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Esquire Nominees Ltd v Federal Commissioner of Taxation [1973] HCA 67; (1973) 129 CLR 177 (24 September 1973)

CATCHWORDS

HEARING

DECISION

2. It is not disputed that on 30th April 1969 the appellant, as trustee under a deed of settlement dated 24th April 1969 which set up a trust described as "Manolas Trust", received $30,910.57, the amount of a dividend declared by another company, Mitchell Credits Ltd., on one fully paid B class share of $0.01 which the appellant held in that company. Under the deed of settlement no beneficiary was presently entitled to the income represented by the amount of the dividend. Both the appellant and Mitchell Credits Ltd. were incorporated in Norfolk Island. The question for decision is whether the appellant was rightly assessed to tax on this income. (at p179)

3. The appellant had been formed as a company in Norfolk Island in 1967. Its registered office was on Norfolk Island. At all material times it had three directors, Messrs. McIntyre, Paton and Lamb, all of whom were residents of Norfolk Island. Its articles provided for the division of the share capital into A class and B class shares. The A class shares, which were preference shares, conferred on the holders thereof, inter alia, the right to exercise all the voting power of the company except that the B class shareholders were entitled to vote in respect of the following matters -
(i) The declaration of a dividend other than the 10 per cent preference dividend to which the A class shares were entitled; (ii) Any resolution for the sale of the undertaking of the company; (iii) Any resolution for the winding up of the company; (iv) Any resolution for the reduction of the capital of the company or of any capital redemption reserve fund or of any share premium account involving a distribution of capital. (at p180)

4. At all material times, seven A class shares had been issued; six were held by persons resident in Norfolk Island (namely, Messrs. McIntyre, Paton and Lamb, Mesdames Paton and Lamb and Miss Ionn) and one by a company (Myee Ltd.) which was incorporated in Norfolk Island and of which Messrs. McIntyre and Paton were the directors. Seven B class shares also had been issued; these were held by W.B. & H. Nominees Pty. Ltd., a company which was incorporated in Victoria and which (like W.B. & H. (N.T) Nominees Pty. Ltd. and W.B.B. & C. Nominees (N.T.) Pty. Ltd. to which I shall later refer) operated under the control or influence of a firm of accountants, Messrs. Wilson, Bishop, Bowes and Craig (formerly known as Wilson, Bishop and Henderson). (There were in fact two related firms of the same name, one in Melbourne and one in Darwin, but this detail does not concern us.) All meetings of the shareholders and all meetings of directors of the appellant have been held in Norfolk Island. (at p180)

5. Before and during the year of income a company known as Manolas Pharmacy Pty. Ltd., which was incorporated in the Northern Territory, carried on business in Australia. During the year of income the ordinary shares in that company were held by, or on trust for, members of the Manolas family and there were in addition twenty-five redeemable preference shares which were held by another company, Mitchell Holdings Pty. Ltd., which was also incorporated in the Northern Territory. Until immediately before 28th April 1969 the shareholding in the latter company comprised fifty-one redeemable preference shares held by Forum Holdings Ltd. and forty-nine ordinary shares held by W.B. & H. (N.T.) Nominees Pty. Ltd. and it now appears, in the light of the decision in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1970] HCA 30; (1971) 127 CLR 62 , that Mitchell Holdings Pty. Ltd. was a public company for the purposes of Div. 7 of Pt III of the Act. However, the decision of Windeyer J. in Casuarina Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 30; (1970) 127 CLR 62 , which the Full Court affirmed, was not given until 25th August 1970 and before that date the status of companies in the position of Casuarina Pty. Ltd. was a matter of contentio. Early in 1969 Messrs. Wilson, Bishop, Bowes and Craig, who were advisers to the Manolas family, formed the belief that the Deputy Commissioner would assess Mitchell Holdings Pty. Ltd. as a private company, as indeed the Deputy Commissioner did on 11th April 1969. If that assessment had withstood challenge, the result would have been that Mitchell Holdings Pty. Ltd. would have been liable for Div. 7 tax unless it had made a sufficient distribution before 30th April 1969, but if it had made a distribution, the shareholders would have been liable to tax on the dividends they received. The accountants discussed with Mr. Kerry George Manolas, who appears to have been an influential member of the family, whether they should rely on a challenge to the assessment being successful or take other action to escape from the dilemma in which they would find themselves if the challenge should fail, and it was decided to adopt the latter alternative. (at p181)

6. In consequence of this decision Mr. Sheehan, an accountant employed by Messrs. Wilson, Bishop, Bowes and Craig, visited Norfolk Island for the purpose of having discussions with Mr. McIntyre, who carried on practice there as a solicitor, with a view to the implementation of the plan which the Manolas family had decided to adopt Mr. Dowding, another agent of Messrs. Wilson Bishop, Bowes and Craig, also visited the Island to assist in carrying out the plan. Mr. McIntyre, in giving his evidence, would not agree that the directors of the appellant, and of the other companies which I shall shortly mention, were simply told by Mr. Sheehan what to do, and objected to the suggestion that the appellant was controlled by Messrs. Wilson, Bishop, Bowes and Craig, although he agreed that the board did take considerable heed of the recommendations made by that firm. If it matters, there is however no doubt that all the events I am about to recount occurred in the course of carrying out a plan previously evolved by the advisers of the Manolas family with the object of finding a way of escape from a liability to tax which it was thought (wrongly as it happened) would one way or the other be attracted if things were allowed to remain as they were. (at p181)

7. The first steps to effectuate the plan were taken on 24th April 1969. On that date a deed of settlement was made between one Savas Kiossoglou as settlor and the appellant as trustee. The deed was executed on Norfolk Island and was signed by Mr. Dowding as the attorney of the settlor. The sum settled was $10, but the trust fund, which was to be held by the appellant under the trusts of the deed, comprised not only the settled sum but also, inter alia, all moneys, investments and property paid or transferred to, and accepted by, the appellant as additions to the trust fund. The trusts declared were in favour of various members of the Manolas family, but under the provisions of the deed no beneficiary was presently entitled to the income of the trust fund which was received by the appellant as trustee during the income year in question. (at p182)

8. On the same day, the directors of the appellant resolved that the appellant would accept the office of trustee in respect of the Manolas Trust and would open a separate bank account in respect of that trust. In fact an account, known as Account no. 19, was opened with the Norfolk Island Branch of the Commonwealth Trading Bank of Australia for the purposes of the Manolas Trust. The directors further resolved that the appellant would accept from Mr. Dowding a loan of $100 at call and free of interest for six months. It is clear enough from the evidence that the purpose of obtaining this loan was to enable the appellant to take up shares, and accept options in respect of unallotted share capital, in two new companies, Mitchell Credits Ltd. and Pharmaceutical Investments Ltd., which were incorporated in Norfolk Island on 24th April 1969; each of these companies had its registered office on Norfolk Island and had a shareholding divided into A class and B class shares with respective voting rights similar to those attached to the two classes of shares in the appellant company. Messrs. McIntyre and Paton were appointed as directors of each of these companies. The directors of the appellant resolved to make from Account no. 19 an advance of $10 at call and free of interest to Mitchell Credits Ltd.; this advance was accepted by Mitchell Credits Ltd. on 28th April 1969. (at p182)

9. On 25th April 1969 the following further things were done:
(1) Mitchell Credits Ltd. allotted one A class share in that company each to Messrs. McIntyre, Paton and Lamb, Mesdames Paton and Lamb, Miss Ionn and Myee Ltd.
(2) Pharmaceutical Investments Ltd. allotted one A class share in that company to each of the same seven persons.
(3) Mitchell Credits Ltd. allotted one B class share in that company to "Esquire Nominees Limited Account No. 19".
(4) The appellant advised Mitchell Credits Ltd. by letter that it was willing to assist that company with loan funds, subject, inter alia, to the condition that an option be granted over the unissued capital of Mitchell Credits Ltd. for a period of ten years, and Mitchell Credits Ltd. for a consideration of $10 granted to "Esquire Nominees Limited Account No. 19" the option at any time until 30th June 1979 to have allotted to it at par all or some of eighty-five unissued A class shares and 999,897 unissued B class shares. (Eight A class and two B class shares left unaccounted for were on 1st May 1969 allotted to another Norfolk Island company, Esquiline Ltd.)
(5) Pharmaceutical Investments Ltd. allotted six B class shares in that company to Mitchell Credits Ltd.
(6) The appellant advised Pharmaceutical Investments Ltd. by letter that it was willing to assist that company with loan funds, subject, inter alia, to the condition that an option be granted over the unissued A class shares in Pharmaceutical Investments Ltd. for a period of ten years, and Pharmaceutical Investments Ltd. for a consideration of $10 granted to "Esquire Nominees Limited Account No. 19" the option at any time until 30th June 1979 to have allotted to it at par all or any of the unissued A class shares in that company.
(7) The appellant executed a declaration of trust by which it acknowledged that the option over the unissued capital of Mitchell Credits Ltd. was beneficially owned by W.B.B. & C. Nominees (N.T.) Pty. Ltd.
(8) Each of the seven holders of the A class shares in Pharmaceutical Investments Ltd. executed a declaration of trust by which it was declared that each such share was held by the shareholder as nominee and in trust for Mitchell Credits Ltd.
(9) Mr. Dowding offered to Pharmaceutical Investments Ltd. a loan of $100 at call, interest free, for six months. (The loan was accepted on 28th April 1969.)
(10) The directors of Pharmaceutical Investments Ltd. resolved to offer to purchase all the issued shares of Mitchell Holdings Pty. Ltd. at par. (at p183)

10. The offers by Pharmaceutical Investments Ltd. to purchase shares in Mitchell Holdings Pty. Ltd. were made and accepted by telegram and on 28th April 1969 the directors of Mitchell Holdings Pty. Ltd. approved the transfer to Pharmaceutical Investments Ltd. of forty-nine ordinary shares and fifty redeemable preference shares, and approved the transfer to Secretariat Ltd. (a Norfolk Island company which was the nominee of Pharmaceutical Investments Ltd.) of the remaining one redeemable preference share. (at p183)

11. As a result of these transactions, on 28th April 1969 the whole of the issued shareholding in Mitchell Holdings Pty. Ltd. was beneficially owned by Pharmaceutical Investments Ltd., the whole of the issued shareholding in Pharmaceutical Investments Ltd. was beneficially owned by Mitchell Credits Ltd. and the one issued B class share in Mitchell Credits Ltd. was held by the appellant. On 1st May 1969 the appellant executed a declaration of trust by which it acknowledged that the one B class share in Mitchell Credits Ltd., of which it was the registered owner, and the option over the unissued A class shares of Pharmaceutical Investments Ltd. were beneficially owned by the Manolas Trust. Although this declaration was not executed until 1st May 1969, there is no doubt that from 25th April 1969, when the share in Mitchell Credits Ltd. was allotted to the appellant, that share was held by the appellant as trustee for the Manolas Trust. (at p184)

12. The purchase by and on behalf of Pharmaceutical Investments Ltd. of all the issued shares in Mitchell Holdings Pty. Ltd. for a total consideration of $100 proved a good bargain, for on 28th April 1969, the very day the purchase was effected, Mitchell Holdings Pty. Ltd. declared dividends totalling $30,910.57, payable out of the company's unappropriated profits, on the redeemable preference shares issued by the company. On the same day Pharmaceutical Investments Ltd. declared a dividend amounting to $30,910.57 in favour of Mitchell Credits Ltd. as the holder of the issued B class shares, and Mitchell Credits Ltd. declared a dividend of $30,910.57 "on the B class shares in this company, such dividend being thus payable to Esquire Nominees Limited Account No. 19". In payment of these dividends, on 29th April 1969 three cheques, each for $30,910.57, were drawn on the Commonwealth Trading Bank of Australia, Norfolk Island; the cheques were respectively drawn by Mitchell Holdings Pty. Ltd. in favour of Pharmaceutical Investments Ltd., by Pharmaceutical Investments Ltd. in favour of Mitchell Credits Ltd. and by Mitchell Credits Ltd. in favour of the appellant. The cheques were debited to the accounts of the respective drawers on 30th April 1969. (at p184)

13. On 28th April 1969 the directors of the appellant resolved to accept on behalf of the Manolas Trust the following loans repayable at call, and to be liable for interest at the rate of one-half per cent per month if demanded:

From Kerry G. Manalos........................$45,000
From George K. Manolas......................$111,821
From Theo G. Manolas..........................$4,676
From W.B.B. & C. Nominees (N.T.) Pty. Ltd....$17,043 (at p184)

14. These projected loans totalled $178,540 and a cheque for that amount drawn by Mitchell Holdings Pty. Ltd. on 28th April 1969 was banked to the appellant's Account no. 19 on 30th April 1969. This cheque, and that drawn on 29th April 1969 by Mitchell Holdings Pty. Ltd. in favour of Pharmaceutical Investments Ltd. in respect of the dividends, totalled $209,450.57. The account of Mitchell Holdings Pty. Ltd. with the Commonwealth Trading Bank of Australia, Norfolk Island, on which these cheques were drawn, was able to meet the cheques only because on 30th April 1969 there was placed to the credit of that account a deposit of $209,469 made up of four cheques drawn respectively by Manolas Pharmacy Pty. Ltd. (two cheques of $5,000 and $30,929 respectively), Manolas Holdings Pty. Ltd. ($83,097) and Manolas & Sons Pty. Ltd. ($90,443). These cheques were debited to their respective accounts on 6th May 1969. It was not explained what arrangements had been made by Kerry G. Manolas, George K. Manolas, Theo G. Manolas and W.B.B. & C. Nominees (N.T.) Pty. Ltd., with the three companies which drew these cheques, but this is not material. (at p185)

