TAXATION v SranpaRD

TAXATION v SranpaRD - [1933] HCA 19 - HCA 1933 case summary — Zoe

[43]

In the year 1915 the sum of £18,721 2s. 4d. was debited to e reserve account. Such sum was made up of the items set out below, being moneys paid as a result of a judgment of the Judicial Committee of the Privy Council in certain litigation with respect to the liability of the appellant to income tax under the law of the State of Victoria, which had been the subject of proceedings 'in the Supreme Court of Victoria, and then in the High Court of Australia, and which came before the Judicial Committee of the 'Privy Council on appeal from the High Court of Australia (1). a 17. In the year 1924 the sum of £25,482 1s. 10d., being brokerage "expenses amounting to £1,026 Is. 10d. and discount of 15 per cent amounting to £24,456 in respect of the issue by the appellant in that year of debenture stock of a face value of £163,040 issued at a price of £85 for every £100 of stock, and in the year 1925 the sum of £9,112 7s. 6d., being an average discount of £14 3s. 103d. per cent 'in respect of the issue by the appellant in that year of debenture stock of a face value of £64,200 issued at an average price of 5 16s. 14d. for every £100 of stock, was debited to the reserve ecount. All such expenses were incurred and paid in London.
On 18th January 1926 the appellant was asked on behalf of respondent, the Federal Commissioner of Taxation, to state why "no part of the surplus arising from the realization of the original s had been included in its Federal income tax returns for any The appellant replied on 23rd January 1926 in a letter from hich the following is an extract: - ' The company under the authority of the judgment of the Privy Council in Commissioner of Taxation v. Melbourne Trust Ltd. considered that these profits were not liable to taxation, having in view the decision of the Privy Council at profits on the realization of the old assets and securities were not liable to taxation until they had been treated by the company as profits available for distribution."

[96]

necessary to keep the profits in suspense and so the old realizations reserve became simply an ordinary reserve account. It was dealt with as such for income tax purposes and other outgoings were debited to it. If the Judicial Committee meant that the profits of this company were not taxable until distributed to shareholders, ere has been no distribution, but, if it meant that profits were not taxable until dealt with as a profit, they have been so dealt with from 1910 onwards. The new art. 128 (a) takes nothing from a suspense fund. On the contrary it puts in suspense half of the eserve fund which after 1910 was free to be used for any purpose inarily met from a company's reserve. The Penang Sugar ate was sold to a new company in 1923. The totality of the transaction occurred at one or other of the dates, 31st December 913, 31st December 1923, or, at latest, 31st December 1925. hen the totality was reached it could be definitely stated that the plus was profit. Profits are not made in the year in which they ascertained to be profits without doubt, but in the respective is when the component parts of such profit comes in. {Evarr J. referred to Westminster Bank Ltd. v. Osler (1).] The manner in which money is dealt with after receipt is by no means conclusive. The character of the transaction and not the sposal of the proceeds determines whether receipts are income capital (Commissioner of Income Tak (Q.) v. Bank of New h Wales (2); Forrest v. Federal Commissioner of Taxation (3) ). The respondent was not misled by any returns or representations of et into thinking that the company was holding this money in su pense after 1925. The only representation made was by an accountant as to his view of the effect of the former decision of e Privy Council. No doubt this was an honest representation of is opinion, and in any event the Commissioner cannot say that the ountant's reading of the law estops the company. The savings by the company's purchasing its own debenture stock at a ount are not income profits (Commissioner of Tavres v. British lustralian Wool Realization Association (4) ).

[110]

of the company which brought it into its hands were performed before that date and had caused its receipt. The contention of the Commissioner is that the sum had not the clear characteristics of income until it was, so to speak, severed from the receipts or funds of the company and diverted from them in a manner which impliedly acknowledged that it was income. The sum of £92,008 represents the proportion obtained from Australian sources of amounts credited to the company's realization reserve account. This account contained a record of the results of the company's dealings with the assets acquired at its inception in consideration of shares and debenture stock. The entire basis of the assertion that the sum in question standing at the credit of that account bore an equivocal character until it was appropriated, as income only could be, is a supposed analogy which the Commissioner has found between 'the condition of the company and its financial operations in 1927 and that of 1909, dealt with in the Privy Council (Commissioner of Taxes v. Melbourne Trust Lid. (1)). At that date the com- pany had not realized by the disposal of its original assets a 'sufficient amount to cover the value at which they were acquired or _ the value at which they were taken into the account. Its debenture stock had not been paid off and, by an article of association, the company was prohibited from paying any dividend out of such realizations until the debenture stock was redeemed. The proceeds _ of realization were accordingly carried to a realization account, and, _ so far as concerned the question whether the contents of the account constituted profit or a fund available for dividend, it was necessarily true that the account might properly be considered a suspense account. Until enough was recovered by the realization of the to cover the amount treated as expended in their acquisition could be no logical certainty that any sum at its credit repre- d profit on the entire transaction. Until the debenture stock s paid off none of the moneys contained in the account was avail- jle for dividend. The Privy Council had before them this state of 8 obtaining in 1909. The facts, however, showed that by 15th October 1909 the whole of the debenture stock had been paid off and that out of the moneys to the credit of the realization account

