Esquire Nominees Ltd v Federal Commissioner of Taxation

[1973] HCA 67

HIGH COURT OF AUSTRALIA

. Gibbs J. Barwick C.J., McTiernan, Menzies and Stephen JJ.

ESQUIRE NOMINEES LTD. v. FEDERAL COMMISSIONER OF TAXATION.

(1973) 129 CLR 177

31 May 1972

Income Tax (Cth)

Income Tax (Cth)—Source of income—Income derived by residents of Norfolk Island from sources within Norfolk Island—Excepted from operation of Act—Dividend received in Norfolk Island by company incorporated there—Profits of Australian trader passed in form of dividends through chain of companies to taxpayer company as trustee—Whether provisions invalidating arrangements for avoidance of tax apply to that income—Income Tax Assessment Act 1936-1969 (Cth), ss. 7 (1), 44 (1) (b), 99, 260.

Decisions

1972, May 31.
GIBBS J. delivered the following written judgment:-
This is an appeal under s. 187 (b) of the Income Tax Assessment Act 1936 (as amended) (Cth) ("the Act") against an assessment made by a Deputy Commissioner of Taxation of the tax payable by Esquire Nominees Ltd. ("the appellant"), as trustee of Manolas Trust, on income derived during the year ended 30th June 1969. No return of income was lodged by the appellant as such trustee and the Deputy Commissioner made a default assessment by which he treated as taxable an amount of $30,910 received as a dividend during the year of income. The assessment purported to be made under s. 99 of the Act on the footing that the amount of $30,910 was the net income of a trust estate to which no beneficiary was presently entitled. (at p179)

2. It is not disputed that on 30th April 1969 the appellant, as trustee under a deed of settlement dated 24th April 1969 which set up a trust described as "Manolas Trust", received $30,910.57, the amount of a dividend declared by another company, Mitchell Credits Ltd., on one fully paid B class share of $0.01 which the appellant held in that company. Under the deed of settlement no beneficiary was presently entitled to the income represented by the amount of the dividend. Both the appellant and Mitchell Credits Ltd. were incorporated in Norfolk Island. The question for decision is whether the appellant was rightly assessed to tax on this income. (at p179)

3. The appellant had been formed as a company in Norfolk Island in 1967. Its registered office was on Norfolk Island. At all material times it had three directors, Messrs. McIntyre, Paton and Lamb, all of whom were residents of Norfolk Island. Its articles provided for the division of the share capital into A class and B class shares. The A class shares, which were preference shares, conferred on the holders thereof, inter alia, the right to exercise all the voting power of the company except that the B class shareholders were entitled to vote in respect of the following matters -
(i) The declaration of a dividend other than the 10 per cent preference dividend to which the A class shares were entitled; (ii) Any resolution for the sale of the undertaking of the company; (iii) Any resolution for the winding up of the company; (iv) Any resolution for the reduction of the capital of the company or of any capital redemption reserve fund or of any share premium account involving a distribution of capital. (at p180)

4. At all material times, seven A class shares had been issued; six were held by persons resident in Norfolk Island (namely, Messrs. McIntyre, Paton and Lamb, Mesdames Paton and Lamb and Miss Ionn) and one by a company (Myee Ltd.) which was incorporated in Norfolk Island and of which Messrs. McIntyre and Paton were the directors. Seven B class shares also had been issued; these were held by W.B. &H. Nominees Pty. Ltd., a company which was incorporated in Victoria and which (like W.B. &H. (N.T) Nominees Pty. Ltd. and W.B.B. &C. Nominees (N.T.) Pty. Ltd. to which I shall later refer) operated under the control or influence of a firm of accountants, Messrs. Wilson, Bishop, Bowes and Craig (formerly known as Wilson, Bishop and Henderson). (There were in fact two related firms of the same name, one in Melbourne and one in Darwin, but this detail does not concern us.) All meetings of the shareholders and all meetings of directors of the appellant have been held in Norfolk Island. (at p180)

5. Before and during the year of income a company known as Manolas Pharmacy Pty. Ltd., which was incorporated in the Northern Territory, carried on business in Australia. During the year of income the ordinary shares in that company were held by, or on trust for, members of the Manolas family and there were in addition twenty-five redeemable preference shares which were held by another company, Mitchell Holdings Pty. Ltd., which was also incorporated in the Northern Territory. Until immediately before 28th April 1969 the shareholding in the latter company comprised fifty-one redeemable preference shares held by Forum Holdings Ltd. and forty-nine ordinary shares held by W.B. &H. (N.T.) Nominees Pty. Ltd. and it now appears, in the light of the decision in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR 62 , that Mitchell Holdings Pty. Ltd. was a public company for the purposes of Div. 7 of Pt III of the Act. However, the decision of Windeyer J. in Casuarina Pty. Ltd. v. Federal Commissioner of Taxation (1970) 127 CLR 62 , which the Full Court affirmed, was not given until 25th August 1970 and before that date the status of companies in the position of Casuarina Pty. Ltd. was a matter of contentio. Early in 1969 Messrs. Wilson, Bishop, Bowes and Craig, who were advisers to the Manolas family, formed the belief that the Deputy Commissioner would assess Mitchell Holdings Pty. Ltd. as a private company, as indeed the Deputy Commissioner did on 11th April 1969. If that assessment had withstood challenge, the result would have been that Mitchell Holdings Pty. Ltd. would have been liable for Div. 7 tax unless it had made a sufficient distribution before 30th April 1969, but if it had made a distribution, the shareholders would have been liable to tax on the dividends they received. The accountants discussed with Mr. Kerry George Manolas, who appears to have been an influential member of the family, whether they should rely on a challenge to the assessment being successful or take other action to escape from the dilemma in which they would find themselves if the challenge should fail, and it was decided to adopt the latter alternative. (at p181)

