the United Kingdom should purchase the whole clip in the same way as in the six preceding years, but it was to be handled by the Joint Organisation, and the Commonwealth was to reimburse to the United Kingdom one half of the cost of so much of the clip as remained unsold at the end of the wool year. In the following year (1946/47) the normal system of selling wool by auction in Australia was resumed. Actually in that year the Joint Organisation purchased a substantial quantity of Australian wool at auction sales. The plan provided that the operating expenses of the Joint Organisation should be borne equally by "the industry" and the Joint Organisation itself. The contribution to be made by the industry was provided for by Commonwealth legislation - the Wool (Contributory Charge) Assessment Act 1945 and the Wool (Contributory Charge) Act 1945.

[23]

In Ritchie's Case [1] the question before the Court was not a question of liability to taxation, but I would regard the reasoning of the judgment in that case as decisive of the present case. In that case the trustees of the will of a testator, who died in 1905, were carrying on during the war a pastoral business, in the course of which they supplied wool for appraisement in each of the years 1939/40 to 1945/46 inclusive. The estate was settled by the will, which gave power to carry on the business. The trustees having received their due proportion in a distribution under the Wool Realization (Distribution of Profits) Act 1948, the questions arose whether the moneys so coming to their hands were income or corpus of the estate, and, if income, whether they were income of the year of receipt or ought to be distributed among the years in which the wool was supplied in proportion to the appraised value of wool supplied in each year. This Court, affirming the decision of the Full Court of the Supreme Court of Victoria unanimously held that the moneys were income of the estate, and income of the year in which they were received by the trustees. In the course of considering the first question, the Court said: - "It is clear that from the beginning the distribution, in whole or in part, of the Australian share of any surplus arising on divisible profits account was contemplated. The decision was taken administratively that skin wool should be excluded and wool was accordingly submitted for appraisement and appraised as participating and non-participating. That of course implied that the basis of distribution would be appraised value of the wool submitted" [2] . After pointing out that there was no legal right to participate in profits the Court said: - "But courts should not be unmindful of the fact that administrative measures and understandings may, according to circumstances, raise an expectation almost as assured of realization as if it rested upon a foundation of legal right" [2] . After referring to the contention of the appellants that the moneys belonged to corpus because they "formed an unsought and fortuitous accretion to the estate, the source of which lay in the bounty of the Commonwealth", the Court said: - "These contentions cannot be sustained. They are based upon isolated points in the transaction ending with the distribution of the wool disposals profit. The course pursued to give effect to the Wool Purchase Arrangement by the acquisition of wool from the grower must be considered as an entirety. The receipt of the payments is an actual consequence of the submission of wool for appraisement" [1] . The Court added: "It is, of course, true that the Parliament, in the exercise of its legislative power, could have dealt in any manner it chose with the fund. But that legal fact does not determine the character or the consequences of the course which the Parliament actually took or the nature, as between capital and income, in trusts for successive interests, of the amounts distributed. They constitute receipts resulting from the operations of wool-growing. As possible or contingent receipts they were in contemplation when the appraisements were made. The title to receive them when in the end it is placed on a legal basis consists in the submission of shorn wool for appraisement for the purposes of the Wool Purchase Arrangement. The amount is a percentage of the appraised value of the wool so submitted" [2] .

[27]

