FEDERAL COURT OF AUSTRALIA Brewing Investments Ltd v Federal Commissioner of Taxation [2000] FCA 34 INCOME TAX – assessable income – non-resident companies in liquidation – successive distributions from one non-resident company to another – eventual distribution to resident shareholder company – whether distribution assessable income in resident shareholder's hands Income Tax Assessment Act 1936 (Cth), s 44(1), s 47(1) Inland Revenue Commissioners v George Burrell [1924] 2 KB 52 cited Commissioner of Taxation (NSW) v Stevenson (1937) 59 CLR 80 cited Thornett v Federal Commissioner of Taxation (1938) 59 CLR 787 cited Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388 cited Archer Brothers Pty Ltd (in vol liq) v Federal Commissioner of Taxation (1953) 90 CLR 140 cited Parke Davis and Company v Commissioner of Taxation (1959) 101 CLR 521 applied Glenville Pastoral Company Pty Limited (in liq) v Commissioner of Taxation (1963) 109 CLR 199 cited Commissioner of Taxation v Uther (1965) 112 CLR 630 cited Harrowell v Commissioner of Taxation (1967) 116 CLR 607 discussed Federal Commissioner of Taxation v W E Fuller Pty Ltd (1959) 101 CLR 403 cited Gibb v Commissioner of Taxation (1966) 118 CLR 628 discussed Federal Commissioner of Taxation v Comber (1986) 10 FCR 88 cited BREWING INVESTMENTS LTD ACN 004 233 055 v THE FEDERAL COMMISSIONER OF TAXATION VG 310 of 1998 KENNY J MELBOURNE 28 JANUARY 2000 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 310 OF 1998 BETWEEN: BREWING INVESTMENTS LTD ACN 004 233 055 Applicant AND: THE FEDERAL COMMISSIONER OF TAXATION Respondent JUDGE: KENNY J DATE OF ORDER: 28 JANUARY 2000 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The objection decision the subject of the appeal be set aside. 3. The matter of the objection be remitted to the respondent to be considered and decided according to law. 4. The respondent pay the applicant's costs of and incidental to the appeal. AND THE COURT DECLARES THAT: The amount of $41,939,520 distributed to Brewing Investments Ltd is not deemed to be dividends by virtue of s 47(1) of Income Tax Assessment Act 1936 (Cth) and is not assessable income under s 44(1) of that Act. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 310 OF 1998 BETWEEN: BREWING INVESTMENTS LTD ACN 004 233 055 Applicant AND: THE FEDERAL COMMISSIONER OF TAXATION Respondent JUDGE: KENNY J DATE: 28 JANUARY 2000 PLACE: MELBOURNE REASONS FOR JUDGMENT the appeal 1 The applicant, Brewing Investments Ltd ("BIL"), appeals to this Court against the decision of the Deputy Commissioner of Taxation ("the Commissioner") to disallow BIL's objection to an assessment of income tax for the year ended 30 September 1993 ("the 1993 year of income"). In its return for the 1993 year of income, BIL included an amount of Aus$48,599,855 in its assessable income as a deemed dividend pursuant to s 47(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). BIL subsequently requested the Commissioner to amend its assessment in respect of the 1993 year of income by subtracting the amount of Aus$41,939,520 from the amount of Aus$48,599,855, upon the basis that s 47(1) of the Act did not apply to the former amount. The Commissioner declined to amend the assessment. On 3 July 1998, the Commissioner disallowed BIL's objection, brought by notice of objection dated 11 May 1998. This appeal is against the Commissioner's disallowance of that objection. factual background 2 The following is derived from the parties' agreed statement of facts. 3 BIL (formerly Henry Jones Investments Limited) is an Australian resident company for the purposes of the Act. It was the sole beneficial owner of all the issued share capital of Rowsom Investments Limited ("Rowsom"). Rowsom was in turn the sole beneficial owner of all the issued share capital of Clarkson Holdings Limited ("Clarkson"); and Clarkson was the sole beneficial owner of all the issued share capital of Elders Investments Limited ("EIL"). None of Rowsom, Clarkson and EIL was a resident company of Australia for the purposes of the Act. They were residents of unlisted countries for the purposes of Part X of the Act. Rowsom and Clarkson were incorporated in the Turks and Caicos Islands. EIL was incorporated in Bermuda. All three companies had their central management and control in Hong Kong. Neither Rowsom nor Clarkson derived any relevant income from Australian sources. Although EIL derived income from both Australian and non-Australian sources, the Commissioner expressly disavowed any reliance in this appeal on that fact. 4 Clarkson was placed in voluntary liquidation on 3 June 1991. On 10 June 1991, Clarkson's liquidator distributed net assets amounting to US$52,013,763 to Rowsom. For accounting purposes, the distribution was treated as a capital receipt in Rowsom's books of account. In the books of Clarkson, the distribution was represented by the following shareholders' funds accounts: Issued Share Capital US$4,943 Share Premium US$16,075,723 Revenue Reserve (Retained Earnings) US$35,933,097 US$52,013,763 Clarkson's Retained Earnings consisted of Income Reserves amounting to US$10,415,507 and Capital Profits Reserves (on the sale of shares and exchange gains) amounting to US$25,517,590. 