sane tH be. * CATCHWORDS INCOME TAX — Assessable income — Dividend paid by company limited by guarantee without a share capital - Whether dividend a return of capital or distribution of profits within para 44(1) (a) of the Income Tax " ABsessmene Act 1936 — Whether para. 44(1) (a) applies oniy to revenue profits. - Income Tax Assessment Act 1936 ss. 6, 44, 47. SLATER HOLDINGS" LIMITED v. THE COMMISSTONER' OF TAXATION ° FOR THE COMMONWEALTH OF AUSTRALIA Wo. G 175 of 1981 5 MAY, 1983 AT SYDNEY MCGREGOR, LOCKHART & FITZGERALD JJ, "a IN THE FEDERAT; COURT OF AUSTRALIA ) ) WEW SOUTH WALES DISTRICT REGISTRY }) No. G 175 of 1981 ) GENERAL DIVISION ) * ON APPEAT;, FROM THE SUPREME COURT "OF NEW SOUTH WALES BETWEEN: SLATER HOLDINGS LIMITED Appellant AND: THE COMMISSIONER OF TAXATION FOR ° THE COMMONWEALTH OF AUSTRALIA Respondent ORDERS JUDGE MAKING ORDERS: MCGREGOR, LOCKHART & FITZGERALD JJ. DATE OF ORDER: 5 MAY 1983 WHERE MADE: SYDNEY ' THE' COURT ORDERS' THAT:~- 1. The appeal be allowed. 2. The Orders of the Supreme Court of New South Wales of 5 November 1981 be set aside except insofar as they order the appellant to pay the respondent's costs of the initial hearing before that Court, ey 2. The amended assessment number 33.143/70 issued on 10 August 1971 be remitted to the respondent so that it may be amended accordingly. / The respondent pay the appellant's costs of this appeal. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G 175 of 1981 ) ) GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES BETWEEN : SLATER HOLDINGS LIMITED Appellant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: McGregor, Lockhart and Fitzgerald JJ. Date: 5 May 1983 REASONS FOR JUDGMENT McGregor J. SLATER HOLDINGS LIMITED (""appellant") appeals from a decision of the Supreme Court of New South Wales which had held that a so .called dividend received by it from OGG HOLDINGS LIMITED ("Ogg Holdings") was assessable income. The history of the matter may be conveniently stated. On 10 September 1959 and at the instance of william ogg Senior, Ogg Holdings, pursuant to the Companies Act 1936 ("the Companies Act") of New South Wales was incorporated as a company limited by guarantee but having no share capital. Mr. Ogg Senior and his wife were its governing directors, and they and their children, William Ogg Junior, Douglas Ogg and their daughter, now Mrs. Enid Slater, were its members. In approximately January 1960 it purchased from Ogg senior certain freehold lands for $77,105 which amount was raised as a credit to his loan account in the books of Ogg Holdings. On or about 2 June 1960 that company paid him $36,000, thereby reducing his loan account to $41,105; at the same time as is recorded in the minutes of a Directors' meeting of 2 June 1960, he made a gift which the company agreed to accept of $36,000. It is common ground that the gift was unconditional. It is, I understand, referred to in the books of Ogg Holdings as is reflected in that company's Return of Income for the year ended 30 June 1960 under the heading "Liabilities" as "Membership Funds". Counsel for the appellant submitted that the amount given may well have been so treated as being the initial capital of the company. Ogg Holdings built, operated and eventually sold a shopping centre in a Sydney suburb. From the sale a capital profit was realised which, with perhaps other capital profits and losses, is reflected 1n the balance sheet of Ogg Holdings dated 30 September 1969, again under the larger heading of "Liabilities" and as part of the total entry there, thus - "Members Funds $36,000.06 Capital Profits Reserve 36,990.96 3 Profit & Loss Appropriation Account 7,140.31 TOTAL MEMBERS FUNDS $80,131.27 Mr. Ogg senior and his wife died. Their children decided to distribute to themselves, one third each of the assets in Ogg Holdings. To effect this Mrs. Enid Slater's company (the taxpayer) became a participating member of Ogg Holdings as did Mr. Douglas Ogg's company, Ogg Investments Limited. At the same time Mrs. Enid Slater and Mr. Douglas Ogg resigned as members of Cgg Holdings. This is evidenced in Minutes of a Meeting of Directors of that company held on 8 December 1969, the relevant entry reading - "IT WAS RESOLVED A. 1. That the application of Slater Holdings Limited for admission as a participating member of the Company be approved with the classification of an "S" Class member with full rights as an ordinary member. 2. That the application of Cgg Investments Limited for admission as a participating member of the Company be approved with the classification of an "on Class member with full rights as an ordinary member. 3. That the resignation of Douglas Ogg as a member of the Company be hereby accepted. - 4. That the resignation of Enid Isabella Slater as a member of the Company be hereby accepted. 5. That the following be admitted as non-participating member of the Company - Douglas Ogg Enid Isabella Slater, and Barry John McDonald and that all other non-participating Members of the Company be and they are hereby removed from membership. B. That the Company repay to the estates of the late W. & B. Ogg all moneys owing to them by the Company. Cc. That the Company declare the following dividends out of its capital - To Ogg Investments Limited $26,900.00 To Slater Holdings Limited $26,900.00" The distribution to two of the three members was referred to in relevant Minute at the Members' Meeting of Ogg Holdings on 15 December 1969 reading - "IT WAS RESOLVED that the dividend of $26,900 to Ogg Investments Limited and $26,900 to Slater Holdings Limited as recommended by the Directors to be paid out of the Capital of the Company be hereby adopted and the said dividends paid forthwith." It 1s noted that Ogg Holdings was not wound up. The entitlement of William Ogg junior remained with that company. As to "ordinary" members and "non participating" members, see para.4 Articles of Association of Ogg Holdings. In its Return of Income for the year ended 30 June 1970, the taxpayer referred to the receipt of the sum of $26,966 as follows - a "DIVIDENDS AND DISTRIBUTIONS RECEIVED" Ogg Holdings Limited:- Taxable - From accumulated Appropriation Account $2,569.68 Non-taxable:- Return of Members Funds 12,000.00 Dividend ex Capital Profits Reserve 12,330.32" The Commissioner's first assessment dated 19 April 1971 did not dispute the claim of the taxpayer as to the character of receipt; but in an amended assessment relying on s.170 of the Income Tax Assessment Act 1936 and issued on 10 August 1971 there was included as taxpayer's assessable income the distribution from Ogg Holdings of the sum of $12,330.32 and $12,000.00 respectively. The Adjustment Sheet includes - "Taxable income assessed $3,056.60 Amended to include distributions from Ogg Holdings Ltd. "Capital Profit Reserve Account" $12,330 and "Members Funds" $12,000 (being ' capital profit by way of gift) constitute dividends as defined by section 6(1) of the Inccme Tax Assessment Act and are included in the assessable inccme under section 44(1)(a) Add 24,330.00 Taxable income as amended $27,386.00" To this amended assessment the taxpayer objected and upon disallowance thereof appealed to the Supreme Court, which rejected any entitlement of the Commissioner, in the circumstances, to issue an amended assessment. This decision was reversed by a Full Court of this Court which held that the Commissioner was entitled to issue an amended assessment. The e Supreme Court considered the matter again. It held that so much of the dividend as represented the two items of $12,330.32 and $12,000.00 was paid to the taxpayer by Ogg Holdings out of capital profits derived by it (s.44(1)(a) of the Act) and therefore was correctly treated by the Commissioner as part of the taxpayer's assessable income. From that judgment the taxpayer has appealed to this court. The parties are not in dispute as to objective facts, but as to the correct inferences therefrom or construction thereof. The question is whether each of the two sums referred to e.g. in the Adjustment Sheet $12,330.32 and $12,000.00 are to be described as a dividend out of profits within the meaning of s.44(1)(a) on which alone the Commissioner relies and which 1s set out below. In s.6(1) of the Companies Act, 1936 N.S.W. ("the Companies Act") (unless the context otherwise requires) "Company limited by guarantee" was defined as - "a company formed on the principle of having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up." Sub-s.