6. In consequence of this decision Mr. Sheehan, an accountant employed by Messrs. Wilson, Bishop, Bowes and Craig, visited Norfolk Island for the purpose of having discussions with Mr. McIntyre, who carried on practice there as a solicitor, with a view to the implementation of the plan which the Manolas family had decided to adopt Mr. Dowding, another agent of Messrs. Wilson Bishop, Bowes and Craig, also visited the Island to assist in carrying out the plan. Mr. McIntyre, in giving his evidence, would not agree that the directors of the appellant, and of the other companies which I shall shortly mention, were simply told by Mr. Sheehan what to do, and objected to the suggestion that the appellant was controlled by Messrs. Wilson, Bishop, Bowes and Craig, although he agreed that the board did take considerable heed of the recommendations made by that firm. If it matters, there is however no doubt that all the events I am about to recount occurred in the course of carrying out a plan previously evolved by the advisers of the Manolas family with the object of finding a way of escape from a liability to tax which it was thought (wrongly as it happened) would one way or the other be attracted if things were allowed to remain as they were. (at p181)

7. The first steps to effectuate the plan were taken on 24th April 1969. On that date a deed of settlement was made between one Savas Kiossoglou as settlor and the appellant as trustee. The deed was executed on Norfolk Island and was signed by Mr. Dowding as the attorney of the settlor. The sum settled was $10, but the trust fund, which was to be held by the appellant under the trusts of the deed, comprised not only the settled sum but also, inter alia, all moneys, investments and property paid or transferred to, and accepted by, the appellant as additions to the trust fund. The trusts declared were in favour of various members of the Manolas family, but under the provisions of the deed no beneficiary was presently entitled to the income of the trust fund which was received by the appellant as trustee during the income year in question. (at p182)

8. On the same day, the directors of the appellant resolved that the appellant would accept the office of trustee in respect of the Manolas Trust and would open a separate bank account in respect of that trust. In fact an account, known as Account no. 19, was opened with the Norfolk Island Branch of the Commonwealth Trading Bank of Australia for the purposes of the Manolas Trust. The directors further resolved that the appellant would accept from Mr. Dowding a loan of $100 at call and free of interest for six months. It is clear enough from the evidence that the purpose of obtaining this loan was to enable the appellant to take up shares, and accept options in respect of unallotted share capital, in two new companies, Mitchell Credits Ltd. and Pharmaceutical Investments Ltd., which were incorporated in Norfolk Island on 24th April 1969; each of these companies had its registered office on Norfolk Island and had a shareholding divided into A class and B class shares with respective voting rights similar to those attached to the two classes of shares in the appellant company. Messrs. McIntyre and Paton were appointed as directors of each of these companies. The directors of the appellant resolved to make from Account no. 19 an advance of $10 at call and free of interest to Mitchell Credits Ltd.; this advance was accepted by Mitchell Credits Ltd. on 28th April 1969. (at p182)

9. On 25th April 1969 the following further things were done:
(1) Mitchell Credits Ltd. allotted one A class share in that company each to Messrs. McIntyre, Paton and Lamb, Mesdames Paton and Lamb, Miss Ionn and Myee Ltd.
(2) Pharmaceutical Investments Ltd. allotted one A class share in that company to each of the same seven persons.
(3) Mitchell Credits Ltd. allotted one B class share in that company to "Esquire Nominees Limited Account No. 19".
(4) The appellant advised Mitchell Credits Ltd. by letter that it was willing to assist that company with loan funds, subject, inter alia, to the condition that an option be granted over the unissued capital of Mitchell Credits Ltd. for a period of ten years, and Mitchell Credits Ltd. for a consideration of $10 granted to "Esquire Nominees Limited Account No. 19" the option at any time until 30th June 1979 to have allotted to it at par all or some of eighty-five unissued A class shares and 999,897 unissued B class shares. (Eight A class and two B class shares left unaccounted for were on 1st May 1969 allotted to another Norfolk Island company, Esquiline Ltd.)
(5) Pharmaceutical Investments Ltd. allotted six B class shares in that company to Mitchell Credits Ltd.
(6) The appellant advised Pharmaceutical Investments Ltd. by letter that it was willing to assist that company with loan funds, subject, inter alia, to the condition that an option be granted over the unissued A class shares in Pharmaceutical Investments Ltd. for a period of ten years, and Pharmaceutical Investments Ltd. for a consideration of $10 granted to "Esquire Nominees Limited Account No. 19" the option at any time until 30th June 1979 to have allotted to it at par all or any of the unissued A class shares in that company.
(7) The appellant executed a declaration of trust by which it acknowledged that the option over the unissued capital of Mitchell Credits Ltd. was beneficially owned by W.B.B. &C. Nominees (N.T.) Pty. Ltd.
(8) Each of the seven holders of the A class shares in Pharmaceutical Investments Ltd. executed a declaration of trust by which it was declared that each such share was held by the shareholder as nominee and in trust for Mitchell Credits Ltd.
(9) Mr. Dowding offered to Pharmaceutical Investments Ltd. a loan of $100 at call, interest free, for six months. (The loan was accepted on 28th April 1969.)
(10) The directors of Pharmaceutical Investments Ltd. resolved to offer to purchase all the issued shares of Mitchell Holdings Pty. Ltd. at par. (at p183)

10. The offers by Pharmaceutical Investments Ltd. to purchase shares in Mitchell Holdings Pty. Ltd. were made and accepted by telegram and on 28th April 1969 the directors of Mitchell Holdings Pty. Ltd. approved the transfer to Pharmaceutical Investments Ltd. of forty-nine ordinary shares and fifty redeemable preference shares, and approved the transfer to Secretariat Ltd. (a Norfolk Island company which was the nominee of Pharmaceutical Investments Ltd.) of the remaining one redeemable preference share. (at p183)