It was suggested by counsel for the company that the view taken in Ritchie's Case [2] did not altogether square with, or must be regarded as modified in some way by, the judgment delivered by Lord Porter for the Privy Council in Perpetual Executors Trustees & Agency Co. (W.A.) Ltd. v. Maslen [3] . The suggestion is, in my opinion, entirely without foundation. The question in Maslen's Case [3] turned largely on s. 10 (3) of the Wool Realization (Distribution of Profits) Act 1948, which makes provision for a case where wool has been supplied for appraisement by a partnership and the partnership has been dissolved before payment of the amount attributable to that wool. There had in the particular case been, some years before 1948, an assignment by one partner to another of his interest in all the partnership assets, including book debts. Their Lordships stressed the fact that moneys paid under the Act were paid by way of bounty, that they were, in effect, a "gift". The absence of any obligation of any kind to pay anything to growers out of profits has, of course, never been doubted since the decision in John Cooke & Co. Pty. Ltd. v. Commonwealth [4] . In the view of their Lordships it assumed great importance in Maslen's Case [3] , because it meant that it was impossible that the assignment could carry the share of wool profit which might ultimately be "given" in respect of wool supplied by the partnership. The share payable under the Act of 1948 went, therefore, to the individual partners (or their personal representatives) as the persons designated by the Act to receive it, and its destination was not affected by s. 10 or s. 11 of the Act. Thus their Lordships said: - "The correct view is that it is a true gift to the supplier of the wool. It is not, and never was, part of the assets of the partnership" [1] . And again: "it is a personal gift to the parties concerned, not passing under either assignment, nor is its destination affected by the terms of sections 10 or 11 of the Act of 1948" [2] . The "voluntary" character of the payments was clearly and fully recognised and explicitly stated in Ritchie's Case [3] in which an entirely different question arose. Neither case has, in my opinion, any bearing on the other, and there is nothing in Maslen's Case [4] to derogate in any way from Ritchie's Case [3] .

[29]

A word should be said in conclusion with regard to the "wool scheme" of the war of 1914-1918. In a matter of such great importance one would naturally look to see if any guidance could be there found, and although no binding authority is disclosed, the position is of interest. The Wool Purchase Arrangement of 1916, like that of 1939, contained a provision that the Commonwealth should be entitled to share in profits which might accrue to the United Kingdom Government on certain resales of wool by that Government. At the end of the war in 1918 a very similar position arose to that which arose in 1945, and a variation of the original agreement between the two Governments was agreed to. The scheme adopted was analogous to, but different in detail from, the Disposals Plan. In Commissioner of Taxes v. British Australian Wool Realisation Association Ltd. [5] Lord Blanesburgh, to use his own words in another judgment delivered on the same day, "traced in outline the history of that great scheme". Its central feature was the formation of a company, which was incorporated in Victoria on 27th January 1921 under the name of British Australian Wool Realization Association Ltd., and which came to be generally known as "B.A.W.R.A." or "Bawra". The nominal capital of the company was £25,000,000, divided into shares of £1. The company took over for realization the whole of the surplus wool on hand, and, by direction of the Central Wool Committee, issued 12,000,000 shares and £10,000,000 of what were called "priority wool certificates" to the Australian growers who had supplied shorn wool for appraisement. These shares and certificates represented, of course, the Commonwealth's half share in any profit that might accrue from the realization of the wool taken over by Bawra. For the sake of simplicity, I will refer only to the shares. The proportion of shares issued to each recipient was determined on precisely the same basis as was adopted by s. 7 of the Wool Realization (Distribution of Profits) Act 1948. The shares were listed on the stock exchanges and were readily transferable.

[30]

After the war of 1914-1918, as after the war of 1939-1945, there was no legal or equitable right in any supplier to share in any profits. As Lord Blanesburgh said, "no individual supplier, however important, ever had in the eye of the law prior to the formation of the Association a right to any part of the Commonwealth Government's share of profits" [1] . There was, however, the same expectation and understanding, and the shares were issued and received in full discharge of any obligation which might be held to subsist. The recipients were assessed to income tax in respect thereof by the Federal Commissioner and the State Commissioners, the shares being taken for the purpose of assessment at their market value, which was at the relevant times about 12s. 6d. They were assessed, of course, on the basis that the interest which they received in Bawra represented part of the proceeds of the wool supplied for appraisement - the proceeds of a business carried on. No objection was ever taken to any of these assessments, or, if any were taken, it was not carried to any Court, and the taxes assessed were paid. Very large sums were involved, and it may be safely assumed that this course was not adopted without taking the opinions of eminent counsel. Bawra ultimately sold the wool, which it had taken over, at prices totalling a sum very much larger than the value at which it had been taken into the opening accounts. No dividend was ever declared, but a series of reductions of capital were made, and confirmed by the Supreme Court of Victoria. Ultimately the company went into liquidation, and a final distribution was made in the winding up. The Commissioners sought to tax the amounts received by shareholders in pursuance of these reductions, but the shareholders objected and appealed, and they were ultimately successful in the Supreme Court of Queensland and in the Privy Council: see Commissioner of Taxes v. Union Trustee Co. of Australia Ltd. [2] . The shares, when received, had been treated as income, but the moneys received were received by way of realization of those shares and were capital. The analogy in the present case is, of course, with the original receipt of the shares, and not with the amounts received on the reductions of capital.

