Brohier v Federal Commissioner of Taxation

[1966] HCA 10

HIGH COURT OF AUSTRALIA

McTiernan A.C.J., Kitto and Owen JJ.

BROHIER v. FEDERAL COMMISSIONER OF TAXATION

(1966) 115 CLR 235

3 March 1966

Income Tax

Income Tax—Assessment—Assessable income—Taxpayer resident in Australia—Dividends paid by foreign companies—Amount deducted by companies for foreign tax—Set-off by taxpayer of amount deducted—Assessment of taxpayer for foreign tax and payment of refund to him—Whether taxpayer entitled to credit for foreign tax—Income Tax and Social Services Contribution Assessment Act 1936-1962 (Cth)—Income Tax Ordinance 1939-1962 (Ceylon), ss. 53B, 53D.

Decisions

March 3.
The following written judgments were delivered: -
McTIERNAN A.C.J. This matter consists of a reference by a board of review, made upon the request of the taxpayer pursuant to s. 196 (2) of the Income Tax and Social Services Contribution Assessment Act 1936-1962 (Cth). The questions which are the subject of the reference arose before the board when they were entering upon a review of the assessment issued to the taxpayer of the tax payable by him on the income of the year ended 30th June 1962. His objection to the assessment was that the Commissioner of Taxation refused the claim for a credit under s. 45 of the above-mentioned Act. The material part of the section is as follows: "(1) Where a dividend paid by a company which is a resident of a country outside Australia is included in the assessable income of any year of income of a taxpayer who is a resident of Australia, and the taxpayer has paid either directly or by deduction from the dividend income tax in respect of that dividend for which he was personally liable under the law of that country, the taxpayer shall, subject to sub-sections (6), (7) and (8) of this section, be entitled to a credit". The taxpayer is a resident of Australia. The claim was made in respect of dividends received by him during the year of income ended 30th June 1962 from companies resident in Ceylon of which respectively he was a shareholder. The taxpayer stated in his tax return that the amount of the total dividends was Rs 1,425 and that he was entitled to a credit under s. 45 on the footing that the whole amount was the assessable income under the law of Ceylon and the tax chargeable was a sum equal to twenty per centum of the dividends. The equivalent of Rs 1,425 in Australian currency was 130 pounds. The Commissioner sent, with the notice of the assessment issued to the taxpayer, an alteration sheet showing that the total amount of the dividends as returned was reduced by 44 pounds and the total income made up of these dividends was assessed at 86 pounds. The sum of 44 pounds is described in the alteration sheet as being "less tax paid at source" (33 1/3 per cent). The equivalent of 44 pounds in Ceylon currency was Rs 475/01. Thus, the taxpayer claimed the credit on the basis that a dividend of 130 pounds was paid and he was personally liable under Ceylon law to income tax in respect of that amount, but the Commissioner assessed the dividend which was assessable income in Australia at 86 pounds. (at p238)

2. The board of review made this reference on the basis that the relevant law of Ceylon upon which the claim depends is the Income Tax Ordinance (Ch. 188), Income Tax (Amendment) Act, No. 13 of 1959 and Income Tax (Amendment) Act, No. 10 of 1962. (at p238)

3. The reasons of the Commissioner for disallowing the claim of the taxpayer are in a statement furnished to the board of review which is a part of the reference. The statement reads as follows: "That, in respect of the year of income ended 30th June 1962, the taxpayer is not entitled to any credit under s. 45 of the Income Tax and Social Services Contribution Assessment Act 1936-1962 in respect of dividends which were received by him from companies resident in Ceylon and which were included in his assessable income for the purposes of the above-mentioned Act, because he has not paid, either directly or by deduction from those dividends, income tax for which he was personally liable under the law of Ceylon". The board of review cites in the reference certain provisions of the Ceylon Ordinance under which income tax was imposed on individuals at the relevant time. The provisions are ss. 5, 20 (a) and relevant attachments and s. 49. It appears that residents and non-residents are liable to taxation on income arising in Ceylon, and income includes dividends. (at p238)

4. The taxpayer's assessment under Ceylon law for the financial year corresponding to year of income, 1st July 1961 to 30th June 1962, the relevant Australian financial year, is contained in a document included in the present reference. The title of the document is "Computation of Repayment". The entries which are material to this case are as follows:

Rs

Total income 1425 Assessable income 1425 Income 1,425 Rs. Tax 20 per cent 285 Net tax due 285 Tax paid by direct assessment Nil

Less Tax paid at source in year ended March 31, 1962 475/01 Tax repayable 190/01
Less 20 per cent surcharge 57 Tax repayable 133/01

It appears from the document that a demand draft was sent to Mr. Brohier (the taxpayer) for Rs 133/01. The assessable income mentioned in this document consists of the dividends from companies in Ceylon in which he was a shareholder. It would appear that he did not derive other assessable income from Ceylon. (at p239)

5. The Commissioner, doubtless, adopted the term used in this Ceylon assessment to describe the sum of 46 pounds by which he reduced the total amount of the dividends as returned by the taxpayer, Rs 1,425 or 130 pounds. The sum of 46 pounds represents the sum Rs 475/01 in the document (Computation of Repayment). (at p239)

6. The interpretation of the document depends upon Ceylon law. What the entries are is a question of fact to be elucidated by opinion evidence of experts in that law. The present reference includes statutory declarations sworn by two such experts respectively. These declarations were tendered to the board of review in the proceedings in which the taxpayer sought this reference. The expert who made the declaration tendered by the Commissioner's representative contains the expert's answers to two questions. These are: "(a) By what statutory authority was the sum of Rs 475/01 set off against the net tax due of Rs 285/-? (b) By what statutory authority was the sum of Rs 133/01 repaid to the taxpayer?" His reply is: "In my opinion the answer to these questions is: (a) The taxpayer is entitled to a set-off of the sum Rs 475/01 against the net tax due of Rs 285/- pursuant to s. 53D (6) of the Ceylon Act. (b) The sum of Rs 133/01 was repaid to the taxpayer pursuant to s. 84 (1) of the Ceylon Act". (at p239)

7. This Act is the Income Tax Ordinance as amended. The other expert made two statutory declarations which the taxpayer tendered to the board. This expert stated in one declaration that: "The sum of Rs 475/01 shown therein (the Computation of Repayment) as 'tax paid at source in year ended 31st March 1962' represents the deduction at source made by the company under s. 53D (1) of the Income Tax Ordinance and under Ceylon tax law is treated as a provisional tax paid at source by the shareholder himself. The shareholder's actual liability to Ceylon tax based on his total Ceylon income amounted to Rs 285/- and the difference between Rs 475/01 (deducted at source) and Rs 285/- (total liability assessed) amounting to Rs 190/01 was refundable. From this amount of Rs 190/01 was deducted a surcharge calculated at twenty per cent on the income tax payable. This surcharge amounted to Rs 57/- and the net amount refunded by the Department to the shareholder amounted to Rs 133/01. The refund of the sum of Rs 133/01 was made to Mr. Brohier in terms of s. 53D (6) and not under s. 84 of the Ordinance." The same expert stated in a second statutory declaration: "In terms of s. 53D (1) introduced by the Income Tax (Amendment) Act, No. 13 of 1959, every resident company is entitled to deduct from the amount of the dividend paid to any shareholder, tax equal to 33 1/3 per cent of such amount. In Ceylon this tax is regarded as tax deducted at source from the income of the shareholder. This position is supported by the provisions of s. 53D (2) which empowers the Commissioner of Inland Revenue to give notice in writing to a resident company requiring it to deduct from the amount of dividend payable to a particular shareholder tax on such amount at a rate greater than 33 1/3 per cent but no greater than the highest rate at which tax is chargeable for such year of assessment on the taxable income of an individual. The procedure for assessment of dividend income in the hands of a shareholder is that the shareholder is required to include as part of his income the gross amount of the dividend (without deduction of the 33 1/3 per cent tax paid at source) and the individual shareholder is assessed to tax on such gross amount. On the total tax payable by him being determined he receives credit to the extent of the tax suffered at source on dividends and he is required to pay only such amount of the total tax as is in excess of the tax deducted at source. Where however the total tax deducted at source is in excess of the total income tax liability of any particular shareholder the Department refunds to such shareholder the excess amount so deducted at source. This procedure is in accordance with s. 53D (5) and (6)". The deponent does not state his own opinion. What he stated is that under Ceylon law the sum Rs 475/01 in the context of the "Computation of Repayment" "is treated" as a provisional tax paid at source by the shareholder himself; and, in Ceylon, "is regarded" as tax deducted at source from the income of the shareholder. Neither of these statements is in terms an expression of the expert's own opinion. It is his view of how a deduction under s. 53D (1) of the Ordinance "is treated" or "is regarded" for the purpose of assessing the income tax payable by a taxpayer who is a shareholder of a company which exercised a right conferred by that provision. It would have been better if the expert had explicitly stated his own opinion as to the construction of s. 53D (1). In my opinion this reference ought to be considered upon the basis of the other expert's opinion that the sum of Rs 475/01 is not tax of the taxpayer deducted at the source but is a set-off under s. 54D (6); and that s. 84 (1) is the statutory authority for the repayment of the sum of Rs 133/01. (at p241)

