H.C. or A, Income Tax— Assessment—Company— Income— Deduction— Dividends— Pa; 1916. aw Mrxnourne, Oct. Griffith C.3., Barton, Isaacs, Gavan Duffy and Rich J. Griffith 0.5. THE FEDERAL COMMISSIONER OF TAXA- HIGH COURT [HIGH COURT OF AUSTRALIA.] THE FOSTER BREWING CO. LTD. 5 . APPELLA AND TION } Respo: ear out of profits—Income Tax Assessment Act 1915 (No. 34 of 1915), sec. 16. 'A company, whose assets consisted principally of shares in another company, July 1915. A few days before each dividend was paid the company ha' money in hand. It had in its books an account called a reserve of the nominal amount of £15,000 which represented undivided profits that had been invested in income-producing property. Immediately before payment of each of the two dividends the company received by way of inco! from its assets a sum rather larger than the amount of the dividend. E sum when received was paid to the credit of the company's banking account which was then overdrawn, and each dividend was immediately paid by cheqi drawn upon that banking account. In its return of income for the y ending 30th June 1915 for the purposes of the Income Tax Assessment 1915 the company claimed to deduct the amount of the two dividends its total income for that year, but the Commissioner apportioned the dividen between the amount appearing in the profit and loss account for the hal ending 31st January 1915 as having been brought forward from the pre half-year and the net profit for the year, and allowed a deduction of only proportionate amount of the dividend so attributed to the net profit for year. Held, that the fact that in the profit and loss accounts the dividen¢ were debited against the gross sums made up of the net profits of the preced- ing half-years together with the balances brought forward from the previou: periods was not conclusive to show that the dividends sought to be deduct were not wholly income distributed to the members of the company the meaning of sec. 16 of the Income Tax Assessment Act 1915. RJ OF AUSTRALIA. _ Held, by Griffith C.5., on the evidence, that the dividends sought to be deducted were wholly income distributed to the members within the meaning K STATED and hearing of appeal from the Federal Commissioner High Court against an assessment of them by the Federal mer of Taxation for income tax for the year ending 30th . The Foster Brewing Co. is a company duly incorporated under the Companies Acts of Victoria and has its registered office in Mel- e in the State of Victoria. The Company is what is called a ing company," its assets consisting principally of shares in ther company. . The Company issued half-yearly halance-sheets and profit and accounts as on 31st January 1915, 31st July 1915 and 31st respect of that period the sum of £5,760 was distributed Company amongst its members by way of dividends and ses pursuant to the following resolutions duly passed by the ders of the Company :— 22nd February 1915. That a dividend at the rate of 8 per t. per annum and a bonus at the rate of 2 per cent. per annum e half-year ended 31st January 1915 he declared." August 1915. That a dividend at the rate of 8 per cent. num and a bonus at the rate of 2 per cent. per annum for the ear ended 31st July 1915 be declared payable forthwith." The Company kept a single current banking account, to the dit of which it paid all moneys received. A sum of £15,000, ing undistributed profits, was invested in income-producing 880 were paid by the Company out of the moneys standing credit of its banking account. Except as appears by the 289 - H C. or A. 1916. ~~ Fosrer Brewine Co. Lap. v. FEDERAL Cowons- SIONER OF Taxation. + 290 H.C. or A. 1916, Foster BrewinG Co. Lrp. v. FreperaL Commis- . date the account was overdrawn. HIGH COURT [191 profit and loss accounts they were not specially debited to, or paid out of, any particular fund. 7. The amount standing to the credit of the said banking account on 22nd February 1915 prior to the payment of dividend £3,083 11s. 9d., which sum was in fact made up entirely of dividends and interest received by the Company after 9th February, on which 8. The amount standing to the credit of the said banking account on 30th August 1915 prior to the payment of dividend was £3,161, 7s. 11d., which sum except as to £114 2s. 11d. was in fact made up © entirely of dividends and interest received by the Company after 23rd August, on which date the account was overdrawn. The said sum of £114 2s. 11d. was part of the proceeds of the Company's investments, and was not part of the year's income. 