15. On 28th April 1969 the directors of the appellant further resolved to advance to Pharmaceutical Investments Ltd. an amount of $209,400 at interest at the rate of 11/4 per cent per month. On the following day the directors of Pharmaceutical Investments Ltd. resolved to advance $36,000 to Manolas Pharmacy Pty. Ltd. $83,000 to Manolas Holdings Pty. Ltd. and $90,000 to Manolas & Sons Pty. Ltd. (a total amount of $209,000) at a rate of interest of one and one-quarter per cent per month. To give effect to these resolutions the appellant on 29th April 1969 drew a cheque in favour of Pharmaceutical Investments Ltd. for $209,000 and Pharmaceutical Investments Ltd. drew a cheque for $36,000 in favour of Manolas Pharmacy Pty. Ltd., a cheque for $83,000 in favour of Manolas Holdings Pty. Ltd. and a cheque for $90,000 in favour of Manolas & Sons Pty. Ltd. These cheques were credited to the respective accounts on 6th May 1969. (at p185)

16. The net result of this juggling of cheques was that amounts of $35,929, $83,097 and $90,443 were drawn respectively from the accounts of Manolas Pharmacy Pty. Ltd., Manolas Holdings Pty. Ltd. and Manolas & Sons Pty. Ltd. and amounts of $36,000, $83,000 and $90,000 respectively were on the same day credited back to the accounts of those companies. (at p185)

17. On 23rd June 1969 it was resolved by the directors of the appellant to demand from Pharmaceutical Investments Ltd. payment of interest for the months May to October 1969, but to accept payment at the rate of one per cent per month, namely $12,564, in complete satisfaction; it was also resolved to make a further advance of $12,514 to Pharmaceutical Investments Ltd. On the same day the directors of Pharmaceutical Investments Ltd. resolved to demand from Manolas Pharmacy Pty. Ltd., Manolas Holdings Pty. Ltd. and Manolas & Sons Pty. Ltd. interest for twelve months at one per cent per month, namely from Manolas Pharmacy Pty. Ltd. $2,160, from Manolas Holdings Pty. Ltd. $4,980 and from Manolas & Sons Pty. Ltd. $5,400, and on the same day resolved to make further advances of $2,052 to Manolas Pharmacy Pty. Ltd., $4,731 to Manolas Holdings Pty. Ltd. and $5,130 to Manolas & Sons Pty. Ltd. Cheques to give effect to these resolutions were exchanged on 30th June 1969. The net result of the exchanges was that $12,540 went to Norfolk Island from the mainland companies and $11,913 went back. (at p186)

18. The accounts of Mitchell Holdings Pty. Ltd. show that during the year ended 30th June 1968 that company received from Manolas Pharmacy Pty. Ltd. dividends totalling in amount $31,503.50. It was conceded that these dividends were paid by Manolas Pharmacy Pty. Ltd. out of the profits of a business carried on by it in Australia. The profit and loss appropriation account of Mitchell Holdings Pty. Ltd. for the year ended 30th June 1968 showed a balance of $30,910.63. No revenue is shown for the year ended 30th June 1969. It is therefore apparent that the dividend of $30,910.57 was paid by Mitchell Holdings Pty. Ltd. out of profits derived by that company as a result of the receipt of dividends from Manolas Pharmacy Pty. Ltd. (at p186)

19. The accounts of Pharmaceutical Investments Ltd. reveal a total gross income during the year ended 30th June 1969 of $43,451, being the dividend of $30,911 received from Mitchell Holdings Pty. Ltd. and the interest totalling $12,540 received from Manolas Pharmacy Pty. Ltd., Manolas Holdings Pty. Ltd. and Manolas & Sons Pty. Ltd. Expenses amounted to $12,607, including interest of $12,564 paid to the appellant. The net profit of $30,844 was in fact rather less than the amount of the dividend declared in favour of Mitchell Credits Ltd. (at p186)

20. The sole income of Mitchell Credits Ltd. during the year of income was $30,910.57 received as a dividend from Pharmaceutical Investments Ltd. (at p186)

21. The movement of the amount of $30,910.57 from Mitchell Holdings Pty. Ltd. to Pharmaceutical Investments Ltd., thence to Mitchell Credits Ltd. and finally to the appellant can be clearly traced through the accounts of these companies. (at p186)

22. Not all of the facts recited above are relevant to the questions whose decision, in the view that I take, governs this appeal, but I have thought it desirable to state them, first to give the full background to the relevant events, and secondly because if the view that I have formed is wrong, the facts stated may be relevant to the consideration of the questions that would then arise as to the effect of s. 260 of the Act. (at p186)

23. On behalf of the appellant it was submitted that the appellant was a resident of Norfolk Island and that the income in question - the dividend of $30,910.57 received from Mitchell Credits Ltd. - was derived from a source within Norfolk Island and that the appellant was accordingly not liable to tax on the income by reason of s. 7 (1) of the Act, which provides as follows:

"This Act shall extend to the Territories of Papua and New
Guinea, Norfolk Island, Cocos (Keeling) Islands and Christmas
Island, but shall not apply to any income derived by a resident
of those Territories from sources within those Territories." (at p187)

24. The Commissioner, on the other hand, denied that s. 7 (1) governs the matter. In his submission, s. 7 (1) is merely declaratory and does no more than re-state the position brought about by other sections of the Act, and in particular by s. 23 (r), which provides that "income derived by a non-resident from sources wholly out of Australia" shall be exempt from income tax. The purpose of s. 7 (1) in the Commissioner's submission, was to extend to the Territories mentioned provisions of a machinery kind - such parts of the Act as, for example, provide for returns, assessments, appeals, the calculation of tax and the enforcement of penalties - and the proviso introduced by the word "but" was included, out of an abundance of caution, to prevent the subsection from being given a construction that would treat income derived by a resident of a Territory from a source within a Territory as assessable income. According to the Commissioner, the case comes within s. 44 (1) (b) of the Act, which is rendered applicable by Div. 6 of Pt III of the Act. Section 95 defines, for the purposes of that Division, "the net income of a trust estate" to mean "the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions, except the concessional deductions ..." and except certain other deductions which need not be mentioned. Section 99, under which the assessment in the present case was made, provides in effect by sub-s. (2) inter alia that where there is no part of the net income of the trust estate to which any beneficiary is presently entitled, the trustee is liable to pay tax on that net income as if it were the income of an individual and were not subject to any deduction. In Union-Fidelity Trustee Co. of Australia Ltd. v. Federal Commissioner of Taxation [1969] HCA 36; (1969) 119 CLR 177 , it was held that income derived by the trustee of a trust estate from sources outside Australia is not taxable under s. 99, notwithstanding that the trustee is resident in Australia. Shortly stated, the ground for this decision is that by s. 95 the net income of the trust estate is to be calculated as if the trustee were a taxpayer in respect of that income, but not as if he were a taxpayer whose residence is known, that is, not as if he were a resident. Since, in the case of a non-resident, only income derived from an Australian source is assessable, s. 99 taxes only so much of the total income of the trust estate as is derived from Australian sources. The members of the Court in that case, in contrasting the position of residents with that of non-residents, referred to s. 25 which deals with assessable income generally, but in the present case, where we are concerned with dividends, the provision applicable is s. 44 (1) which, so far as it is material, provides as follows:

"The assessable income of a shareholder in a company
(whether the company is a resident or a non-resident) shall...
(a) if he is a resident - include dividends paid to him by the
company out of profits derived by it from any source; and
(b) if he is non-resident - include dividends paid to him by
the company to the extent to which they are paid out of
profits derived by it from sources in Australia." (at p188)

25. It seems to me to follow from the reasoning of the Union-Fidelity Trustee Co. Case [1969] HCA 36; (1969) 119 CLR 177 that such of the income of the trust estate as comprises dividends paid to the trustee by a company in which he held shares as trustee will be taxable under s. 99 only to the extent to which the dividends were paid out of profits derived by the company from sources in Australia. I therefore agree with the submission on behalf of the Commissioner that ss. 95, 99 and 44 (1) (b) together have the effect that the appellant should succeed in this appeal if it is held that the dividend in question was paid to the appellant by Mitchell Credits Ltd. out of profits derived by that company from sources in Norfolk Island. (at p188)

26. However, in my opinion it does not follow that s. 7 (1) can have no application to the present case. The proviso to that subsection does present some difficulties of construction, but it is widely expressed, and if given the full meaning of which its words are capable it would at least have the effect that the provisions of s. 17 of the Act, that income tax is levied and shall be paid upon the taxable income derived during the year of income by any person, whether a resident or a non-resident, do not apply to any income derived by a resident of the Territories mentioned in s. 7 (1) from sources within those Territories. In effect, s. 7 (1) declares that the income to which it refers is not liable to tax. It is difficult to see any valid reason for declining to give effect to this declaration of the intention of the Legislature. Counsel for the Commissioner referred to the decision in Parke Davis & Co. v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521 , where it was held that the specific provisions of s. 44 (1) (b), as to dividends, fulfil and carry out the general policy expressed in s. 23 (r) and that the latter provision must be read with the former, which gives it specific effect. I find it difficult to regard s. 44 (1) (b) as elucidating and giving effect to the general policy of s. 7 (1), or to hold that s. 7 (1) cannot be given an operation independent of s. 44 (1) (b). The provisions of s. 7 (1) appear to me to be intended to override the other provisions of the Act, redundant though some of them may then be. I therefore consider that under the Act the appellant has two alternative arguments open to it. The appellant will succeed if it is held that it was a resident of Norfolk Island and that the income in question was derived by it from sources within Norfolk Island. Equally the appellant will succeed if it is held that the dividend paid to it by Mitchell Credits Ltd. was not paid out of profits derived by that company from sources in Australia, and in that event it will be irrelevant where the appellant is resident. However, in the present case, it is perhaps only an academic question whether s. 7 (1) affords an exemption from liability to tax in cases to which it applies, for the circumstances are such that the appellant cannot escape under s. 7 (1) if it is liable under s. 44 (1) (b). If it is right to hold that the dividend paid to the appellant by Mitchell Credits Ltd. was paid out of profits derived by that company from sources in Australia, so that the appellant is caught by s. 44 (1) (b), the same reasoning would lead to the conclusion that the income derived by the appellant was not derived from sources in Norfolk Island, so that the appellant, even if a resident of Norfolk Island, could not bring itself under the protective mantle of s. 7 (1). If the dividend received by the appellant does not answer the description contained in s. 44 (1) (b), the appellant is not liable to tax under s. 99 and has no need to invoke s. 7 (1) . It therefore seems unnecessary to decide whether the appellant is a resident of Norfolk Island for the purposes of the latter sub-section. However, that question has been fully argued and may be briefly dealt with, and it is convenient to deal with it. (at p189)

27. It is now well settled that, for the purposes of income tax, a company is resident where its real business is carried on, and its real business is carried on where the central management and control actually abides: Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation [1940] HCA 33; (1940) 64 CLR 15, at p 19 and on appeal [1941] HCA 13; (1940) 64 CLR 241, at pp 243-244, 246, 251 ; North Australian Pastoral Co. Ltd. v. Federal Commissioner of Taxation [1946] HCA 17; [1946] HCA 17; (1946) 71 CLR 623, at p 629 ; Unit Construction Co. Ltd. v. Bullock (Inspector of Taxes) (1960) AC 351, at p 360 . For the purposes of the definition of "resident" in s. 6 of the Act, the fact of incorporation in Australia is made conclusive; that definition does not have any direct application to s. 7 (1), but the place of incorporation is a factor to be considered: Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation (1940) 64 CLR, at p 246 ; North Australian Pastoral Co. Ltd. v. Federal Commissioner of Taxation (1946) 71 CLR, at p 633 . The question where a company is resident is one of fact and degree. (at p190)

28. In the present case the appellant was incorporated in Norfolk Island and had its office there. All the directors resided in Norfolk Island. All the A class shareholders who were natural persons were residents of Norfolk Island and it seems proper to conclude that the other A class shareholder, Myee Ltd., was also a resident. All meetings of the company and of the directors were held in Norfolk Island. The business of the company was to act as trustee on Norfolk Island. These facts strongly support the conclusion that the appellant was a resident of Norfolk Island. However, the Commissioner, relying particularly on the decision in Unit Construction Co. Ltd. v. Bullock (Inspector of Taxes) (1960) AC 351 , that it is the actual place of management of a company and not the place where it ought to be managed which fixes its residence, submitted that the directors of the appellant merely carried out directions given to them by Messrs. Wilson, Bishop, Bowes and Craig, and that the actual management and control of the appellant company was in Australia. It was said that at all relevant times the activities of the appellant were confined to acting as trustee of a number of settlements all of which had been set up on similar lines as a result of instructions received from Messrs. Wilson, Bishop, Bowes and Craig, and that the administration of the trusts of the settlements followed a general pattern which had been laid down in advance by that firm. The extent of the influence of the accountants was shown by the fact that they would not infrequently prepare in detail the agenda of a meeting of the directors of the appellant or of the company itself. These facts, according to the Commissioner, showed that in reality the activities of the appellant were directed from Australia. I am unable to accept this argument. As I have already indicated, it is obvious that what the appellant did in relation to the Manolas Trust was done in the course of carrying out a scheme formulated in Australia and that Messrs. Wilson, Bishop, Bowes and Craig not only communicated to the appellant particulars of the scheme but advised the appellant in detail of the manner in which it should be carried out. But if it be accepted that the appellant did what Messrs. Wilson, Bishop, Bowes and Craig told it to do in the administration of the various trusts, it does not follow that the control and management of the appellant lay with Messrs. Wilson, Bishop, Bowes and Craig. That firm had no power to control the directors of the appellant in the exercise of their powers or the A class shareholders in the exercise of their voting rights. Although it is doubtless true that steps could have been taken to remove the appellant from its position as trustee of one or more of the trust estates, Messrs. Wilson, Bishop, Bowes and Craig could not control the appellant in the conduct of its business of a trustee company. The firm had power to exert influence, and perhaps strong influence, on the appellant, but that is all. The directors in fact complied with the wishes of Messrs. Wilson, Bishop, Bowes and Craig because they accepted that it was in the interest of the beneficiaries, having regard to the tax position, that they should give effect to the scheme. If, on the other hand, Messrs. Wilson, Bishop, Bowes and Craig had instructed the directors to do something which they considered improper or inadvisable, I do not believe that they would have acted on the instruction. It was apparent that it was intended that the appellant should carry on its business of trustee company on Norfolk Island. It was in my opinion managed and controlled there, none the less because the control was exercised in a manner which accorded with the wishes of the interests in Australia. The appellant was, in my opinion, a resident of Norfolk Island. (at p191)