(2) thereof of s.9 providing for the formation of Companies, reads — "Such a company may be either - (b) a company having the liability of its members limited by the memorandum to such amount as the member may respectively thereby undertake to contribute to the assets of the company in the event of it being wound up; or Section 11 read - "(1) In the case of a company limited by guarantee the memorandum must state —- (a) the name of the company, with "Limited" as the last word in its name; (bo) the objects of the company; (c) that the liability of the members 1s limited; (d) that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member, or within one year after he ceases to be a member, for payment of the debts and liabilities of the company contracted before he ceases to be a member, and of the costs, charges and expenses of winding up and for adjustment of the rights of the contributories among themselves, such amount as may be required, not exceeding a specified amount ; It its clear that the appellant company carried on as a trading corporation; this 1s not commonly the role of a company limited by guarantee. In such a company the members have the advantage over the shareholders in that, not having had. to provide initial capital, any liability they may incur will only crystallise in a winding up where the state of accounts require contribution from them up to the amount which they have undertaken to provide. It is noted in "Australian Company Law and Practice" (C.C.H. Australia Limited) p.7404, that the Jenkins "h Committee in its 1962 report on the U.K. Companies Legislation commented — "We have been informed that guarantee companies with a share capital are very rarely registered and it has been suggested that the Act should no longer provide for them to be registered. We agree that if a company is formed with the intention of making pro rata distributions of profits to its members it seems inappropriate that it should be able to register as a company limited by guarantee." Pursuant to the Memorandum of Association of this company, the members each undertook to contribute to the assets of Ogg Investments for payment of debts and liabilities, in the event of its being wound up whilst they were members or within one year thereafter, such amount as would be required not exceeding one pound. Article 42 reads - "Subject to the rights of the members of any class and subject to such provisions as may from time to time be made as to reserves the profits of the Company which shall from time to time be determined to divide in respect of any year or other period may be distributed by way of dividend amongst the members according to their respective rights thereto and in the proportions affecting the same." We must decide this appeal lacking the assistance of any relevant authorities relating to a company limited by guarantee without a share capital in circumstances such as these. The fundamental question then appears to be accepted by both parties to this appeal i.e. as to the operation of s.44(1)(a) of the Act which I set out below, underlining the crucial words - "(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, to the next' succeeding section and to section one hundred and twenty-eight D of this Act - (a) aif he is a resident - include dividends paid to him by the company out of profits derived by it from_any source; and In the Act as it was in 1969, these were the following definitions (unless a contrary intention) - company" includes all bodies or associations corporate or unincorporate, but does not include partnerships; "dividend" includes - (a) any distribution made by a company to any of its shareholders, whether in money or other property; (b) any amount credited by a company to any of ats shareholders as shareholders; and "shareholder" includes member or stockholder; "shares", in relation to a company, means shares in the capital of the company, and includes stock;" It is common ground that the sum paid to the taxpayer by Ogg Investments was a "distribution" (s.6); and I assume that "shareholder", which includes "member", could describe the taxpayer. Does s.44(1)(a) properly describe or comprehend the amount or any part of 1t which was paid to the taxpayer? If it or any part of it is "....out of profits derived by it from any source...." then, with respect, I agree that the sum of $26,300 10. otherwise answers the description of a distribution made by Ogg Holdings to the taxpayer and is thus a dividend within the meaning of s.44(1)(a). The cases (1n which the Commissioner was a party) of Webb (1922) 30 C.L.R. 450, Stevenson (1937) 59 C.L.R. 80, Thornett (1938) 59 C.L.R. 787, Blakeley (1951) 82 C.L.R. 388, Uther (1965) 112 C.L.R. 630 and Harrowell (1967) 116 C.L.R. 607 were all concerned with companies with a share capital. of these, Webb, Stevenson, Blakeley, and Harrowell were concerned with a winding up, at least attempted or de facto; and Thornett and Uther with a reduction of capital. Once there is a (voluntary) liquidation the directors no longer have power to declare a dividend; "1t 1s a misapprehension after the liguidator has assumed his duties, to continue the distinction between surplus profits and capital": Inland Revenue Commissioner v. Burrell (1924) 2 K.B. 52 at p.63 per Pollock M.R. And in Thornett and Uther there was no detachment of profits from share capital. In Uther Menzies J. at p.644 said:- "A return of paid-up capital or a payment off of share capital - whichever form of words be used - is, of course, a distribution by a company to its shareholders but, whether or not what 1s distributed exceeds the nominal amount by which the capital "is reduced, there is always but a single distribution and all that is distributed has the one character, viz. a return of paid-up capital or a payment off of share capital." I mention these matters because, with respect, I suggest there is not any definitive assistance to be found from the cases ll. cited; and there is no reason which precludes a court from examining, if the evidence permits, the components of the sum said in this appeal to be, or to be in part, income. The significant issue remains as to the interpretation of s.44 and to determine with the assistance of the records of Ogg Investments and the taxpayer's return the nature of the payment. I note the assertion in the resolution quoted that the ",...out of its capital." payment is to be made by Ogg Holdings The company limited by guarantee has no capital; yet perhaps 1t could be said to have funds which might be described as "fixed" or "circulating", capital as opposed to accumulated revenue or capital profits. (cf. Industrial Equity Limited v. Blackburn (1977) 137 C.L.R. 567 at p.576 per Mason J). In a company with share capital the profits may at some stage by some formal act of the company be applied to replace a loss of paid up capital. See Glenville Pastoral Company Pty. Limited (In Liguidation) v. The Commissioner of Taxation; (1963-64) 109 C.L.R. 199 at pp.207,208; Principles of Income Tax Law in Australia (Parsons and Kenneally) 1979 Chap.X1l1l p.57. Then they will lose the character of profits. But here there has been no equivalent act and there is no question of the "dividend" being 1n the common law sense a sum of profits "....detached released or liberated, leaving the share intact as a piece of paper." because there is no share to be left intact and no capital in the ordinary sense. See Stevenson at p.99. 12. In company law (as opposed e.g. to bankruptcy law) the word "dividend" implies the existence of a share whose integrity is intact after the payment. The emphasis, I suggest, in s.44(1)(a) us to describe the dividend by reference to the actions of the company. The dissenting judgment in Uther by Kitto J. at p.633 so indicates, though there in the context of a reduction of share capital. His Honour said at pp.636,637 - "TI turn to the second question, where the distribution 1n the present case, so far as it was in excess of the paid-up capital returned, was paid by the company out of profits. If, by a decision binding within the structure of the company, a fund of profits had been made the source for payment of the excess of the amount distributed in the reduction of capital over the amount of the reduction, it could hardly have been doubted, I should have thought, that within the meaning of s.44(1) (a) the excess was a distribution paid by the company out of profits derived by it. There was in fact no such decision; but the Supreme Court's approval of the reduction necessarily implies that the assets of the company remaining after the reduction were sufficient to provide for the paid-up capital that was not paid off; and the figures before the Court in the present appeal point convincingly in the same direction. Indeed it seems obvious that the moneys distributed on the reduction of capital, so far as they exceeded the amount paid up on the cancelled shares, consisted of profits which the company had derived. Whether capital profits or trading profits it is not material to inquire. the fact that the excess was not distributed separately from the share capital returned does not seem to me a ground for saying that there was not a