Commissioner of Taxation (NSW) v Hardie Investments Pty Ltd

The Commissioner of Taxation (NSW) appealed to the High Court of Australia against a decision of the Supreme Court of New South Wales, which had allowed an appeal by Hardie Investments Pty Ltd. The dispute concerned whether bonus shares received by Hardie Investments Pty Ltd from another company, James Hardie & Co. Ltd, should be included in its assessable income for the purposes of New South Wales special income tax. The Commissioner had assessed the value of these bonus shares as assessable income, but Hardie Investments Pty Ltd contended they were exempt.

The legal issues before the High Court were whether the bonus shares constituted assessable income, and if so, whether they were excluded by section 53(c) of the *Income Tax (Management) Act 1936* (NSW). This section provides an exemption for dividends paid wholly and exclusively out of profits arising from the revaluation of assets not acquired for resale at a profit, where such dividends are satisfied by the issue of shares. The core of the dispute lay in determining whether the revaluation undertaken by James Hardie & Co. Ltd genuinely gave rise to profits within the meaning of this exemption.

The Court, applying the principles established in *Dickson v. Federal Commissioner of Taxation*, held that the value of the bonus shares did not form part of the respondent's assessable income. The reasoning centred on the interpretation of "profits arising from the revaluation of assets" in section 53(c). The Court accepted that a company could, for legitimate business purposes, write down its assets conservatively and subsequently write them up to a figure closer to their true value, even if not to their full real value. If this process disclosed a profit, and the dividend was paid from such profits and satisfied by the issue of shares, then the exemption applied. The Court found that the revaluation in this case, despite the initial conservative write-downs for commercial reasons, did disclose profits that met the requirements of section 53(c).

Consequently, the High Court dismissed the Commissioner's appeal, affirming the decision of the Supreme Court of New South Wales. The bonus shares received by Hardie Investments Pty Ltd were therefore held to be excluded from its assessable income.