29. I turn then to the crucial questions in the case. The question arising under s. 7 (1) is whether the dividend which the appellant received from Mitchell Credits Ltd. was income derived by the appellant from sources within Norfolk Island. The question arising under s. 44 (1) (b) is whether that dividend, which was paid by Mitchell Credits Ltd. out of moneys received by way of dividend on the shares which it held in Pharmaceutical Investments Ltd., was paid out of profits derived by Mitchell Credits Ltd. from sources in Australia. The appellant's case is that the share on which a dividend is paid should be regarded as the source from which the dividend was derived. The share held by the appellant in Mitchell Credits Ltd. and those held by Mitchell Credits Ltd. in Pharmaceutical Investments Ltd. were registered at the respective offices of those companies on Norfolk Island and could be effectively dealt with only in Norfolk Island. For some revenue purposes at least the shares were situated in Norfolk Island: Brassard v. Smith (1925) AC 371 ; Erie Beach Co. Ltd. v. Attorney-General (Ontario) (1930) AC 161 ; Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42, at p 48 . Then it was said to follow that the source from which the dividend was derived by the appellant was the place where the share was situated - Norfolk Island. Similarly it was said that the dividend was paid by Mitchell Credits Ltd. out of profits derived by that company from a source in Norfolk Island. (at p192)

30. In ordinary English usage, the "source" of income or profits is the place of their origin. In Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183, at pp 189-190 , this Court, in the course of a discussion of the effect of ss. 10 and 14 (b) of the Income Tax Assessment Act 1915-1916 (Cth), said:

"The Legislature in using the word 'source' meant, not a
legal concept, but something which a practical man would
regard as a real source of income. Legal concepts must, of
course, enter into the question when we have to consider to
whom a given source belongs. But the ascertainment of the
actual source of a given income is a practical, hard matter
of fact."

"The conclusion as to the source of income for the purposes
of the Act is a conclusion of fact. There is no statutory
definition of 'source' to be applied, the matter being judged
as one of practical reality. In each case, the relative weight
to be given to the various factors which can be taken into
consideration is to be determined by the tribunal entitled to
draw the ultimate conclusion as to source. In my opinion,
there are no presumptions and no rules of law which require
that that question be resolved in any particular sense."

"We are frequently told, on the authority of judgments of
this court, that such a question is 'a hard, practical matter
of fact'. This means, I suppose, that every case must be
decided on its own circumstances, and that screens, pretexts,
devices and other unrealities, however fair may be the legal
appearance which on first sight they bear, are not to stand
in the way of the court charged with the duty of deciding these
questions. But it does not mean that the question is one for a
jury or that it is one for economists set free to disregard every
legal relation and penetrate into the recesses of the causation
of financial results, nor does it mean that the court is to treat
contracts, agreements and other acts matters and things
existing in the law as having no significance." (at p193)

31. I regard it as clear that what is said in these authorities with regard to the effect of the word "source" equally applies to "sources" in ss. 7 (1) and 44 (1) (b) of the Act. It is true that s. 10 of the Income Tax Assessment Act 1915-1916 (Cth) considered in Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , like s. 25 (1) of the Act which was the subject of discussion in Federal Commissioner of Taxation v. Mitchum [1965] HCA 23; ; (1965) 113 CLR 401 , spoke of income "derived directly or indirectly from sources within Australia" and that the words "directly or indirectly" do not appear in either s. 7 or s. 44 (1) (b). However, although the words "directly or indirectly" were in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR, at pp 188-189 said to be of great importance, and although their absence may be regarded as an indication that the words "derived from sources" were intended to mean "directly derived", in my opinion their presence or absence has no effect on the meaning of the word "source", and what was said in Nathan v. Federal Commissioner of Taxation (1918) [1918] HCA 45; 25 CLR 183 , with regard to the meaning of that word is applicable in the context of ss. 7 (1) and 44 (1) (b). As has been pointed out on a number of occasions, the words "directly or indirectly" are related to the word "derived" and not to the word "source" (Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd. [1931] HCA 32; (1931) 46 CLR 417, at p 441 ; Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR, at pp 528, 537 ; Commissioner of Inland Revenue v. N.V. Philips' Gloeilampenfabrieken (1955) NZLR 868, at p 888 ) and in the enactments considered in some of the cases which laid down the law as to the effect of the word "source" in the same terms as Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , the words "directly or indirectly" did not appear (see Studebaker Corporation of Australasia Ltd. v. Commissioner of Taxation (N.S.W.) [1921] HCA 13; (1921) 29 CLR 225 , and Liquidator, Rhodesia Metals Ltd. v. Commissioner of Taxes (1940) AC 774 ). (at p194)

32. It would be quite opposed to the authorities that I have been discussing to hold that there is a rule of law that requires the situs of the share - in itself a somewhat artificial conception developed primarily for the purposes of death duties - to be treated as the source of the dividends paid on it. However, there are some decisions in which the question what is the source of a dividend has fallen for particular consideration, and to them it is now necessary to turn. (at p194)

33. In the forefront of these cases is Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 . In that case the appellant, who was a shareholder in a number of companies which were incorporated in England and had their registered offices and central management and control there but which carried on business and made profits in Australia as well as elsewhere, was paid in England dividends declared in England on those shares. He was assessed to tax on sums which represented that proportion of the total dividends received by him which was attributable to the profits derived by each of the companies from that part of their respective businesses which was carried on in Australia. It was held that these sums were "derived directly or indirectly ... from sources within Australia" and rightly included in the assessment. The Court (1918) 25 CLR, at p 192 et seq rejected the argument that the place where a share is situated must be regarded as the source of the dividend, and said (1918) 25 CLR, at p 196 that "the share in the capital is not the 'source', but the measure of the dividend ..." Although the Court said that the question what is the source of a shareholder's income is one of fact, to be determined on practical grounds, it answered the question by saying that the source of the dividend is the place where the company made the profits out of which the dividend was paid. Their Honours said (1918) 25 CLR, at p 198 :

"The 'dividend' he" (the shareholder) "receives is an
aliquot part of the fund divided; the fund itself is the source
of the part that he receives, and if on analysis the fund is
derived from various sources, some of which are within Australia
and some outside Australia, he is, according to the
provisions of the Act, liable or not liable to taxation in respect
of it accordingly." (at p195)

34. In reaching its conclusion, the Court in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR, at pp 194-195 , found some support in the judgments of the Court of Appeal in Gilbertson v. Fergusson (1881) 7 QBD 562 , a case which has since been overruled by the House of Lords in Canadian Eagle Oil Co. Ltd. v. The King (1946) AC 119 . However, it seems to me that in overruling the earlier decision the House of Lords did not reflect adversely on the statements which this Court in Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , regarded as opposed to the view that the place of the share, rather than the place where the profits were earned, constitutes the source of the dividend. In Gilbertson v. Fergusson (1881) 7 QBD 562 , the London agency of a foreign banking company was assessed to tax on the full amount of dividends paid in London to shareholders resident in London, and the Court of Appeal decided (to adopt the summary given by Lord Russell of Killowen in Canadian Eagle Oil Co. Ltd. v. The King (1946) AC, at p 146 ) that "since those dividends were payable out of the general earnings of the bank, which were composed partly of profits made in the United Kingdom (which had already been taxed under Case 1 of sch. D) and partly of profits made elsewhere, the agency should only be assessed under s. 10" (of the Income Tax Act 1853 (U.K.)) "on so much of the dividends as were paid out of the profits made elsewhere than in the United Kingdom". Their Lordships held that this decision of the Court of Appeal was not in conformity with the income tax statutes of the United Kingdom. As Viscount Simon L.C. pointed out (1946) AC, at pp 137-139 , the Court of Appeal proceeded upon two errors; first, they acted upon a concession made by the revenue, in accordance with the view then prevailing but since declared to be wrong, that a company charged with paying tax under sch. D in respect of profits accruing to it in the United Kingdom was assessed and paid the tax as agent on behalf of its shareholders, and secondly, it was assumed that there was a general principle to be applied in construing the Income Tax Acts that tax is not to be payable twice over by the same person in respect of the same thing. The decision in Canadian Eagle Oil Co. Ltd. v. The King (1946) AC 119 established that under the English legislation a charge is imposed on dividends payable in respect of the shares of a foreign company, "without any reference to the sources of that company's income" (per Viscount Simon L.C. (1946) AC, at p 140 ) and that the charge is not abated in proportion as the income is itself chargeable or not chargeable to British income tax. It is apparent that their Lordships were not called on to decide what was the source from which the dividends arose, and they had no need to discuss, and did not discuss, those passages in the judgments in Gilbertson v. Fergusson (1881) 7 QBD 562 , that suggest that if it is necessary to find the source of the dividend, it will be found where the profits were made. (at p196)

35. Canadian Eagle Oil Co. Ltd. v. The King (1946) AC 119 is one of a line of cases that decide that dividends paid by a foreign company and received in the United Kingdom are assessable as "income arising from possessions out of the United Kingdom" within Case V of sch. D of the Income Tax Act, 1918 (U.K.). That provision does not refer to the "source" of the income, but dicta are to be found in these decisions to the effect that the share is the source of the dividend paid on it. Thus in Bradbury v. English Sewing Cotton Co. Ltd. (1923) AC, at p 753 , Viscount Cave L.C. said, "where the company is, there the share is also, and there is the source of any dividend paid upon it", and in Inland Revenue Commissioners v. Reid's Trustees (1949) AC 361, at p 383 , Lord MacDermott said:

"Is it permissible, in order to determine the liability of the
dividend to tax in the hands of the respondent shareholders,
to look beyond the immediate source, the shareholding, and
to examine the make-up of the profits out of which the dividend
has been declared? In my opinion the answer must be in
the negative."

36. I now return to consider the decisions in this Court. In Murray v. Federal Commissioner of Taxation [1921] HCA 1; (1921) 29 CLR 134 the taxpayer, an English resident who received in England dividends declared in England by English companies which carried on business in Australia and derived their main income from sources in Australia, was held liable under the Income Tax Assessment Act 1915-1916 (Cth) to tax in respect of so much of each dividend as bore to the whole dividend the same proportion that the profits derived by the company from sources in Australia bore to the total profits of the company. An unsuccessful attempt was made to distinguish Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , on the ground that there the shareholder was resident in Australia. The Court, following Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , rejected the argument that though the source of the income of the companies was Australian, that of the taxpayer's income was not. (at p197)

37. It might have been thought, after the decisions in Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , and Murray v. Federal Commissioner of Taxation [1921] HCA 1; (1921) 29 CLR 134 , that there was little room for an argument that the source of dividend income is necessarily the situs of the share, but the next case in which the matter was discussed, Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , does appear to afford some support for such a contention. In that case the question was whether payments in respect of dividends on shares held by the taxpayer in Placer Development Ltd. ("Placer") were excluded from his assessable income by s. 53 (a) of the Income Tax (Management) Act 1936 (N.S.W.), which excluded from assessable income (inter alia) "dividends paid ... wholly and exclusively out of one or more of the following: (a) income derived from sources outside Australia ..." It was accepted by the Court that one of the dividends was paid wholly and exclusively out of funds made up of dividends received from another company. Bulolo Gold Dredging Ltd. ("Bulolo"), and the question then arose whether the dividends received by Placer from Bulolo constituted "income derived" by Placer "from sources outside Australia". Bulolo was a company whose main activity was the working of a gold-mining property in New Guinea. It was incorporated in British Columbia, where its principal register of members was kept, but it also kept a branch register in Sydney, and a number of the shares held by Placer were on the branch register and dividends in respect of those shares were paid and received in Sydney. The Court said (1956) 30 ALJ, at p 48 that they took Nathan's Case [1918] HCA 45; (1918) 25 CLR 183

"to be authority for the proposition that, as a 'practical,
hard matter of fact' - whatever that expression may mean -
though not as a matter of 'legal concept', the place where a
company earns its profits may be said to be the source from
which a taxpayer, entitled by way of dividend - and upon such
conditions as the articles of the company may prescribe - to
participate in the company's profits, derives his dividend
receipts".