5 In September 1993, EIL was placed in voluntary liquidation and, on 24 September 1993, EIL's liquidator distributed net assets amounting to US$62,264,631 to Rowsom. For accounting purposes, the distribution was treated as a capital receipt in Rowsom's books of account. In the books of account of EIL, the distribution was represented by the following shareholders' funds accounts: Share Capital US$5,590,122 Share Premium Reserve US$39,636,406 Profit and Loss Account (Retained Earnings) US$17,038,103 US$62,264,631 EIL's Retained Earnings consisted wholly of Income Reserves. These Reserves included profits which had been accumulated and not distributed before the date of liquidation. 6 In September 1993, Rowsom was placed in voluntary liquidation and, on 24 September 1993, Rowsom's liquidator distributed net assets amounting to US$70,238,424 to BIL. For accounting purposes, the distribution was treated as a capital receipt in BIL's books of account. In the books of account of Rowsom, the distribution was represented by the following shareholders' funds accounts: Share Capital US$5,000 Share Premium US$12,902,369 Profit and Loss Account – Capital (Capital Profits Reserve) US$52,971,200 Profit and Loss Account – Revenue (Retained Earnings) US$4,359,855 US$70,238,424 As at 24 September 1993, US$70,238,424 was equivalent to Aus$107,299,762. Rowsom's Capital Profits Reserve contained the distributions by the liquidators of EIL and Clarkson. Those distributions comprised: EIL – Income Reserves US$17,038,103 Clarkson – Income Reserves US$10,415,507 Clarkson – Capital Profits Reserve US$25,517,590 US$52,971,200 7 As already noted, in its 1993 return, BIL included in its assessable income an amount of Aus$48,599,855, which was equivalent to US$31,813,465, made up of: Rowsom – Retained Earnings US$4,359,855 Part of Rowsom's Capital Profits Reserve US$27,453,610 US$31,813,465 The Capital Profits Reserve was made up of all of EIL's reserves (US$17,038,103), represented as income in EIL's profit and loss account, and that part of the distribution made by Clarkson's liquidation which represented interest income (US$10,415,507). It is not in contest that the balance of the distribution from Rowsom to BIL (US$38,524,959) was a return of capital and, on no view, was deemed dividends. 8 As we have seen, BIL subsequently departed from this approach. It now claims that the only amount properly to be included in its assessable income is the amount that represents the retained earnings of Rowsom, namely, US$4,359,855. The Commissioner declines to accept the validity of BIL's altered approach. the issue 9 The principal issue on this appeal is whether the amount of Aus$41,939,520 (which is equivalent to the sum of US$27,453,610 distributed by the liquidators of Clarkson and EIL to Rowsom and then by the liquidator of Rowsom to BIL) represents income derived by Rowsom for the purposes of s 47(1) of the Act. legislative framework 10 Section 25 of the Act provides that the assessable income of a taxpayer shall include, where the taxpayer is a resident, the gross income derived directly or indirectly from all sources whether in or out of Australia, which is not exempt income; and, where the taxpayer is a non-resident, the gross income derived directly or indirectly from all sources within Australia, which is not exempt income. Section 23 exempts from income tax specific incomes and classes of income. Paragraph (r) exempts income derived by a non-resident from sources wholly out of Australia. Subdivision D of Division 2 of Part III deals, in ss 43A - 47A, with dividends. 11 Section 44(1), which gives effect to s 23(r), provides in relation to the assessability of dividends: The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall, subject to this section and to section 128D – (a) if he is 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. At the relevant time, s 47 of the Act provided as follows: (1) Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid up capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. (1A) A reference in subsection (1) to income derived by a company includes a reference to: (a) an amount included in the assessable income of the company otherwise than under section 160ZO; or (b) an amount that would be included in the assessable income of the company under section 160ZO if: (i) a reference in Part IIIA to the indexed cost base of an asset were a reference to the cost base of an asset; (ii) section 160ZC had not been enacted; and (iii) for the purposes of Part IIIA; (A) a net capital gain were taken to have accrued to a taxpayer in respect of a year of income if a capital gain or capital gains accrued to the taxpayer during the year of income; and (B) the amount of the net capital gain that, under sub-subparagraph (A), is taken to have accrued to the taxpayer in respect of a year of income were an amount equal to the capital gain or the sum of the capital gains referred to in that sub-subparagraph. As I have already indicated, this appeal turns on whether the amount of Aus$41,939,520 distributed to BIL by the liquidator of Rowsom represented income derived by Rowsom for the purposes of s 47(1). the parties' respective cases 12 The case for BIL is that the amount distributed to Rowsom by the liquidators of Clarkson and EIL (and placed in Rowsom's Capital Profits Reserve) was a capital receipt, the character of which was unaffected by s 47(1) on account of Rowsom being a non-resident company that did not derive any relevant income from an Australian source. It followed, so BIL submitted, that the distribution made by Rowsom's liquidator to BIL did not fall within s 47(1), because the distribution did not represent income derived by Rowsom in any ordinary or statutorily-extended sense. 