distribution of the excess out of profits within the meaning of s.44(1): cf. Stevenson's Case." 13. His Honour's judgment implies that s.44 - "....turns away from the nature of the receipt and looks only at the source from which the company has made the distribution." See also per Latham C.J. in Blakeley's case at p.397; Principles of Income Tax Law 1n Australia (supra) at p.60. In order to decide whether the sum (or any part of 1t) paid by Ogg Holdings to the taxpayer is "out of profits", 1t is first to be noted that no assistance is derived from the deeming provision in s.44(1B) which refers only to a company with a share capital. So it is necessary to attempt to discover otherwise if the amount paid, sa1d in the Resolution earlier mentioned to have been paid "out of its capital" was so paid; or "out of profits" as is contendd for by the Commissioner. In Principles of Income Tax Law in Australia (supra) Chap.X11l p.65 it is stated - & "The phrase "paid out of profits" in s.44 would appear to express accounting ideas, though there is a recurring disposition by lawyers to endeavour to trace revenue receipts into specific assets and thus find profits in specific assets. The disposition 1s more evident when it 1s "income" which the lawyer seeks to trace. Thus the judgment in Glenville Pastoral Co. Case (1963) 109 C.L.R. 199; 9 A.I.T.R. 118' 13 A.T.D. 196 refers to a "distribution of moneys which have been derived by the company as income". Clearly it 1s impossible to trace a profit, for profit involves a balance of receipts and outgoings. It may be possible to trace income, though, it will be seen later, the point of the exercise may be questioned." 14. We ought not to yield here to such discouragement and, speaking only for myself, I would not accept the argument for taxpayer that the payment of $24,330 was a distribution of one third of "the capital" represented as members' funds. We are not here considering either a winding up or a company with capital or any extinguishment of the rights attached to any share. Nor do I consider that s.376 of the Companies Act 1936 has any part to play here. The section, as I understand it, emphasises the wisdom of maintenance of the integrity of capital in a company with share capital for the protection of creditors rather than insisting that dividends be paid from profits. See Australasian Oil Exploration Limited v. Lachberg (1959) 101 C.L.R. 119 at p.132 where it 1s said - "To have adopted either of these courses would have offended against "the fundamental principle of company law that the whole of the subscribed capital of a company with limited liability, unless diminished by expenditure upon the company's objects (or, of course, by means sanctioned by statute) shall remain available for the discharge of its liabilities" (per Kitto J. in Davis Investments Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) (10958) 100 C.L.R. 392 at p-413. This principle 1s beyond question and it is unnecessary to refer to the many authorities which have restated it over many years." In Verner v. General and Commercial Investment Trust [1894] 2 Ch. 239 at p.266, Lindley L.J. said - "The law is much more accurately expressed by saying that dividends cannot be paid out of capital, than by saying that they can only be paid out of profits." i5. See generally the Industrial Equity case (above) and Marra Developments Ltd. v. B.W. Rofe Pty. Ltd. [1977] 2 N.S.W.L.R. 616 at p.628 et seq. Anyway, we do not have any shareholders here; and creditors apparently were generously safeguarded by the guarantee provisions in the Memorandum. So it is convenient now to consider the nature of the payment or payments made. With respect, it may be correct to say that they were paid and received by the appellant in satisfaction of and by way of replacement of its interest as a participating member; though I would not agree that it received its aliquot proportion of the net fund without distinction as to the source of its components. There was, I suggest, a clear distinction shown in the items in the taxpayer's return; so much so that one of the components ($2,569) anitially separately considered by the Commissioner, is not the subject of appeal, and, in arguments advanced by the taxpayer, is not sought to be brought back to the total receipt, 1.e. as part of a sum of $26,900. Furthermore, from the entries in the balance sheet of Ogg Holdings the amount from which the payment was made to the taxpayer is clearly adentifiable and, in turn, explicitly set out in the appellant's return. The Articles e.g. s.42, s.43 and s.53 recognize there may be separate payments. In Brogan v. Staffordshire Coal and Iron Co. Ltd. [1963] 1 W.L.k. 905 the distribution was by a company limited by guarantee but which went unto liquidation. The speech of Lord keid seems to emphasise (p.91G) that - 16. "whatever 1s distributed in liquidation is capital whatever may have been its source." To the same effect are the words of Lord Evershed pp.915, 916, 917 and Lord Jenkins e.g. at p.918; and particularly in his reference at p.920 to the judgment at first instance of Plowman J. See also per Lord Hodson at p.921. But here there was no liquidation. I accept that the word "profits" in s.44(1)(a) ought not be read as if it were qualified by the words "revenue" or "trading", and that Harrowell (supra) should not be read as saying more than that the word "profits" in the section includes revenue profits. I agree with the majority that the cases of McNeil v. Federal Commissioner of Taxation in Ratcliffe and McGrath's Income Tax Decisions of Australasia (1891-1927) at p-35 and Houghton v. Federal Commissioner of Taxation (1957) 96 C.L.R. 516 are of limited value; but they are not against the view I will ultimately take. Accordingly, as there is no winding up followed by a distribution of a conglomerate sum or the extinguishment of a share by any sum 1t represented; and, further, in the total sum paid to the taxpayer, as there was clearly distinguished how the entitlement was made up, I consider the components of the sum paid to the taxpayer may be looked at individually. Of the three sums, there 1S no issue about the first, viz. $2569.68. As to the second, $12,000, being portion of a gift, I am unable to see how 1t could answer the description "profits...." "derived .... " 17. The first 1s well accepted as a word of somewhat indeterminate meaning+ see authorities already cited and In re Income Tax Acts (No.2)1930 V.L.R. 233 at p.238 per Irvine C.J. at p.243 et. seq. per Macfarlan J. Yet the isolated gift of $36,000 by Mr. Ogg senior seems to me when received by the company to be an addition more akin to capital than either profits, or, for that matter, income. I would add that in Principles of Income Tax Law in Australia Chap.Xlll the authors refer to profits as being a - ",...conception of company law and accounting inventions" I note that the gift was described in the relevant balance sheet as "Membership Funds". See also Principles of Company Law (Ford) 3rd Ed. para.1009. The evidence of Mr. Cameron does not, I suggest, recognize that in determining profits any increase of net tangible assets should be calculated as suggested by the words of Macfarlan J. (supra). The learned judge at first instance did not comment on this evidence which, anyway, was not precisely directed to the issues in this appeal. Nor was Mr. Lee's evidence referred to. In the circumstances here, and lacking the assistance of direct authority, I consider that of the two sums with which we are concerned, the return to the taxpayer of the proportion of the gift by Mr. 