Smith v Federal Commissioner of Taxation [1932] HCA 44; (1932) 48 CLR 178 (18 August 1932)

Certain lands of the taxpayer became the property of the City of Brisbane under and by virtue of the City of Brisbane Improvement Act of 1916. By sec. 13 the Council was empowered "without complying with the Act," to "enter into an agreement to take" any land required. But action was not taken under sec. 13, and the course adopted was to "take" the land under sec. 3 by "notice of resumption" published in the Gazette.

The question which now arises is whether the transaction mentioned was a "sale of assets" within the meaning of the third proviso to sec. 16 (b) (i.) of the Income Tax Assessment Act 1922-1927. That proviso enacts that when a company dividend or bonus is paid "wholly and exclusively out of the profits arising from the sale of assets which were not acquired for the purpose of resale at a profit a member of shareholder shall not be liable to tax on that dividend or bonus."

The general scheme of the proviso is not in doubt. The assets of a company are divided into assets acquired "for the purpose of resale" and those not so acquired, that is, "fixed" assets. Profit may arise from the sale by the company of assets belonging to the second class, and, if profit does arise, it is not taxable as dividend in the hands of the shareholder.

We do not think that the expression "sale" in the proviso is sufficiently elastic to include the compulsory taking of the appellant's land by the Council. There was no agreement between the parties prior to the taking. The property became vested in the Council by force of the publication of the notice, not by force of any conveyance or transfer. After Gazette notification, the appellant retained no interest whatever in the land, and his sole right was to have compensation paid to him. The subsequent arrangement between the parties as to the amount of that compensation was directed solely to avert the litigation which otherwise would have taken place. For a "sale," there must be a seller or vendor, a purchaser or a buyer, and a transfer of the thing sold—for a price. These predominant features are absent from the transaction here, where there was never a vendor, never a purchaser, and never a price. We are not impressed by the consideration that the resumption of lands under some State laws the true intent of which is to compel a person to sell land for a price, may be within the proviso. That is not the case here.

When, in August 1930, the Legislature amended the Income Tax Assessment Act, it altered the proviso under consideration and used the disjunctive phrase "profits arising from the sale, or compulsory resumption for public purposes, of assets"; but made the alteration applicable only to assessments in respect of financial years, commencing with the financial year 1930-1931. This amendment can, we think, be looked at, and it shows conclusively the Legislature thought that a very clear distinction existed between a sale and a compulsory resumption of land, and that the original proviso did not apply to compulsory resumptions. The form of the amending legislation is inexplicable on any other hypothesis.

This is a taxpayer's appeal under sec. 51 (6) of the Income Tax Assessment Act 1922-1930 from a decision of the Board of Review. The proceedings came before me pursuant to Rule 13 of Order LIa. and at the request of both parties I referred the matter to be argued before the Full Court. The question before the Board arose under the third and last proviso of sec. 16 (b) (i.) of the Income Tax Assessment Act 1922-1927, which makes a general exception to the rule that the assessable income of any person shall include in the case of a member of a company profits credited, paid or distributed by the company. The proviso is as follows: "Provided also that where a dividend or bonus is paid wholly and exclusively out of the profits arising from the sale of assets which were not acquired for the purpose of resale at a profit a member or shareholder shall not be liable to tax on that dividend or bonus." The taxpayer as a shareholder participated in a distribution by a company of profits said to arise from the compulsory sale of assets which were not acquired by the Company for the purpose of resale at a profit. The question arose under this provision before the amendment effected by sec. 6 (b) of No. 50 of 1930. The Board considered the question whether the expression "arising from the sale of assets" covered the involuntary realization of property as a result of compulsory acquisition, but decided against the taxpayer upon the ground that the dividend had not been paid by the Company wholly and exclusively out of the profits from the realization. This decision proceeded upon the view that certain expenses incurred by the Company in order to establish itself in new premises in lieu of those taken compulsorily ought to be thrown against the purchase-money or compensation received. The character of these expenses was imperfectly explained by the evidence before the Board. But, if we were confined to the materials before it, I should have great doubt as to the propriety of the allocation of the disbursements. But upon the further evidence given before me it is quite plain that the profits relied upon by the Company cannot be reduced by attributing the expenses in question to capital account. The case is thus restricted to the question whether the word "sale" in the proviso as it stood before the amendment of 1930 includes compulsory sale. I must confess that if it had not been for the subsequent amendment I should not have hesitated in giving an affirmative answer. Sale is not a word of precise technical import. In many contexts the essential idea it conveys is an agreement to transfer property for a valuable consideration. Often the valuable consideration intended is restricted to money. In other contexts agreement is not of the essence of the conception but the conversion of property into money or its realization is the notion sought to be expressed. Ever since the Lands Clauses Consolidation Act 1845 the alienation of property accomplished under its provisions has been regarded as an instance of sale. The very title under which the subject is discussed in legal compilations is compulsory purchase.