13 The case for the Commissioner is that s 47(1), which is without any territorial limitation, operated recursively to make successive distributions on winding up of a series of interrelated companies assessable pursuant to s 44(1). In consequence, for the purposes of s 44(1)(a) of the Act, the distributions of US$10,415,507 and US$17,038,103 by Clarkson's and EIL's liquidators respectively constituted income which was deemed, by virtue of s 47(1) of the Act, to be dividends paid to Rowsom out of profits derived by Clarkson and EIL and, so the Commissioner contended, income derived by Rowsom within the meaning of s 47(1). Upon the distribution by Rowsom's liquidator to BIL of an amount representing the distributions from Clarkson and EIL, s 47(1) operated, so the Commissioner submitted, to deem that amount to be dividends paid by Rowsom to BIL out of profits derived by Rowsom. In consequence, the distribution of Aus$41,939,520 from Rowsom to BIL constituted assessable income pursuant to s 44(1)(a) of the Act. 14 As we will see, the outcome of this appeal depends on the answer to one or other of the following questions: 1. Is the effect of s 47(1), where it applies, not only to deem a relevant distribution dividends in the hands of a relevant recipient but also to ensure that the distribution constitutes a receipt in the nature of income in the hands of the recipient? 2. In what way is the operation of s 47(1) affected by the phrase, "for the purposes of this Act"? 3. If the effect of s 47(1), where it applies, is to ensure that a relevant distribution is deemed dividends and an income receipt in the hands of a relevant recipient, does the distribution necessarily constitute "assessable income" irrespective of any other provision of the Act? did the $41,939,520 represent income or capital? (a) The object of s 47(1) 15 At common law, a distribution to a shareholder by a liquidator is considered to be a receipt in the nature of capital, not income, in the hands of the shareholder: see Inland Revenue Commissioners v George Burrell [1924] 2 KB 52 ("Burrell"); Commissioner of Taxation (NSW) v Stevenson (1937) 59 CLR 80 at 100-1; Thornett v Federal Commissioner of Taxation (1938) 59 CLR 787 at 796-7, 799, 802; Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388 at 402, 407; Archer Brothers Pty Ltd (in vol liq) v Federal Commissioner of Taxation (1953) 90 CLR 140 ("Archer") at 152; Parke Davis and Company v Commissioner of Taxation (1959) 101 CLR 521 ("Parke Davis") at 530; Glenville Pastoral Company Pty Limited (in liq) v Commissioner of Taxation (1963) 109 CLR 199 ("Glenville") at 206; Commissioner of Taxation v Uther (1965) 112 CLR 630 ("Uther") at 641; and Harrowell v Commissioner of Taxation (1967) 116 CLR 607 ("Harrowell") at 610. Section 47(1) of the Act was first enacted in an earlier form to meet the situation spelt out in Burrell: see Parke Davis at 430. Where it applies, s 47(1) is intended to alter the position at common law. That is, for the purposes of the Act, distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (other than income which has been properly applied to replace a loss of paid-up capital) are deemed to be dividends paid to the shareholders by the company out of profits derived by the company. (As will be seen, critical to BIL's case is the proposition that when the liquidators of Clarkson and EIL made the distributions to Rowsom, s 47(1) had no purpose of the Act to serve, because Rowsom was a non-resident that did not derive any relevant income from an Australian source.) (b) The operation of s 47(1) 16 As Dixon CJ, dissenting, said in Federal Commissioner of Taxation v W E Fuller Pty Ltd (1959) 101 CLR 403 at 409 (in reasons for judgment which the majority in Gibb v Commissioner of Taxation (1966) 118 CLR 628 ("Gibb") preferred over those of the majority in Fuller): Section 25(1) begins so to speak at bedrock with the simple notion of income as a known legal and commercial term. Provision after provision of the Act then says that this or that shall be part of the assessable income. One such provision is s 44 which deals with dividends and says what dividends shall and what shall not be included in the assessable income. From the legal conception of "income" you can work forward, through s 25(1), to "assessable income". But the one thing which to my mind you cannot do is to work backward from what goes by express provision into "assessable income" and use it to control the basal conception of "income". That appears to me to run counter to the plan on which the Act is constructed. As it happens, BIL relies principally on the reasons of the majority in Gibb, especially on the concurring judgment of Windeyer J, to support its contention that the distributions to Rowsom by the liquidators of Clarkson and EIL did not represent income derived by Rowsom. Gibb's Case 17 The circumstances under consideration in Gibb were different from those relevant to this appeal. Gibb concerned a distribution to a parent company of bonus shares of a subsidiary paid for out of an asset revaluation account. The parent company sold the shares before being placed in liquidation. The liquidator distributed the proceeds of sale to the taxpayers. The distribution of the bonus shares was not assessable to the parent company on account of s 44(2) as it then stood. Amongst the questions raised upon a stated case was whether the distribution by the liquidator was "deemed to be dividends paid to the shareholders by the company out of profits derived by it" within the meaning of s 47(1). 