Meares v Acting Federal Commissioner of Taxation [1918] HCA 15; (1918) 24 CLR 369 (21 March 1918)

HIGH COURT OF AUSTRALIA

Meares Appellant; and The Acting Federal Commissioner of Taxation Respondent.

H C of A

On appeal from Barton J.

21 March 1918

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

Schutt (with him Eager), for the appellant.

Starke (with him Mann), for the respondent.

Schutt, in reply.

The judgment of the Court, which was read by Griffith C.J., was as follows:—

March 21

Griffith C.J.,

Gavan Duffy, Powers and Rich JJ.

Among the categories of income liable to taxation under the Income Tax Assessment Acts 1915 (sec. 14) are dividends paid to any member or shareholder of a company which derives income from a source in Australia, subject to the proviso that "where a company distributes to its members or shareholders any undistributed income accumulated prior to the first day of July one thousand nine hundred and fourteen the sum so received by the member or shareholder shall not be included as part of his income."

A further proviso, upon which this appeal depends, was added, by amendment, in the same year as follows: "Provided also that amounts carried forward by a company to the credit of the profit and loss account shall not be deemed to be accumulated income."

The amount upon which the Commissioner has assessed the income tax now in question was a portion of undistributed income of a company, earned before 1st July 1914, but not applied in payment of dividends until after that day.

In order that dividends paid out of it may be liable to taxation it must be established that it was "carried forward by the Company to the credit of the profit and loss account." What, then, do these words mean? The sum in question was not entered in any account called by that name in the Company's books as a sum brought forward from a previous account, but we do not think that that fact is conclusive of the matter.

In our opinion the phrases "carried forward" and "profit and loss account" have a well recognized meaning. The account called the "profit and loss account," whether of a company, a partnership or an individual, is an account showing the transactions of the business adventure during a given period, usually a year or half-year, in which are entered on one side amounts received, and on the other the expenditure incurred during the same period in producing those receipts. The difference shows the profit or loss for that period. It is of the essence of the account that it is for a stated period.

It is not a necessary part of the account that it should show how the profit, if any, has been or is intended to be disposed of, or how the loss, if any, has been or is intended to be made up. It is not unusual, however, to include such information.

Sometimes, as was the practice of this company and of the firm whose business they took over, the whole of the profit shown is transferred to an account called an "appropriation account," in which is recorded the manner of its disposition. Very often a partial disposition by way of distribution in dividends or transfer to what is called a "reserve fund" or some other special fund is shown, and if these dispositions do not exhaust the whole amount a balance will remain.

We can now see plainly the meaning of the words "carry forward." In the first place they import an act of volition on the part of the company.

It is, as our daily experience shows, not uncommon to transfer such a balance to the profit and loss account for the next succeeding period, and to group it with the receipts proper of that period in making up the amount available to defray the expenditure for the period. When this is done by a company, the company shows its intention to treat the amount so transferred as forming part of the transactions of the later period. This, then, is what is meant, and all that is meant, by carrying forward by the company to the credit of the profit and loss account. Its doing so may well be thought inconsistent with an intention to treat the amount so dealt with as an accumulated fund, and the Act says that it shall not be so regarded. When the company itself so includes a sum in its current receipts, it is to be regarded as so included for all purposes of taxation, without any disentanglement of accounts which the company has thought fit to combine.

The contention of the Commissioner involves the consequence that, whenever a company distributes to its members any income earned but not distributed before 1st July 1914, the account which shows that distribution becomes ipso facto part of the profit and loss account, and that the entry in it of the amount to be distributed is therefore ipso facto a carrying forward of that amount to "the profit and loss account." Such a construction of the later proviso would be to make it, not a qualification, but a flat negation, of the principal enactment to which it is a proviso. This was clearly not the intention of Parliament.

We think, therefore, that the sum in question is not within the second proviso. The appeal must be allowed, and the respondent must pay the costs both here and before Barton J.

Appeal allowed and assessment reduced accordingly. Respondent to pay costs of appeals to this Court and to Barton J.

Solicitors for the appellant, Meares & Duigan.

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