Federal Commissioner of Taxation v Foster Brewing Co Ltd [1917] HCA 7; (1917) 22 CLR 545 (15 March 1917)

HIGH COURT OF AUSTRALIA

The Federal Commissioner of Taxation Appellant; and The Foster Brewing Company Limited Respondent.

H C of A

15 March 1917

Barton, Isaacs, Gavan Duffy and Rich JJ.

Starke and Morley, for the appellant.

Mann, for the respondents.

Morley, in reply.

Barton J.

It appears that this company carried forward each half-year, in its profit and loss account, an amount which was made up of two specified sums, namely, first, an accumulated fund, and, secondly, the profit of the previous half-year. As against the amount so made up there appeared in the profit and loss account of each succeeding half-year, on the credit side, a sum of £2,880 to meet the dividend and bonus which were paid. The net profit for the half-year in review was disclosed in the last previous account, to which it was debited. The two accounts must, of course, be read together.

It is argued that these accounts show that the sum appearing as dividend and bonus was paid out of a mixed or general fund, and cannot be referred to the profits of the particular half-year only. As I understand the term, a dividend, according to the general acceptation, is the same thing as is indicated in sec. 16 of the Act, that is, income distributed to the members or shareholders of the company, to be deducted from its total income. That sum, when it is less than the profit seen to have been made for the period under review, is, according to public understanding, referable to that profit. So also when the sum is equal to the profit. But if it appears that the sum paid is larger than the profit, it is the general understanding that resort has been had to the other existing funds of the company to make up the excess. I think that the profit and loss accounts of companies are in general made up in accordance with this understanding. And there is nothing in the Act which is inconsistent with, or apparently designed to do away with or to run counter to, this general understanding, in accordance with which the Statute should therefore be read.

If I am right so far, then, as the sum declared as dividend is in each case less than the net profit made in the half-year under review, it comes within the words of the Act. It is declared from the net profit of the half-year, and is deductible, not by way of apportionment in the manner assumed by the Commissioner, that is, in part from the net profit and in part from the anterior accumulations, but only from the total income of the half-year. If I am right there, the conclusion of the learned Chief Justice is abundantly right and his decision cannot be disturbed. The case appears to me to lie within a small compass. Unless a departure from the common understanding is seen, we need not be troubled with minor differences in the manner in which this or that accountant may choose to keep a profit and loss account. Especially is this so when we consider that the accounts made up after the passage of the Act merely followed the method in which they were made up before its passage, without any relation to prospective liability to taxation. Where it is apparent, as it is here, that there is a profit for the taxable period exceeding the amount of the dividend, I think that in all common sense there is an end of the matter. Men of business do not do the thing which, inferentially, the Commissioner has attributed to this company.

I think the appeal should be dismissed.

Isaacs J.

I also think that the appeal should be dismissed. The matter turns upon the construction and application of sec. 16 (1) of the Income Tax Assessment Act 1915. As I view it, the taxpayer, the amount of whose total income is undoubted, has to show what is claimed as a deduction. In this case the taxpayer has to show that the sum of £5,760 was distributed out of income primâ facie taxable. He launches his proof by showing that every penny of that £5,760 was paid to the shareholders by cheques on the banking account of the Company, which then stood in credit, and that every penny of that credit was composed of moneys paid in and being income received in that period and admitted to be for that period. If that stood as the only evidence, it could not be doubted that the taxpayer had proved his case. That proof is affirmative proof, and as it stands, unaccompanied by any other evidence, excludes the notion that the sum of £5,760 was paid out of any other moneys than the income referred to. Other evidence might, however, show that the money was utilized only as a temporary expedient and that its place was really filled up by other money, or that it was brought into account so as to alter the apparent transaction.

The Commissioner, for this purpose, introduced other evidence, namely, profit and loss accounts and a journal. The journal is colourless. The profit and loss accounts, on their face, represent in each half-year a sum carried forward from the previous half-year and being on the face of the profit and loss accounts an undivided sum of profits. From that undivided sum of profits is taken in each case the amount paid in each half-year by way of dividend, namely, £2,880. In the two half-years the sum of £5,760 was paid. That evidence, if it stood alone, might not unreasonably have led to the conclusion that the sums so paid were paid out of an indiscriminate sum of "profit fund," as I call it by way of convenience. But it is not conclusive of that; I mean it is not inconsistent with those sums paid for dividends being referable to some particular part of the "profit fund" I have mentioned. But when as against that inconclusive evidence there is placed the very definite primâ facie evidence of the payment out of the banking account I have mentioned, it appears to me that upon the whole the proper conclusion to be drawn as a matter of fact applicable to this particular case is that the sums were paid out of the income for the taxable period.

On these grounds I think the appeal should be dismissed.

Gavan Duffy J.

In my opinion the proper inference to be drawn from the facts proved and admitted is that the two dividends in question were paid out of the profits of the two half-years. That being so, it follows that the decision of the learned Chief Justice was perfectly correct.

Rich J.

What my brother Gavan Duffy has said expresses my opinion.

Appeal dismissed with costs.

Solicitor for the appellant, Gordon H. Castle, Crown Solicitor for the Commonwealth.

Solicitors for the respondents, Pavey, Wilson & Cohen.