"But we do not understand Nathan's Case [1918] HCA 45; (1918) 25 CLR 183 to decide
that the locality where a company derives the profits from
which it pays dividends must be regarded exclusively as the
source of a shareholder's dividend receipts. If it does, it is,
it seems to us, in conflict with the reasoning in such cases as
Canadian Eagle Oil Co. Ltd. v. The King (1946) AC 119 , and Inland
Revenue Commissioners v. Reid's Trustees (1949) AC 361 . The latter case
was decided on the basis that dividends declared by a South
African company and transmitted to a shareholder resident in
the United Kingdom were 'income arising from possessions
out of the United Kingdom'. And we can see no reason why,
if dividend income can be said to arise from the shares in
respect of which the dividends have been paid, the shares
themselves should not be regarded as the immediate source
of the dividends. Such shares, although intangible property,
may be said to have a location and there is no reason in principle
why the place where they are located and where the rights to
which they give rise may be enforced should not be regarded
as the place from which the shareholders' dividends are
derived. In the present case it is clear that those shares of
Placer which were registered on Bulolo's Australian register
were situated in Australia (Brassard v. Smith (1925) AC 371 ; R. v.
Williams (1942) AC 541 , and Treasurer of Ontario v. Blonde (1947) AC 24

constituted items of property situated in Australia and Placer's
right to receive dividends in respect of them sprang directly
from their ownership. In these circumstances we are of
opinion that it is proper to regard the place where they were
located as the direct or immediate source of the relevant
divided payments even if Nathan's Case [1918] HCA 45; (1918) 25 CLR 183 requires the
conclusion that the place where Bulolo earned its profits
should, perhaps paradoxically, be regarded as their indirect
or ultimate source."

38. It is not easy to reconcile Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , with the decision in Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , or with the reasons given for that decision that have come to be treated as authoritative. One possible explanation of the case is that it intended to lay down, as a matter of law, that the direct or immediate source of a dividend must be held to be the situs of the share, even though the indirect or ultimate source may be found elsewhere. So to hold, however, would be to resolve the question of source by the application of a rule of law rather than by making a conclusion of fact, and this is the approach that the decisions from Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , to Federal Commissioner of Taxation v. Mitchum [1965] HCA 23; (1965) 113 CLR 401 , have steadily rejected. Another possible explanation of the case is that it depends on its particular facts, but the reasons for judgment do not appear to treat the question as simply one of fact. Perhaps the most acceptable explanation is that what was said in Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , relates only to the special provisions of the New South Wales statute, and this view finds some support in the emphasis which the Court placed upon the word "exclusively", and also in some of the observations in Parke Davis & Co. v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521 , to which I am about to refer. However, against this explanation it must be said that once it had been found that one of the dividends received by the taxpayer from Placer had been paid wholly and exclusively out of the dividends declared by Bulolo, the question that remained to be decided was whether the latter dividends had been derived from sources outside Australia, and it might have been thought immaterial whether those dividends were exclusively so derived. (at p199)

39. Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , fell for consideration in Parke Davis & Company v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521 . In that case the appellant, a non-resident, had received from another company, resident in Colorado, a distribution that was deemed under s. 47 (1) of the Act to be a dividend, and that was paid out of profits derived by the Colorado company from sources in Australia. It was held that the distribution formed part of the assessable income of the appellant by virtue of the combined effect of ss. 44 (1) and 47. The appellant argued that the income was exempt under s. 23 (r) as being income derived by a non-resident (the appellant) from sources wholly out of Australia because, it was said, the source of the dividend was the share whose locality was fixed by the register and was therefore in Colorado, and relied upon Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 . In the course of considering this submission, Dixon C.J., who delivered the judgment of the Court, said (1958) 101 CLR, at p 531 :

"I think that it would not be useful to institute a comparison
between the provisions of the Commonwealth legislation and
those of the New South Wales Income Tax (Management) Act
1936 as amended. It is enough to say that at one point in the
complicated facts of Freeman's Case (1956) 30 ALJ 42 a question did

as to the source of a dividend, and that for the purposes of
the expression used in the New South Wales Act, we though
that the fact that the dividend was derived from a share on a
register in New South Wales showed that the source was in
New South Wales."

"It will be apparent from the emphasis placed on the
word 'exclusively' that the Court, in deciding Freeman's
Case (1956) 30 ALJ 42 was contemplating the possibility that a dividend

be attributed to different sources according to the character
of enactment dealing with the matter and perhaps according
to the facts, and that the Court did not intend to say that the
only source to which a dividend could be imputed was the
locality of the share. In the present case we are of opinion
that the answer to the contention lies in the view we take of
the relationship of s. 44 (1) (b) and s. 23 (r). The view we
take of the relationship is that s. 44 (1) (b) is not cumulative
upon and independent of s. 23 (r), but is carrying out s. 23 (r)
and stating what, in the case of a dividend received by a
non-resident, is the source for the purposes of s. 23 (r). If it
were treated as cumulative and independent it would mean
that in the case of a non-resident holding shares in an Australian
company, assuming that for the purpose of s. 23 (r) so construed
the share was regarded as the source of a dividend
upon it, he would be liable to tax on dividends paid out of
Australian profits if his shares were upon an Australian register
of the company but not liable to such tax if his shares were
upon a register kept in some place out of Australia by the
company."

40. In my opinion, however, Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , be explained neither that decision, nor Parke Davis & Company v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521 , nor any dictum in the English decisions on Case V of sch. D, warrants the conclusion that the question what is the source of income or of profits, for the purpose of s. 7 (1) or s. 44 (1) (b) of the Act, must, where a dividend payment has constituted the income or profits, be decided as a matter of law rather than as a matter of fact. If there is an inconsistency between Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , and Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , I would feel bound to prefer the latter authority, not only because the former was a decision on the different words of the New South Wales statute, but also because Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , has frequently been followed and approved in this Court, and the test which it laid down has more recently than Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , been reaffirmed in Federal Commissioner of Taxation v. Mitchum [1965] HCA 23; [1965] HCA 23; (1965) 113 CLR 401 . I hold, therefore, that the sources of income, for the purpose of s. 7 (1), and the sources of profits, for the purposes of s. 44 (1) (b), must be ascertained as "a practical, hard matter of fact", and that in applying these sections to the present case I am not compelled, contrary to the realities of the situation, to hold that the source of each dividend is the locality of the share or shares on which it was paid. (at p201)

41. The questions of fact that then fall for decision present little difficulty. The income of the appellant was received in the form of a dividend from Mitchell Credits Ltd. That company carried on no business of any kind, but itself received a dividend from Pharmaceutical Investments Ltd. The latter company went through the motions of borrowing and lending money, perhaps so that it might be said that it carried on business on Norfolk Island, but those transactions yielded no profit and the company was enabled to pay a dividend only because of the dividend which it received from Mitchell Holdings Pty. Ltd. The amount of $30,910.57, which the appellant ultimately received, came from the profits made by the conduct of a business in Australia and was passed on by Mitchell Holdings Pty. Ltd., through Pharmaceutical Investments Ltd. and Mitchell Credits Ltd., to the appellant. The only business operations which yielded the production of any income took place in Australia. Nothing that was done at the office of Mitchell Credits Ltd. or the office of Pharmaceutical Investments Ltd. in Norfolk Island produced one cent of the income that the appellant received or one cent of the profits out of which the dividend received by the appellant was paid. Notwithstanding the devices adopted to give the facts a specious appearance, the reality is that the source, and the only source, of the income derived by the appellant was in Australia. Similarly, the dividend paid to the appellant by Mitchell Credits Ltd. was paid out of profits derived by it from sources in Australia and from no other sources. (at p202)

42. I hold, therefore, that the income in question was not derived by the appellant from any source within Norfolk Island and that s. 7 (1) does not exempt the appellant from liability to tax. (at p202)

43. I hold further that the dividend paid to the appellant by Mitchell Credits Ltd. was paid out of profits derived by that company from sources in Australia within s. 44 (1) (b). I have already mentioned that the omission from s. 44 (1) (b) of the words "directly or indirectly", which qualify "derived" in s. 25, may be regarded as an indication that "derived" in s. 44 (1) (b) means "directly derived". Assuming that this is so, this does not mean that the section should be construed as though it included the word "directly" and as though that word had to be given its precise dictionary meaning. It may, however, mean that indirect modes of derivation which might be caught by the words of s. 25 are not within those of s. 44. The import of the words "directly" and "indirectly" in this context may be gleaned from the judgment in Lovell and Christmas Ltd. v. Commissioner of Taxes (1908) AC 46, at p 52 , to which the Court in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR, at pp 188 189 , referred. Where income has been derived from more than one source, it may in some cases be said to have been derived only indirectly from the remoter source, although in other cases it may be derived directly from both. In Dickson v. Commissioner of Taxation (N.S.W.) (1925) 36 CLR, at p 506 , Higgins J. said that "the word 'directly', as used in that case," (Lovell and Christmas Ltd. v. Commissioner of Taxes (1908) AC 46 ), "is not used in the sense of 'immediately', but as contradistinguished from ancillary..." Although Higgins J. dissented in that case, this observation does not seem opposed to the view of the majority. In that case income had been earned as a result of a series of operations including the recovery of gold in New South Wales, its realization outside New South Wales and the receipt of the proceeds, also outside New South Wales, yet it was held that part of the income was directly derived from a source in New South Wales (see particularly per Starke J. (1925) 36 CLR, at pp 510-511 ). An apportionment was necessary because some part of the income was attributable to sources not in New South Wales, but that situation does not arise here. Whatever meaning the word "directly" might have in qualifying the word "derived", it does not imply that there can be no step between the production of the profits and their receipt by the company (cf. the discussion of the effect of the source of "direct result" in Boiler Inspection and Insurance Co. of Canada v. Sherwin-Williams Co. of Canada Ltd. (1951) AC 319, at p 333 ). Section 44 (1) (b) must have been framed in the contemplation of the complexity of many business activities and obviously it may often be necessary to use some intermediate agency to get the money representing the profits from their source into the company's coffers. In the present case, as I have said, the profits had only one source - the business operations in Australia - and the fact that in an attempt to disguise their real origins they were made to pass fleetingly through the accounts of Pharmaceutical Investments Ltd. did not mean that they were not directly derived by Mitchell Credits Ltd. from their source in Australia. It is obvious that in the present case, where the income of the appellant had no source within the Territory of Norfolk Island, no similar question can arise under s. 7 (1). (at p203)

44. It was suggested that if a non-resident who received outside Australia a dividend from a company which neither had a share register in, nor itself carried on business in, Australia were liable to tax, there might in many cases be grave difficulty in obtaining sufficient information as to the business of the company to enable a decision to be made as to where the profits of the company were earned, and further difficulty in enforcing the liability against the taxpayer. The fact that problems of administration may arise in some cases is no justification for departing from the proper construction of the Act. As Dixon C.J. said in Parke Davis & Company v. Federal Commissioner of Taxation (1959) 101 CLR, at p 533 , difficulties of accountancy cannot disturb the real meaning of the sections. (at p204)

45. It follows from what I have said that the contentions of the appellant cannot be accepted and that it is unnecessary to consider the arguments advanced on behalf of the Commissioner in relation to s. 206 of the Act. (at p204)

46. The notice of objection against the assessment included other grounds which (to state their effect very briefly) raised two main contentions, first, that if the Act purports to render the appellant liable to tax in the circumstances of the present case it is unconstitutional, and secondly, that if and in so far as the Commissioner was authorized to make an assessment he ought to have assessed under s. 99A of the Act rather than under s. 99. However, no argument was advanced in support of any of these grounds and I therefore need not consider them. (at p204)

47. The appeal will be dismissed. (at p204)

ORDER

Appeal dismissed with costs. Usual order as to exhibits.
The appellant appealed from the decision of Gibbs J. to the Full Court of

J. McI. Young Q.C. (with him A.P. Webb Q.C. and A.R. Castan), for the appellant. The Income Tax Assessment Act 1936-1969 (Cth) does not apply to the income received by the appellant in the form of a dividend because it is within the operation of s. 7 (1) of the Act which says that the Act does not apply to income derived by a resident of Norfolk Island from a source within Norfolk Island. The word "sources" in s. 7 (1) is not defined and its meaning is to be determined in accordance with general principles. "Source" has no geographic connotation but indicates the origin. Two questions must be distinguished: what is the source and what is the location of the source. The source of a dividend is a share. Nothing in the Act requires one to look beyond the share. The immediate source of the dividend must be the share because if the share is sold the source of the dividend is destroyed. If s. 44 (1) (b) of the Act is relevant, the appellant is not rendered liable by it. The meaning of the word "source" in ss. 44 (1) (b) and 7 (1) is not the same. Section 7 (1) directs attention to the source of income of the taxpayer, whilst s. 44 (1) (b) directs attention to the source of profits from which the dividend is paid by the company. Section 44 (1) (b) is so constructed as to stop the inquiry at the point of the profits of the company paying the dividend. The reasoning of Gibbs J. provides no stopping point. (MENZIES J. referred to s. 25 (1).) "Derived" in s. 7 (1) means "directly derived": Lovell and Christmas Ltd. v. Commissioner of Taxes (1908) AC 46, at p 52 , although the insertion of the word "directly" may add nothing. The direct source of the income was the shares in Mitchell Credits Ltd. which were in Norfolk Island. (MENZIES J. referred to s. 7 (2).) (He referred to In re Chalmers (1913) 13 SR (NSW) 711 ; Bradbury v. English Sewing Cotton Co. Ltd. (1923) AC 744 ; Inland Revenue Commissioners v. Reid's Trustees (1949) AC 361 and Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 .) The effect of the decision of Gibbs J. is to determine the source of a dividend by pursuing the ultimate source until the business operations generating the funds are reached. There is no warrant for that course in Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 . Parke Davis & Co. v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521 does not support the adoption of the ultimate economic origin as the source of the dividend: cf. Union-Fidelity Trustee Co. of Australia Ltd. v. Federal Commissioner of Taxation [1969] HCA 36; (1969) 119 CLR 177 . If the dividend is not income within the operation of s. 7 (1) then s. 44 (1) (b) cannot be relevant: Federal Commissioner of Taxation v. Belford [1952] HCA 73; [1952] HCA 73; (1952) 88 CLR 589 . To adopt the reasoning of Gibbs J. is to treat an investment company (whose income is derived from dividends) differently from an operating company. The test of "hard practical matter of fact" does not provide authority for looking to the ultimate economic source of the money which finds its way into the dividends: Tariff Reinsurances Ltd. v. Commissioner of Taxes (Vict.) [1938] HCA 21; (1938) 59 CLR 194 . Section 7 (2) has no application to this case and is of very limited operation; it is directed to the deeming of a person to be a resident not for the purpose of ascertaining what is his assessable income but for the purpose of assessment.