'Ogg to Ogg Holdings is the return of capital and 18. not in any sense an amount "paid....out of profits"; but that the sum of $12,330.32 described as - "Return of Members Funds Dividends ex Capital Products Reserve" is a dividend within the meaning of s.44(1)(a). So, ln respect of the sum of $12,000, I would uphold the appeal; and in respect of the sum of $12,330.32, dismiss it. As I have the misfortune to differ from my brothers, it is not appropriate to discuss further any form of order; except to say that had I agreed with them, I would join in the order they propose. | certife that this and the seventeen preceding pages are a true cony of the Reasons for Judgment herein of his Honour Mr. Justice McGregor. oft. W Vs festa Associate Dated: 4/- 5° FS IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NO. G 175 OF 1981 ) ) GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES BETWEEN : SLATER HOLDINGS LIMITED Appellant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: MCGREGOR, LOCKHART AND FITZGERALD JJ. 5 May, 1983 REASONS FOR JUDGMENT LOCKHART & FITZGERALD JJ. This 1s an appeal from a judgment of the Supreme Court of New South Wales. The Supreme Court held that part of a dividend paid by Ogg Holdings Limited ("Ogg Holdings") to one of its members, the appellant Slater Holdings Limited ("the taxpayer"), was paid out of the capital profits of Ogg Holdings and thus constituted assessable income of the taxpayer under para. 44(1)(a) of the Income Tax Assessment Act 1936 ("the Act") for the year of income ended 30 June 1970. Ogg Holdings was incorporated on 10 September 1959 under the Companies Act 1936 (N.S.W.) as a company limited by guarantee and not having a share capital. It was established by William Ogg Senior who, together with his wife, were its governing directors. Mr. Ogg Senior, his wife and three children (a son wWalliam Ogg Junior, a son Douglas Ogg, and a daughter Mrs. Enid Slater) were its members. In or about January 1960 Ogg Holdings purchased from Mr. Ogg Senior real estate at West Pennant Hills, Sydney for the sum of $77,105.00, and a credit was raised to his loan account in an equivalent amount in the company's books. On 2 June 1960 a meeting of directors of Ogg Holdings was held where it was resolved that it repay to Mr. Ogg Senior $36,0UU.00 in partial reduction of his loan & «unt. It was also resolvec et that meeting to accept an offer of Mr. Ogg Senior to give $36,000.40 to Ogg Holdings. The minutes cf the meeting record that Mr. Ogg Senior handed the secretary a cheque and that the secretary was instructed to deposit it to the credit of Ugg Holaings' banking account. It 2S common ground that Mr. Ogg Senior gave the sum ef $36,000.00 to Ogg Holdings absolutely and unconaitionally. The auditor of Ogg Holdings, a Mr. A. J. Lee, raised the gift in the books of Ogg Holdings as members' funds. Cgg Holdings' balance sheet 4s at 30 June 1960 and later balance sheets record the gift of $36,000.00 under the heading "Liabilities" as "members funds". Ogg Holdings constructed and operated a shopping centre on the land at West Pennant Hillis. It later sold the land and shopping centre and made a capital profit. Various other transactions resulted zn other capital profits or losses. Amounts were carried to a Capital Profits Reserve which was also included in the liabilities recorded in the balance sheet of Ogg Holdings. As at 30 September 1967 that balance sheet showed under the heading "Liabilities":- t "Members Funds $36000 - 00 Capital Profits Reserve 36990 - 96 Profit and Loss Appropriation Account 7140 - 31 Total Members Funds $60131 - 27" As at December 1969 Mr. Ogg Senior and his wife were deceased and Ogg Holdings was under the control of his three children. They decided that, as Ogg Holdings was of no further use to them as a family company, its assets should in effect be distributed as to 1/3rd to Mr. William Ogg Junior, 1/3rd to Mr. Douglas Ogg and 1/3rd to Mrs. Enid Slater. This was to be achieved by Mrs. Slater's company (the taxpayer) becoming a participating member of Ogg holdings and Couglas Ogg's company (Ogg Investments Limited) also becoming a participating member, and by 1/3rd of the assets of Ogg Holdings being distributed to the taxpayer and 1/3rd to Ogg Investments, leaving Mr. William cgg Junior as the only remaining participating member af Ogg Holdings. Under the Articles of Association of Ogg Holdings membership is divided into "ordinary members" and "non-participatang members". A person may cease to be a member of Ggg Holdings upon his resignation in writing being accepted by the Board of Directors member, (Article 6). A other than an ordinary member, shall cease to be a member upon his being removed from membership for any reason or without reason by the Board of Directors (Article 7). December "nA l. At a meeting of the directors of Ogg Holdings held 1969 it was resolved as follows:- That the application of Slater Holdings Limited for admission as a participating member of the Company be approved with the classific1ration of an "s" Class member with full rights as an ordinary member. That the application of Ogg Investments Limited for admission as a participating member of the Company be approved with the classificiation of an "o" Class member with full rights as an ordinary member. That the resignation of Louglas Ogg as a member of the Company be hereby accepted. That the resignation of Enid Isabella Slater as a member of the company be hereby accepted. That the following be admitted as non-participating members of the Company:- Douglas Ogg Enid Isabella Slater, and Barry John McDonald and that all other non-participating members of the Company be and they are hereby removed from membership. . That the Company repay to the estates of the late W. & B. Ogg all moneys owing to them by the Company. That the Company aeclare the following dividends out of its capital:- To Ogg Ivestments (sic) Limited $26,900.00 To Slater Holdings Limited $26,900.60" on 8 The reference in Resolution B to the estates of the late W. and B. Ogg is to the estates of the late Mr. Ogg senior and his wife. Although Resolution C refers to the capital of Ogg Holdings, in fact it has no share capital. A meeting of the members of Ogg Holdings was held on 15 December 1969 and all members, participating and non-participating, were present. The following resolutions were passed:- "TT WAS RESOLVED that the dividend of $26,900 to Ogg Investments Limited and $26,900 to Slater Holdings as recommended by the Directors to be paid out of the Capital of the Company be hereby adopted and the said dividends paid forthwith. IT WAS FURTHER RESOLVED that the following Resolution be adopted as a Special Resolution of the Company: 'That Article 25 paragraphs 1 and 2 of the Articles of Association be deleted and the following article be adopted in its place: 25. (1) (2) William Ogg and Valerie Amy Ogg shall be Directors of the Company and shall remain in office until they die or resign. The said william Ogg and Valerie Amy Ogg shall jointly and severally be Governing Directors of the Company for and during his or her lifetime or until he or she shall resign with power by nomination in writing for the surviving or remaining one of them to appoint a Governing Director in his place for such period as he shall think fit and in like manner for him to remove such Governing Director and from time to time to remake and revoke such appointment as he shall think fit." (pp. 38 and 39 of 2nd appeal book). The dividends of $26,900.00 each were in fact paid to the taxpayer and Ogg Investments. It seems that the taxpayer resigned as a member of Ogg Holdings after the dividend had been distributed to 1t. The evidence 1s not very clear as to whether Ogg Investments resigned as a member ef Ogg Holdings, but it probably did. Mr. Ogg Junior remained a participating member. His wife and children then became participating members, and Mr. Douglas Ogg, Mrs. Enid Slater and Mr. B. J. McDonald (the solicitor for Ogg Holdings and for members of the Ogg family) became non-participating members. The payments were later recorded in the Profit and Loss Appropration Account of Ogg Holdings for the year ended 30 June 1970 as "Distribution of Capital." The taxpayer disclosed the receipt from Ogg Holdings of the sum of $26,900.00 in its return of income for the year ended 30 June 1970. It 1s not disputed that that sum was equivalent to one-third of Ogg Holdings' net tangible assets. Nor was it disputed that, subject to disagreement about the character of the gift from Mr. Ogg Senior to Ogg Holdings, all of the tangible assets of Ogg Holdings represetned profits which it had derived, or that, subject to that qualification, what was paid to the taxpayer was "paid...out of profits derived" by Ogg Holdings. The taxpayer's return divided the amount received into three parts, asserting that two parts were non-taxable. Under the heading "DIVIDENDS AND DISTRIBUTIONS RECE1VED" the return reads:- "Ogg Holdings Limited:-— $ Taxable - From accumulated 2,569.68 Appropriation Account. Non-taxable:- Return of Members Funds 12U0U.60 Dividend ex Capital Profits 12336.32 Reserve" On 19 April 1971 the Commissioner issued a notice of assessment accepting that the two last-mentioned items were correctly described as ""non-taxable". An amended assessment was subsequently made and a notice of that assessment together with an accompanying adjustment sheet was issued on 10 August 1971 which included in the taxpayer's assessable income the distribution from Ogg Holdings of $12,330.32 from the "Capital Profits Reserve" and $12,000.00 described as "Return of Members Funds". Section 170 was relied upon as authority for amending the assessment. The taxpayer lodged objections to the amended assessment and when those objections were disallowed it appealed to the Supreme Court. The Supreme Court held that there was no mistake of fact within sub-ss. (2) or (3) of s. 170 and that the taxpayer had made a full and true disclosure of all the material facts necessary for the assessment. In those circumstances the