11. As a result of these transactions, on 28th April 1969 the whole of the issued shareholding in Mitchell Holdings Pty. Ltd. was beneficially owned by Pharmaceutical Investments Ltd., the whole of the issued shareholding in Pharmaceutical Investments Ltd. was beneficially owned by Mitchell Credits Ltd. and the one issued B class share in Mitchell Credits Ltd. was held by the appellant. On 1st May 1969 the appellant executed a declaration of trust by which it acknowledged that the one B class share in Mitchell Credits Ltd., of which it was the registered owner, and the option over the unissued A class shares of Pharmaceutical Investments Ltd. were beneficially owned by the Manolas Trust. Although this declaration was not executed until 1st May 1969, there is no doubt that from 25th April 1969, when the share in Mitchell Credits Ltd. was allotted to the appellant, that share was held by the appellant as trustee for the Manolas Trust. (at p184)

12. The purchase by and on behalf of Pharmaceutical Investments Ltd. of all the issued shares in Mitchell Holdings Pty. Ltd. for a total consideration of $100 proved a good bargain, for on 28th April 1969, the very day the purchase was effected, Mitchell Holdings Pty. Ltd. declared dividends totalling $30,910.57, payable out of the company's unappropriated profits, on the redeemable preference shares issued by the company. On the same day Pharmaceutical Investments Ltd. declared a dividend amounting to $30,910.57 in favour of Mitchell Credits Ltd. as the holder of the issued B class shares, and Mitchell Credits Ltd. declared a dividend of $30,910.57 "on the B class shares in this company, such dividend being thus payable to Esquire Nominees Limited Account No. 19". In payment of these dividends, on 29th April 1969 three cheques, each for $30,910.57, were drawn on the Commonwealth Trading Bank of Australia, Norfolk Island; the cheques were respectively drawn by Mitchell Holdings Pty. Ltd. in favour of Pharmaceutical Investments Ltd., by Pharmaceutical Investments Ltd. in favour of Mitchell Credits Ltd. and by Mitchell Credits Ltd. in favour of the appellant. The cheques were debited to the accounts of the respective drawers on 30th April 1969. (at p184)

13. On 28th April 1969 the directors of the appellant resolved to accept on behalf of the Manolas Trust the following loans repayable at call, and to be liable for interest at the rate of one-half per cent per month if demanded:
From Kerry G. Manalos........................$45,000
From George K. Manolas......................$111,821 From Theo G. Manolas..........................$4,676 From W.B.B. &C. Nominees (N.T.) Pty. Ltd....$17,043 (at p184)

14. These projected loans totalled $178,540 and a cheque for that amount drawn by Mitchell Holdings Pty. Ltd. on 28th April 1969 was banked to the appellant's Account no. 19 on 30th April 1969. This cheque, and that drawn on 29th April 1969 by Mitchell Holdings Pty. Ltd. in favour of Pharmaceutical Investments Ltd. in respect of the dividends, totalled $209,450.57. The account of Mitchell Holdings Pty. Ltd. with the Commonwealth Trading Bank of Australia, Norfolk Island, on which these cheques were drawn, was able to meet the cheques only because on 30th April 1969 there was placed to the credit of that account a deposit of $209,469 made up of four cheques drawn respectively by Manolas Pharmacy Pty. Ltd. (two cheques of $5,000 and $30,929 respectively), Manolas Holdings Pty. Ltd. ($83,097) and Manolas &Sons Pty. Ltd. ($90,443). These cheques were debited to their respective accounts on 6th May 1969. It was not explained what arrangements had been made by Kerry G. Manolas, George K. Manolas, Theo G. Manolas and W.B.B. &C. Nominees (N.T.) Pty. Ltd., with the three companies which drew these cheques, but this is not material. (at p185)

15. On 28th April 1969 the directors of the appellant further resolved to advance to Pharmaceutical Investments Ltd. an amount of $209,400 at interest at the rate of 11/4 per cent per month. On the following day the directors of Pharmaceutical Investments Ltd. resolved to advance $36,000 to Manolas Pharmacy Pty. Ltd. $83,000 to Manolas Holdings Pty. Ltd. and $90,000 to Manolas &Sons Pty. Ltd. (a total amount of $209,000) at a rate of interest of one and one-quarter per cent per month. To give effect to these resolutions the appellant on 29th April 1969 drew a cheque in favour of Pharmaceutical Investments Ltd. for $209,000 and Pharmaceutical Investments Ltd. drew a cheque for $36,000 in favour of Manolas Pharmacy Pty. Ltd., a cheque for $83,000 in favour of Manolas Holdings Pty. Ltd. and a cheque for $90,000 in favour of Manolas &Sons Pty. Ltd. These cheques were credited to the respective accounts on 6th May 1969. (at p185)

16. The net result of this juggling of cheques was that amounts of $35,929, $83,097 and $90,443 were drawn respectively from the accounts of Manolas Pharmacy Pty. Ltd., Manolas Holdings Pty. Ltd. and Manolas &Sons Pty. Ltd. and amounts of $36,000, $83,000 and $90,000 respectively were on the same day credited back to the accounts of those companies. (at p185)