R.J. Ellicott Q.C., Solicitor-General for the Commonwealth (with him W.P. Deane Q.C. and M.H. McLelland), for the respondent. Section 7 (1) must be read so as to give equal prominence to other sections of the Act such as s. 96. Section 7 is irrelevant here. Section 44 (1) (b) applies, and in the determination of "source" does not point to the locus of the share as the determining factor. The word "sources" in ss. 44 (1) (b), 23, 25 and 7 has the same connotation. The word "sources" in s. 7 should be construed so as to be consistent with the meaning of the word wherever found in the Act. The cases establish the following propositions: (a) The ascertainment of the course of income (including dividends) is a question of a hard practical matter of fact. (b) The locus of the share in respect of which a dividend is declared does not dictate the locality of the source of a dividend. (c) In determining the location of the course of a dividend, screens, pretexts and devices will not be permitted to stand in the way of that determination. As a practical matter there is no difficulty in concluding on the facts that the dividend here was derived from a source within Australia. Section 44 (1) (b) is a criterion for determining the meaning of "sources" in s. 7 (1). If it is decided that income is derived from sources within Norfolk Island under s. 7 (1) the test applied ought to determine whether it is income derived from a source in Australia under s. 7 (2); and s. 7 (2) applies to s. 25 and to other sections of the Act. There is no room in the Act for a conception of dual source. The policy of the Act as exemplified in s. 44 (1) (b) is to ignore the locus of the share and to look to the distribution of a fund. This policy applies whether one looks at dividends of a non-resident or the source of profits of a company. (He referred to Parke Davis & Co. v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521 .) Section 7 (1) is not dominant, and in relation to its interpretation the same exercise should be performed as in Nathan v. Federal Commissioner of Taxation [1918] HCA 45[1918] HCA 45; ; (1918) 25 CLR 183 . (He referred to Gilbertson v. Fergusson (1881) 7 QBD 562 .) It is consistent with reality to identify the dividend with the fund from which it is distributed. The "proviso" in s. 7 (1) is merely for the more abundant caution to ensure that a Norfolk Islander will not, by the extension of the Act in the earlier part of the sub-section, be subjected to more tax than he should previously have been. (He referred to Spratt v. Hermes [1965] HCA 66; (1965) 114 CLR 226 .) Section 7 (1) did not extend the liability of Norfolk Island residents but left the position precisely as it had previously been. "Source" means origin in the sense of the activity or operation giving rise to the profits from which the dividend is distributed. The source in this case was the profits of Manolas Pharmacy Pty. Ltd. The source of the dividend is not to be looked at from the point of view of the shareholder. The interposed companies may be ignored where they are placed as a screen or device between the shares yielding the dividend and the activity generating the profits. (He referred to Murray v. Federal Commissioner of Taxation [1921] HCA 1; (1921) 29 CLR 134 and Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 .) In effect the dividends declared by each of the companies had the same source. The test of a "hard practical matter of fact" means that the question is decided with a sense of business reality and no pretext or device may stand in the way of determining the real source of the dividend. Section 7 (1) does not apply in relation to a trustee. If it were not for Div. 6 the Act would not embrace trustees: Union-Fidelity Trustee Co. of Australia Ltd. v. Federal Commissioner of Taxation [1969] HCA 36; (1969) 119 CLR 177 ; Webb v. Syme [1910] HCA 32; (1910) 10 CLR 482 ; Syme v. Commissioner of Taxation (1914) AC 1013 ; Williams v. Singer [1920] UKHL 2; (1919) 2 KB 108; (1921) 1 AC 65 . Section 7 (1) does not apply because a resident of Norfolk Island does not include a person who is a trustee in respect of trust income and because a trustee is not a taxpayer within the meaning of the Act: Ebrahim Trust v. Commissioner of Income Tax (Bombay) (1934) 78 Sol Jo 206 ; Federal Commissioner of Taxation v. Clarke [1927] HCA 49; (1927) 40 CLR 246 . In any event s. 260 operates to strike out the effect of the transaction. A decision was made as to whether dividends would be received and they were received in such a way as to seek to avoid a liability to the tax which would be imposed if they were received directly. The purpose of interposition of companies was to avoid liability to tax. The effect of s. 260 is to set aside the arrangement so far as it has the effect of avoiding liability to tax, that is, that part of the transaction which purports to give the dividends a Norfolk Island source. It is not necessary to set aside the incorporation of any of the Norfolk Island companies. The setting up of the register in Norfolk Island may be ignored, and s. 44 (1) (b) may be applied. (MENZIES J.: To do that would be to give s. 260 a creative effect.) (He referred to Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [1963] HCA 61; (1963) 111 CLR 106 .) An alternative approach is to regard what flowed to the appellants simply as money and not as dividends, so that the Commissioner is entitled to treat it as income derived from an Australian source: Federal Commissioner of Taxation v. Newton [1957] HCA 99; (1957) 96 CLR 577; (1958) AC 450 ; Hancock v. Federal Commissioner of Taxation [1961] HCA 90; (1961) 108 CLR 258 ; Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443; [1966] UKPCHCA 1; (1966) 116 CLR 38; (1967) 1 AC 308 ; Ellers Motors (Sales) Pty. Ltd. v. Federal Commissioner of Taxation [1969] HCA 60; (1969) 121 CLR 665 .

A.P. Webb Q.C. in reply. In Parke Davis & Co. v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521 it was admitted that the source of profits was in Australia. (As to whether s. 7 (1) applies to trustees he referred to Federal Commissioner of Taxation v. Clarke (1927) 40 CLR 260 ; Harding v. Federal Commissioner of Taxation [1917] HCA 13; (1917) 23 CLR 119 and Union-Fidelity Trustee Co. of Australia Ltd. v. Federal Commissioner of Taxation [1969] HCA 36; [1969] HCA 36; (1969) 119 CLR 177 .) The Australian authorities are to the effect that if the income is income to which no beneficiary is presently entitled, the trustee does derive the income. Questions of double taxation do not arise. If the income is produced by a situation described in s. 7(1) then s. 260 simply cannot apply. In any event the facts do not establish a scheme or arrangement without which liability would have attached. Alternatively, if there was a tax liability it was the liability of Mitchell Holdings Pty. Ltd. or its shareholders; the appellant cannot be assessed because the consequence of the scheme is to produce excepted income. There was at no stage an intention to pay moneys to the appellant which would be taxable in its hands and then a scheme to relieve the appellant of that liability. (He referred to Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [1963] HCA 61; (1963) 111 CLR 106 ; Hancock v. Federal Commissioner of Taxation [1961] HCA 90; (1961) 108 CLR 258 ; War Assets Pty. Ltd. v. Federal Commissioner of Taxation [1954] HCA 81; (1954) 91 CLR 53 ; Commissioner of Inland Revenue v. Europa Oil (N.Z.) Ltd. (1971) AC 760; (1971) NZLR 641 .) The appellant cannot be considered as preserved while its characteristics are disregarded. If the other Norfolk Island companies are annihilated and the appellant is found in possession of moneys, a vacuum remains and the Commissioner has no foundation for taxing that money.

Cur. adv. vult.

Solicitors for the appellant, Peter Barker, Harty & Co.

Solicitor for the respondent, R.B. Hutchison, Crown Solicitor for the Commonwealth.
A.C.A.

1973, September 24.

The following written judgments were delivered :-
BARWICK C.J. The taxpayer is a company incorporated in Norfolk Island under

2. In the income tax year 1968-1969 it received in Norfolk Island the sum of $30,910 being a dividend paid on shares held by it in Mitchell Credits Ltd., a company also incorporated in Norfolk Island under the said Ordinance and having its registered office and central management and control there. (at p208)

3. The taxpayer held the shares in Mitchell Credits Ltd. as trustee of a trust known as the "Manolas Trust". According to the terms of the trust deed no person in the year of income was beneficially entitled to the income of this trust and in particular to the money received by way of dividend on the shares in Mitchell Credits Ltd. or to any part thereof. (at p209)

4. Section 7 of the Act provides as follows:

"(1) This Act shall extend to the Territories of Papua and
New Guinea, Norfolk Island, Cocos (Keeling) Islands and
Christmas Island, but shall not apply to any income
derived by a resident of those Territories from sources
within those Territories.
(2) Any taxpayer who is resident in a Territory specified in
sub-section (1.) of this section shall, for the purposes of
assessment and payment of income tax on income
derived from sources in Australia, be deemed to be a
resident of Australia." (at p209)

5. The respondent Commissioner, however, took the view that by reason of certain facts to which I shall shortly refer the proceeds of the dividend paid by Mitchell Credits Ltd. did not constitute in the hands of the taxpayer income derived from sources within the Territory of Norfolk Island. Accordingly, he assessed the taxpayer under s. 99 of the Act in respect of the sum of $30,910 on the footing that it constituted income derived from Australia. The taxpayer duly objected to the assessment which objection, being disallowed, was transmitted at the taxpayer's request to this Court as an appeal against the assessment. (at p209)

6. My brother Gibbs, who heard the appeal, upheld the assessment rejecting the taxpayer's submission that the dividend was derived from sources within Norfolk Island. His Honour held that the taxpayer was a resident of Norfolk Island, a conclusion with which I fully agree. The sole question therefore before this Court, is whether or not the proceeds of the dividend paid to the taxpayer by Mitchell Credits Ltd. was income derived by the taxpayer from sources within Norfolk Island. If yea, no part of the Act will apply in respect of the taxpayer's receipt of that sum. If nay, then ss. 44 and 99 clearly apply and no further questions arise. (at p209)

7. In resolving the fact which determines whether or not the Act applies at all, one cannot resort to the substantive provisions of the Act itself as in any way definitive of the question. It may be that regard might be had to express definitions in the Act of any of the words used in s. 7(1). However, the only expression in that section which needs definition or construction is to be found in the words "derived from sources within ... " Norfolk Island. Of these words or of any of them there is no express definition in the Act. Consequently the question whether or not the proceeds of the dividend constitute income derived from a source within Norfolk Island must be determined according to the general law. But, of course, decisions upon the meaning of the word "source" will be relevant to be considered though they were given in the construction of other provisions of this Act or of others of other Acts: but care needs to be taken to observe whether or not those decisions in any respect turn on the particular terms of the Act which they purport to construe and apply. (at p210)

8. As I have said, Mitchell Credits Ltd. is a company incorporated in Norfolk Island. Its share register at material times was there. It was not a trading company, but in the year of income, held shares in Pharmaceutical Investments Ltd., a company also incorporated and having its central management and control in Norfolk Island. From this company, Mitchell Credits Ltd. had received a dividend of $30,910 upon those shares. The money received by way of this dividend provided the fund of profit out of which Mitchell Credits Ltd. paid the dividend to the taxpayer. (at p210)

9. The various operations as a result of which Pharmaceutical Investments Ltd. was enabled to pay such a dividend to Mitchell Credits Ltd. are recounted in the reasons for judgment of my brother Gibbs. Holding the view which I do and which I will ultimately express upon the question raised in this appeal, there is no need for me to include in my reasons a recital of that detail. Suffice it to say that those in control of Mitchell Holdings Pty. Ltd., a company which was at material times a resident of Australia for the purposes of the Act, and of other Australian resident companies connected with Mitchell Holdings Pty. Ltd., contrived to pass a sum of about $30,000 which was initially part of the profits made in Australia by a trading company to the hands of Pharmaceutical Investments Ltd. The method of passing the money included the declaration and payment of dividends and the making of loans from one company to another. The maneouvres which effected this transfer of money were undertaken because those in control of Mitchell Holdings Pty. Ltd. supposed, mistakenly as it proved, that that company was under the necessity of making a distribution of its profits in order not to expose itself to liability to tax under Div. 7 of the Act. (at p210)

10. My brother Gibbs held that the source of the dividend paid by Mitchell Credits Ltd. to the taxpayer was Australia, being a portion of profits made in Australia. However, with due respect, I am unable to agree that the profits earned in Australia were the source of the dividend paid to the taxpayer according to the general law. Of course, if one were asking what was the source of the money which ultimately enabled the payment of the dividend, it might be said that it was money which had been earned in Australia; but that in my opinion is not the question. The question is what is the source of the dividend. There is, in my opinion, a clear distinction between the source of the dividend and the source of the money which enables a dividend to be paid. (at p211)

11. There can be no doubt that a dividend is the product of the share or shares in respect of which it is paid and by virtue of which the recipient is entitled to receive it. But the concept of the Act is that all income is derived from some source having a geographical location or, at any rate, that it is possible to predicate of all income that it is so derived. This relation of income to a geographically located source has provided its problems in the past and no doubt will do so in the future. I do not think that any single verbal formula can be devised which by its mere mechanical application to any given factual situation will yield the answer to the problem of the location of the source of some item of income. (at p211)