[38]

In the first place, the National Security (Wool) Regulations took from a wool grower in the position of the appellant wool which in other circumstances he would have disposed of by the normal method of sale by auction, and they gave him in its place two things. One was a right to receive what reg. 30 (1) described as "the payments for wool". In the administration of the regulations these payments comprised the appraised value of the appellant's wool (divided into an initial payment and the "retention money" paid at the end of the wool season), and the flat rate adjustment which was the appellant's proportionate share of the excess, ascertained at the end of the season, of the price received by the Commonwealth for the whole clip at the flat rate purchase price over the total appraised value of the whole clip. For the purpose of determining the income or non-income quality of these payments, no real distinction can be drawn between them and a price realized by sale. Indeed the regulations (reg. 15) actually described the compulsory disposition of wool in pursuance of their provisions as a "sale of wool by appraisement". But that was not all. The grower also got, no less certainly than these payments, a chance of receiving something more, in effect an addition to the price, by an exercise of the discretion which reg. 30 (2) entrusted to the Central Wool Committee. The discretion was conferred as an absolute discretion, but on well-known principles it could not have been validly exercised otherwise than upon grounds within the scope of the regulations. The moneys to which the discretion extended (if any should come into existence) were thus significantly differentiated from moneys intended for the public purse, and solid ground was provided for an expectation that, as the history of wool in the previous war and considerations both ethical and political would all combine to suggest, any distribution that might be made under reg. 30 (2) would be a distribution to the wool growers who had supplied wool for appraisement. That is to say that any such distribution would be made (not precisely, but as nearly as common knowledge suggests that it was either practicable or necessary to go), to the persons who had supplied shorn wool for appraisement. This expectation was, of course, confirmed by the action of the Central Wool Committee in causing all shorn wool to be designated "participating wool" in the appraisement catalogues, in contemplation, as the case stated sets out, that the Commonwealth Government's share of any profit to arise would be paid to the suppliers of shorn wool. The point which it is important to observe here is that the expectation thus created, resting as it did upon most substantial considerations, arose, together with and no less surely than the moneys which were paid in respect of the appraised value and the flat rate adjustment, in favour of the persons who supplied the shorn wool for appraisement; and together they formed the totality of that which the regulations gave those persons in place of their wool. It must have followed, if there had ever been a distribution under reg. 30 (2), that the question whether moneys distributed to a particular supplier of wool were of an income nature would be answered yea or nay, according as the proceeds of his wool if sold at auction would or would not have constituted an income receipt in his hands. In the vast majority of cases, and certainly in the case of the appellant, whose wool had been produced for sale in the course of a business of growing and selling wool, the moneys received would certainly have had to be brought into the trading accounts, and would accordingly have gone to swell assessable income.

[39]

The next point which emerges from a consideration of the history of the matter is that the fund out of which came the moneys now in question, though it was not the identical fund which reg. 30 (2) contemplated, had such a relation to the wool supplied for appraisement that considerations were applicable to it which were not substantially different from those which have just been mentioned. This view was stoutly contested by counsel for the appellant, who contended that it had been too readily accepted by the Court in Ritchie v. Trustees Executors & Agency Co. Ltd. [1] . Counsel pointed out that immediately before the agreement containing the Disposals Plan took effect (as it did in Australia by virtue of the Wool Realization Act 1945), the potential sources of distributions to wool growers by the Central Wool Committee in exercise of its discretion under reg. 30 (2) were of three descriptions: Australia's one-half share of amounts which had been accumulated in an account known as the Divisible Profits Account; other moneys which had already arisen to the Committee; and such further moneys as might be derived from the continued operation of the Wool Purchase Arrangement. Clause 2 (b) of the Financial Plan, which formed Pt. III of the agreement, disposed of the amounts accumulated in the Divisible Profits Account by authorizing the United Kingdom Government to retain them. The Wool Industry Fund Act 1946 disposed of all other moneys vested in the Central Wool Committee by diverting them to a Wool Industry Fund which it made applicable for certain purposes not material to be considered. And of course there could not be any further share of profits accruing under the Wool Purchase Arrangement, for that arrangement was brought to an end. The result, it was said, was to destroy the possibility of any distribution being made to wool growers under reg. 30 (2); and the new scheme which came into being was so essentially different from the Wool Purchase Arrangement of 1939 that any moneys that might accrue to the Commonwealth in consequence of its operation must be regarded as completely unaffected by the expectation of further payment which the wool growers had formerly possessed.

