Rowdell Pty Ltd v Commissioner of Taxation (Cth) [1963] HCA 61

High Court of Australia Dixon C.J. Kitto and Menzies JJ. Rowdell Pty Ltd v Commissioner of Taxation (Cth) [1963] HCA 61

ORDER The questions in the case stated be answered as follows:

Q. 1. This question does not arise for an answer

Q. 2.

(a) No.

(b) No.

(c) No.

Q. 3.

(a) Yes.

(b) No.

(c) No.

Q. 4.

(a) Yes.

(b) No.

(c) No.

Q. 5. No.

Q. 6. This question does not arise for an answer.

Q. 7. No.

Reserve the costs of the case stated for the judge disposing of the appeals.

Cur. adv. vult.

The following written judgments were delivered:—

1963, Dec. 10 Dixon C.J.

This is a case stated under s. 18 of the Judiciary Act 1903-1960 Cth. The case was stated upon an appeal and cross appeal from a Board of Review under s. 196 (1) of the Income Tax Assessment Act 1926-1949. The decision or decisions of the Board of Review appealed from were upon references of objections made to certain assessments and amended assessments of the Commissioner in respect of the income of the appellant company for the income years ended 30th June 1947, 1948 and 1949. It appears from the case stated that the appellant company was incorporated in Western Australia on 12th June 1926 and it carried on the business of dealing in stocks and shares and securities. It is important to notice that the fact so stated is not disputed. It is, however, a private company under Div. 7, Pt III, of the Act, although this is not of immediate importance and does not affect the decision of the appeal.

In the years of income ended 30th June 1947, 1948 and 1949 the appellant company proceeded on what appears to have been a plan with reference to other companies which had accumulated profits of a nature which upon distribution would involve either exemptions or rebates of tax under ss. 107, 46 and 44 (2) (b) (ii). Section 44 (2) (b) (ii) relates to profits accumulated before the repeal of the provision by Act No. 58 of 1941 (see sub-s. (2) of s. 7 of No. 58 of 1941, p. 135 of the 1941 volume of the statutes). The shares in these companies were acquired by the appellant company from the shareholders at a price representing the asset value less ten per cent or thereabouts. Some of the companies were, when the shares were purchased, already in liquidation; others it was expressly or tacitly arranged should be wound up; in either case it was intended that in the liquidation the appellant should receive the accumulated profits. In some cases it was intended that the appellant should after receiving dividends to exhaust the accumulated profits resell the shares for a very much lower sum than it paid for them. The shareholders of these various companies, so it was assumed, would receive the money, which in one sense represented the accumulated profits, as capital. The appellant company on its side assumed that rebates and exemptions under ss. 107, 46 and 44 (2) (b) (ii) would enure for its benefit. However confident may have been the assumption of the shareholders who sold their shares to the appellant company, the Commissioner of Taxation in fact invoked the aid of the provisions of s. 260 of the Act and assessed the shareholders of those companies for income tax on the basis that when the distributions were made they, rather than the appellant, had received distributions of profits; and, except one, these assessments apparently stood. See Hancock v. Federal Commissioner of Taxation [1] . The Commissioner of Taxation then adopted the view that inasmuch as under s. 260 the vendors had been treated as having gained not a capital return but an actual or notional distribution of dividends under the guise of purchase money for their share interests, it followed that s. 260 should be applied in reverse so as to treat the appellant company, Rowdell Pty. Limited, as having obtained not dividends but other income of a taxable character by these transactions. Kitto J. in his judgment in this case, which I have had the advantage of studying, has disposed completely of this contention on the part of the Commissioner of Taxation and I do not desire to add to the reasoning set out in his judgment on this question. After all, the basis of s. 260, as its structure shows, is that a contract, agreement or arrangement entered into, and that includes the carrying out of the contract, agreement or arrangement, shall not stand in the way of the Commissioner in so far as it has the qualities or is intended to have the qualities set out in the paragraphs of s. 260. It is not to stand in his way when he seeks to put in execution the positive commands of the Act. In the circumstances stated that means that he assessed what was in reality taxable income when s. 260 as interpreted had been applied to expose that each vendor shareholder received what in truth and substance were dividends or distributions although disguised as purchase money by the contract, agreement or arrangement which s. 260 avoided. But if you take any of the transactions in question in this case and turn them the other way round, s. 260 is not appropriate to give a taxable character to any profit to which the appellant became entitled, for in respect of such profits there is no contract, agreement or arrangement to disguise the taxable character of the moneys to which the appellant became entitled. The point in the present case lies elsewhere. It lies in the fact that among the things which were obtained by the appellant company were accumulated profits of the companies whose shares were purchased by the taxpayer company. These accumulations would represent in one case, when distributed, dividends which under s. 44 (2) (b) (ii) were exempt from tax; in other cases dividends entitling the shareholder to a rebate in his assessment of certain amounts calculated in accordance with s. 46; in still a third class of cases the exclusion of amounts representing a dividend or part of a dividend from certain sources set out in s. 107 (1). (For the sake of clearness it is perhaps desirable to add that the single case in which s. 44 (2) (b) (ii) applies is one where the dividends paid, credited or distributed were declared before 30th October 1941 or paid out of profits arising from the sale or compulsory resumption for public purposes of assets not acquired for the purpose of resale at a profit and that the sale or resumption took place prior to 30th October 1941. By reason of sub-s. (2) of s. 7 which omitted par. (a) of s. 44 of the Act, the amendment did not affect those dividends which otherwise were exempt. See s. 7 of the Income Tax Assessment Act 1941 (Act No. 58).)