12. But some things, I think, are clear. The dividend is a division of such part of the company's profits as its directors decide shall be distributed. That is to say, some part of the fund constituted by the profits earned by the company, whether in the same or in earlier years, can properly be regarded as the source of the dividend. The destination of the amount divided is determined by the holding of the appropriate share or shares in the capital of the company. But the location of that fund, or perhaps in particular cases of its distributed part, remains to be decided. The location of the share itself whether actual or notional, is in no way identified or connected with the earning or the making of the fund which is the source of the declared dividend. It might be, for some purposes, that the location of the share fixes the location of the right to receive the dividend. But it is not, in my opinion, the geographical source of the dividend. Thus the location of the share cannot, in my opinion, be decisive of the source of the dividend. (at p211)

13. In general, in my opinion, the location of the fund of profits which is distributed by means of the dividend is the place where they are made. Of course, the profits of a company may not be made in the same geographical area: in such a case it may be necessary to resort to apportionment of the total fund of profits and to assign a different locality to the portions so estimated or calculated. Further, the whole of a fund or a part of a fund of profits made in the one place need not necessarily be treated in the same way, as for example in the case of profits derived from activities carrying some tax concession. In some cases real difficulties may be met in deciding in point of geographical location, where the relevant profits of a company were made. But it is a question of fact to be determined on all the facts and circumstances in each particular case. Prima facie it seems that the place where the distributed profits were made is the geographical source of the fund out of which the dividend itself is declared: therefore it may be said that that place is the geographical source of the dividend. (at p212)

14. The second matter which I think clearly emerges is that it is the fund of profits of the company in which the share is held which is the source of that dividend. There can, in my opinion, be no warrant for treating the profits of some other company as the source of the shareholders' dividend. (at p212)

15. Further a company may make profits without trading in goods or commodities or for that matter in securities. It may make profits simply by investment and may do so through its investment portfolio consists only of shares in one other company or even of all the shares in one other company. In such a case its net income from its investment will be its profits. Further, in my opinion, the place where the company makes its investment income will be the place where it has its central management and control. It will, of course, be different in the case of a company conducting manufacturing or trading activities. In the case of such companies the place where these activities are carried on can be seen in fact to be the geographical source of the profits these activities yield. (at p212)

16. To apply these propositions to the present circumstances, Mitchell Investments Ltd. had only one shareholding and that shareholding produced its income. Nothing in the company's manner of conducting its affairs requires consideration. The amount of the dividend received from Pharmaceutical Investments Ltd. represented both its gross and its net profit. As already indicated, its central control and management was in Norfolk Island. Its profits were not made in more than one place so the complications which can arise in the case of a trading company do not arise here. The geographical source of its profit, being its net income from investment, was Norfolk Island, for there, in my opinion, that profit was made. The whole process of profit-making of Mitchell Credits Ltd., rudimentary as it might appear, was geographically located in Norfolk Island. It is, of course, true but in my opinion irrelevant that the fact that Mitchell Credits Ltd. held shares in Pharmaceutical Investments Ltd.; and the fact that the latter company was in a financial position to pay a dividend on such shares were contrived in furtherance of a plan to avoid the exposure of an Australian resident company to Div. 7 tax. It is the source of the dividend in this case which determines whether the Act other than s. 7 applies at all to the circumstances of the case. If that source is within Norfolk Island none of the other provisions of the Act apply, including s. 44 and s. 260. (at p213)

17. In so remarking I must not be taken as in any way suggesting that if s. 260 of the Act were available to the Commissioner in this case the "arrangement" made in this case might fall within the scope of that section. That is not a question which presently arises. (at p213)

18. My brother Gibbs dealt fully in his reasons for judgment with such of the decided cases as bear on the problem of the source of income for the purposes of taxation. Perhaps none of them of itself, provides the solution of the present problem. However, in my opinion, what was decided and said in Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 , supports the views which I have expressed. The source of the income is a matter of fact, and generally, in respect of company dividends, it is the profit of the company which pays the dividend. I have no need on this occasion to discuss the validity of the reasoning which led to the result in Parke Davis & Co. v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521 , a result with which I am in respectful agreement. Suffice it to say that I do not regard that case as requiring any different conclusion in this case to that which I have expressed. (at p213)

19. In my opinion, the source of the dividend received by the taxpayer upon its shares in Mitchell Credits Ltd. was within the Territory of Norfolk Island. (at p213)

McTIERNAN J. The question for decision is whether the source of the dividend of $30,910.57 included in the assessment at the amount of $30,910 was within Norfolk Island. It is not disputed that Esquire Nominees Ltd. was a resident of Norfolk Island. The word "sources" in s. 7 of the Income Tax Assessment Act is not defined by the Act. The word includes "source". Neither "sources" nor "source" is used in the Act as a term of art. In my opinion the question - What was the source of the amount of $30,910.57? - is a question of fact. In the case of a dividend its source is not necessarily the share upon which the dividend is declared. The fact that the dividend was declared by Mitchell Credits Ltd. on a share held by the appellant in that company is not the only fact material to the question in issue. Having regard to the facts found by the learned judge the share is not as a matter of fact the source of the amount of $30,910957 received by the appellant from Mitchell Credits Ltd. There can be no doubt that this amount is made up of profits of Manolas Pharmacy Pty. Ltd. for the year ended 30th June 1967 and the next accounting period, out of which dividends were declared by that company on 30th April 1968 and 27th June, payable to Mitchell Holdings Pty. Ltd. The former carried on business in Australia. These were associated companies, both incorporated in the Northern Territory. These profits of Manolas Pharmacy Pty. Ltd. could clearly be regarded as the sources of the dividends payable to Mitchell Holdings Pty. Ltd. With regard to these dividends the learned judge stated in his judgment:

"The accounts of Mitchell Holdings Pty. Ltd. show that
during the year ended 30th June 1968 that company received
from Manolas Pharmacy Pty. Ltd. dividends totalling in
amount $31,503.50. It was conceded that these dividends
were paid by Manolas Pharmacy Pty. Ltd. out of the profits
of a business carried on by it in Australia. The profit and loss
appropriation account of Mitchell Holdings Pty. Ltd. for the
year ended 30th June 1968 showed a balance of $30,910.63.
No revenue is shown for the year ended 30th June 1969. It
is therefore apparent that the dividend of $30,910.57 was paid
by Mitchell Holdings Pty. Ltd. out of profits derived by that
company as a result of the receipt of dividends from Manolas
Pharmacy Pty. Ltd." (at p214)

2. Two new companies, Pharmaceutical Investments Ltd. and Mitchell Credits Ltd. were incorporated in Norfolk Island on 24th April 1969. The minutes of a meeting of directors of Pharmaceutical Investments Ltd. held on 28th April 1969 at the registered office of the company at Kingston, Norfolk Island, contains the following statements: "The Chairman tabled a cable advising that a dividend of $30,910.57 had been declared by Mitchell Holdings Pty. Ltd. in favour of this Company (Pharmaceutical Investments Ltd.)." "It was resolved: 'that a dividend amounting to $30,910.57 be declared in favour of Mitchell Credits Ltd. of 9 Quality Row, Kingston, Norfolk Island, the holder of all the issued "B" class shares of the Company (Pharmaceutical Investments Ltd.)'". (at p214)

3. The minutes of a meeting of directors of Mitchell Credits Ltd. held on 25th April 1969 at Kingston, Norfolk Island, contains the following statements: "The following share application was tabled before the Board: Esquire Nominees Limited Account No. 19 of 9 Quality Row, Kingston, Norfolk Island - 'B' Class share. It was resolved: 'that the application be approved, the share allotted, and the Common Seal of the Company be affixed to the Share Certificate'." (at p215)

4. The minutes of a meeting of the directors of Mitchell Credits Ltd. held on 28th April 1969 at the last-mentioned place contains the following: "It was noted that a dividend of $30,910.57 had been declared in favour of this Company on the 'B' class shares it held in Pharmaceutical Investments Limited. It was resolved: 'that a dividend of $30,910.57 be declared on the "B" class shares in this Company, such dividend being thus payable to Esquire Nominees Limited Account No. 19'." (at p215)

5. The Profit and Loss Statement of Mitchell Credits Ltd. for the period ended 30th June 1969 reads thus:

"INCOME
Dividend Received -
Pharmaceutical Investments Limited...........$30,910.57
EXPENDITURE............................................Nil
NET PROFIT for the period transferred to Profit and
Loss Appropriation Account.......................$30,910.57
PROFIT AND LOSS APPROPRIATION ACCOUNT
NET PROFIT for the period transferred from Profit
and Loss Account.................................$30,910.57
LESS Dividend declared and paid 'B' Class share
- 29.4.1969......................................$30,910.57
UNAPPROPRIATED PROFITS CARRIED FORWARD..............Nil" (at p215)

6. The learned judge found on the facts proved before him that "... on 28th April 1969 the whole of the issued shareholding in Mitchell Holdings Pty. Ltd. was beneficially owned by Pharmaceutical Investments Ltd., the whole of the issued shareholding in Pharmaceutical Investments Ltd. was beneficially owned by Mitchell Credits Ltd. and the one issued B class share in Mitchell Credits Ltd. was held by the appellant (Esquire Nominees Ltd.)". His Honour further found that the share was held by Esquire Nominees Ltd. as trustee for the Manolas Trust, and that during the year of income the ordinary shares in Manolas Pharmacy Pty. Ltd. were held by or on trust for the Manolas family. They were the beneficiaries of the Manolas Trust. The trust deed was so drawn that no beneficiary was presently entitled to any share of the income of the trust. The learned judge stated in his judgment that the B class share allotted by Mitchell Credits Ltd. to Esquire Nominees Ltd. was a fully-paid share of $0.01. (at p215)

7. The learned judge made the following finding with regard to transactions between Mitchell Holdings Pty. Ltd., Pharmaceutical Investments Ltd., Mitchell Credits Ltd. and Esquire Nominees Ltd.:

"The purchase by and on behalf of Pharmaceutical Investments
Ltd. of all the issued shares in Mitchell Holdings Pty.
Ltd. for a total consideration of $100 proved a good bargain,
for on 28th April 1969, the very day the purchase was effected,
Mitchell Holdings Pty. Ltd. declared dividends totalling
$30,910.57, payable out of the company's unappropriated
profits, on the redeemable preference shares issued by the
company. On the same day Pharmaceutical Investments Ltd.
declared a dividend amounting to $30,910.57 in favour of
Mitchell Credits Ltd. as the holder of the issued B class shares,
and Mitchell Credits Ltd. declared a dividend of $30,910.57
'on the B class shares in this company, such dividend being
thus payable to Esquire Nominees Limited Account No. 19'.
In payment of these dividends, on 29th April three cheques,
each for $30,910.57, were drawn on the Commonwealth Trading
Bank of Australia, Norfolk Island; the cheques were respectively
drawn by Mitchell Holdings Pty. Ltd. in favour of
Pharmaceutical Investments Ltd., by Pharmaceutical Investments
Ltd. in favour of Mitchell Credits Ltd. and by Mitchell
Credits Ltd. in favour of the appellant. The cheques were
debited to the accounts of the respective drawers on 30th
April 1969." (at p216)

8. His Honour further found that:

"The sole income of Mitchell Credits Ltd. during the year
of income was $30,910.57 received as a dividend from Pharmaceutical
Investments Ltd. The movement of the amount of
$30,910.57 from Mitchell Holdings Pty. Ltd. to Pharmaceutical
Investments Ltd., thence to Mitchell Credits Ltd. and finally
to the appellant (Esquire Nominees Ltd.) can be clearly traced
through the accounts of these companies." (at p216)

9. The conclusion at which the learned judge arrived is the following:

"The income of the appellant (Esquire Nominees Ltd.) was
received in the form of a dividend from Mitchell Credits Ltd.
That company carried on no business of any kind, but itself
received a dividend from Pharmaceutical Investments Ltd.
The latter company went through the motions of borrowing and
lending money, perhaps so that it might be said that it carried
on business on Norfolk Island, but those transactions yielded
no profit and the company was enabled to pay a dividend
only because of the dividend which it received from Mitchell
Holdings Pty. Ltd. The amount of $30,910.57, which the
appellant ultimately received, came from the profits made by
the conduct of a business in Australia and was passed on by
Mitchell Holdings Pty. Ltd., through Pharmaceutical Investments
Ltd. and Mitchell Credits Ltd., to the appellant. The
only business operations which yielded the production of any
income took place in Australia. Nothing that was done at
the office of Mitchell Credits Ltd. or the office of Pharmaceutical
Investments Ltd. in Norfolk Island produced one cent of the
income that the appellant received or one cent of the profits
out of which the dividend received by the appellant was paid.
Notwithstanding the devices adopted to give the facts a
specious appearance, the reality is that the source, and the
only source, of the income derived by the appellant was in
Australia. Similarly, the dividend paid to the appellant by
Mitchell Credits Ltd. was paid out of profits derived by it from
sources in Australia and from no other sources. I hold, therefore,
that the income in question was not derived by the
appellant from any source within Norfolk Island and that s. 7 (1)
does not exempt the appellant from liability to tax. I hold
further that the dividend paid to the appellant by Mitchell
Credits Ltd. was paid out of profits derived by that company
from sources in Australia..."