Stamp duty is levied upon the assurance of property as a conveyance or transfer on sale (Commissioners of Inland Revenue v. Glasgow and South-Western Railway Co.[1]), where it was not even argued that the conveyance did not answer this description. In Mason v. Stokes Bay Pier and Railway Co.[2] Wood V.C. (as he then was) said: "In this case the amount to be paid had been settled by the award, and a parliamentary contract had been made which could be enforced in this Court at the instance of either vendor or purchaser ... after notice given and the price fixed, the relation of the parties, as vendor and purchaser, was as fully constituted as in the case of a formal and regular agreement." And Swinfen Eady J. (as he then was), in In re Cary-Elwes' Contract[3], said: "It is well settled that in cases of compulsory purchase, after notice to treat and ascertainment of the price, a contract is established, enforceable in a Court of Equity, and with regard to which both vendor and purchaser can enforce specific performance (Adams v. London and Blackwall Railway Co.4(1850) [1850] EngR 716; 2 Mac. & G. 118; 42 E.R. 46.; Regent's Canal Co. v. Ware5(1857) [1857] EngR 551; 23 Beav. 575; 53 E.R. 226.). Following these decisions, it was held by Jessel M.R. in In re Pigott and Great Western Railway Co.6(1881) 18 Ch. D., at p. 150. that as specific performance of the contract, as a contract of purchase and sale, or sale and purchase, may be enforced, all the ordinary rules apply, unless you find some statutory enactment in the way." Many references will be found to the relationship established by notice to treat and ascertainment of the purchase-money in which it is called a quasi-contract, e.g., per Lord Watson in Tiverton and North Devon Railway Co. v. Loosemore[7], and as a purchase, e.g., by Lord Bramwell[8]. It is true that the Queensland statute under which the land was taken from the Company does not proceed by notice to treat but by a Gazette notice of acquisition. Perhaps in England the procedure by notice to treat produced a greater similarity in conveyancing practice to the completion of a voluntary sale, but the difference is not material in considering whether agreement is an essential element in the connotation of the word "sale," or whether it is capable of including alienation of property for a money sum, when the alienee alone possesses freedom of action; see per Lord Macnaghten in Williams v. Permanent Trustee Co. of New South Wales[9], where he says: "It is a compulsory purchase just as much in the one case as in the other." The common speech of lawyers in Courts of Equity justifies the assertion that the word is capable of the more extensive meaning, and the only question remaining is whether in this statute it should receive the more restricted construction. The subject with which the statute is dealing points unmistakably in the direction of the more extended meaning. It is directed to the discrimination between income profits and capital profits, but the object is to leave dividends derived from income or trading profits arising from the disposal of stock-in-trade and the like subject to tax and to exclude from taxation dividends derived from money into which property has been converted although not acquired for the purpose of resale. Broadly the distinction is between the recovery of fixed capital and circulating capital, and the detachment therefrom of the surplus over expenditure. The fact that the fixed capital is recovered by a compulsory conversion as distinguished by a voluntary conversion of the asset into money is quite irrelevant to the purpose of the Legislature. When trading stock was requisitioned in war time no one considered that the trader should exclude the proceeds paid to him by the Government from his profit and loss account; and I have no doubt that the ordinary accountant would put the sums down amongst the trader's "sales." Further, it is probable that the Commissioner would consider the transaction as a resale within the meaning of the present proviso. But the difficulty remains that the Legislature has, after the date of the transaction now in question, made an amendment of the proviso by, amongst other things, introducing the words "or compulsory resumption for public purposes." Further, the provision making the amendment is, by sec. 26 (5) of No. 50 of 1930, to apply to assessments of the financial year beginning on 1st July 1930 and subsequent years. From this it is argued that an alteration in the law has been made to take effect prospectively, thus amounting to a legislative acknowledgement that "sale" did not cover compulsory sale. Argument from subsequent legislative exposition of prior statutes is always hazardous. In this case the amendment at least shows clearly that the wider interpretation of the word "sale" gave effect to the policy of the enactment. All that can be logically inferred from the amendment is that the Legislature supposed that by its previous choice of expressions it had failed in its attempt to give effect to that policy. But no judicial decision existed to inspire that belief, which must have arisen either from apprehension or from a course of administrative practice. It is for the Courts to ascertain the meaning expressed in the enactments of Parliament, and, though no doubt the enactments of a subsequent Parliament may be a source of enlightenment, they can only control their actual meaning by declaratory provision. The Act of 1930 is far from being declaratory. It justifies no more than an inference that the Legislature regarded its previous statement of its intentions as open to so much doubt that a restatement was necessary.