8. Turning to Ch. VIIIA of the Income Tax Ordinance, the subject of which is entitled "Tax in respect of Companies", ss. 53B and 53D deal with the taxation of companies resident in Ceylon. The companies concerned are in that category. Section 53B (1) imposed two taxes, one of which is: "(b) a sum equal to 33 1/3 per centum of the aggregate amount of the gross dividends distributed by such company out of the profits on which the taxable income of such company is computed for such year of assessment". Under s. 53B (3), "'amount of the gross dividends' of a company means the amount of the dividends before such deductions as the company is entitled to make under this Ordinance for tax are made from the dividends". Section 53D (1) provides that "every resident company shall be entitled to deduct from the amount of any dividend payable to any shareholder in the form of money or an order to pay money out of the profits on which the taxable income of that company is computed for any year of assessment commencing on or after April 1, 1959, tax equal to 33 1/3 per centum of such amount". By sub-ss. (2) and (3) of s. 53D, the Commissioner may direct that in the case mentioned in these sub-sections respectively the rate of deduction should be varied. By sub-s. (5) of s. 53D, every person who issues a dividend warrant, cheque or other order in payment of any dividend paid by a resident company is required to annex to such warrant, etc., a statement in writing showing (a) gross amount of the dividend, (b) the sum deducted as tax and (c) the net amount actually paid. In the present case, Rs 1,425 was the total of the gross amounts of the dividends; Rs 475/01 was the total of the sums deducted under s. 53D (1); and Rs 949/9 was the total of the net amounts actually paid. The corresponding sums in Australian currency were 130 pounds, 44 pounds and 86 pounds (vide "Alteration Sheet" supra). (at p241)

9. The last of the provisions which should be noticed is sub-s. (6) of s. 53D. This sub-section enacts that where the assessable income of a person includes a dividend from a resident company, he is entitled, on production of the statement which he obtained in accordance with sub-s. (5), to a set-off of the amount of the tax shown in the statement (which is the tax imposed by s. 53B (1) (B)) against the income tax imposed on him personally under the provisions of the Ordinance which are cited in the reference relating to tax imposed upon individuals. (at p242)

10. The question then is whether the conditions of s. 45 in respect of the payment of tax abroad on ex-Australian dividends were fulfilled. I am unable to gather from the present taxpayer's Ceylon assessment (found in the Computation of Repayment) that he paid directly the income tax chargeable on the dividends (Rs 1,425). His tax was twenty per centum of that amount (Rs 285). The sum of Rs 475/01 was the amount of the deductions made by the companies in reference to the tax imposed on a resident company by s. 53B (1) (b), 33 1/3 per cent of the dividend payable before distribution to shareholders. I cannot find anything in the provisions of the Income Tax Ordinance of Ceylon which attributes to this deduction the character of a payment by deduction from the dividend of the income tax for which the shareholder is liable in respect of the dividend. (at p242)