18 The majority in Gibb held that the distribution by the liquidator of the parent company was not deemed by the Act to be a dividend paid to the shareholders out of profits derived by the company within the meaning of s 47. In a joint judgment, Barwick CJ, McTiernan and Taylor JJ held that the issue of the bonus shares in the circumstances of the case could not amount to a receipt by the shareholders of income within ordinary principles (at 632); and that none of the provisions of the Act operated to give the share issue the character of income for the purposes of the Act (636-7). The majority rejected the Commissioner's submission that, because the definition of the word "dividend" in s 6(1) of the Act included bonus shares, then a receipt of bonus shares took on the character of income for the purposes of the Act (635, 640). In concluding their joint reasons for judgment, Barwick CJ, McTiernan and Taylor JJ added at 637: One further matter may be mentioned which, it seems to us, operates to confirm the views which we have expressed. By force of s 47 of the Act, distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company other than income which has been properly applied to replace a loss of paid-up capital, are deemed to be "dividends" paid to the shareholders by the company out of profits derived by it. But although in the language of the Act they may to this extent be properly described as "dividends" they do not, by force of their character as such, further assume the character of assessable income, or, for that matter, of income. This, we think, is clear enough from the observations in Glenville Pastoral Co Pty Ltd v Commissioner of Taxation of the Commonwealth (1963) 109 CLR 199, at pp 205-207 and Commissioner of Taxation of the Commonwealth v Uther (1965) 112 CLR 630, at pp 641, 642. The "statutory fiction" (see Muller v Dalgety & Co Ltd (1909) 9 CLR 693, at p 696) introduced by s 47 merely provides a basis for the operation of s 44 which is concerned exclusively with what dividends shall or shall not form part of a taxpayers' assessable income. It would, in our view, be anomalous to hold that distributions which constitute "dividends" because they are comprehended by the definition of that term thereby, necessarily, achieve the character of income whilst distributions of a character which are not comprehended by the definition but which are deemed by s 47 to be "dividends", do not by force of that provision achieve that character. 19 Windeyer J concurred in holding that the receipt of the bonus shares by the parent company constituted neither "a receipt by it of income in the ordinary economic sense of that term" (638) nor "income" in any sense given by the Act. In terms which echoed in part what had been said by Dixon CJ in W E Fuller in the passage set out above, Windeyer J stated at 638-9: The argument for the Commissioner that the word "income" in s 47(1) had a larger application than income in the ordinary economic sense was, as I gathered it, put in several ways. The first is that the word comprehends everything which would, under any provision of the Act, be brought to charge as part of what the Act calls "assessable income". This proposition was expressed as being that anything which the Act treats as income is income within the meaning of that word in s 47. But that is misleading, because the Act, as I read it, does not treat as income, or describe as income, anything which is not income according to ordinary concepts of the distinction between capital and income. What it does is to provide how a tax described as a "tax upon incomes" shall be assessed and collected. … [The] method [of the Act] is to impose the tax in respect of all receipts of an income nature, except such as it expressly exempts from charge, and also in respect of certain receipts not of an income nature which it expressly brings to charge. This it does by stating that receipts of money or other benefits in respect of which tax is levied are all included in a taxpayers' "assessable income". That term "assessable income" is not defined by reference to the word "income". Even if one assumes, as the argument for the Commissioner does – erroneously I think – that the word "income" in s 47 is to be given a meaning which would comprehend anything which under any provision under the Act is brought to charge as part of the assessable income, I am unable to agree that something which is both not income in the strict sense, and not by the Act made part of the assessable income of a company, can be "income derived by the company" within the meaning of s 47. 