10. The whole of this conclusion is clearly supported by the evidence. Having regard to the evidence it would not, in my opinion, be correct in principle to disturb the finding of the learned judge that the source of the amount of $30,910.57 was within Australia. It cannot, in my opinion, be reasonably said that the finding is clearly wrong. The meaning of the word "sources" in s. 7 of the Act does not require that the B class share allotted to Esquire Nominees Ltd. in Mitchell Credits Ltd. should be held to be the source of the income in question. It is attributable exclusively to profits of Manolas Pharmacy Pty. Ltd. These are the sources of the income. They are in fact its real source. In the light of the evidence concerning the origin of the amount of $30,910.57 and its transmission to Norfolk Island, the B class share allotted to the appellant by Mitchell Credits Ltd. cannot be regarded as the real source of that amount. The conclusion which I would draw from the evidence is that the share is nothing other than an artificial source, indeed, an illusory source. (at p217)

11. The decisions relating to ascertainment of the source of income for the purpose of income tax are cited by the learned judge in his judgment. I do not think it is necessary for me to add anything to the learned judge's discussion of the decisions. (at p217)

12. I would dismiss the appeal. (at p217)

MENZIES J. The appellant - the taxpayer - appeals to the Full Court against the decision of Gibbs J. in favour of the Commissioner upon an appeal against an assessment made by the Commissioner under s. 99 of the Income Tax Assessment Act 1936-1969 by which the sum of $30,910, a dividend received during the year of income 1969, was treated as the net income of a trust estate to which no beneficiary was presently entitled. (at p218)

2. The taxpayer did, as the trustee of Manolas Trust, receive the dividend in question from Mitchell Credits Ltd. Under that trust no beneficiary was presently entitled to the income represented by the dividend. (at p218)

3. Both the taxpayer and Mitchell Credits Ltd. were incorporated in Norfolk Island. The income of Mitchell Credits Ltd., which enabled the dividend to be paid, was a dividend from Pharmaceutical Investments Ltd., another company incorporated in Norfolk Island which had received a dividend of a like amount from Mitchell Holdings Pty. Ltd., a company incorporated in the Northern Territory. Mitchell Holdings Pty. Ltd., during the year 1968, had received from Manolas Pharmacy Pty. Ltd. dividends totalling $31,503.50 out of profits of a business carried on in Australia. It was these profits that enabled the making of the successive distributions as aforesaid. (at p218)

4. Early in 1969, it was contemplated by the persons concerned with all these companies, i.e. the Manolas family and their advisors, Messrs. Wilson, Bishop, Bowes & Craig, that unless Mitchell Holdings Pty. Ltd. made a sufficient distribution by 30th April 1969, it would be liable for Div. 7 tax, but that if it did make such a distribution the dividends paid would be taxable in the hands of the shareholders of that company. It was to escape from this predicament that, between 24th and 28th April 1969, a number of transactions took place which are described in detail in the judgment of Gibbs J. and which had the result which his Honour described as follows:

"...the whole of the issued shareholding in Mitchell
Holdings Pty. Ltd. was beneficially owned by Pharmaceutical
Investments Ltd., the whole of the issued shareholding in
Pharmaceutical Investments Ltd. was beneficially owned by
Mitchell Credits Ltd. and the one issued B class share in
Mitchell Credits Ltd. was held by the appellant. On 1st May
1969 the appellant executed a declaration of trust by which
it acknowledged that the one B class share in Mitchell Credits
Ltd., of which it was the registered owner, and the option over
the unissued A class shares of Pharmaceutical Investments
Ltd. were beneficially owned by the Manolas Trust. Although
this declaration was not executed until 1st May 1969, there
is no doubt that from 25th April 1969, when the share in
Mitchell Credits Ltd. was allotted to the appellant, that share
was held by the appellant as trustee for the Manolas Trust."

5. His Honour also traced a number of transactions which culminated with cheques being drawn and banked on 29th April 1969. His Honour summarized the position as follows:

"To give effect to these resolutions the appellant on 29th
April 1969 drew a cheque in favour of Pharmaceutical Investments
Limited for $209,400 and Pharmaceutical Investments
Ltd. drew a cheque for $36,000 in favour of Manolas Pharmacy
Pty. Ltd., a cheque for $83,000 in favour of Manolas Holdings
Pty. Ltd. and a cheque for $90,000 in favour of Manolas & Sons
Pty. Ltd. These cheques were credited to the respective
accounts on 6th May 1969.
The net result of this juggling of cheques was that amounts
of $35,929, $83,097 and $90,443 were drawn respectively
from the accounts of Manolas Pharmacy Pty. Ltd., Manolas
Holdings Pty. Ltd. and Manolas & Sons Pty. Ltd. and amounts
of $36,000, $83,000 and $90,000 respectively were on the same
day credited back to the accounts of those companies."

"The income of the appellant was received in the form of a
dividend from Mitchell Credits Ltd. That company carried on
no business of any kind, but itself received a dividend from
Pharmaceutical Investments Ltd. The latter company went
through the motions of borrowing and lending money, perhaps
so that it might be said that it carried on business on Norfolk
Island, but those transactions yielded no profit and the
company was enabled to pay a dividend only because of the
dividend which it received from Mitchell Holdings Pty. Ltd.
The amount of $30,910.57, which the appellant ultimately
received, came from the profits made by the conduct of a
business in Australia and was passed on by Mitchell Holdings
Pty. Ltd., through Pharmaceutical Investments Ltd. and
Mitchell Credits Ltd., to the appellant." (at p219)

6. As it turned out, this spate of activity at the end of April 1969 was all to no purpose for the decision of this Court in Casuarina Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 30; (1970) 127 CLR 62 , given subsequently, showed that the taxation predicament was not as stated earlier and that Mitchell Holdings Pty. Ltd. at the critical date was a public and not a private company. It was not, therefore, liable to tax under Div. 7. However, that is now unimportant and the present problem is whether what did occur rendered the appellant liable to tax as assessed. (at p219)

7. For the appellant it was contended that being incorporated in Norfolk Island, having its office and directors there, having all its meetings there, and its business being to act as a trustee there, it was a resident of Norfolk Island and that the dividend in question having been received from Mitchell Credits Ltd. - a company in similar circumstances - was derived from a source within Norfolk Island, so that the taxpayer was not subject to tax by reason of the operation of s. 7 (1) of the Act which is in these terms:

"This Act shall extend to the Territories of Papua and New
Guinea, Norfolk Island, Cocos (Keeling) Islands and Christmas
Island, but shall not apply to any income derived by a resident
of those Territories from sources within those Territories." (at p220)

8. Gibbs J., after a full examination of the facts and the authorities, came to the conclusion that the appellant was a resident of Norfolk Island. With this conclusion I agree. The same reasoning established that Mitchell Credits Ltd. was also a resident of Norfolk Island. (at p220)

9. His Honour further decided, however, that the source of the income in question, i.e. the dividend received by the taxpayer from Mitchell Credits Ltd., was not Norfolk Island but Australia. As to this he said:

"The only business operations which yielded the production
of any income took place in Australia. Nothing that was done
at the office of Mitchell Credits Ltd., or the office of Pharmaceutical
Investments Ltd. in Norfolk Island produced one
cent of the income that the appellant received or one cent of
the profits out of which the dividend received by the appellant
was paid. Notwithstanding the devices adopted to give the
facts a specious appearance, the reality is that the source,
and the only source, of the income derived by the appellant
was in Australia." (at p220)

10. The conclusion that a dividend paid to a shareholder whose shares were registered in Norfolk Island by a company incorporated, resident, and carrying on its only business in Norfolk Island out of its profits was not derived from a source within Norfolk Island is one with which I respectfully disagree. The critical finding which brought his Honour to this conclusion has already been stated. It seems to me, however, that in considering the source of a dividend the proper inquiry is not to ascertain where the production of wealth, to which it can ultimately be traced through other companies, took place. This would be too large an inquiry. Nor, at the other extreme, would I attribute the source of a dividend upon a share to the place where the share happens to be located, i.e. the place in which the register is kept upon which the share appears. To do so would be artificial. (See Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183, at p 196 .) To determine the source of the dividend, it is, in my opinion, necessary to examine the situation of the company which pays it out of its profits, rather than by merely looking at the share register. The most material consideration is the place where the profit, out of which the dividend was paid, was made. A dividend is payable out of the profits of the company paying it, and, in the case of a holding company, this profit-making business may merely be the receipt of a dividend from another company. It is, for instance, well known that Utah Mining Australia Ltd. is presently a holding company and not an operating company. The fact, however, that it simply holds shares in Utah Development Co., an operating company from which it receives dividends which it distributes to its shareholders, does not signify that it does not itself carry on a profit-making business in Australia. If it were to happen that part of the profits of Utah Development Co. were earned outside Australia, I do not think it would follow that dividends paid by Utah Mining Australia Ltd. to its shareholders would be classified as derived in part from a source outside Australia. It is to be observed that s. 44 of the Act refers to dividends paid to a shareholder by a company "out of profits derived by it from any source". The words "derived by it" are of great significance and indicate, I think, that it is to the derivation of the profits by the very company which pays the dividend in question that attention must be directed, rather than to the derivation of profits at an earlier stage by an operating company which created the wealth without which there could have been no successive distribution of profits. The same notion of the source of income is, I think, present in s. 7 and where the income under consideration is a dividend. It is the profit-making business of the company paying the dividend that is the source of the dividend paid out of profits so made. (at p221)

11. This conclusion, which depends upon the construction of the statute unaided by authority, must, however, be tested by reference to the authorities which are collected and analyzed with care in the judgment of Gibbs J. The critical authorities are: Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183 ; Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 ; and Federal Commissioner of Taxation v. Mitchum [1965] HCA 23; (1965) 113 CLR 401 . The English authorities dealing with different statutory provisions are not, I think, of great assistance. (at p221)

12. It appears to me that some observations in Freeman's Case (1956) 30 ALJ 42 cannot be completely reconciled with the decision in Nathan's Case [1918] HCA 45; (1918) 25 CLR 183 , but Freeman's Case (1956) 30 ALJ 42 was decided upon the special provisions of a New South Wales statute - see Parke Davis and Co. v. Federal Commissioner of Taxation [1959] HCA 15; (1959) 101 CLR 521, at pp 531, 532 - and, in my opinion, what was said in Freeman's Case (1956) 30 ALJ 42 does not impair the authority of Nathan's Case [1918] HCA 45; [1918] HCA 45; (1918) 25 CLR 183 which was fully accepted in Mitchum's Case [1965] HCA 23; (1965) 113 CLR 401 . Accordingly, in my opinion, the law to be applied is that stated in Nathan's Case [1918] HCA 45; (1918) 25 CLR 183 ; viz. that the source of a dividend is that place where the company made the profit out of which the dividend was paid. Thus authority confirms the conclusion which I would have reached from the statute itself. Two citations from that case must, I think, be read together; viz.:

(1) "The legislature in using the word 'source' meant, not
a legal concept, but something which a practical man would
regard as a real source of income. Legal concepts must, of
course, enter into the question when we have to consider to
whom a given source belongs. But the ascertainment of the
actual source of a given income is a practical, hard matter of
fact." (1918) 25 CLR, at pp 189-190 .
(2) "When the company has made its profits, though no
individual corporator can lay claim to any portion of them,
every corporator has an interest in them. He can prevent their
diversion to any purpose inconsistent with the bargain he has
made, and if the corporation by its proper officers determines
to divide them and does divide them, the individual shareholder's
rights with respect to them do not then simply originate;
they come to fruition in the final act, that has been aimed
at from the beginning. The 'dividend' he receives is an aliquot
part of the fund divided; the fund itself is the source of the
part that he receives, and if on analysis the fund is derived
from various sources, some of which are within Australia and
some outside Australia, he is, according to the provisions of
the Act, liable or not liable to taxation in respect of it accordingly.
The Act treats a dividend from profits arising in Australia
as also arising in Australia." (1918) 25 CLR, at pp 197-198 . (at p222)

13. Applying the foregoing principles to the facts here, I am compelled to conclude that, in the circumstances already stated, the dividend which the taxpayer received from Mitchell Credits Ltd. was derived from sources in Norfolk Island. All indicia, other than the ultimate source of the wealth being distributed, point to Norfolk Island as the source of the dividend in question. (at p222)

14. Having so decided, it is necessary to consider the Commissioner's reliance upon s. 260 of the Act - a problem with which Gibbs J. did not have to deal. The short answer to that reliance is, I think, to be found in s. 7 itself which provides that the Act does not apply to the income upon which the Commissioner seeks to assess tax. It is not possible by means of s. 260 to tax income which s. 7 puts outside the operation of the Act, including s. 260 itself. (at p223)

15. In my opinion, therefore, the appeal should be allowed and the assessment set aside. (at p223)

STEPHEN J. From the complex facts of this case Gibbs J. has distilled its essence and there emerges from that distillation the problem, the location of the source from which the taxpayer derived a dividend of some $30,000. Section 7 (1) of the Income Tax Assessment Act extends the operation of the Act to certain overseas Territories of the Commonwealth, including Norfolk Island, but provides that it shall not apply to any income derived by a resident of those Territories "from sources within those Territories". If the source of that dividend lies within Norfolk Island that is an end of the case, the Act will be inapplicable and the Commissioner's assessment should be set aside. His Honour came, however, to the contrary conclusion, hence this appeal. (at p223)

2. The taxpayer is the first of five companies linked in a shareholding chain; it holds shares in a second company which holds shares in a third and so until the fifth and last company of the chain is reached, which carries on business in Australia as a pharmaceutical chemist whereas each of the other four carries on, in substance, no business other than that of holding shares in and receiving dividends from its successor in the chain. The taxpayer and the next two links in the chain are companies incorporated in Norfolk Island and resident there, the last two companies in the chain are resident in Australia. (at p223)

3. The taxpayer having received in the relevant year of income this dividend of some $30,000 and having appealed against its assessment to tax in respect of it, Gibbs J. disallowed that appeal and held that that dividend was not income derived by it from a source within Norfolk Island but was, on the contrary, derived from an Australian source, that source being the profits derived by the fifth company in the chain from its Australian pharmacy business. It is with the correctness of this identification of source that this appeal is concerned. (at p223)

4. As Evatt J. observed in Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd. [1931] HCA 32; (1931) 46 CLR 417, at p 441 , taxation by reference to source of income has long been a feature of fiscal legislation in Australia, income being depicted as a flowing stream fed from identifiable sources. To use "source" in such a context is not to employ any legal concept but rather a metaphorical expression - Federal Commissioner of Taxation v. United Aircraft Corporation, per Rich J. [1943] HCA 50; (1943) 68 CLR 525, at p 537 - and in the task of applying this metaphor so as to determine fiscal consequences it has become accepted doctrine that the ascertainment of the actual source of a given income "is a practical, hard matter of fact", the source being "something which a practical man would regard as a real source of income" - Nathan v. Federal Commissioner of Taxation, per Isaacs J. [1918] HCA 45; (1918) 25 CLR 183, at p 189 . (at p224)

5. As Kitto J. said in Federal Commissioner of Taxation v. French [1957] HCA 73; (1957) 98 CLR 398, at p 417 , the Act

"assumes that it is possible to identify, with respect to
every amount of income, some activity, event or thing which
may properly, though metaphorically, be described as the
source from which that income has been derived".