Supreme Court found it unnecessary to express any view as to the correctness of the amended assessment. The Commissioner appealed from that judgment to this Court. A Full Court of this Court held that there had been a mistake of fact within the meaning of sub-s. 170 (3) and that in those circumstances the Commissioner was not precluded by sub-s. 170 (3) from amending the assessment in accordance with the power conferred by sub-s. 170 (1). It was unnecessary for the Court to determine whether or not there was a full and true disclosure by the taxpayer. The appeal was allowed and the matter remitted to the Supreme Court to determine, within the limits of the grounds relied on by the taxpayer in its objection to the amended assessment, whether that amended assessment was correct, and to make such order as to costs of the original proceedings before that Court and of the proceedings remitted by our order as it saw fit. It was further ordered that the taxpayer pay the Commissioner's costs of the appeal to this Court. The matter came on for further hearing before the Supreme Court which held that so much of the dividend as represented the two items of $12,330.32 and $12,000.00 was paid to the taxpayer by Ogg Holdings out of capital profits derived by it (para. 44 (1) (a) of the Act) and therefore was correctly treated by the Commissioner as part of the taxpayer's assessable income. The Supreme Court dismissed the taxpayer's appeal and ordered it to pay the Commissioner's costs including the costs of the initial hearing before that Court. It is from that judgment that the taxpayer appeals to this Court. The facts are not in dispute although there are some differences between the parties as to the proper inferences to be drawn from them. The essential question for determination by this Court 15s whether so much of the sum of $26,900 which the taxpayer received from Ogg Holdings as is represented by the two items which the taxpayer asserted were "Non-taxable", totalling $24,330.32, answer the description of a "dividend paid out of profits", within the meaning cf para. 44 (1) (a) which 1s the only provision in the Act upon which the Commissioner relies. It was not contended, for example, that the distribution to the taxpayer was a distribution (sub~s. 47 (1) ) or a deemed distribution (sub~s. 47 (2) ) by a liquidator to the taxpayer aS a member of Ogg Holdings in the course of any de facto winding up of Ogg Holdings. The taxpayer accepts that $2,569.68, part of the distribution of $26,900.00, was paid out of the accumulated profits derived by Ogg Holdings from revenue sources and therefore was correctly included in 1ts assessable income. On the view at which we have arrived, that concession was perhaps unnecessary but that 1s of no present moment. It 1s not, however, unimportant to emphasize that Ogg Holdings did not distribute three dividends - one of $2,569.68 from accumvlated appropriation account, another of $12,000.00 from members' funds and another of $12,332.32 from capital profits reserve. There was but one divided declared and paid to the taxpayer namely, of $26,900.00. The minutes of the meetings of directors of Cgg Holdings of §& December 1969 and of the meeting of its members of 15 December 1969 make this clear. It was the taxpayer which divided the sum of $26,900.00 into three parts in its return of income, thereby reflecting a corresponding division made by Ogg Holdings in its balance sheet and accounts as at 30 June 1970. The distributions of $12,006.00 and $12,330.32 to the taxpayer and the dastribution of the like amcunts to Ogg Investments Limited were treated as reducing the members' funds and capital profits reserve of Ogg Holdings and as being distributions of capital. Yet they were also included in the Profit and Loss Appropriation Account of Cgg Holdings for the year ended 30 June 1970, but this 1S not decisive of any question this Court is called on to determine. -10- Section 44 of the Act relevantly provides: ] "44 (1) The assessable income of a shareholder in a company...shall...- (a) if he is a resident - include dividends paid to him by the company out of profits derived by 1t from any source;..." ° Section 6 of the Act contains an extended definition of "dividend". It includes any distributions made by a company to its shareholders where in money or other property. That section also provides that "'paid' ain relation to dividends includes credited or distributed", and defines "shareholder" as including a member or stockholder. Plainly the payment of the sum of $26,960.00 answers the description of a distribution made by Ogg Holdings to the taxpayer and is thus a dividend within the meaning of para. (a) of the definition of "divadend". It 1s common ground that the other paragraphs, (b) to (£) anclusive, in the definition of "dividend", do not apply. The question 1s whether the dividend was paid out of profits derived by Ogg Holdings. The taxpayer's case, as we understood it, seemed not only to assume but to assert that, of the amount paid tc the taxpayer by Cag Holdings $12,000 was pai@ by it out of ""Members' Funds", and $12,330.32 was paid by it out of capital profits. The taxpayer's -li-e- primary submission was that neither amount was paid out ©_ rcevenue prefits (which the Conmissioner conceded) and that para. 44 (1) (a) of the Act, upon which the Commissicner relies, is concerned only with payments by a company out of profits of that character. Alternatively, the taxpayer contended that the $12,000 was not paid to the taxpayer by Ogg Holdings out of profits of any character. The Supreme Court accepted the Commissioner's argument that, as the gift increased the assets of Ogg Holdings and was neither subscribed capital nor revenue profit, 1t must have amounted to a capital profit. Further, the Supreme court held that Harrowell v. Federal Commissioner of Taxation (1967) 116.C.L.R. 607 did not establish that para. 44 (1) (a) of the Act "operated only where the davidend was paid out of profits derived from the payer's revenue account", and continued:- "No other case which was cited to me supports such a suggestion. In these circumstances, I can see no reason why Section 44 (1) (a) should not be construed according to its express terms. It cannot be disputed that the dividends in question were paid out of capital profits. I hold that they therefore amount to assessable income in the hands of the taxpayer in accordance with that Section." In our view this matter should be approached on the footing that the sum received by the taxpayer was paid to 1t by Ogg Holdings, that it was paid to it in its capacity as a member of Ogg Holdings, that it was paid to it in consideration of its retirement from membership of Ogg Holdings, and that it was paid to it in full satisfaction of ats rights as a member and its corresponding "interest" in the assets of Ogg Holdings. Although 1t may not much matter, since there is no suggestion that the interests of anyone but the members of the Ogg family were involved, 1t seems that, prior to -12- the payments and retirements, each of the ordinary members of Ogg Holdings had an equal "financial stake" in Cgg Holdings and its assets. See Article 53, which provides:- "If the Company shall be wound up the assets available for distribution amongst the members shall be paid and divided to and between the members in accordance with the rights to the same attaching to the respective classes of membership to which such members belong." and compare In re N.F.U. Development Trust Ltd. [1972] 1 W.L.R. 1548, 1553; and Stafford Coal _ and Iron Co. Ltd. v. Brogan (Inspector of Taxes) [1963] 3 All E.R. 277. Article 8 of the Articles of Association relevantly provides: "8. Upon a person ceasing to be a member for any reasons whatsoever the Company may make- such payment to him as the Board of Directors shall think fit." we doubt that Article 8 is directed to members in effect winding up their interests in Ogg Holdings. No other machinery existed for the formal achievement of what was planned. Apart from Article 8, the only arguably relevant Articles were Article 4 (b) and (e), 42 and 44 which respectively provides:- "4 (b) No person shall have a right to participate an the divisible profits of the Company by way of . dividend ottherwise than as a member as herein provided. 4 (e) The Board of Directors subject to the provisions of these Articles may lay down the terms and conditions applying to each class of membership whether as to participation in profits or in the surplus of assets ovér liabilities of the Company on a winding up or as to voting rights and with a -13- such preferred deferred or other special rights or such restrictions as 1t shall think fit with full power without the consent of any member of a class to vary from time to time the rights restrictions or obligations attaching to or affecting that class provided. 