20 The effect of the majority's reasons in Gibb is, it seems, that a receipt, which is not income within ordinary principles, may be "assessable income" under the Act although not "represent income" for the purpose of s 47(1). This view of the effect of Gibb and of s 47 was adopted in the explanatory memorandum to the Bill which introduced sub-s 1A of s 47 (a sub-section intended to correct anomalies arising from Gibb). The memorandum stated, at 7, in relation to s 47(1), that: For these purposes, income has its ordinary meaning and does not include amounts – such as certain capital profits – that are specifically included in assessable income of a taxpayers by various provisions of income tax law. If this were accepted on this appeal, then the Commissioner would fail. 21 The Commissioner challenged the authority of Gibb in a number of ways. First, as the Commissioner noted, the passage from the reasons for judgment of Barwick CJ, McTiernan and Taylor JJ (set out above) is, plainly enough, in the nature of obiter dictum. Secondly, that passage is, so the Commissioner submitted, misleading or erroneous. In the first place, if their Honours, in that passage, intended to say that the role of s 47(1) was "merely" in the sense of "only" ancillary to s 44(1), then the statement was plainly inconsistent with earlier authority: see, e.g., Archer at 154-5 per Williams ACJ, Kitto and Taylor JJ and Glenville at 207. It does not seem to me, however, that their Honours intended to be so understood. What their Honours were seeking to convey, I think, was that s 47(1) did not operate by or on itself. Instead, s 47(1) operated in conjunction with other provisions of the Act (in Gibb's Case, s 44) and it did so "merely" by providing a basis for its operation. So understood, the statement in question is neither wrong nor misleading. 22 The Commissioner submitted, in the second place, that neither Glenville nor Uther were authority for the proposition advanced by Barwick CJ, McTiernan and Taylor JJ, that deemed dividends did not "by force of their character as such, further assume the character of assessable income, or, for that matter, of income": 118 CLR at 637. If, indeed, their Honours were referring to Glenville and Uther as definitive authority for this proposition, then there would be some force in the Commissioner's submission. But I doubt that this was their purpose. A reading of the references (Glenville at 205-207 and Uther at 641, 642) given by their Honours shows the point being made plainly enough. Kitto, Taylor and Owen JJ, in Glenville,and Taylor J, in Uther, were indicating, at the pages cited, that the amounts at issue in those cases were not made assessable income solely by virtue of s 47 but by force of another provision (in Glenville and Uther, s 44(1)). That, indeed, was the purpose of the reference by Taylor J, in Uther at 642, to Glenville at 206 and 207. I am, therefore, unable to discern any fault in their Honours' reasoning. 23 Ultimately, the Commissioner's case rested very largely on the proposition that the present appeal is not governed by Gibb but by Harrowell. Gibb was, so the Commissioner contended, distinguishable on a number of bases. First, it turned, in part, on the operation of the definition of "dividend" in s 6(1) of the Act; and, secondly, it involved distributions by only one liquidator of the proceeds of sale of bonus shares paid out of a fund made up of profits on an assets revaluation. Although these two points may be accepted, it is necessary to examine Harrowell itself in order to assess the strength of the Commissioner's proposition that Harrowell, not Gibb, determines the outcome of this appeal. Harrowell's Case 24 Harrowell concerned the result of successive distributions made in the course of winding up by a liquidator of two companies, E Killen and Sons Pty Ltd ("Killens"), and its parent company, Glenville Pastoral Co Pty Limited ("Glenville Pastoral"). The appellant was the executor and trustee of the estate of a deceased owner of a substantial number of ordinary shares in Glenville Pastoral. The liquidator of Killens made distributions to Glenville Pastoral which, pursuant to s 47(1) of the Act, were treated as assessable income in the hands of Glenville Pastoral. The liquidator of Glenville Pastoral subsequently made a distribution to Glenville Pastoral's shareholders. The distribution by the liquidator of Killens represented that company's trading profits and was the source of the distribution subsequently made by Glenville Pastoral's liquidator. 25 The appellant in Harrowell contended that the distribution by Glenville Pastoral's liquidator was not assessable income in the hands of Glenville Pastoral's shareholders, because the fund out of which the liquidator made the distribution was not income according to ordinary concepts and did not become "income" within the meaning of s 47(1) simply because the amount out of which the distribution was made to Glenville Pastoral's shareholders was assessable income, by virtue of s 47(1) and s 44(1)(a) of the Act, in the hands of Glenville Pastoral. The appellant submitted that, by analogy with Gibb, although s 47 deemed the distribution to Glenville Pastoral to be a dividend paid to that company out of profits derived by Killens, it did not enable the Commissioner to treat any part of the amount of the distribution made by the liquidator of Glenville Pastoral as representing income derived by Glenville Pastoral. 