9. On 11th November 1915 the Company pursuant to the Income 4 Tax Assessment Act 1915 furnished to the Federal Commissioner of Taxation a return setting forth a statement of the income received by it during the year beginning Ist August 1914 and ending 31st July 1915, which return was accepted by the Commissioner in lieu of a return for the year beginning on Ist July 1914 and ending on 30th June 1915. In such return the Company claimed to deduct the said sum of £5,760 from the said sum of £6,044 for the purpose of arriving at the taxable income, which was accordingly stated as £284. : 10. Pursuant to the Act the Commissioner caused an assessment to be made for the purpose of ascertaining the taxable income upon which income tax should be levied and gave a notice in writing — of such assessment to the Company. The Commissioner appor- tioned the said dividends and bonuses paid to the shareholders — ratably to and between the net profits disclosed by the balance- — sheets and profit and loss accounts of the Company for the said period, namely, the £6,044 2s. 11d., and the amount brought forward — in the profit and loss account of the Company for the period begin- ning 1st August 1914, which was £8,115 2s. 6d. 11. The Company duly gave notice of objection to the assessment, — and the Commissioner having considered the objection on 29th ; April 1916 disallowed it. The appellant, being dissatisfied with — "RJ OF AUSTRALIA. decision of the Commissioner, on 3rd May 1916 asked the Com- to treat the objection as an appeal and forward it to the h Court pursuant to the provisions of the Act, and the Commis- pursuant to the Act duly transmitted the objection to the Court for determination as a formal appeal. rofit and loss accounts the dividends paid were debited against ss sums made up of the net profits of the preceding half- together with the balances brought forward from the pre- periods is conclusive to show that the dividends sought to ' Dr. Salary, Directors' and Audit Fees, General Expenses ae £172 4 9 Balance brought forward £8,115 2 6 Net Profit for Half-year 3,011 2 8 Balance es —————— 1116 5 2 £11,298_9 11 Cr. Balance from last Half-year £10,419 2 6 ess Dividend Paid 2,304 0 0 : ——————_ £8,115 2 6 Dividend ©. & U. Breweries Ltd. 3,045 0 0 Interest cage 3 1388 7 5 -— 3,183 7 5 £11,298 9 11 H.C. or A. 1916. ~~ Foster Brewtne Co. Lrp. v. FeperaL Commis- SIONER OF TAXATION. Hi. C. or A. 1916. ww Foster Brewine Co. Lrp. v. Feperan Commis- SIONER OF TaxaTIon. HIGH COURT The profit and loss account for the six months ended 31st Jul uly 1915 was as follows :— Dr. To Salary, Directors' and Audit Fees, " General Expenses _ £140 9 1¢ », Balance brought forward £8,246 5 2 +» Net Profit for Half-year 3,033 0 3 » Balance AY ——— line £11,419 15 Cr. By Balance from last Half-year £11,126 5 2 ,, Less Dividend and Bonus 2,880 0 0 —-—-————- £8,246 5 », Dividend C. & U. Breweries Ltd. 3 045 0 0 » Interest and Commission 128 0a ———-— 3173 10 £11,419 15 1916 was as follows :— Dr. To Salary, Directors' and Audit Fees, General Expenses ae £132 18 10 », Balance brought forward £8,130 6 5 », Net Profit for Half-Year 2,298 15 1 » Balance te —-————— 10429 1 6 £10,562 0 4 Cr. By Balance from last Half-year £11,279 Sb eo Less Dividend and Bonus Paid -. £2,880 0 0 Tncome Tax Re- serve -+, 268819 0: : ——— » 61a —-——— £8,130 6 a », Dividend C. & U. Breweries Ltd. 2 301 17 6 a >» Interest and Commission 129 16 5 ———_ 2,431 18 11 £10,562 0 4 OF AUSTRALIA. for the appellant. ke (with him Morley), for the respondent. el for the respondent stated that he could not argue the H C.J. We are all agreed that the fact that in the profit loss accounts the dividends paid were debited against the sums made up of the net profits of the preceding half-years her with the balances brought forward from the previous ds is not conclusive on the question whether the dividends e been paid out of income or not. Whether the dividends have so paid is a question of fact which will be determined by the who will hear the appeal. Question answered in the negative. Case remitted. Costs to