[40]

The points of difference were certainly not unsubstantial. First, it was pointed out, the Disposals Plan dealt with different wool from that covered by the Wool Purchase Arrangement, for it included the 1945/46 clip and any wool of later clips that might be purchased for the Joint Organization at auction. Moreover, whereas under the Wool Purchase Arrangement the wool to be sold was the property of the United Kingdom Government, under the Disposals Plan the wool dealt with by the Joint Organization was wool held in joint ownership by the United Kingdom and Australian Governments. Further, the profit in which Australia was entitled to share had been limited, under the Wool Purchase Arrangement, to profit on the sale of Australian wool outside the United Kingdom, whereas under the Disposals Plan it extended to profit on the sale of Australian wool wherever it might be sold. Again, instead of the Central Wool Committee being entitled to only one-half of certain defined profits but standing to lose nothing in the event of a loss being incurred on the resale of Australian wool by the United Kingdom Government, the Commonwealth became a shareholder in the Joint Organization, in effect paying for its share over £E40,000,000 (i.e. one-half of the £E82,777,089 mentioned in par. 33 of the case stated). By the same token, under the new plan the Commonwealth was entitled to have some say in the disposal of the wool, whereas under the old plan disposal was a matter for the United Kingdom Government alone. Because of these and other differences, the argument proceeded, the view should be accepted that any profit coming to the Commonwealth under the Disposals Plan not only belonged to it in point of law, but was unaffected by any such considerations favouring the persons who had supplied participating wool for appraisement as those which formerly applied to moneys falling within reg. 30 (2); and for that reason the moneys which the Act of 1948 directed the commission to distribute were moneys which the Commonwealth was in the fullest sense free to dispose of as it saw fit. Add to that the fact that the Act chose as the recipients, not wool growers as such, but the persons who supplied wool for appraisement whether they had grown it or acquired it from the growers, and the right conclusion, it was said, is that the distributions were truly in the nature of gifts which cannot be classified as income, for they arose from the bounty of the Commonwealth to persons chosen by the Commonwealth in exercise of a complete freedom to apply its own moneys as it saw fit, persons chosen for reasons which were personal to them and which had no reference to any carrying on by them of income-producing operations.

[41]

To take this view, however, is to get the whole matter out of focus. When the Commonwealth by cl. 2 (b) of the Financial Plan gave up to the United Kingdom Government its half share of the amount standing to the credit of the Divisible Profits Account, it acquired by virtue of cl. 1 of the Disposals Plan an interest as joint owner with that government in the latter's accumulated stocks of Australian wool. Such possibility as there was that further profits might have arisen to the Central Wool Committee from the continued operation of the Wool Purchase Arrangement was, of course, wrapped up in the same stocks of wool. So that Australia's share of realized profit and the Commonwealth's rights under the old arrangement with respect to future profit both went into the acquisition by the Commonwealth of an interest as joint owner of the accumulated wool; and that meant that the wool growers' prospect of having distributions of those profits made to them by the committee under reg. 30 (2) was in effect invested in the Australian wool which the Joint Organization was to turn into money. It is true that the Commonwealth Government also undertook by the Financial Plan to contribute to the Joint Organization fifty per cent of the original capital represented by the opening stock of wool; but as it turned out it was able to do this out of its share of the proceeds of sales of wool effected by the Joint Organization; so that the proceeds actually coming to the hands of the Commonwealth must be considered as really standing in the place of the Australian share under the Wool Purchase Arrangement of the profits, realized and prospective, which the Commonwealth gave up by entering into the 1945 agreement. It is also true that the Joint Organization would be selling, not only the accumulated stocks, but also such wool of later clips as it might buy with a view to supporting the market; but this was only a means; the main purpose of the Disposals Plan was to ensure the realization of the accumulated stocks in a manner as advantageous as possible to those who were interested in their profitable sale, while at the same time preventing prejudice to the sale of future clips: see the third paragraph of the preamble to the Wool Realization Act 1945. It is also clear that the Commonwealth's share of the profits of the Joint Organization would be received by the Commonwealth itself and not by the Central Wool Committee, and that the manner of their ultimate disposal would be determined by the Commonwealth and not by the committee. But it is evident that in a practical sense, as in a constitutional sense, the power of the Commonwealth to dispose of those profits was not unlimited; and it would be only a partial view of the situation which would lead one to describe the profits as the Commonwealth's own moneys which it might apply as it thought fit. The considerations which had operated to give substantial assurance that the committee would distribute amongst the wool growers any surplus that might have arisen in its hands operated now to give no less assurance that the Commonwealth would distribute amongst the same persons such profits as should become available for distribution by it in consequence of the working of the Disposals Plan.