26 The Court (Taylor, Windeyer and Owen JJ) held, at 611-612: The argument, however, is fallacious and the reasoning applied in Gibb's Case … has no application to the circumstances of this case. Distributions by a liquidator to the shareholders of a company can be made only after the debts of the company have been paid or provided for and this must be borne in mind when we come to consider s 47(1). Accordingly, when the sub-section expresses the initial condition for its operation – "Distributions … to the extent to which they represent income derived by the company" – it proceeds on the basis that if a distribution is made to the shareholders in the course of winding up out of a fund which, either in whole or in part, represents income derived by the company, such distribution, or such part thereof, is to be regarded as a revenue profit and it is in that context that the distribution "is deemed to be dividends paid to the shareholders by the company out of profits derived by it". Within this framework there is, therefore, no room for the view that a deemed dividend under s 47 may in some circumstances consist of or include a capital profit and the reasoning in Gibb's Case … can have no application. It seems to us that the concluding words of the sub-section were introduced to accommodate its provisions to the language of s 44. But it is clear enough that when the legislature used these words it was speaking of a profit derived by a company on its revenue account and not otherwise. Accordingly the sub-section, for the purposes of the Act, deems the distribution, to the extent to which the distribution is made out of income derived by the company, as dividends paid to the shareholders out of such profits. The distribution by the liquidator of Killens, representing, as it did, income derived by Killens, the conclusion is inescapable that the effect of the sub-section was to invest the distribution with the character of a dividend paid to Glenville [Pastoral] out of, and only out of, profits derived by Killens on revenue account and, therefore, income in Glenville[Pastoral]'s hands. (Citations omitted.) The Court in Harrowell apparently considered that, if there were a deeming effected by s 47, then any subsequent distributions out of the deemed dividends represented "income", within the meaning of that provision, derived by the company being wound up. 27 The Commissioner submitted that Harrowell, being a case of successive distributions, governs this appeal. The decision in Harrowell made it clear, so the Commissioner submitted, that the effect of s 47(1) was to invest the distributions to Rowsom with the character of dividends paid out of profits derived by Clarkson and EIL on revenue account and, in consequence, to invest the distributions with the character of income in Rowsom's hands. 28 BIL submitted, and I accept, that Harrowell is inapplicable. The distributions in Harrowell were from one resident company to another resident company and then to a resident taxpayer. Harrowell, so BIL submitted and I accept,turned upon the fact that s 47(1) operated to deem the initial distribution from the subsidiary to the parent company to be dividends paid to the parent company out of profits derived by the subsidiary on revenue account. On the view taken in Harrowell, it was in consequence of this that the receipt of the distribution represented income in the parent company's hands, with the result that s 47(1) also applied to the distribution to the taxpayer. In the circumstance that there was a chain of residents, the initial distribution from the subsidiary gave rise, by virtue of s 47(1) and s 44(1)(a), to assessable income in the hands of the parent; and, also pursuant to s 47(1) and s 44(1)(a), the distribution to the taxpayer gave rise to assessable income. 29 In contrast to Harrowell, none of Clarkson, BIL and Rowsom was a resident for the purposes of the Act. The initial distributions from liquidators of Clarkson and BIL did not give rise to assessable income, by virtue of s 44 and s 47 or any other provision of the Act. Further, for the reasons to be given, s 47 did not operate on the distributions from Clarkson and EIL to Rowsom (and, in consequence, did not apply to the distribution from Rowsom to BIL). Even if the reasoning in Harrowell was accepted, there were no dividends deemed as paid to Rowsom out of the profits of Clarkson and EIL in consequence of the distributions by their liquidators to Rowsom. As a result, the receipt of those distributions could not, even on the view taken in Harrowell, represent income derived by Rowsom. In summary, I accept, as BIL submitted, that Harrowell is distinguishable from the present case 30 As we have seen, the reasoning in Gibb and Harrowell may not be entirely compatible, although that was not the view of the Court in Harrowell (the members of which had participated in Gibb). As it turns out, it is unnecessary to express a definitive view about the matter. I simply note that there is a difference between the effect of an interpretation provision, such as the definition of "dividend" in s 6(1) of the Act considered in Gibb, and the operation of a deeming provision, such as s 47(1). That difference may well provide a basis for reconciling the two decisions. Nor is it necessary in this case to express a view, one way of the other, about whether Gibb or Harrowell represents the preferable approach. (BIL challenged the correctness of Harrowell in so far as it was necessary to do