be costs in the appeal. _ The hearing of the appeal was then proceeded with before Griffith On the facts the proper conclusion is that the whole ount of the two dividends was not paid out of the profits of the icular year of assessment but was paid out of, and appropriated he books and accounts to, the general balance of profit and loss. is so, there should be an apportionment of the dividends. rritH C.J. A few days before each of the dividends in ques- was paid, the Company had no money in hand. It had in in income-producing property. Immediately before the of each of the two dividends, it received by way of e from its property a sum of money rather larger than the nt of the dividend. Each sum when received was paid to the of the Company's banking account, which was then over- mn, and each dividend was immediately paid by cheques drawn H.C. or A. 1916. ~ Foster Brewin Co. Lrp. v. FepERaL Comms- SIONER OF 'TAXATION. H. C. or A. Brewin Co, Lrp. SIONER OF TAXATION. HIGH COURT (1916. upon that banking account. Under these circumstances I find as a matter of fact, and, indeed, of common sense, that so much of the income of the Company as was paid as dividends was income — distributed to the members of the Company within the meaning of sec. 16. The point was raised that because in each of the Company's prot and loss accounts a previous balance was brought forward a added to the income for the half-year and the amount of the dividend — was subtracted from the total amount, showing a new balance to be carried forward, therefore the dividends should be treated as" having been apportioned by the Company between the previous — balance and the half-year's income. The Full Court has just held on the case stated that that fact is not conclusive on the point. I think it is hardly even evidence on the point. I am at any rate not bound to decide to the contrary of what I believe to be the _ truth, which is that each of these dividends was in fact distributed . to the members out of the actual income of the half-year. Any other conclusion would lead to the taxation of profits accumu- — lated before the Act came into operation, The whole of the income — of a Company is within the area of taxable income, but the Company — is not taxable in respect of its whole income. So much of the income which it receives as is distributed among its members is not, however, withdrawn from the area of taxable income, since — the members are taxable in respect of it if their incomes are of taxable amount. If they are not, they go free, so that, in the result, so much of the income of the Company as is paid to them goes free from taxation altogether. But, if the contention of the Commis- sioner were accepted, it would follow that income earned by a Company before the Act came into force would be made taxable. Suppose, for instance, that (as in this case) the amount carried — forward had been earned before the Act came into operation, and was equal to the amount of the income for the year—in this case it was in the proportion of about 4 to 3,—then, if the dividend equal in amount to the net income were apportioned as claimed by the — Commissioner, it would follow that the amount distributed to the members, and so falling within the taxable area, would be made up, as to one half, of income earned before the commencement of the _ OF AUSTRALIA. The income earned after the commencement of the Act s already stated, within the taxable area. The total amount g within the taxable area would therefore be one and a half as great as the actual income of the year. I do not think s was the intention of the Act. If it was, it could be easily ped by a slight change in the mode of keeping profit and loss asked to base my decision upon the intention of the Company wn by the way in which it kept its accounts. In my on there is nothing to show that it intended to make an appro- on the only result of which would have been a gratuitous ption of liability to income tax. I think it intended to do it actually did, that is, to apply the sums just received by s income to the immediate payment of dividends. e appeal must, therefore, be allowed. Appeal allowed with costs. 295, nd, as to the other half, of income earned after its commence- H. ©. or A. 1916. a Foster Brewine Co. Lrp. v. FeperaL Commis- SIONER OF TAXATION.