W Thomas & Co Ltd v Commissioner of Taxation (WA) [1931] HCA 11; (1931) 45 CLR 539 (4 April 1931)

HIGH COURT OF AUSTRALIA

W Thomas and Company Limited Plaintiff, Appellant; and The Commissioner of Taxation (Western Australia) Defendant, Respondent.

H C of A

On appeal from the Supreme Court of Western Australia.

4 April 1931

Starke, Evatt and McTiernan JJ.

Robert Menzies K.C. and Frisby-Smith, for the appellant.

J. L. Walker, for the respondent.

Frisby-Smith, in reply.

The Court delivered the following written judgment:—

April 4

Starke, Evatt and McTiernan JJ.

[The facts as above set out were here stated, and the judgment continued:—] If the assets transferred were not worth £190,000, then the shares were not worth their face value, and the inclusion of the sum of £160,000 as a cash receipt might, in such circumstances, be open to some question in point of fact. (Compare Doughty v. Commissioner of Taxes[1].) But both parties to this appeal assumed a cash receipt by the Company of £160,000 under the 1927 agreement, and rested their respective contentions upon the construction of the Dividend Duties Act 1902-1924. Now, under this Act, secs. 5 and 6, a duty or tax is imposed upon all profits made by a company carrying on business in Western Australia, for a calendar year, or the balancing period of the company. That Act, as it originally stood, imposed a duty upon dividends declared by a company carrying on business in Western Australia (see Swan Brewery Co. v. The King[2]; Inland Revenue Commissioners v. Blott[3]); but this provision was repealed by the Act 1915, No. 24, sec. 2, and, except as an aid to construction, is not now of any importance.

The question is whether the words "all profits" upon which the tax is imposed include not only the balance of trading profits over trading expenses, but also realized accretions or enhancements in value of capital or fixed assets. The income tax cases are not of much assistance, for there the tax is on income and not on profits (Ruhamah Case[4]; Bawra Case in the Privy Council[5]). The Commissioner's contention is that "if a company acquires assets and with them carries on business, every increment of value, whether by way of appreciation of the assets or by way of profit earned in employing them," is a profit. In some sense it is a profit (Buckley on Companies Acts, 11th ed., p. 757; In re Spanish Prospecting Co.[6]). But in every case the question is what is the true meaning of the words "net profits," "profits," or, as in the present instance, "all profits," in the document to be construed. (Compare Patent Castings Syndicate Ltd. v. Etherington[7]; Vulcan Motor and Engineering Co. v. Hampson[8].) The subject is not, of course, to be taxed unless the Act clearly imposes the obligation. The profits here taxed are profits made or earned during a calendar year, or the balancing period of the Company, and by a company carrying on business in Western Australia. Now, that indicates profits arising from the business of the Company, and not profits of any description. They are the profits resulting from the trading operations of that year. But the Act formerly taxed dividends declared by a company carrying on business in Western Australia. That predicated profits of some kind, and, subject to any internal regulations of a company, accretions in value of capital assets might, when realized at all events, be brought into profit and loss and declared as a dividend (Lubbock v. British Bank of South America[9]). Consequently it is said that when the Act taxes "all profits" made by a company carrying on business in Western Australia, then profits available for dividends necessarily fall within the meaning of those words. This, we think, is the view at the basis of the judgment appealed from. But it is one thing to tax realized or ascertained profits declared and paid as a dividend, and quite another to tax profits calculated on a basis of comparison in the value of assets of a company at the end of a calendar year or the balancing period of the company—mere estimated profits: such a method might theoretically be possible, and yet practically difficult or impossible.

There is, as Farwell J. said in Bond v. Barrow &c. Co.[10], no single definition of the word "profits" which will fit all cases. One must return to the particular document to be construed, to its subject matter, and the context in which the word is found. The present Act is dealing with the profits of companies engaged in business, in commercial activities, and with the usual methods of drawing up accounts and ascertaining the profits of a business at the close of the calendar year or the annual balancing period of the business. It is quite unusual, and contrary to all commercial practice, to include under profits "gains and losses arising from causes not directly connected with the business of the company, such, for instance, as a rise in the market value of land occupied by the company." (See Spanish Prospecting Co.'s Case[11].) In the Act under consideration, the Legislature is dealing with commercial ventures, and must be taken to legislate with regard to the usual methods of ascertaining profits therein. Consequently, when the Act uses the words all profits made by a company carrying on business, it is referring to profits arising from the trading or business operations of a company, and not to profits of any description, such as increments arising from the appreciation in the value or the realization of capital assets of a company.

In our opinion, therefore, the judgment of the Full Court should be reversed.

Appeal allowed. Order of Full Court set aside. Declare that the amount upon which the duty of £4,552 19s. 11d. has been assessed is not profit within the meaning of the Dividend Duties Act 1902-1924, and is not chargeable with duty under the said Act. Order that the respondent the Commissioner of Taxation pay the costs of the appeal to the Full Court and of this appeal. Remit case to the Supreme Court of Western Australia with the foregoing declaration.

Solicitors for the appellant, Downing & Downing.

Solicitor for the respondent, J. L. Walker, Crown Solicitor for Western Australia.

[1] (1927) A.C. 327, at p. 332.

[2] (1914) A.C. 231.

[3] (1921) 2 A.C. 171.

[4] (1928) 41 C.L.R., at p. 151.

[5] (1931) A.C. 224; 47 T.L.R. 57

[6] (1911) 1 Ch. 92.

[7] (1919) 2 Ch. 254.

[8] (1921) 3 K.B. 597.

[9] (1892) 2 Ch. 198.

[10] (1902) 1 Ch., at p. 366.

[11] (1911) 1 Ch., at p. 99.