17. On 23rd June 1969 it was resolved by the directors of the appellant to demand from Pharmaceutical Investments Ltd. payment of interest for the months May to October 1969, but to accept payment at the rate of one per cent per month, namely $12,564, in complete satisfaction; it was also resolved to make a further advance of $12,514 to Pharmaceutical Investments Ltd. On the same day the directors of Pharmaceutical Investments Ltd. resolved to demand from Manolas Pharmacy Pty. Ltd., Manolas Holdings Pty. Ltd. and Manolas &Sons Pty. Ltd. interest for twelve months at one per cent per month, namely from Manolas Pharmacy Pty. Ltd. $2,160, from Manolas Holdings Pty. Ltd. $4,980 and from Manolas &Sons Pty. Ltd. $5,400, and on the same day resolved to make further advances of $2,052 to Manolas Pharmacy Pty. Ltd., $4,731 to Manolas Holdings Pty. Ltd. and $5,130 to Manolas &Sons Pty. Ltd. Cheques to give effect to these resolutions were exchanged on 30th June 1969. The net result of the exchanges was that $12,540 went to Norfolk Island from the mainland companies and $11,913 went back. (at p186)

18. The accounts of Mitchell Holdings Pty. Ltd. show that during the year ended 30th June 1968 that company received from Manolas Pharmacy Pty. Ltd. dividends totalling in amount $31,503.50. It was conceded that these dividends were paid by Manolas Pharmacy Pty. Ltd. out of the profits of a business carried on by it in Australia. The profit and loss appropriation account of Mitchell Holdings Pty. Ltd. for the year ended 30th June 1968 showed a balance of $30,910.63. No revenue is shown for the year ended 30th June 1969. It is therefore apparent that the dividend of $30,910.57 was paid by Mitchell Holdings Pty. Ltd. out of profits derived by that company as a result of the receipt of dividends from Manolas Pharmacy Pty. Ltd. (at p186)

19. The accounts of Pharmaceutical Investments Ltd. reveal a total gross income during the year ended 30th June 1969 of $43,451, being the dividend of $30,911 received from Mitchell Holdings Pty. Ltd. and the interest totalling $12,540 received from Manolas Pharmacy Pty. Ltd., Manolas Holdings Pty. Ltd. and Manolas &Sons Pty. Ltd. Expenses amounted to $12,607, including interest of $12,564 paid to the appellant. The net profit of $30,844 was in fact rather less than the amount of the dividend declared in favour of Mitchell Credits Ltd. (at p186)

20. The sole income of Mitchell Credits Ltd. during the year of income was $30,910.57 received as a dividend from Pharmaceutical Investments Ltd. (at p186)

21. The movement of the amount of $30,910.57 from Mitchell Holdings Pty. Ltd. to Pharmaceutical Investments Ltd., thence to Mitchell Credits Ltd. and finally to the appellant can be clearly traced through the accounts of these companies. (at p186)

22. Not all of the facts recited above are relevant to the questions whose decision, in the view that I take, governs this appeal, but I have thought it desirable to state them, first to give the full background to the relevant events, and secondly because if the view that I have formed is wrong, the facts stated may be relevant to the consideration of the questions that would then arise as to the effect of s. 260 of the Act. (at p186)

23. On behalf of the appellant it was submitted that the appellant was a resident of Norfolk Island and that the income in question - the dividend of $30,910.57 received from Mitchell Credits Ltd. - was derived from a source within Norfolk Island and that the appellant was accordingly not liable to tax on the income by reason of s. 7 (1) of the Act, which provides as follows:

"This Act shall extend to the Territories of Papua and New Guinea, Norfolk Island, Cocos (Keeling) Islands and Christmas Island, but shall not apply to any income derived by a resident of those Territories from sources within those Territories." (at p187)

24. The Commissioner, on the other hand, denied that s. 7 (1) governs the matter. In his submission, s. 7 (1) is merely declaratory and does no more than re-state the position brought about by other sections of the Act, and in particular by s. 23 (r), which provides that "income derived by a non-resident from sources wholly out of Australia" shall be exempt from income tax. The purpose of s. 7 (1) in the Commissioner's submission, was to extend to the Territories mentioned provisions of a machinery kind - such parts of the Act as, for example, provide for returns, assessments, appeals, the calculation of tax and the enforcement of penalties - and the proviso introduced by the word "but" was included, out of an abundance of caution, to prevent the subsection from being given a construction that would treat income derived by a resident of a Territory from a source within a Territory as assessable income. According to the Commissioner, the case comes within s. 44 (1) (b) of the Act, which is rendered applicable by Div. 6 of Pt III of the Act. Section 95 defines, for the purposes of that Division, "the net income of a trust estate" to mean "the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions, except the concessional deductions ..." and except certain other deductions which need not be mentioned. Section 99, under which the assessment in the present case was made, provides in effect by sub-s. (2) inter alia that where there is no part of the net income of the trust estate to which any beneficiary is presently entitled, the trustee is liable to pay tax on that net income as if it were the income of an individual and were not subject to any deduction. In Union-Fidelity Trustee Co. of Australia Ltd. v. Federal Commissioner of Taxation (1969) 119 CLR 177 , it was held that income derived by the trustee of a trust estate from sources outside Australia is not taxable under s. 99, notwithstanding that the trustee is resident in Australia. Shortly stated, the ground for this decision is that by s. 95 the net income of the trust estate is to be calculated as if the trustee were a taxpayer in respect of that income, but not as if he were a taxpayer whose residence is known, that is, not as if he were a resident. Since, in the case of a non-resident, only income derived from an Australian source is assessable, s. 99 taxes only so much of the total income of the trust estate as is derived from Australian sources. The members of the Court in that case, in contrasting the position of residents with that of non-residents, referred to s. 25 which deals with assessable income generally, but in the present case, where we are concerned with dividends, the provision applicable is s. 44 (1) which, so far as it is material, provides as follows:

"The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall... (a) if he is a resident - include dividends paid to him by the company out of profits derived by it from any source; and (b) if he is non-resident - include dividends paid to him by the company to the extent to which they are paid out of profits derived by it from sources in Australia." (at p188)