42. Subject to the rights of the members of any class and subject to such provisions as may from time to time be made as to reserves the profits of the Company which shall from time to time be determined to divide in respect of any year or other period may be distributed by way of dividend amongst the members according to their respective rights thereto and in the proportions affecting the same. 44, The Board of Directors may from time to time...set aside out of the profits of the ccompany such sum as they think proper as a reserve or reserve fund...which shall with the sanction of the Company in General Meeting be as to the whole or in part applicable for equalising dividends or for distribution by way of bonus or special dividends among the members of the company for the time being on such terms and in such manner as the Company in General Meeting may from time to time determine." There was no attempt to effect an equal apportionment between all members of Ogg Holdings. It was not argued by the solicitor who appeared for the taxpayer that the Articles of Ogg Holdings empowered the course which was followed. Whether the distributions were authorised or not by the Articles they in fact took place and it is the actual facts to which the Assessment Act is directed. It was not contended by either party that the distributions contravened the law. It 1S common ground that s. 276 of the Companies Act 1961 (N.S.W.). which was in force at the relevant time, and which prohibited the payment to shareholders except out of profits or pursuant to s. 60, aid not apply to guarantee companies without a share capital. -14- The researches of counsel have not revealed any case where this question has been previously considered involving a company limited by guarantee without a share capital. No doubt this is due at least in part to the fact that a large proportion of companies limited by guarantee are associations formed for promotion of commerce, art, science, charity, religion or other public objects. A large number of such companies are exempted from the use of the word "limited" as part of their name. Many other companies are formed as guarantee companies for purposes as diverse as trade protection, exchange of information, pooling and selling commodities of various kinds, exploiting and realising patents and concessions and insuring against accidents or marine risks. Ogg Holdings falls into none of these categories. The taxpayer relies on various decisions, mainly of the High Court, concerning companies with share capital, to support its argument that in this case the payment to the taxpayer, although a dividend by definition in s. 6, was not paid out of profits derived by Ogg Holdings. The first of those cases to which detailed reference _ is necessary is Federal Commissioner of Taxation v. Blakely (1951) $2 C.L.R. 389. Before exploring the reasons for that decision, it is appropriate to deal briefly with some of the earlier authorities. -15- In Webb v. Federal Commissioner of Taxation (1922) 30 C.L.R. 450, a case decided under the Income Tax Assessment Act 1915-1918 (C'wealth), there had been a scheme of reconstruction which involved a transfer of all of the assets of an old company to a new company, the issue of shares in the new company to shareholders in the old company and the voluntary winding up of the old company. The assets of the old company represented, to a very large extent, accumulated profits. It was held that no part of the shares 1n the new company represented income in the hands of recipients. The same principle was applied in Commissioner of Taxation (New South Wales) v. Stevenson (1937) 59 C.L.R. 80, a case under the Income Tax (Management) Act 192& (N.S.W.), to a distribution of the assets of a company to shareholders without any formal laquidation. In their joint judgment Rich, D2xon and McTiernan Jd, after referring to the fact that the payment made to the taxpayer was received by her in replacement of her shares, said at p. 104:- "No part of it was a detachment of the profit from the funds of the company paid as the income earned by the share. None of 1t was a dividend, profit or bonus, paid by the company as a going concern in respect of the shares as continuing, although intangible, pieces of property". For those reasons their Honours considered that the amount distributed represented the full capital value of the taxpayer's shares and the payment was made in extinguishment of her share interest. The receipt was a receipt of capital and no part of it was brought to tax by the New South Wales Act. -16- In Thornett v. Federal Commissioner of Taxation (1938) 59 C.L.R. 787, the taxpayer held 3/40ths of the issued shares in a company. They were fully paid one pound shares and she held 26,250 of them. The company reduced its capital by paying off and cancelling a number of its issued shares, including those held by the taxpayer. In return for the cancellation of her shares, the company transferred to her assets to the value of forty-one thousand eight hundred and twenty-three pounds representing 3/40ths of the whole of its assets. The Commissioner treated twenty-six thousand two hundred and fifty pounds, the face value of the shares, as being a return of capital and sought to tax the balance as assessable income under para 16 (b) (i) of the Income Tax Assessment Act 1922-1929. That provision was in terms almost identical with those of sub-s. 11 (b) of the New South Wales Act which had been considered in Stevenson's Case. It was held, following that case, that the amount paid to the taxpayer, although derived from profits earned by the company, was not a dividend, bonus or profit credited, paid or distributed to her as a shareholder. Dixon J. said (at pp. 802-~-603):- "The appellant received an entire and indivisible sum representing the value of her shares, that is, her interest in the company. It was paid and received in satisfaction of, and by way of replacement for, her share interest. It terminated her interest and extinguished the property or choses in action which it replaced. in my opinion none of the sixty per cent excess over the paid-up capital held by her in the company forms part of her assessable income." -17- In Blakely's Case the shareholders of a company took its assets, some of which represented profit which 1t had derived and accumulated, and discharged its liabilities. Later, the company was dissolved. As in this case, formalities were not observed but all creditors were paid. Both shareholders were involved in what occurred, and there was no one who could challenge or seek to undo what was done. It was held by the High Court that no part of the amount received by the shareholders as a result of their appropriation of the company's assets was made assessable income by para. 44 (1) (a) of the Act. Section 47 of the present Act and 1ts predecessors reveal a legislative response designed to tax distributions in the liquidation of a company to the extent to which they represent undistributed profits of the company but, even taken with the definition of "liquidator" in s. 6 of the Act, s. 47 did not apply in Blakely's Case and plainly does not apply in this case. There is no purpose to be served by an analysis of the legislative provisions which fell for consideration in the decisions prior to Blakely's Case and by an attempt to compare and contrast those provisions with para. 44 (1) (a) and sub-s. 6 (1) as they were at the time material for present purposes. The legislation then was relevantly identical with the Act at the tame of Blakely's Case. The importance of the earlier authorities for present purposes lies in a4 recognition of the way in which they have influenced the construction of the sections which fall for current consideration. -18- The basis of the judgment of Latham C.J. in favour of the taxpayer in Blakely's Case was that an appropriation by shareholders of the assets of the company by their own act could not be regarded as a distribution by the company. Thus, no part of what was received by the taxpayers could be described as a dividend paid to them by the company, although part of 1t did represent profit derived by the company. It is plain that in his Honour's opinion, had the Gistribution been made by the company, the Commissioner would have been entitled to succe*ed. It is also plain that in his Honour's view it was unnecessary to have regard to what the nature of the receipt would be in the hands of a taxpayer but for para. 44 (1) (a), and that a distribution by a company to a taxpayer forms part of the assessable uncome of a taxpayer insofar as it represents the profits as dastinct from the capital of the company. However, Fullagar J., with whom Dixon J. agreed, was of a quite different view. The importance of Fullagar J.'s judgment for