11. The provisions of ss. 53B and 53D contain a plan of company taxation similar to that of the provisions of the Malay Ordinance which were considered in Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 Section 40 (2) of the Malay Ordinance corresponds with s. 53D (5) of the Ceylon Ordinance. The former provides for the issue of a "certificate"; the latter of a "statement". These documents respectively serve the same sort of purpose. Section 42 (a) of the former Ordinance corresponds with s. 53D (6) of the latter. The former does not require production of the certificate under s. 40 (2) as a condition of the set-off of the deduction made by a company for its tax against the tax payable by the taxpayer to whom the company issued the certificate. The production of the statement issued pursuant to s. 53D (5) is, as already mentioned, a condition precedent to the similar type of set-off under s. 53D (6). The absence of any reference in s. 42 (a) to the certificate under s. 40 (2) was adverted to in the above-mentioned case. As regards s. 53D (6), no doubt its words appear to make the production of the statement issued pursuant to sub-s. (5) a condition precedent to a set-off. There is no evidence of the opinion of an expert in Ceylon law as to whether the effect of the condition as to production of the statement is only that the statement is given an evidentiary value, or whether its effect goes so far as to give the statement value in exchange. Reading the words of the Ceylon Ordinance, I should not think that they could operate to bring the deduction, evidenced by a statement issued pursuant to s. 53D (5), within the scope of the statutory meaning of the words "dividend" and "paid" contained in s. 6 (1) of the Assessment Act (Australia). It would follow that the Commissioner was right in computing the dividends at 86 pounds for inclusion in the taxpayer's assessable income and in refusing the claim for a credit under s. 45 for the reasons he gave. The decision of the Full Court in Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 and of Menzies J. in Federal Commissioner of Taxation v. Brohier (1959) 103 CLR 632 are both applicable to the present case Each question formally referred by the board of review should in my opinion be answered: No. (at p243)

KITTO J. I have given this case very close consideration, both during the argument and since, being for two reasons specially anxious to recognize every consideration that might tend in favour of the appellant. One reason is that the appellant has striven without legal assistance to cope with the difficulties of a very technical subject, though I am bound to say that the disadvantage he has been at has been reduced to a minimum by the full and eminently fair discussion with which Mr. Blackburn has favoured us. The other reason is that if the appellant fails it must be because his case, though appearing to be within the spirit of s. 45, is outside its terms, and the resulting anomaly not unnaturally produces a sense of injustice. (at p243)

2. I am satisfied, however, that the case is covered in principle by the decision of this Court in Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345 and that Menzies J. was right in the reasons he gave for so holding in Federal Commissioner of Taxation v. Brohier (1959) 103 CLR 632 At first I was inclined to think that something might be made in the appellant's favour of the differences to which he pointed between the Income Tax Ordinance 1947 of Malaya which we had to consider in Hughes' Case (1958) 98 CLR 345 and the Income Tax Ordinance as amended by the Income Tax (Amendment) Acts of Ceylon with which we are concerned now; but I cannot find in those differences anything which makes inapplicable the reasoning of the judgments in Hughes' Case (1958) 98 CLR 345 If anything is to be done for such cases as this it will have to be by amending legislation. (at p243)

3. I need not discuss the case in greater detail, as I have had an opportunity of reading the judgment prepared by my brother Owen and find myself in agreement with it. (at p244)

4. I would answer both questions: No. (at p244)

OWEN J. This matter was referred to the Court by a board of review under s. 196 (2) of the Income Tax and Social Services Contribution Assessment Act. The question is whether on certain agreed facts the appellant taxpayer is, as a matter of law, entitled to a credit under s. 45 (1) of the Act for the year ended 30th June 1962. That sub-section provides that "Where a dividend paid by a company which is a resident of a country outside Australia is included in the assessable income . . . of a taxpayer who is a resident of Australia, and the taxpayer has paid either directly or by deduction from the dividend income tax in respect of that dividend for which he was personally liable under the law of that country, the taxpayer shall . . . be entitled to a credit . . . " of an amount to be ascertained in the way which is set out in the paragraphs following the words I have quoted. "Dividend" is defined by s. 6 (1) to include "any distribution made by a company to its shareholders, whether in money . . . and any amount credited to them as shareholders . . . ", and "paid" in relation to dividends to include "credited or distributed". (at p244)