25. It seems to me to follow from the reasoning of the Union-Fidelity Trustee Co. Case (1969) 119 CLR 177 that such of the income of the trust estate as comprises dividends paid to the trustee by a company in which he held shares as trustee will be taxable under s. 99 only to the extent to which the dividends were paid out of profits derived by the company from sources in Australia. I therefore agree with the submission on behalf of the Commissioner that ss. 95, 99 and 44 (1) (b) together have the effect that the appellant should succeed in this appeal if it is held that the dividend in question was paid to the appellant by Mitchell Credits Ltd. out of profits derived by that company from sources in Norfolk Island. (at p188)

26. However, in my opinion it does not follow that s. 7 (1) can have no application to the present case. The proviso to that subsection does present some difficulties of construction, but it is widely expressed, and if given the full meaning of which its words are capable it would at least have the effect that the provisions of s. 17 of the Act, that income tax is levied and shall be paid upon the taxable income derived during the year of income by any person, whether a resident or a non-resident, do not apply to any income derived by a resident of the Territories mentioned in s. 7 (1) from sources within those Territories. In effect, s. 7 (1) declares that the income to which it refers is not liable to tax. It is difficult to see any valid reason for declining to give effect to this declaration of the intention of the Legislature. Counsel for the Commissioner referred to the decision in Parke Davis &Co. v. Federal Commissioner of Taxation (1959) 101 CLR 521 , where it was held that the specific provisions of s. 44 (1) (b), as to dividends, fulfil and carry out the general policy expressed in s. 23 (r) and that the latter provision must be read with the former, which gives it specific effect. I find it difficult to regard s. 44 (1) (b) as elucidating and giving effect to the general policy of s. 7 (1), or to hold that s. 7 (1) cannot be given an operation independent of s. 44 (1) (b). The provisions of s. 7 (1) appear to me to be intended to override the other provisions of the Act, redundant though some of them may then be. I therefore consider that under the Act the appellant has two alternative arguments open to it. The appellant will succeed if it is held that it was a resident of Norfolk Island and that the income in question was derived by it from sources within Norfolk Island. Equally the appellant will succeed if it is held that the dividend paid to it by Mitchell Credits Ltd. was not paid out of profits derived by that company from sources in Australia, and in that event it will be irrelevant where the appellant is resident. However, in the present case, it is perhaps only an academic question whether s. 7 (1) affords an exemption from liability to tax in cases to which it applies, for the circumstances are such that the appellant cannot escape under s. 7 (1) if it is liable under s. 44 (1) (b). If it is right to hold that the dividend paid to the appellant by Mitchell Credits Ltd. was paid out of profits derived by that company from sources in Australia, so that the appellant is caught by s. 44 (1) (b), the same reasoning would lead to the conclusion that the income derived by the appellant was not derived from sources in Norfolk Island, so that the appellant, even if a resident of Norfolk Island, could not bring itself under the protective mantle of s. 7 (1). If the dividend received by the appellant does not answer the description contained in s. 44 (1) (b), the appellant is not liable to tax under s. 99 and has no need to invoke s. 7 (1) . It therefore seems unnecessary to decide whether the appellant is a resident of Norfolk Island for the purposes of the latter sub-section. However, that question has been fully argued and may be briefly dealt with, and it is convenient to deal with it. (at p189)

27. It is now well settled that, for the purposes of income tax, a company is resident where its real business is carried on, and its real business is carried on where the central management and control actually abides: Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation (1940) 64 CLR 15, at p 19 and on appeal (1940) 64 CLR 241, at pp 243-244, 246, 251 ; North Australian Pastoral Co. Ltd. v. Federal Commissioner of Taxation (1946) 71 CLR 623, at p 629 ; Unit Construction Co. Ltd. v. Bullock (Inspector of Taxes) (1960) AC 351, at p 360 . For the purposes of the definition of "resident" in s. 6 of the Act, the fact of incorporation in Australia is made conclusive; that definition does not have any direct application to s. 7 (1), but the place of incorporation is a factor to be considered: Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation (1940) 64 CLR, at p 246 ; North Australian Pastoral Co. Ltd. v. Federal Commissioner of Taxation (1946) 71 CLR, at p 633 . The question where a company is resident is one of fact and degree. (at p190)

28. In the present case the appellant was incorporated in Norfolk Island and had its office there. All the directors resided in Norfolk Island. All the A class shareholders who were natural persons were residents of Norfolk Island and it seems proper to conclude that the other A class shareholder, Myee Ltd., was also a resident. All meetings of the company and of the directors were held in Norfolk Island. The business of the company was to act as trustee on Norfolk Island. These facts strongly support the conclusion that the appellant was a resident of Norfolk Island. However, the Commissioner, relying particularly on the decision in Unit Construction Co. Ltd. v. Bullock (Inspector of Taxes) (1960) AC 351 , that it is the actual place of management of a company and not the place where it ought to be managed which fixes its residence, submitted that the directors of the appellant merely carried out directions given to them by Messrs. Wilson, Bishop, Bowes and Craig, and that the actual management and control of the appellant company was in Australia. It was said that at all relevant times the activities of the appellant were confined to acting as trustee of a number of settlements all of which had been set up on similar lines as a result of instructions received from Messrs. Wilson, Bishop, Bowes and Craig, and that the administration of the trusts of the settlements followed a general pattern which had been laid down in advance by that firm. The extent of the influence of the accountants was shown by the fact that they would not infrequently prepare in detail the agenda of a meeting of the directors of the appellant or of the company itself. These facts, according to the Commissioner, showed that in reality the activities of the appellant were directed from Australia. I am unable to accept this argument. As I have already indicated, it is obvious that what the appellant did in relation to the Manolas Trust was done in the course of carrying out a scheme formulated in Australia and that Messrs. Wilson, Bishop, Bowes and Craig not only communicated to the appellant particulars of the scheme but advised the appellant in detail of the manner in which it should be carried out. But if it be accepted that the appellant did what Messrs. Wilson, Bishop, Bowes and Craig told it to do in the administration of the various trusts, it does not follow that the control and management of the appellant lay with Messrs. Wilson, Bishop, Bowes and Craig. That firm had no power to control the directors of the appellant in the exercise of their powers or the A class shareholders in the exercise of their voting rights. Although it is doubtless true that steps could have been taken to remove the appellant from its position as trustee of one or more of the trust estates, Messrs. Wilson, Bishop, Bowes and Craig could not control the appellant in the conduct of its business of a trustee company. The firm had power to exert influence, and perhaps strong influence, on the appellant, but that is all. The directors in fact complied with the wishes of Messrs. Wilson, Bishop, Bowes and Craig because they accepted that it was in the interest of the beneficiaries, having regard to the tax position, that they should give effect to the scheme. If, on the other hand, Messrs. Wilson, Bishop, Bowes and Craig had instructed the directors to do something which they considered improper or inadvisable, I do not believe that they would have acted on the instruction. It was apparent that it was intended that the appellant should carry on its business of trustee company on Norfolk Island. It was in my opinion managed and controlled there, none the less because the control was exercised in a manner which accorded with the wishes of the interests in Australia. The appellant was, in my opinion, a resident of Norfolk Island. (at p191)