[113]

the directors resolved to distribute 6d. a share as a bonus to the members of the company and further proposed a distribution of - new debenture stock to the shareholders, paid up out of the same source. Their Lordships, whose opinion was delivered by Lord Dunedin, after holding that the initial figure at which the original assets were taken into the company's account represented real value and should be adopted said : - '" But it is possible that other investments on realization may show loss instead of profit; and it is obvious that it is in the totality of the transactions that the question of profit comes to be fixed. Their Lordships are, however, of opinion that the company may well be held bound by its own actions. In distributing a bonus of 6d. per share it affirmed that to that extent at least there was profit realized. In the same way in making a distribution of debenture stock on and after August 10, 1910, they may be held to have distributed profit. . . . As regards the question of when a profit is earned their Lordships' view is that a profit can be said to be earned when it is dealt with as a profit. In ordinary cases this synchronizes with the realization of the sums which swell the assets of the person or company, and which entering the account (whether on the creditor or debtor side will depend on the particular account in view) go to bring out the balance which is deemed profit. But for the reasons already given their Lordships think that in a case like this the company are entitled to hold at least a part of their realizations in suspense - as indeed they have done in their accounts - and that it is only when finally the same is given to the shareholders that the final impress of profit is, so to speak, stamped upon it, and that therefore, for the purposes of the Act, that is the time at which it is earned" (1). Among the declarations made by their Lordships was the following : - " Declare that as regards the bonus of 6d. per share referred to in par. 7 of the directors' report of April 9, 1910, there is evidence sufficient to show that this is taxable as profit so far as it was earned in or derived from Victoria ; and that pari ratione the distribution of debenture stock to share- holders calculated as justified by the state of the realization reserve account should be properly held to be taxable as profit according to the pecuniary value thereof" (2). Now, to my mind, it is obvious

[115]

that the whole foundation of these observations and of their Lord- ships' decision upon this point is the condition of the company's affairs at that time when the result of the " totality of the transac- tions " was not known, although it is upon that totality that "the question of profit: comes to be fixed." If in these circumstances @ corporation exercising a trade in carrying out such transactions chooses to detach from the moneys so far recovered a sum which it forthwith treats as profit it avows that by the exercise of trade it has, when it does so, earned that profit. But when it has become clear that a profit has been earned on the " totality of the transac- tions" and it continues to trade with the assets remaining in its hands quite different considerations arise. It needs no exercise of judgment on the part of the directors, no determination to appropriate funds, and no distribution, to establish the character of the moneys derived. The ascertainment of their character depends upon nothing but the construction of the correct account. In the present case Cussen A.C.J. has made a close examination of the company's _ condition and of its accounts, and, to my mind, has shown conclusively that the realization account was not considered and could not be considered a suspense account in any relevant sense, that a clear profit had arisen on " the totality of the transactions," and that the moneys out of which £92,008 came were accumulations in the hands of the company which bore no equivocal character. I cannot agree with the contention on the part of the Commissioner that, because large sums had already been distributed to the shareholders, and because losses might have been incurred in dealings by the company with other assets, or deficiencies in the book values of such original assets as might be considered still in the company's hands at any televant date might appear on realization, therefore the contents of the realization account must be still considered as held in suspense awaiting determination whether they represented profits or not. is argument departs from the issue. In every trading concern valuations may be falsified by the event, and net profits ascertained -on the trading account at a particular date may be lost in subsequent 'operations. The issue is, whether, apart from severance or detach- from the company's funds, it could be said that in the disposal of the items of a mass of assets a profit had been made. Once the

At a glance

Court

Decision date

Before

Source

Judgment (194 paragraphs)

(1) (1914) A.C., at p. 1010; 18 C.L.R.,. (2) (1914) A.C. 1001 ; 18 C.L.R. 413;

Parties