London Australia Investment Co Ltd v Commissioner of Taxation (Cth) [1977] HCA 50

High Court of Australia Barwick C.J. Gibbs and Jacobs JJ. London Australia Investment Co Ltd v Commissioner of Taxation (Cth) [1977] HCA 50

ORDER Appeals allowed. Order the appellant to pay the costs of the appeals to this Court. Orders of Supreme Court set aside. In lieu thereof order that the appeals be allowed and that the assessments be remitted to the Commissioner for amendment, and further order that the respondent Commissioner pay to the appellant one half of the costs of the appeals to the Supreme Court.

Cur. adv. vult.

The following written judgments were delivered:—

1977, Sept. 20 Barwick C.J.

The appellant is an investment company incorporated in New South Wales with a shareholding predominantly held by residents of the United Kingdom. It did not carry on any business in Australia other than investment in Australian companies with a view to the production of an income from dividends. A full description of its manner of operating its investment policy is to be found in the carefully expressed judgment of Helsham J. from which these appeals are brought. It suffices for my present purpose to say that the appellant, with the advice and recommendation of an Australian management company which managed its affairs in Australia, pursued a policy of endeavouring to maintain a consistent yield on its capital invested in shareholding in Australian companies. It did not purchase or otherwise acquire shares in order to make a profit by their resale. But, in order to maintain the desired yield, it was advisable if not indeed necessary from time to time to realize shares which, by reason of changes in market value or dividend paid, ceased to provide that yield. A share of which the market value substantially increased would have a diminished yield unless in the unlikely event its dividend rate commensurately increased. Upon realization of such a share in order to maintain a consistent yield, an excess over the cost of the share could result. But, as the learned primary judge found, this was not a result sought by the appellant or its advisers for its own sake. Indeed, the appellant's articles of association precluded the use of any such excess for the payment of dividends to shareholders. Sums so obtained must be held in an equalization account designed to protect the invested capital. From this account amounts could be carried in the discretion of the board to a capital reserve. An excess in recovery or a deficiency in recovery were similarly treated. Dividends were payable only out of the income derived from dividends received on shares held by the appellant.