29. I turn then to the crucial questions in the case. The question arising under s. 7 (1) is whether the dividend which the appellant received from Mitchell Credits Ltd. was income derived by the appellant from sources within Norfolk Island. The question arising under s. 44 (1) (b) is whether that dividend, which was paid by Mitchell Credits Ltd. out of moneys received by way of dividend on the shares which it held in Pharmaceutical Investments Ltd., was paid out of profits derived by Mitchell Credits Ltd. from sources in Australia. The appellant's case is that the share on which a dividend is paid should be regarded as the source from which the dividend was derived. The share held by the appellant in Mitchell Credits Ltd. and those held by Mitchell Credits Ltd. in Pharmaceutical Investments Ltd. were registered at the respective offices of those companies on Norfolk Island and could be effectively dealt with only in Norfolk Island. For some revenue purposes at least the shares were situated in Norfolk Island: Brassard v. Smith (1925) AC 371 ; Erie Beach Co. Ltd. v. Attorney-General (Ontario) (1930) AC 161 ; Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42, at p 48 . Then it was said to follow that the source from which the dividend was derived by the appellant was the place where the share was situated - Norfolk Island. Similarly it was said that the dividend was paid by Mitchell Credits Ltd. out of profits derived by that company from a source in Norfolk Island. (at p192)

30. In ordinary English usage, the "source" of income or profits is the place of their origin. In Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183, at pp 189-190 , this Court, in the course of a discussion of the effect of ss. 10 and 14 (b) of the Income Tax Assessment Act 1915-1916 (Cth), said:

"The Legislature in using the word 'source' meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact."

This statement has been accepted as correct, and as applicable to similar statutory provisions, in a number of cases in this Court of which one of the earliest is Studebaker Corporation of Australasia Ltd. v. Commissioner of Taxation (N.S.W.) (1921) 29 CLR 225, at p 233 and the most recent is Federal Commissioner of Taxation v. Mitchum (1965) 113 CLR 401 . The same test has been applied by the Judicial Committee (Liquidator, Rhodesia Metals Ltd. v. Commissioner of Taxes (1940) AC 774, at p 789 ) and by the Court of Appeal in New Zealand (Commissioner of Inland Revenue v. N.V. Philips' Gloeilampenfabrieken (1955) NZLR 868, at pp 873, 883, 888, 896 ). Although in Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ, at p 48 some doubt was expressed as to the meaning of the phrase "practical, hard matter of fact", in my opinion the two adjectives were inserted not for the purposes of empty rhetoric but to emphasize that the question is to be decided in accordance with the practical realities of the situation without giving undue weight to matters of form, and not by the application of absolute rules of law. The position was authoritatively stated in Federal Commissioner of Taxation v. Mitchum by Barwick C.J. (1965) 113 CLR 401, at p 407 with whom Menzies and Owen JJ. concurred (1965) 113 CLR, at p 409 , as follows:

"The conclusion as to the source of income for the purposes of the Act is a conclusion of fact. There is no statutory definition of 'source' to be applied, the matter being judged as one of practical reality. In each case, the relative weight to be given to the various factors which can be taken into consideration is to be determined by the tribunal entitled to draw the ultimate conclusion as to source. In my opinion, there are no presumptions and no rules of law which require that that question be resolved in any particular sense."

I would further respectfully agree with the remarks made by Rich J. in Tariff Reinsurances Ltd. v. Commissioner of Taxes (Vict.) (1938) 59 CLR 194, at p 208 some of which were repeated in Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR 525, at p 538 :

"We are frequently told, on the authority of judgments of this court, that such a question is 'a hard, practical matter of fact'. This means, I suppose, that every case must be decided on its own circumstances, and that screens, pretexts, devices and other unrealities, however fair may be the legal appearance which on first sight they bear, are not to stand in the way of the court charged with the duty of deciding these questions. But it does not mean that the question is one for a jury or that it is one for economists set free to disregard every legal relation and penetrate into the recesses of the causation of financial results, nor does it mean that the court is to treat contracts, agreements and other acts matters and things existing in the law as having no significance." (at p193)