6. The process of identification of the locality of a source of income may differ depending upon the nature of the income in question. Where income may be seen to be derived solely from the acts of the taxpayer the source is to be found where those acts are performed; but the problem is seldom set in such simple terms, such personal exertion income will often be seen to be derived from the performance of work pursuant to some contract and the place of performance, the place of payment and the locus of the contract may all affect the question of source - French's Case, per Taylor J. (1957) 98 CLR, at p 422 . (at p224)

7. Here no question of income from personal exertion arises, the dividend in question is income from property both in the ordinary sense of that phrase and in its defined meaning in s. 6 of the Act. It has been said that the doing of acts or the possession of property are the only two sources of income and that in the case of the latter the location of the property in a particular country identifies the source of income flowing from it - United Aircraft Case, per Latham C.J. (1943) 68 CLR, at p 536 . Thus the appellant relies upon the location of the shares upon which the dividend received by the appellant was declared as decisive in its favour; those shares being situated in Norfolk Island, dividends declared on them are, it is said, derived from that territory and s. 7 (1) renders the Act inapplicable to that dividend. There are alternative arguments of some sophistication upon which it also relies and which have called forth, in response, arguments of equal ingenuity from counsel for the Commissioner, but I am content to dispose of this appeal upon s. 7 (1) alone. (at p225)

8. The two contending views, so far as concern s. 7 (1), are, then, on the one hand, that the source of a dividend is situated where the shares on which it is declared are situated and, on the other, that, since identification of source is a question of fact and an essentially practical matter, it is formalistic and in disregard of reality to look simply at the location of the shares; instead the origin of that fund of profits out of which the dividend is paid must be sought in some operation of business and in that search there may be ignored any corporate entities through the hands of which the fund of profits may have passed en route to its final destination in the hands of the taxpayer. (at p225)

9. This latter view, that of the Commissioner, does not, I think, accord with the language of s. 7 (1) and is, in my view, opposed to authority. Looking first at the language of the sub-section, its proviso speaks simply of "income derived by a resident of those Territories from sources within those Territories". (at p225)

10. The word "source" has a quite variable meaning, depending upon the context in which it appears. A river's source may refer to the locality from which come the waters which go to make up its main stream or to its origin in melting snows or monsoonal rainfall; the first is a purely locational concept, the second is concerned rather with the character of its origin. In the present case it is clear that it is in a locational sense that "source" is used. (at p225)

11. Again, as in problems of causation, the answer to any question as to "source" or "origin" must depend upon whether a proximate or a remote, or perhaps ultimate, source or origin is inquired after. (at p225)

12. To say that questions of source depend upon practical matters of fact will not necessarily assist in determining which of a range of possible meanings of source is meant, but context should provide a solution. The context furnished by the proviso to s. 7 (1) is that of the individual taxpayer and of his derivation of his income either by his own acts or from property rights which he possesses. It is a context unconcerned with the questions of ultimate origin; the source referred to is that from which income is produced by the taxpayer's own acts of derivation or ownership. All this suggests that a quite proximate source is being referred to. (at p225)

13. The income-producing property rights here in question consist of the taxpayer's rights as a member of a company. All the possibly relevant facts relating to that company point to a geographic location of source in Norfolk Island; the company is resident there, the share in its capital held by the taxpayer was held on a Norfolk Island register, the fund of profits out of which the dividend was declared was derived from the company's shareholding in another company resident in Norfolk Island and the dividend was declared and paid there. In those circumstances there is no occasion to make a choice between the locality of the taxpayer's share and some other possible criterion of locality of source, such as the place where the company made its profits; whatever guide to locality of source be adopted the result will be a Norfolk Island source unless what I regard as the relevant context be ignored and some more remote source be sought for, perhaps because the taxpayer's property rights as a member of the dividend-paying company are thought not to constitute a legitimate source for this purpose. (at p226)

14. The Commissioner's contention appears to me to deny that ownership of income-producing property necessarily constitutes a relevant source of income and to assert that before such income-producing property can constitute a relevant source of income it must, when it consists of a shareholding in a company, be a shareholding in a company which does not derive its own income from shareholdings in other companies but rather from some independent business activity which it pursues. I am unable to discern any such limitation in the words of s. 7 (1). (at p226)

15. The authorities seem to me to be opposed to what I have called the Commissioner's contention. No nice distinction appear, in the past, to have been drawn between different kinds of property, some constituting a relevant source of income and others being disregarded and passed over in favour of more remote origins. In the United Aircraft Case, Latham C.J., after describing property as one possible source of income, said (1943) 68 CLR, at p 536 , "if a person has rights over property or in relation to property he may derive income from that property". His Honour regarded as essential to the identification of income as having a source in a particular country the ownership of something in that country or the doing of something in that country. No qualification upon the nature of what was owned, so long as it was income-producing, was hinted at. (at p226)

16. In that case, Rich J. (1943) 68 CLR, at p 539 , albeit in a very different context, denied the legitimacy of tracing back beyond a relevant source to the more remote origins of an item of income; he instanced an Australian tourist's purchase of an article from an American shopkeeper in New York, saying that there could be no justification for describing the shopkeeper as having derived income from a source in Australia because the tourist paid for it out of income which he had received in Australia. So too here, unless for some reason not apparent to me the shareholding of the taxpayer is to be disqualified as a possible source of its income, it appears equally inappropriate to describe the source of that income as to be found in some transaction, however remote, which lies behind the fund of profits out of which the dividend has been declared in favour of the taxpayer. (at p227)

17. In the earlier case of Tariff Reinsurances Ltd. v. Commissioner of Taxes (Vict.) [1938] HCA 21; (1938) 59 CLR 194 , Latham C.J., in considering the position of an English re-insurer of a Victorian underwriter's risks, had said (1938) 59 CLR, at p 205 :

"In order to determine whether the profits are derived in
or from Victoria it is necessary to ascertain what the taxpayer
does in order to obtain the profits in question (Premier Automatic
Ticket Issuers Ltd. v. Federal Commissioner of Taxation,
per Dixon J. [1933] HCA 51; [1933] HCA 51; (1933) 50 CLR 268, at p 294). It is not relevant to

person, who is not an agent in any sense of the taxpayer, does in
order to obtain the moneys which he uses for the purposes of
making payments to the taxpayer."

18. Rich J. (1938) 59 CLR, at p 209 spoke of the reasoning which the Court was asked to adopt but which its members rejected when he said "if this method of reasoning were allowable the income of the first producer of any article should be traced through to the ultimate consumer who pays for it". In Commissioner of Inland Revenue v. N.V. Philips' Gloeilampenfabrieken (1955) NZLR 868, at p 876 , the Chief Justice said of a Dutch company which the Commissioner had sought to assess to tax in respect of interest on a loan made by it to an affiliated New Zealand company,

"The Dutch company owns no property in New Zealand, and
it has done nothing in New Zealand. It has no servants or
agents in New Zealand, and, therefore, cannot do anything
here. As was said by Sir John Latham, C.J., in Federal Commissioner
of Taxation v. United Aircraft Corporation [1943] HCA 50; (1943) 68 CLR 525 :
'a person who neither owns anything in a country nor does
nor has done anything in that country cannot, in my opinion,
derive income from that country' [1943] HCA 50; (1943) 68 CLR 525, at p 536.
And be it noted that
the learned Chief Justice made those remarks in reference to
an Act which, like ours, contained references to 'source' and
'directly or indirectly'. It must always be remembered that
we are concerned with the source of the Dutch company's
income - not with the source of its debtor's earnings. The
interest on this loan is no doubt paid by the debtor out of
moneys it receives from carrying on its business in New
Zealand. But that is no concern of the lender."

"proper regard must be paid to the word 'derived'; it
should not be read as 'received'. The word 'derived' means
more than received; it connotes the source or origin, rather
than the fund or place, from which the income was taken.
It means flowing, springing, emanating from, or, as was said
in Commissioners of Taxation v. Kirk (1900) AC 588, at p 592,
arising from or accruing.
To be a 'source' of the income within the meaning
of the subsection, it is necessary, I think, to look to the
originating cause. It is not sufficient to ascertain the fund
out of which the income was in fact paid, which is no more
than the reservoir from which it was drawn. It is not whence
it was paid, but why it was paid, that is the determining factor.
The emphasis is not upon the receipt, but upon the derivation
of the income. Consequently, it does not constitute the source
within the meaning of the section that the money was drawn
from or provided by the trading profits in New Zealand. The
New Zealand company was free to obtain the funds with which
to perform its obligation anywhere it chose, from deposits in
England, if it had any, or from borrowing in England, or from
the profits of its trading in New Zealand. That was a domestic
matter. The money could 'come from' any of these 'sources',
but none of them would be the source from which the Dutch
company derived what it received as income. The combination
of the words 'derived' and 'source' import, I think, some
causative link." (at p228)

19. These passages suggest that when source of a taxpayer's income is in question and it is found that he has received income from another person who is not his agent and in whose business activities he is no participant the reason why that income is so received is all important but the source from which that other person derived the moneys from which he provides the taxpayer with his income is of no relevance. (at p228)

20. As has been remarked by Gibbs J., there is difficulty in reconciling some of the passages from the joint judgment in Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , with the joint judgment in Nathan's Case [1918] HCA 45; (1918) 25 CLR 183 but for the reasons already stated the present case calls for no such reconciliation. Whatever differences may be discerned in these two decisions, Freeman's Case (1956) 30 ALJ 42 does not, I think, cast any doubt upon the factual character of the investigation into source of income emphasized in Nathan's Case [1918] HCA 45; [1918] HCA 45; (1918) 25 CLR 183 and acknowledged in later cases, including decisions of this Court subsequent to the decision in Freeman's Case (1956) 30 ALJ 42 . If the two judgments do suggest conflicting answers to the question "Where lies the source of a dividend?" at least neither, so far as applicable to the present case, seems to me to involve any investigation of origins more remote than the activities of the company declaring the dividend; nor does either suggest that certain types of income-producing property may be disregarded as a relevant source of income, the search for a source therefore having to be pursued to a more remote origin. (at p229)

21. Accordingly I reject the Commissioner's contention and conclude that the source of the dividend in this instance was in Norfolk Island. There was situate the relevant share register and the fund of profits available for distribution and there were undertaken the business activities of the company paying the dividend, that is to say, the activity of holding shares and receiving payment of dividends, which was its only business activity. The fact that a further company in the chain and in which it held shares and from which it derived its sole income in turn derived its income from dividends the origin of which was Australia I regard as too remote to be relevant to the location of the source of the taxpayer's income. (at p229)

22. It follows that I regard this dividend as derived by the taxpayer from a source in Norfolk Island. (at p229)

23. Two further aspects should be mentioned; the first relates to the Commissioner's contention that because the taxpayer was a trustee of its shareholding s. 7 (1) had no application to it and that, instead, the relevant section was s. 44 (1) (b), made applicable by Div. 6 of Pt. III of the Act. It suffices that I express my agreement with what was said in this regard by Gibbs J., who held that the provisions of s. 7 (1) were intended to override the other provisions of the Act; I respectfully adopt his Honour's reasons for this conclusion. I may add that s. 44 (1) (b) cannot, in my view, be relied upon by the Commissioner as affecting the meaning of s. 7 (1) and as thereby justifying a search for some remote source of the taxpayer's dividend. In Parke Davis & Co. v. Federal Commissioner of Taxation (1959) 101 CLR, at p 532 , the Court said of s. 44 (1) (b) that it was not cumulative upon and independent of s. 23 (r) but merely carried out s. 23 (r) and stated what was, in the case of a dividend received by a non-resident, its source for the purpose of s. 23 (r). Its role is not, however, to provide any similar interpretive function for the overriding provisions of s. 7 (1). (at p230)

24. The second aspect concerns the Commissioner's reliance, in the alternative, upon s. 260 of the Act. If, as I have concluded, s. 7 (1) operates to exclude from the operation of the Act this income of the taxpayer then I consider that s. 260 cannot have any operation in relation to that income. (at p230)

25. In my view this appeal should be allowed and the assessment set aside. (at p230)

ORDER