2. The appellant in the present case was at all relevant times a resident of Australia and a shareholder in a number of companies carrying on business and "resident" in Ceylon. During the year ended 30th June 1962 dividends were declared by those companies. The dividends on the shares held by the appellant totalled Rs 1,425. By s.53B (1) of the relevant Ceylon income tax legislation, the tax payable by a company resident in Ceylon is a sum equal to 45 per cent of its taxable income, together with a sum equal to 33 1/3 per cent of the aggregate amount of the "gross" dividends distributed by it out of the profits on which its taxable income is computed. By s. 53B (3), "the amount of the gross dividends" means the amount of the dividends before making the deduction for which s. 53D provides. Under s. 53D a company resident in Ceylon is empowered - but not required - to deduct from the amount of any dividend payable to a shareholder what is described as "tax", the amount of that "tax" being the same percentage of the gross dividend as that on which the company's tax on those dividends is computed. If such a deduction is made, s. 53D (5) requires the person who issues the warrant, cheque or other order drawn or made in payment of the dividend to annex to it a statement showing the amount of the gross dividend, the sum deducted as "tax" and the net amount actually paid to the shareholder. And, by s.53D (6), where the assessable income of the person to whom the dividend is paid includes that dividend he is entitled, on production of this statement to the revenue authorities, to a set-off of the amount of the deduction shown on the statement against his own tax liability. It is important to notice that the amount deducted by the company is not required to be paid over or to be accounted for by it to the revenue authorities in discharge of the shareholder's tax liability. It is a means whereby it is permitted to recoup itself for moneys which it has paid or is liable to pay in satisfaction of its own tax liability. To illustrate the way in which the legislation works I take the case of one of the companies in which the appellant held shares - the Kaluganga Valley Tea and Rubber Co. Ltd. It declared a gross dividend which on the taxpayer's shares amounted to Rs 240. From the amount of the gross dividend on the appellant's shares it deducted and retained 33 1/3 per cent, namely Rs 80. The balance of Rs 160, being the net dividend, it paid to the appellant. With the cheque for the payment of that amount he was given the statement for which s. 53D (5) provides. The same procedure was followed in the case of the other companies. In his return of income to the Ceylon revenue authorities the appellant, as he was required to do, showed the receipt of the gross dividends, but since the total of the deductions shown on the statements was greater than the amount of the tax for which he was liable the right to a set-off which s. 53D (6) gave him resulted in a payment to him by the revenue authorities. In his Australian income tax return the appellant showed the receipt of Rs 1,425 by way of dividends, that being the amount of the gross dividends which would have actually been paid to him had the companies concerned not made the deductions which the law of Ceylon permitted them to make. He claimed then to be entitled to a credit under s. 45 of the Australian Act as having paid, either directly or by deduction from those dividends, income tax in Ceylon for which he was personally liable under the laws of that country. The Commissioner, however, assessed him to tax upon the net amounts of the dividends received by him from the companies and refused to allow a credit under s. 45. (at p245)

3. The decision of this Court in Hughes v. Federal Commissioner of Taxation (1958) 98 CLR 345, which Menzies J. followed in Federal Commissioner of Taxation v. Brohier (1959) 103 CLR 632, seems to me to dispose of the present case. Hughes' Case (1958) 98 CLR 345 was decided upon the Income Tax Ordinance 1947 of the Federation of Malaya. The general scheme of that Ordinance and the facts of that case were in all relevant respects similar to the provisions of the Ceylon legislation and the facts with which the present case is concerned. The Court there held that in assessing the taxpayer to tax in Australia and determining the application of s. 45 of the Commonwealth Act it was the net and not the gross amount of dividends received by him from the Malayan companies in which he held shares that had to be considered. Accordingly in the present case the Commissioner rightly treated the amounts actually received by the appellant, that is to say the net dividends, as being his assessable income derived from his shareholdings. In Hughes' Case (1958) 98 CLR 345 the Court went on to say that if the amounts deducted from the gross dividends had been required to be paid by the companies concerned to the revenue authorities on behalf of the taxpayer to satisfy his liability to pay Malayan income tax he might have brought himself within s. 45 but this was not the case. The amounts deducted were retained by the companies and whatever tax they paid was paid on their own behalf and not on behalf of the taxpayer. For the purposes of s. 45 it could not be said that he had paid, either directly or by deduction from the dividends, income tax in Malaya on the net dividends which he had received. In respect of those dividends his right of set-off had resulted in a payment to him by the revenue authorities. (at p246)

4. I can find no relevant distinction between the Ceylon Act and the Malayan Ordinance which was considered in Hughes' Case (1958) 98 CLR 345 nor is any such distinction to be found between the Ceylon legislation as it was when the first Brohier Case (1959) 103 CLR 632 was decided and the legislation which we have to consider. (at p246)

5. In my opinion the questions asked in the case should be answered by saying that the appellant is not entitled to a credit under s. 45 of the Income Tax and Social Services Contribution Assessment Act for the year ended 30th June 1962. (at p246)

Orders

Questions in the reference to be answered as follows:

1. (a) No. (b) No. 2. No.

Costs of the argument of the reference before the Full Court of the High Court to be paid by the appellant taxpayer.