present purposes 1S such that 1t 1S appropriate to set out the critical passages:- "The Commissioner's 43 ment may be stated shortly thus. When you look at the relevant balance sheet of the company, you see that the assets received by the shareholders represent in part capital originally paid up and in part accumulated profits of the company. What was received by each shareholder, therefore, represents in part profits Made by the company, and to the extent to which it does represent those profits it 1s assessable income in his or her hands. To ascertain the extent to which what was received represents profits, 1t is necessary, of course, to make an apportionment. The method of apportionment adopted by the Commissioner is not challenged as such, but his argument is attacked at its foundation. it is ~19- said that what was received does not possess at all the character of income in whole or in any severable part." (P. 402). "That a due proportion of receipts of the nature in question " (i.e. capital receipt) "could be brought into charge by special statutory provision is not open to question. ...It was accordingly argued for the Commissioner that the legislation relevant to the present case did, on its true construction, bring into charge a proportion of the value of the assets received or "taken over" by Mr. and Mrs. Blakely, and that the present case was therefore not covered by Stevenson's Case and Thornett's Case." (P. 404). "Now 1t is possible that, when the Commonwealth legislation assumed in 1936 the form which it has since retained, at was intended to cover, and was believed to cover, such cases as Stevenson's Case and Thornett's Case. I should seriously doubt this myself. One would have expected such a result to be sought rather through the medium of s. 47 than through the medium of s. 44, and s. 47 would seem to be unnecessary i1f s. 44 has the meaning contended for. But, 1f this was the intention behind the new form which the legislation took, I think that the draftsman missed, as I think the argument for the Commissioner in this case misses, the whole point of the decisions in Stevenson's Case and Thornett's Case - and, for that matter, in Burrell's Case. And I do not think tha the Act of 1936-1942 brings into charge any part of what the taxpayer received in this case. I would not be prepared to deny that there was a "distribution" in this Case. There was clearly a "distribution" in Stevenson's Case. But the point in this case is, as it was in Stevenson's Case, as to the nature of the receipt. There was not a distribution of profits, or a distribution out of profits. What was received was capital. There was no detachment or severance from the funds of the company of money or other assets as representing a profit made by the company. There was simply a realization of a4 share investment (per Starke J. in Thornett's Case (1938 ) 59 C.L.R. at p- 799). "The shareholders...receive nothing but the ultimate capital value of the intangible property constituted by the shares...The shareholder simply receives his proper proportion of a total net fund without Gistinction in respect of the source of 1ts components, and he receives 1t in replacement for his share" (per Rich, Dixon and Meliernan JJ. in Stevenson's Case (1937) 59 C.L.R. at p. 99). There -20- 1s, in my opinion, nothing in the Act which gives the character of income to this receipt, which was according to general principles a capital receipt." (Pp. 406). As is apparent from the passages quoted, Blakely's Case did not depend upon the proposition that there had been "a return of paid-up capital..." so that, for that reason, what had been received by the taxpayer was not a "dividend". That Blakely's Case has a broader foundation 1s clearly confirmed by the Judgment of Gwen J. in Uther v. Federal Commissioner of Taxation (1964) 111 C.L.R. 318; and on appeal by a full bench of the High Court (1965) 112 C.L.R. 630. In Uther's Case a reduction of capital involving the cancellation of issued shares was duly confirmed by the Supreme Court of Victoria. The taxpayer, a shareholder in the company, received his due proportion of the amount distributed by the company in respect of the cancelled shares. The amount which he received in respect of each share exceeded the amount paid up thereon. The Commissioner contended that the effect of sub-s. 44 (1) when read with the former definition of "dividend" in sub-s. 6 (1) was to make what otherwise would have been capital receipts in the hands of the shareholders receipts of income for the purposes of the Act. The then definition of "dividend", so far as relevant, was - ""Dividend' includes any distribution made by a company to its shareholders...but does not include a return of paid up capital". -21- Owen J., in a judgment which contains a most useful review of many of the earlier cases, held, following Stevenson, Thornett and Blakely, that no part of the amount paid to the shareholders pursuant to the reduction of capital could be said to be paid out of profits derived by the company. His Honour's judgment was affirmed by Taylor and Menzies Jud., Kitto J. dissenting. Taylor and Menzies JJ. held that no part of the amount paid to the shareholders pursuant to the reduction of capital could be said to be a dividend paid out of profits deraved by the company. Taylor J. said that in his opinion the question which arose with respect to sub-s. 44 (1) and the definition of "dividend" in sub-s. 6 (1) was indistinguishable from that which arose with respect to those provisions in Blakely's Case and that the appeal was concluded by the views expressed in the judgment of Fullagar J. in that case. Taylor J. also said that the judgment in Blakely's Case had stood for some fourteen years and that although the Assessment Act had been amended on numerous occasions since then, no attempt to amend it in any way relevant to the question then before the Court had been made. His Honour also mentioned that as recently as 1959 the judgment of Fullager J. in Blakely's Case' was accepted as a correct statement of the law in Parke Davis & Co. v. Commissioner of Taxation (1959) 101 Cc.L.R 521. Such cases established in his view that a distribution of an amount of assets, although in a colloquial sense representing or containing profits, 1S a distribution of capital. -22- Menzies J. was also of the opinion that the judgment of Fullagar J. in Blakely's Case led to the conclusion that the distribution in Uther's Case was not a distribution of or out of profits and that what was received by the shareholders was capital. Kitto J., in a powerful dissent, took a fundamentally different view from the majority. In his view the test under sub-s. 44 (1) is not concerned with the nature of the receipt in the hands of the recipient/shareholder but with the nature of the source from which the company makes the distribution. It 1s obvious that, even 1f there is room for criticism of the judgment of Fullagar in Blakely's Case, this Court 1s bound to apply what was there decided. Indeed, in Uther's Case the High Court declined to consider it. Principles relating to reductions of capital cannot, of course, perse apply to guarantee companies without share capital; but the underlying rationale of the cases is that, on a winding up, whether formal or otherwise, and on a return of capital, the shareholder receives an indivisible sum representing the value of his anterest in the company. It 1S paid and received in satisfaction of and by way of retirement or replacement of that interest. it terminates that imterest and extinguishes the property or chose in action which at replaces. -23- If the correct conclusion to draw from the facts of the present case were that the three children of the founder of Cgg Holdings informally laquidated that company, resigned as ordinary members and each was paid 1/3rd of the surplus of assets over liabilities leaving the company as an empty shell, we would find the conclusion irresistible that the principles expounded in Blakely's Case directly apply. Plainly the intention of the three participating members was to divide the surplus of assets over liabilities of Ogg Holdings equally between themselves and this they in effect achieved. But Ogg Holdings was left intact as a corporate structure with Mr. William Ogg Junior as a participating member. What was in a colloquial sense his 1/3rd share remained reflected in the assets of Ogg Holdings. Notwithstanding that the taxpayer and Ogg Investments ceased to be participating members, the wife and children of Mr. William Ogg Junior became participating members, and Mr. Douglas Ogg and Mrs. Enid Slater together with Mr. McLonald became non-participating members. This last step may have been taken to ensure the continuity of the status of Ogg Holdings as a public company for income tax purposes. Although little is known of the fate of Ogg Holdings after 30 June 1970, it seems plain enough that it was not intended that it be wound up. It remained as a corporate vehicle for the future activities of Mr. William Ogg Junior. Indeed, what happened was in truth the antithesis of an informal winding up. -24- Notwithstanding that there was no winding up of Qgg Holdings, whether formal or de facto, there was a severance or termination of the interest of the taxpayer as a participating member of the company. 