Colclough v Federal Commissioner of Taxation [1918] HCA 12; (1918) 24 CLR 324 (14 March 1918)

HIGH COURT OF AUSTRALIA

Colclough Appellant; and The Federal Commissioner of Taxation Respondent.

H C of A

14 March 1918

Griffith C.J., Gavan Duffy, Powers and Rich JJ.

Starke, for the appellant.

Mann, for the respondent.

Griffith C.J.

It would be a misfortune if such a transaction as that in question were forbidden by law or made ineffectual by taxation. The question is whether the taxpayer is entitled to the benefit of the lower rate of taxation imposed on income from personal exertion, or whether the so-called dividends which he received in respect of the shares standing in his name must be regarded as income derived from property. There is no doubt that the money was, in fact, received by the taxpayer as agreed remuneration in respect of personal services rendered by him to the company. But it is said that the money cannot be so regarded, because it was in form paid by way of dividends from shares in the company. I think that the question must be determined by having regard to the substance of the transaction. Was the money received in substance and in fact personal earnings? The substance of the bargain between the taxpayer and the company is not in dispute. He is an employee of the company, and it is provided by the articles of association that employees may receive for their services, in addition to a fixed salary, a further sum to be calculated upon the basis of, and equal to, the amount of the dividends nominally payable on shares, which for that purpose are allotted to them as fully paid up, but which they can retain only so long, substantially, as they remain in the service of the company. As a matter of common sense, and apart from legal technicalities, that further sum is part of the remuneration for their services. The contention on behalf of the Commissioner is that the incorporation of the company renders such a transaction legally impossible. I do not think that the technical rules governing the mutual relations of companies and their members inter se have anything to do with the construction of the Income Tax Assessment Act, nor do I think that incorporation has the effect of preventing an honest transaction of that sort being carried out in that form. Such arrangements for the remuneration of employees by an interest in the profits of the adventure are at the present day regarded as worthy of encouragement. There is, on principle, no reason why the rate of an employee's remuneration should not be fixed on any basis or payable in any form to which the parties agree. It is still remuneration for services, and if it is received in the form of money it is liable to income tax. My brother Barton held that this money was not income from personal exertion. We have not been favoured with his reasons, but I feel sure that, if he had heard the discussion that has taken place to-day, he would have agreed with the conclusion at which I have arrived.

I am of opinion that the appeal should be allowed.

Gavan Duffy J.

I agree.

Powers J.

I agree.

Rich J.

I agree

Appeal allowed with costs. Appeal from Commissioner allowed with costs, and amount of assessed income to be reduced accordingly.

Solicitors for the appellant, P. D. Phillips, Fox & Overend.

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