[45]

This being so, it may seem somewhat odd that support for the contention that the amount received is not income is claimed from the well-known line of decisions upon the question whether gratuitous payments are assessable as profits arising out of the recipient's employment or by reason of his office, within the meaning of English taxing statutes. The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character, such gifts being variously described as accruing to the donee in virtue of his office (Herbert v. McQuade [3] ), or as remuneration (Beynon v. Thorpe [4] ; Seymour v. Reed [5] ), or in respect of his past services (Beynon v. Thorpe [6] ), or substantially in respect of his services (Blakiston v. Cooper [7] ); and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally, such as those which have been called mere gifts or presents made to the donee on personal grounds (Seymour v. Reed [8] ), mere donations (Stedeford v. Beloe [9] ), gifts moved by the remembrance of past services already sufficiently remunerated as services in themselves (Beynon v. Thorpe [1] ), payments peculiarly due to the personal qualities of the particular recipient, or personal gifts as marks of esteem and respect (Blakiston v. Cooper [2] ). The application of the distinction thus drawn ought surely to be that amounts such as that now in question are to be regarded as income if they were received in relation to wool supplied for appraisement in the course of a business carried on for profit. The Act makes it plain that these amounts are made payable in respect of the wool which was supplied and because it was supplied; not because of any admiration for the personal qualities of the suppliers or because of gratitude for their having supplied wool for which adequate payment was considered to have been made already.

[51]

Now, their Lordships of the Privy Council had to choose, as they said [3] , between the two constructions, and they upheld the view of Fullagar J. They said [4] that the sums paid by the commission were admittedly nothing but a gift, and [3] that it would do violence to that admitted fact to construe the provisions (of s. 10) as going further than to require a member of a dissolved partnership to account to his former partner, that is to say as going so far as to stipulate that the money should be dealt with as if it were the result of a contract or debt which came into existence when the wool was supplied for appraisement. Thus their Lordships decided the case by giving effect to what they considered to be the intention permeating the Act, that is to say the intention that the man who supplied participating wool for appraisement, and (broadly) no one else, should participate in distributions. If I understand the judgment correctly, it was for the purpose of emphasising that intention that the expression "personal gift" was used to describe an amount paid to a participant in a distribution. The moneys payable under the Act, being bestowed as the Parliament had seen fit to bestow them, were described by their Lordships as "payable to the supplier" [1] . "It is a true gift", they said, "to the supplier of the wool" [1] ; "a personal gift to the parties concerned" [2] . It seems clear that what their Lordships were insisting upon by their use of the term "personal gift" was that s. 10 must be construed in the light of the essential point in the scheme of the Act, which was that the wool disposals profits were to be put into the very hands from which participating wool had been compulsorily taken. So construed, s. 10 had the effect of attaching to those profits, when they reached the hands of a member of a partnership which had supplied participating wool for appraisement, the incidents which would have attached at the time when the wool was supplied to the proceeds of a sale of the wool made by the partnership at that time. That meant that it was incorrect to give the section such a retrospective operation as it would have if treated as allowing events occurring between the supply of the wool for appraisement and the distribution under the Act to alter the destination of the moneys distributed. The destination remained what it would have been if those events had not happened; the recipients were selected by reference to the fact that it was they who had supplied wool for appraisement; the Act operated in favour of them personally.