Palvestments Pty Ltd v Federal Commissioner of Taxation [1965] HCA 47; (1965) 112 CLR 661 (24 August 1965)

HIGH COURT OF AUSTRALIA

PALVESTMENTS PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1965] HCA 47; (1965) 112 CLR 661

Income Tax (Cth)

High Court of Australia
Menzies J.(1)

CATCHWORDS

Income Tax (Cth) - Income from dividends - Allowable deduction - Directly relating to income from dividends - Apportionment of deduction as between various income categories - Whether permissible - Calculation of rebate - Income Tax and Social Services Contribution Assessment Act 1936-1962 (Cth), ss. 46 (1) (3)*, 50 (a) (c)**.

HEARING

Sydney, 1965, July 8; August 24. 24:8:1965
APPEAL under the Income Tax and Social Services Contribution Assessment Act 1936-1962 (Cth).

DECISION

August 24.
MENZIES J. delivered the following written judgment:-
The fate of this appeal - as it was presented to the Court - depends upon a which the Commissioner has made is authorized by s. 50 of the Income Tax and Social Services Contribution Assessment Act. If it is, then the amount upon which the appellant's rebate under s. 46 is to be calculated is less than the amount of the dividends received, i.e. 13,573 pounds 19s. 4d., by the amount of the deduction made, i.e. 1,063 pounds. (at p662)

2. The appellant is a company which on 30th June 1962 held listed securities having the value of 216,121 pounds 18s. 6d. These were described in its balance sheet as "Trading Stocks on Hand (Shares in Public Companies at Cost or Under Market Value Listed on a prescribed Stock Exchange - Market Value, 30.6.62 (330,165 pounds)". The appellant's income for the year ended 30th June 1962 comprised 561 pounds 8s. 11d. interest and 13,573 pounds 19s. 4d. dividends. Its trading account for the year ended 30th June 1962 also showed as income an item of 925 pounds 4s. 10d. described as "Revaluation of shares". This was not income, and the revaluation had, I think, no purpose but to create a book entry which, with interest 561 pounds 8s. 11d., produced a so-called income of 1,486 pounds 13s. 9d., exclusive of dividends, to cover the company's expenses of 1,446 pounds 2s. 3d., of which 1,151 pounds 17s. 10d. was interest on overdraft and 294 pounds other expenses. The deduction of 1,446 pounds 2s. 3d. from 1,486 pounds 13s. 9d. produced a sum of 40 pounds 11s. 6d. which in the trading account was called "Net Profit on Trading". The Commissioner, notwithstanding the oddness of the return (including the balance sheet and trading account) was, it seems, prepared to make an assessment upon the figures there shown. (at p663)

3. Upon this appeal I was requested by both parties to decide, upon the basis of the figures in the balance sheet and the trading account, whether or not the Commissioner was justified in deducting from dividends (13,573 pounds 19s. 4d.) the sum of 1,063 pounds, being part of the interest on overdraft 1,152 pounds. In the circumstances, I have decided to follow this somewhat unsatisfactory course and to refrain from considering the proper basis of the taxation of the appellant if its listed securities are really trading stock to which ss. 28 and 31 of the Act apply. Nor do I speculate upon the way in which sales of such trading stock should be treated for taxation purposes. (at p663)

4. It was contended, for the appellant, that the company was essentially a share trader and that "the receipt of dividends incidentally happened, and unavoidably happened". Mr. J. R. Palmer, a member of the Sydney Stock Exchange and the managing director of the appellant, gave evidence to this effect - but I cannot adopt such a conclusion. I have no doubt that one of the reasons why the company purchased shares and fixed-interest securities was to obtain income. Dividends of 13,574 pounds per annum, like interest upon debentures and notes, did not come incidentally, nor were they of no importance. Indeed, the fact that this appeal has been instituted, involving a few pounds of rebate under s. 46, and the fact that the appellant purchased fixed-interest securities indicate how insubstantial is the contention that the company is concerned only to buy and sell securities for profit and cares nothing for income. (at p663)

5. However, dealing with the matter as requested, this is a case where, to use the language of s. 50 of the Act, "the assessable income is derived from more than one of the following classes of income, that is to say, income from personal exertion, income from property other than dividends, and income from dividends . . .". The assessment has been made on the footing that it is s. 50 (a) which governs the case, whereas the appellant's contention is that it is s. 50 (c). The case unquestionably falls within s. 50 (c) unless it is within s. 50 (a); and it is within s. 50 (a) only if 1,063 pounds of the overdraft interest relates directly to the dividend income of 13,574 pounds. (at p664)

