Reid v Federal Commissioner of Taxation [1947] HCA 4; (1947) 73 CLR 282 (19 March 1947)

HIGH COURT OF AUSTRALIA

Reid Appellant; and Federal Commissioner of Taxation Respondent.

H C of A

19 March 1947

Latham C.J., Starke and Dixon JJ.

Tait K.C. (with him H. Walker), for the appellant.

Coppel K.C. (with him Gilbert), for the respondent.

Tait K.C., in reply.

The following judgments were delivered:—

Latham C.J.

The questions raised by this case depend principally upon the interpretation of ss. 23 (q), 25 and 44 of the Income Tax Assessment Act 1936-1944. The taxpayer (who is resident in Australia) has received dividends from Canadian companies which did not carry on any operations in Australia. The dividends payable to him by the Canadian companies are taxed to the extent of fifteen per cent under Canadian legislation. The amount of tax is retained by the companies and paid by them to the Canadian revenue authorities. Accordingly this income of the taxpayer is not exempt from income tax in the country where it is derived. Section 23 (q) provides that:—

The following income shall be exempt from income tax:—

......(q)

income derived by a resident from sources out of Australia, where that income is not exempt from income tax in the country where it is derived.

Upon the natural construction of those words there is no doubt that the income in question falls within them. It is derived entirely from a Canadian source. It is not exempt from income tax in the country where it is derived. Prima facie, therefore, it is not subject to tax.

Section 25 provides:—

The assessable income of a taxpayer shall include—

(a)

where the taxpayer is a resident—the gross income derived directly or indirectly from all sources whether in or out of Australia; and

(b)

where the taxpayer is a non-resident—the gross income derived directly or indirectly from all sources in Australia,

which is not exempt income.

Accordingly, in order to discover the assessable income of a taxpayer, you ascertain his gross income and then ask whether it is exempt or not. The application of these sections by themselves would appear to produce the result that this income is non-taxable. But the Commissioner relies upon s. 44, which provides:—

(1)

The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall, subject to this section—

(a)

if he is a resident—include dividends paid to him by the company out of profits derived by it from any source; and

(b)

if he is non-resident—include dividends paid to him by the company to the extent to which they are paid out of profits derived by it from sources in Australia.

Sub-section (2) of s. 44 provides for exceptions from sub-s. (1). The contention for the Commissioner is that s. 23 (q) is a general provision but that s. 44 consists of special provisions dealing with dividends which should be held to prevail over the general provisions. It is pointed out that in s. 44 (1) (a), which applies to a resident taxpayer, there is a specific provision that his assessable income shall include dividends paid to him by a company whether the company is resident or non-resident and whatever the source of the profits of the company may be. If that provision is to be regarded as a provision specifically applicable to dividends, to the exclusion of other provisions, then these dividends should be included in the assessable income of the taxpayer.

I can see no reason for describing s. 44 as a specific provision excluding or overcoming other provisions which reason would not be as applicable to s. 23 (q). The provisions in s. 23 are very specific, applying to particular specified cases, and I am unable to see any reason for regarding s. 44 as more specific than s. 23 (q). The provision in s. 23 that "the following income shall be exempt from income tax" is a provision which presumes that, apart from the provisions contained in s. 23, the income in question would fall within the other provisions of the Act making income taxable. The very object of s. 23 is to exclude from taxable income income which otherwise would have been taxable. Accordingly I see no reason for failing to give s. 23 (q) its full meaning according to the natural sense of the words.

An argument has been submitted upon s. 72A, which, it was contended by Dr. Coppel, would be quite unnecessary if the view of the taxpayer submitted in this appeal were accepted. In my opinion, Mr. Tait has provided an answer to that suggestion by reference to the case of a non-resident taxpayer paying tax in a foreign country. In that case a deduction is allowed and there is scope for the operation of the section upon the interpretation of s. 23 (q) and s. 44 which I have stated. In my opinion, the questions in the case should be answered in the affirmative, that is, that the amounts are exempt.

Starke J.

I agree.

Dixon J.

I agree.

Questions answered in the affirmative and case remitted to Chief Justice.

Solicitor for the appellant, Bernard Nolan.

Solicitor for the respondent, H. F. E. Whitlam, Crown Solicitor for the Commonwealth.