Forrest v Federal Commissioner of Taxation [1921] HCA 35; (1921) 29 CLR 441 (24 August 1921)

HIGH COURT OF AUSTRALIA

Forrest Appellant; and The Federal Commissioner of Taxation Respondent.

H C of A

24 August 1921

Knox C.J., Gavan Duffy and Starke JJ.

Feez K.C. and Douglas, for the appellant.

Stumm K.C. and Real, for the respondent.

Feez K.C., in reply.

The Court delivered the following written judgment:—

Aug. 24

Knox C.J.,

Gavan Duffy and Starke JJ.

The question submitted by the special case is whether the appellant is liable to income tax in respect of certain "debenture-stock" issued to him as a shareholder in the South Brisbane Gas and Light Co. Ltd. The special case states that on a revaluation of the assets of the Company made in November 1914 it was ascertained that the value of the assets on 30th June 1914 exceeded by £100,000 the amount at which those assets stood in the balance-sheet for the half-year ending on that date, and that before 1st July 1914 no part of this increase in value appeared in any account or balance-sheet of the Company. It states further that the increased value of the assets was appropriated for the purpose of providing for the issue to the shareholders of the debenture-stock a portion of which is the subject of this appeal.

The questions involved in the decision may be stated as follows: (1) Is the amount represented by the debenture-stock "dividend, interest, profits, or bonus credited or paid" to the appellant as a shareholder of a Company within the meaning of sec. 14 (b) of the Commonwealth Income Tax Assessment Act 1915-1916; and (2), if so, does the amount consist wholly or in part of undistributed income of the Company accumulated prior to 1st July 1914 within the meaning of the proviso to that sub-section?

In order to uphold the assessment the Commissioner must establish that, in respect of the debenture-stock issued to the appellant, he has received or been credited with "dividends, interest, profits, or bonus." If he succeeds in this, the appellant can only escape liability by establishing that the fund appropriated for the purpose of providing for the issue of the debenture-stock was undistributed income of the Company accumulated prior to 1st July 1914.

In the view we take of the construction of the proviso to sec. 14 (b) it is not necessary to decide what answer should be given to the former question. But, assuming the Commissioner's first contention is correct, it seems to us to follow that the transaction must amount to a crediting or payment out of the income of the Company.

The remaining questions are whether this income was (a) undistributed and (b) accumulated prior to 1st July 1914. In considering these questions it is proper to ascertain from the Act the intention of Parliament in inserting the proviso. By sec. 5 of the Income Tax Act 1915 it was provided that income tax should be levied in and for the financial year beginning on 1st July 1915; and the effect of this section, read with sec. 10 (1) of the Income Tax Assessment Act 1915, was to render liable to tax income derived by any taxpayer during the year beginning on 1st July 1914 and ending on 30th June 1915. Income derived before 1st July 1914 was not brought within the scope of the tax by that section, but the effect of sec. 14 (b) would, but for the proviso, have been that, although the Company would only be taxable in respect of income derived by it after 1st July 1914, its shareholders would under that section be liable to taxation on so much of the profits of the Company as were distributed among them after that date although the whole or part of those profits might have been derived by the Company before that date. It was in order to exempt the shareholder from liability to tax in respect of so much of his share of the profits of the Company as might have been derived before 1st July 1914, but not distributed until after that date, that the proviso now under consideration was enacted. Considering the object of the proviso, we see no reason for attributing to the expression "undistributed income accumulated" any meaning other than income which had not been in fact distributed and had in fact accrued to the Company before 1st July 1914. Consequently, we are of opinion that this sum of £100,000 was undistributed income of the Company accumulated prior to 1st July 1914 within the meaning of the proviso to sec. 14 (b), and that the question submitted by the special case should be answered in the negative.

The costs will be costs in the appeal.

Question answered accordingly.

Solicitors for the appellant, Atthow & McGregor.

Solicitors for the respondent, Chambers, McNab & McNab, for Gordon H. Castle, Crown Solicitor for the Commonwealth.