6. On 30th June 1962 the company owned listed securities worth 216,121 pounds 18s. 6d., not all of which were shares. From its listed securities which were shares it received in dividends during the year ended 30th June 1962 the sum of 13,573 pounds 19s. 4d. On 30th June 1962 it owed 22,160 pounds upon overdraft, and during the preceding year it paid interest of 1,151 pounds 17s. 10d. upon its overdraft account. It appears that over the years some of the shares purchased by the company were paid for with moneys borrowed upon overdraft. Assuming that some part of what was owing upon overdraft on 30th June 1962 had been incurred to buy some of the shares which yielded dividends during the year ended 30th June 1962, how, upon this assumption, can it be said that any particular part of the interest paid upon the overdraft account during the year ended 30th June 1962 directly related to the dividends received in that year? The Commissioner has arrived at his figure of 1,063 pounds by a simple arithmetical calculation. Thus, because of the total income of 15,061 pounds, a sum of 13,574 pounds was received as dividends, the proportion of the interest paid (i.e. 1,152 pounds) which directly related to dividends was calculated as follows:-

13,574 pounds
_______ x 1,152 pounds = 1,063 pounds.
15,061 pounds

I have not been able to find any justification in law for making this arbitrary appropriation. How arbitrary and unrealistic is such a method of apportionment is perhaps best illustrated by noticing that, without any justification, it throws 91 pounds of interest against the item "Revaluation of shares 925 pounds". It seems to me that what the Commissioner has done here is not substantially different from what was unsuccessfully attempted in a number of earlier cases: North Australian Pastoral Co. Ltd. v. Federal Commissioner of Taxation [1946] HCA 17; (1946) 71 CLR 623 ; Commercial Banking Co. of Sydney Ltd. v. Federal Commissioner of Taxation [1950] HCA 15; (1950) 81 CLR 263 ; Australian Machinery & Investment Co. Ltd. v. Deputy Federal Commissioner of Taxation [1946] HCA 65; (1946) 8 ATD 81 ; and Modern Permanent Building and Investment Society (In Liquidation) v. Federal Commissioner of Taxation (1958) 98 CLR 187 . (at p665)

7. It was argued for the Commissioner that, as in Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [1963] HCA 61; (1963) 111 CLR 106 it was decided that the phrase "income tax deductions allowable" in s. 46 (3) refers in anticipation to the provisions of s. 50 (a), the earlier cases such as North Australian Pastoral Co. Ltd.'s Case [1946] HCA 17; (1946) 71 CLR 623 have lost some of their authority, but I do not see any basis for this. In North Australian Pastoral Co. Ltd's Case [1946] HCA 17; (1946) 71 CLR 623 , the attempt to apportion the general expenses of conducting the business and to attribute a proportionate part to dividends failed, Dixon J. (as he then was) saying: - " . . . the substance of the contention is that a reasonable estimate of the proportion of the deductions allowed as the operating expenses of the company which ought to be attributed to the dividends is one per cent upon the amount of the dividends and that it is unnecessary that there should be any specific connexion between the dividends and the expenses. I do not so read sub-s. (3) of s. 46" (1946) 71 CLR, at pp 635, 636 . I cannot see how the decision in Rowdell's Case [1963] HCA 61; (1963) 111 CLR 106 that a deduction or part of a deduction relating directly to income from dividends (s. 50 (a)) is a deduction allowable from income from dividends (s. 46 (3)) assists the Commissioner's attempt to apportion interest in a case where I am not able to infer that any part of the interest paid in the year ended 30th June 1962 related directly to the dividend income of that year or any previous year of income. I have been puzzled by the bracketed words in s. 50 (a) " (whether of the year of income or of a previous year of income)" but, so far as I can see, these words were brought into the section in 1938 because the Board of Review had rejected the Commissioner's practice of allowing deductions in such a way as to meet some difficulty occasioned by the fact that State tax payable in one year could only be an allowable deduction for Commonwealth tax in the next year. However this may be, the interest paid here upon overdraft in the year ended 30th June 1962 did not relate to the dividend income of a previous year of income any more than, in my view, it did to the dividend income of the year of income. (at p665)

8. In my opinion, therefore, upon the basis upon which this case has been heard, the appellant is entitled to succeed and the assessment appealed from should be remitted to the Commissioner for variation to give effect to this judgment that no part of the sum of 1,151 pounds 17s. 10d. allowed as a deduction for interest on overdraft related directly to the dividend income of 13,573 pounds 19s. 4d. (at p665)

ORDER

Appeal allowed with costs. Assessment of taxpayer to be remitted to the Commissioner for variation to give effect to the judgment that no part of the sum of 1,151 pounds 17s. 10d. allowed as a deduction for interest on overdraft related directly to the dividend income of 13,573 pounds 19s. 4d.