so.) Again I simply note that there is some authority for the proposition that deeming provisions such as s 47(1) are not ordinarily construed as operating beyond the field in which they expressly apply: see, e.g., Federal Commissioner of Taxation v Comber (1986) 10 FCR 88 at 456 per Fisher J and 562 per Lockhart J. On this approach, it may well be said that whilst s 47(1) deems certain distributions to be dividends paid out of a company's profits, it says nothing about the character of the receipts in the hand of the recipient shareholders. As deemed dividends paid out of profits, the distributions are "assessable income" in shareholders' hands by virtue of s 44(1), not because they have been turned into income by s 47(1). As we have seen, that approach finds clearest support in Gibb. "For the purposes of this Act" 31 As I have already indicated, the outcome of this appeal turns on the proposition advanced by BIL, which I accept, that s 47(1) of the Act has no application to the distributions made by the liquidators of Clarkson and EIL to Rowsom. In support of the contrary submission, the Commissioner contended that, for the purposes of the Act, those distributions were to be deemed dividends paid to Rowsom out of profits derived by the distributing companies (even though non-resident and distributing money not relevantly sourced in Australia), because it was for the purposes of the Act to deem those distributions dividends for assessing BIL's income tax liability under the Act. It did not matter, so the Commissioner submitted, that s 47(1) had no prior operation with respect to Clarkson, EIL and Rowsom until the Commissioner came to assess BIL's liability to tax. It was sufficient that s 47(1) operated with respect to those prior distributions in order that, for the purposes of the Act, the distribution from Rowsom to BIL became assessable income by virtue, so the Commissioner said, of s 44(1)(a) and s 47(1) of the Act. Parke Davis 32 The Commissioner's case at this point depends upon the proposition, said to be derived from Parke Davis, that s 47(1) has a kind of floating operation. That is, it was enough that a distribution of the kind to which s 47 referred had taken place somewhere at some time, irrespective of whether s 47(1) had operated at the time of the relevant distribution to deem the distribution dividends paid out of profits, the receipt of which, according to Harrowell, represented income derived by the recipient. Accordingly, it is to Parke Davis that I turn. 33 Parke Davis involved two non-resident companies. One was incorporated under the laws of Colorado and the other, under the laws of Michigan. The question that arose in Parke Davis was whether the distributions made in the winding up of the Colorado company to its shareholder, the Michigan company, were assessable income of the Michigan company to the extent that the distribution included profits derived from sources in Australia. The Court held that the amount distributed on the winding up out of revenue derived from Australian sources was assessable income of the Michigan company by virtue of s 44(1) and s 47(1) of the Act. 34 On this appeal, the Commissioner relied on the following passage in the reasons for judgment of the Court in Parke Davis, which is to be found at 530-1: Section 47(1) is a provision dealing with a transaction according to its character. Its purpose is obvious enough. The section was first enacted in an earlier form to meet the situation, made clear enough by Inland Revenue Commissioners v Burrell [1924] 2 KB 52 which decided in effect that a distribution of a mass of assets, although in a colloquial sense they represented or contained profits, was a distribution of capital. There is no ground, we think, for adding territorial restrictions to s 47. That does not mean, of course, that in the description of the transactions s 47 gives, in reference to winding up and to a liquidator, and so on, grounds may not be found for saying that some particular procedure or process prescribed by foreign law will be outside the terms of the section. But it is, we think, of general application, quite independently of questions of locality. It is when a transaction comes within the terms of s 47 that you go back to the provisions relating to locality if the case be one of a non-resident. It is at that stage that you consider the source of the imputed dividend. In this and other passages in the Court's reasons, the Court emphasised that s 47(1) was intended to operate in conjunction with other provisions of the Act and, relevantly in Parke Davis and in this appeal, s 44(1). 35 Section 44(1) was crucial to the outcome of Parke Davis, as a passage at 526 indicates. It reads: [W]e think that in this particular case the transaction does fall within s 47(1). It falls within it because the assets which were handed over by the liquidator to the parent company included as an unseparated part profits made in the requisite accounting period. That the assets included income derived in Australia is a fact admitted in the case stated, and it is also stated, as has been pointed out, that those assets distributed represented such income derived by the company other than income properly applied to replace a loss of paid-up capital. Parke Davis shows that s 47(1) is not intended to operate by itself and, as the Commissioner would have it, upon itself. In view of this, it is unnecessary to imply territorial restrictions into s 47(1), which, as the Court said in Parke Davis operates "independent of considerations of locality", because s 44(1) (or some other relevant provision) is "intended to provide the territorial criteria for [in the case of s 44(1)] including a dividend in the assessable income of a shareholder": see Parke Davis at 526-7. One thing the Court in Parke Davis did not affirm is that s 47(1) has the kind of "floating" operation for which the Commissioner contends in this appeal. 