'In our opinion the principles of Blakely's Case and Uther's Case apply to this case. There are obvious differences between the interests of shareholders in a company with a share capital and those of members in a guarantee company without share capital, but those differences do not prevent the application of the principles to which we have referred. Our view is supported by In Re N.F.U. Development Trust Ltd. (supra) and Stafford Coal & Iron Co. Ltd. v. Brogan (Inpsector of Taxes) (supra). The true nature of the payment made by Ogg Holdings to the taxpayer is of capital not income. The taxpayer simply received 1ts proper proportion of the total available surplus of assets over liabilities without distinction as to the source of its components. There was no detachment or severance from the funds of the company as representing a profit made by it. The taxpayer received an entire and indivisible sum representing the value of its interest in Ogg Holdings. It was paid and received in satisfaction of and by way of replacement for its interest as a participating member. It terminated or severed the taxpayer's interest and extinguished the chose in action which it replaced. The taxpayer received its aliquot prceportion of the net fund without distinction as to the source of its components. In the result the distributions in guestion in this case totalling -25- $24,330.32 do not fall within the description of para. 44 (1) (a) as a dividend paid to the taxpayer by Ogg Holdings out of profits derived by it. The only relevance of the fact that both Ogg Holdings and its participating members, including the taxpayer, treated the dividend as being in part from members' funds, in part from the capital profits reserve and in part from revenue sources 15S they show how 1t came about that in December 1969 Ogg Holdings was in a position to take the action which it then proceeded to take: Uther's Case. The position may have been different if the taxpayer had continued to remain a participating member of Ogg Holdings following the making of the distribution. This case, like Blakely's Case, Uther's Case and others Lllustrates the distinction between a distribution by way of severance and a distribution of profits of a company leaving intact the shares in respect of which it 1s made. However, on the facts of this case the appeal must succeed. In view of this conclusion, we shall not say very much about whether the two items the subject of this case and returned by the taxpayer as non-taxable could otherwise be said to have represented capital profits. -26- The question whether the profits spoken of by para. 44 (1) (a) extend to capital as well as revenue profits is a matter of obvious importance. Indeed, the practical operation of para. 44 (1) (a) might be impeded quite seriously 1f investigation is always needed to identify the specific source and nature of profits which are distributed; for example, whenever a public company declares and pays a dividend to its shareholders. We respectfully agree with the view of the learned primary Judge tht Harrowell v. Federal Commissiner of Taxation, (supra) which was much pressed in this case on behalf of the taxpayer, does not establish that para 44 (1) (a) of the Act operates only where a dividend is paid out of profits derived on revenue accunt. In Harrowell's Case in the ccurse of winding up E. Killen and Sons Pty. Limited ("Killens"), its liquidator made distributions out of income derived by Killens to its sole shareholder, Glenville Pastoral Co. Pty. Limited ("Glenville"). It was accepted that, by sub-s. 47 (1), such distributions were deemed, for the purposes of the Act, to be dividends paid by Killens out of profits derived by it to its shareholder, Glenville, and that, by wvartue of para. 44 (1) (a), the assessable income of Glenville included the distribution thus received from the liquidators of Killens. Mrs. Harrowell was the executrix of the estate of a shareholder in Glenville to whom, in th course of winding up Glenville, its liquidator made distributions out of the funds which Glenville had received from -27- the liquidator of Killens. It was argued for Mrs. Harrowell that her assessable income did not include the distributions she received from the liquidator of Glenville because, although the assessable income of Glenville included the distributions which it had received from the liquidators of Killens, those distributions were not "income derived" by Glenville within the meaning of sub-s. 47 (1). The High Court in Harrowell's Case did not define exhaustively and for all purposes what are "profits derived". Their Honours said no more than that the only dastributions to which sub-s. 47 (1) relates are distributions representing income which has been derived by a company, and that the sub-section therefore proceeds on the basis that the distributions of which 1t speaks are distributions of "revenue profit". There are express statements by Kitto J. in Uther's Case at p. 637 that "profits" within the meaning of para. 44 91) (a) include capital profits as well as profit on revenue account. Counsel for the Commissioner relied on McNeil v. Federal Commissioner of Taxation in Ratcliffe and McGrath's Income Tax Decisions of Australasia (1891-1927) at p. 35 and Houghton v. Federal Commissioner of Taxation (1957) 96 C.L.R. 516 as support for that view. Those decisions are, however, of limited assistance and we question whether it is possible to separate Kitto J's dicta on this point from the foundation of his dissent on the meaning and operation of para. 44 (1) {a) generally. we -28- note that none of the other members of the High court who addressed themselves to para. 44 (1) (a) or its counterparts in the judgments to which we were referred attempted to differentiate between capital and revenue profits. The real difficulty with this question, which in the event does not call for decision in this case, 1s that it cannot be entirely divorced from the reasoning which underlies the established view that certain distributions by companies to their members are not made assessable income by para. 44 (1) (a) of the Act although paid out of profits. While the law remains as it presently is, any payment by a company to one of its members which 1s a capital receipt in the hands of the member according to ordinary concepts 1s outside the operation of para. 44 (1) (a). It remains for us an open question whether, in these circumstances, the nature of the profit derived by the company may not, in some circumstances at least, be a relevant consideration. There is a further question whether the item $12,330.32 "Return of Members' Funds", which represents part of the initial gift of $36,000.00, answers the description of profits of any kind, or is akin to shareholders' or members' funds and cannot be the source of any payment of dividends to attract the operation of s. 44. -29- Capital profits generally connote such items as profits on sale of capital assets and profits, gains or accretions not of a revenue nature. The gift of $36,000.00 increased the net tangible assets of Ogg Holdings. It was not subscribed capital or loan funds. It us properly regarded as profit of a capital nature. The gift merged with other assets of the company; but the character of the item remained as ""members' funds". If we had reached the conclusion that the principles expressed in Blakely's Case, Uther's Case and the other cases to which we referred were inapplicable to this case we would have concluded that the payment of $23,330.32 part of the total payment of $26,900.00 was out of capital profits derived by Ogg Holdings and properly included in the taxpayer's assessable income pursuant to sub-s. 44 (1). We would allow the appeal and order the Commissioner to pay the taxpayer's costs of the second hearing before the Supreme Court and of this appeal. We would leave undisturbed the Supreme Court's order that the taxpayer pay the Commissioner's costs of the initial hearing before that Court. 'the order of this Court made on 26 November 1980 that the taxpayer pay the Commissioner's costs of the earlier appeal to this Court, of course, still stands. regs Ayer rye I certify that this and the |eeni¢ cli 20, preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr Justice Lockhart and his Honour Mr Justice Fitzgerald Pa "yo, \oPhA Aik hledseé!