31. I regard it as clear that what is said in these authorities with regard to the effect of the word "source" equally applies to "sources" in ss. 7 (1) and 44 (1) (b) of the Act. It is true that s. 10 of the Income Tax Assessment Act 1915-1916 (Cth) considered in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , like s. 25 (1) of the Act which was the subject of discussion in Federal Commissioner of Taxation v. Mitchum (1965) 113 CLR 401 , spoke of income "derived directly or indirectly from sources within Australia" and that the words "directly or indirectly" do not appear in either s. 7 or s. 44 (1) (b). However, although the words "directly or indirectly" were in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR, at pp 188-189 said to be of great importance, and although their absence may be regarded as an indication that the words "derived from sources" were intended to mean "directly derived", in my opinion their presence or absence has no effect on the meaning of the word "source", and what was said in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , with regard to the meaning of that word is applicable in the context of ss. 7 (1) and 44 (1) (b). As has been pointed out on a number of occasions, the words "directly or indirectly" are related to the word "derived" and not to the word "source" (Federal Commissioner of Taxation v. W. Angliss &Co. Pty. Ltd. (1931) 46 CLR 417, at p 441 ; Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR, at pp 528, 537 ; Commissioner of Inland Revenue v. N.V. Philips' Gloeilampenfabrieken (1955) NZLR 868, at p 888 ) and in the enactments considered in some of the cases which laid down the law as to the effect of the word "source" in the same terms as Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , the words "directly or indirectly" did not appear (see Studebaker Corporation of Australasia Ltd. v. Commissioner of Taxation (N.S.W.) (1921) 29 CLR 225 , and Liquidator, Rhodesia Metals Ltd. v. Commissioner of Taxes (1940) AC 774 ). (at p194)

32. It would be quite opposed to the authorities that I have been discussing to hold that there is a rule of law that requires the situs of the share - in itself a somewhat artificial conception developed primarily for the purposes of death duties - to be treated as the source of the dividends paid on it. However, there are some decisions in which the question what is the source of a dividend has fallen for particular consideration, and to them it is now necessary to turn. (at p194)

33. In the forefront of these cases is Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 . In that case the appellant, who was a shareholder in a number of companies which were incorporated in England and had their registered offices and central management and control there but which carried on business and made profits in Australia as well as elsewhere, was paid in England dividends declared in England on those shares. He was assessed to tax on sums which represented that proportion of the total dividends received by him which was attributable to the profits derived by each of the companies from that part of their respective businesses which was carried on in Australia. It was held that these sums were "derived directly or indirectly ... from sources within Australia" and rightly included in the assessment. The Court (1918) 25 CLR, at p 192 et seq rejected the argument that the place where a share is situated must be regarded as the source of the dividend, and said (1918) 25 CLR, at p 196 that "the share in the capital is not the 'source', but the measure of the dividend ..." Although the Court said that the question what is the source of a shareholder's income is one of fact, to be determined on practical grounds, it answered the question by saying that the source of the dividend is the place where the company made the profits out of which the dividend was paid. Their Honours said (1918) 25 CLR, at p 198 :

"The 'dividend' he" (the shareholder) "receives is an aliquot part of the fund divided; the fund itself is the source of the part that he receives, and if on analysis the fund is derived from various sources, some of which are within Australia and some outside Australia, he is, according to the provisions of the Act, liable or not liable to taxation in respect of it accordingly." (at p195)

34. In reaching its conclusion, the Court in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR, at pp 194-195 , found some support in the judgments of the Court of Appeal in Gilbertson v. Fergusson (1881) 7 QBD 562 , a case which has since been overruled by the House of Lords in Canadian Eagle Oil Co. Ltd. v. The King (1946) AC 119 . However, it seems to me that in overruling the earlier decision the House of Lords did not reflect adversely on the statements which this Court in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , regarded as opposed to the view that the place of the share, rather than the place where the profits were earned, constitutes the source of the dividend. In Gilbertson v. Fergusson (1881) 7 QBD 562 , the London agency of a foreign banking company was assessed to tax on the full amount of dividends paid in London to shareholders resident in London, and the Court of Appeal decided (to adopt the summary given by Lord Russell of Killowen in Canadian Eagle Oil Co. Ltd. v. The King (1946) AC, at p 146 ) that "since those dividends were payable out of the general earnings of the bank, which were composed partly of profits made in the United Kingdom (which had already been taxed under Case 1 of sch. D) and partly of profits made elsewhere, the agency should only be assessed under s. 10" (of the Income Tax Act 1853 (U.K.)) "on so much of the dividends as were paid out of the profits made elsewhere than in the United Kingdom". Their Lordships held that this decision of the Court of Appeal was not in conformity with the income tax statutes of the United Kingdom. As Viscount Simon L.C. pointed out (1946) AC, at pp 137-139 , the Court of Appeal proceeded upon two errors; first, they acted upon a concession made by the revenue, in accordance with the view then prevailing but since declared to be wrong, that a company charged with paying tax under sch. D in respect of profits accruing to it in the United Kingdom was assessed and paid the tax as agent on behalf of its shareholders, and secondly, it was assumed that there was a general principle to be applied in construing the Income Tax Acts that tax is not to be payable twice over by the same person in respect of the same thing. The decision in Canadian Eagle Oil Co. Ltd. v. The King (1946) AC 119 established that under the English legislation a charge is imposed on dividends payable in respect of the shares of a foreign company, "without any reference to the sources of that company's income" (per Viscount Simon L.C. (1946) AC, at p 140 ) and that the charge is not abated in proportion as the income is itself chargeable or not chargeable to British income tax. It is apparent that their Lordships were not called on to decide what was the source from which the dividends arose, and they had no need to discuss, and did not discuss, those passages in the judgments in Gilbertson v. Fergusson (1881) 7 QBD 562 , that suggest that if it is necessary to find the source of the dividend, it will be found where the profits were made. (at p196)

35. Canadian Eagle Oil Co. Ltd. v. The King (1946) AC 119 is one of a line of cases that decide that dividends paid by a foreign company and received in the United Kingdom are assessable as "income arising from possessions out of the United Kingdom" within Case V of sch. D of the Income Tax Act, 1918 (U.K.). That provision does not refer to the "source" of the income, but dicta are to be found in these decisions to the effect that the share is the source of the dividend paid on it. Thus in Bradbury v. English Sewing Cotton Co. Ltd. (1923) AC, at p 753 , Viscount Cave L.C. said, "where the company is, there the share is also, and there is the source of any dividend paid upon it", and in Inland Revenue Commissioners v. Reid's Trustees (1949) AC 361, at p 383 , Lord MacDermott said:

"Is it permissible, in order to determine the liability of the dividend to tax in the hands of the respondent shareholders, to look beyond the immediate source, the shareholding, and to examine the make-up of the profits out of which the dividend has been declared? In my opinion the answer must be in the negative."