36 Let it be assumed, for present purposes, that the effect of s 47(1) is not only to deem relevant distributions dividends in the hands of a relevant recipient but also to ensure that the distribution constitutes a receipt in the nature of income and that, contrary to my view, s 47(1) can apply to a transaction irrespective of the operation of s 44(1) or some other provision of the Act. Even in those circumstances, the Commissioner fails, because s 47(1) would not operate to deem the relevant distribution a receipt in the nature of assessable income: that result depends on s 44(1) of the Act and that provision does not have any application on the facts of this case. summary 37 As I have already indicated, I reject the Commissioner's submissions as to the operation of s 47(1) with respect to the distributions from Clarkson and EIL to Rowsom because at the time those distributions were made there could be no deeming "for the purposes of [the] Act". At the time those distributions were made, neither s 44(1) nor any other relevant provision of the Act had any relevant application to the distributions from Clarkson and EIL to Rowsom. As the Commissioner properly conceded, neither s 44(1) in conjunction with s 47(1) nor any other provision of the Act rendered the receipt of those distributions assessable income. Critically, for the purposes of this appeal, the distributions from Clarkson and EIL did not give rise to a receipt by Rowsom in the nature of income in the ordinary sense: see Burrell and the authorities cited earlier in connection with Burrell. Nor did those distributions give rise, for the purposes of the Act, to deemed dividends pursuant to s 47(1). In this circumstance, as BIL submits, Harrowell can have no direct application. If those distributions did not represent income in Rowsom's hands, then the subsequent distribution by Rowsom to BIL did not represent income derived by Rowsom; and, in consequence, that distribution could not, for the purposes of the Act, be deemed to be dividends paid to BIL out of profits derived by Rowsom, by force of s 47(1) or otherwise. 38 This interpretation of s 47(1) and its relation to s 44(1) could lead to some perceived anomalies. For example, a company which receives a distribution on the liquidation of an overseas subsidiary incurs, on this view, a liability to income tax on the receipt of the distribution. If, however, the subsidiary is one step removed from the Australian parent, i.e., the subsidiary of a subsidiary of the parent, then there is no consequential tax liability upon the receipt by the parent of a distribution deriving from the successive liquidations of both subsidiaries. One response is that this result flows from the text of the relevant provisions, and it is not for the Court to change it. Furthermore, there may be good reason for this result. By way of example, it avoids the necessity of having to characterise a transaction potentially long after it has occurred where, say, an overseas subsidiary is liquidated many years before the liquidation of an overseas parent (which is, in turn, a subsidiary of a resident taxpayer). 39 More to the point, it is not the case that, by acknowledging that some distributions are insulated from Australian tax liability, the Court is giving free rein to those who would set up tax shelters by creating bogus intermediary companies overseas. The Act contains anti-avoidance provisions to meet that eventuality. The Commissioner did not allege sham in this case, nor did he invoke the anti-avoidance provisions of the Act. 40 For the reasons given, I am of the view that s 47(1) of the Act did not operate to deem the amount of Aus$41,939,520 distributed by the liquidators of Clarkson and BIL to Rowsom dividends paid to Rowsom out of profits derived by those companies. In consequence, there is no basis upon which to say that the receipt of those distributions amounted to income derived by Rowsom, for the purposes of s 47(1). It follows that there is no basis upon which to say that s 47(1) applies in relation to the distribution from Rowsom to BIL, and it is not, therefore, assessable income pursuant to s 44(1). BIL has established that its assessment was excessive. I propose to allow the appeal, set aside the objection decision the subject of appeal, and remit the matter of the objection to the respondent to be considered and decided according to law. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate: Dated: 28 January 2000 Counsel for the Applicant: Mr B Shaw QC with Ms H Symon and Mr D Farrands Solicitor for the Applicant: Corrs Chambers Westgarth Counsel for the Respondent: Dr C Jessup QC with Mr M Connock Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 9 March 1999 Date of Judgment: 28 January 2000