Australian Knitting Mills Limited (in Liquidation) v Federal Commissioner of Taxation

The Australian Knitting Mills Limited (in Liquidation) appealed to the High Court of Australia against an assessment for war-time profits tax made by the Federal Commissioner of Taxation. The dispute concerned whether the appellant was entitled to deduct 5 per cent of the amount paid in calls on shares in another company from its business profits for the purpose of calculating war-time profits tax. The appellant had subscribed for and paid calls on shares in the Yarra Falls Spinning Co. Proprietary Ltd., a company carrying on operations in Australia, and sought to deduct £3,975, representing 5 per cent of the £79,500 paid in calls during the relevant financial year.

The legal issues before the High Court were whether, under the War-time Profits Tax Assessment Act 1917-1918, specifically sections 10(1) and 15(2), the appellant could deduct 5 per cent of the calls paid on shares in another company. This deduction was claimed by reference to section 18(1)(i) of the Income Tax Assessment Act 1915-1918, which allowed such a deduction in calculating a taxpayer's taxable income. The core question was whether the principles for determining profits for income tax purposes, as incorporated by the War-time Profits Tax Assessment Act, extended to this specific deduction, or if section 15(2) permitted it as an expenditure in respect of the business.

The High Court, in answering the question in the negative, reasoned that section 10(1) of the War-time Profits Tax Assessment Act required profits to be determined on the same principles as for income tax, but this referred to the determination of business profits, not the calculation of taxable income. Section 18(1)(i) of the Income Tax Assessment Act was a deduction from total assessable income to arrive at taxable income, not a principle for ascertaining business profits. Furthermore, section 15(2) of the War-time Profits Tax Assessment Act disallowed capital expenditures unless they were allowed for income tax purposes in respect of the business, and the deduction for calls on shares was not considered an expenditure in or for the business itself, nor was it a deduction from business profits under the Income Tax Assessment Act. Therefore, the deduction was not permissible under either section.