For these reasons I am of opinion that compulsory acquisition is included in the word "sale" in the proviso to sec. 16 (b) (i.).

The Income Tax Assessment Act 1922-1927, sec. 16 (b), provided that where a dividend or bonus is paid wholly or exclusively out of the profits arising from the sale of assets which were not acquired for the purpose of resale at a profit, a member or shareholder shall not be liable to tax on that dividend or bonus.

It appears that certain land had been resumed under the City of Brisbane Improvement Act of 1916, and the question arises whether that resumption is a sale of assets within the meaning of the Income Tax Assessment Act already mentioned. A sale technically imports the conveyance or transfer of property or an agreement or other obligation to convey or transfer property for a price in money. The compulsory acquisition of lands under such Acts as the Lands Clauses Consolidation Act 1845 Eng. and the Lands Compensation Act 1928 of Victoria is well enough described as a sale and purchase once the price is ascertained. As Lord Hatherley L.C. said in Harding v. Metropolitan Railway Co[10]: "When the price is ascertained ... you have then all the elements of a complete agreement, and, in truth, it becomes a bargain made under legislative enactment between the railway company and those over whom they were authorized to exercise their power." Under the City of Brisbane Improvement Act, however, the Council is authorized to declare that any land required for the purposes of the Act has been taken by the Council, and, upon publication of a notice of resumption, the land becomes vested in the Council and the right of the person from whom the land is taken is converted into a claim for compensation under the Act. It is an exchange of land, made under legislative enactment, for money. Substantially the Act has provided the price at which the land is to be taken or resumed (Davies v. Collector of Imposts[11]; Commissioners of Inland Revenue v. Glasgow and South-Western Railway Co.[12]). Does the expression "sale of assets" require a definite contract of purchase and sale, or does it mean a parting with assets in the same manner as upon a contract of purchase or sale? The latter view, in our opinion, is the right one (Great Western Railway Co. v. Commissioners of Inland Revenue[13]). The Act looks to the substance of the matter, and is not concerning itself with technical definitions of the word sale. It would be strange indeed if the Income Tax Assessment Act 1922-1927, sec. 16 (b), applied to compulsory acquisitions of lands by means of a notice to treat under such Acts as the Land Compensation Act of Victoria and not to compulsory acquisitions by means of a notice of resumption under such Acts as the City of Brisbane Improvement Act. The alteration in the provisions of the Income Tax Assessment Act 1922-1927 by the Act 1930, No. 50, sec. 6 (b), does not affect this case, but it has been used in argument as an aid to construction of the words in the original Act. It is not, we think, a legitimate deduction, and in any case the implication that the Legislature was not expanding the meaning of the expression "sale of assets" is just as sound as that it was. Despite some argument to the contrary, the evidence now before us, which was not before the Board of Review, makes it clear in the present case that the dividends, the subject of this appeal, were wholly and exclusively paid out of the profits arising from the land resumed by the City of Brisbane Council, and it was not in contest that the land was not acquired for the purpose of resale.

Appeal allowed. Declare that the amount of £5,275 18s. 5d. received by the appellant by way of dividend from W. R. Smith & Paterson Ltd. is not part of the appellant's assessable income. Assessment discharged and remitted to the Commissioner for reassessment consistently with this declaration. Commissioner to pay the costs of this appeal.

Solicitors for the appellant, Morris, Fletcher & Cross, Brisbane, by Campbell, Campbell & Campbell.

Solicitor for the respondent, W. H. Sharwood, Crown Solicitor for the Commonwealth.

[1] (1887) 12 App. Cas. 315.

[2] (1863) 32 L.J. Ch., at p. 111.

[3] (1906) 2 Ch., at p. 148.

[4] [1850] EngR 716; (1850) 2 Mac. & G. 118; 42 E.R. 46.

[5] [1857] EngR 551; (1857) 23 Beav. 575; 53 E.R. 226.

[6] (1881) 18 Ch. D., at p. 150.

[7] (1884) 9 App. Cas. 480, at p. 501.

[8] (1884) 9 App. Cas., at p. 511.

[9] (1906) A.C. 249, at p. 252.

[10] (1872) L.R. 7 Ch., at p. 158.

[11] (1908) V.L.R. 272; 29 A.L.T. 233.

[12] (1887) 12 App. Cas. 315.

[13] (1864) 1 Q.B. 507.

High Court of Australia

Smith v Federal Commissioner of Taxation [1932] HCA 44; (1932) 48 CLR 178 (18 August 1932)

HIGH COURT OF AUSTRALIA