These dicta, which as might be expected are relied upon by the appellant, support the view that the share is at least the immediate source of the dividend. However, they are directed to a different question arising under a very different legislative scheme, and they do not purport to discuss the meaning of the word "source". In Federal Commissioner of Taxation v. French (1957) 98 CLR 398 all the members of this Court who constituted the majority said that cases decided on Case V of sch. D are of little assistance in interpreting the widely different provisions of the Commonwealth Act (see (1957) 98 CLR, at pp 406, 412-413, 415 and 420 ). In spite of the remarks in Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , to which I shall shortly refer, I do not consider that these dicta throw any light on the meaning of ss. 7 (1) and 44 (1) (b). (at p197)

36. I now return to consider the decisions in this Court. In Murray v. Federal Commissioner of Taxation (1921) 29 CLR 134 the taxpayer, an English resident who received in England dividends declared in England by English companies which carried on business in Australia and derived their main income from sources in Australia, was held liable under the Income Tax Assessment Act 1915-1916 (Cth) to tax in respect of so much of each dividend as bore to the whole dividend the same proportion that the profits derived by the company from sources in Australia bore to the total profits of the company. An unsuccessful attempt was made to distinguish Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , on the ground that there the shareholder was resident in Australia. The Court, following Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , rejected the argument that though the source of the income of the companies was Australian, that of the taxpayer's income was not. (at p197)

37. It might have been thought, after the decisions in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , and Murray v. Federal Commissioner of Taxation (1921) 29 CLR 134 , that there was little room for an argument that the source of dividend income is necessarily the situs of the share, but the next case in which the matter was discussed, Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , does appear to afford some support for such a contention. In that case the question was whether payments in respect of dividends on shares held by the taxpayer in Placer Development Ltd. ("Placer") were excluded from his assessable income by s. 53 (a) of the Income Tax (Management) Act 1936 (N.S.W.), which excluded from assessable income (inter alia) "dividends paid ... wholly and exclusively out of one or more of the following: (a) income derived from sources outside Australia ..." It was accepted by the Court that one of the dividends was paid wholly and exclusively out of funds made up of dividends received from another company. Bulolo Gold Dredging Ltd. ("Bulolo"), and the question then arose whether the dividends received by Placer from Bulolo constituted "income derived" by Placer "from sources outside Australia". Bulolo was a company whose main activity was the working of a gold-mining property in New Guinea. It was incorporated in British Columbia, where its principal register of members was kept, but it also kept a branch register in Sydney, and a number of the shares held by Placer were on the branch register and dividends in respect of those shares were paid and received in Sydney. The Court said (1956) 30 ALJ, at p 48 that they took Nathan's Case (1918) 25 CLR 183

"to be authority for the proposition that, as a 'practical, hard matter of fact' - whatever that expression may mean - though not as a matter of 'legal concept', the place where a company earns its profits may be said to be the source from which a taxpayer, entitled by way of dividend - and upon such conditions as the articles of the company may prescribe - to participate in the company's profits, derives his dividend receipts".

Their Honours offered some criticism of Nathan's Case (1918) 25 CLR 183 , but said that the views expressed therein have, however, been acted upon on a number of occasions, and then went on (1956) 30 ALJ, at p 48 :

"But we do not understand Nathan's Case (1918) 25 CLR 183 to decide that the locality where a company derives the profits from which it pays dividends must be regarded exclusively as the source of a shareholder's dividend receipts. If it does, it is, it seems to us, in conflict with the reasoning in such cases as Canadian Eagle Oil Co. Ltd. v. The King (1946) AC 119 , and Inland Revenue Commissioners v. Reid's Trustees (1949) AC 361 . The latter case was decided on the basis that dividends declared by a South African company and transmitted to a shareholder resident in the United Kingdom were 'income arising from possessions out of the United Kingdom'. And we can see no reason why, if dividend income can be said to arise from the shares in respect of which the dividends have been paid, the shares themselves should not be regarded as the immediate source of the dividends. Such shares, although intangible property, may be said to have a location and there is no reason in principle why the place where they are located and where the rights to which they give rise may be enforced should not be regarded as the place from which the shareholders' dividends are derived. In the present case it is clear that those shares of Placer which were registered on Bulolo's Australian register were situated in Australia (Brassard v. Smith (1925) AC 371 ; R. v. Williams (1942) AC 541 , and Treasurer of Ontario v. Blonde (1947) AC 24 ). They constituted items of property situated in Australia and Placer's right to receive dividends in respect of them sprang directly from their ownership. In these circumstances we are of opinion that it is proper to regard the place where they were located as the direct or immediate source of the relevant divided payments even if Nathan's Case (1918) 25 CLR 183 requires the conclusion that the place where Bulolo earned its profits should, perhaps paradoxically, be regarded as their indirect or ultimate source."

They added that the words "directly or indirectly", which in Nathan's Case (1918) 25 CLR 183 were said to be of great importance, may furnish some ground for drawing a distinction between an immediate source, on the one hand, and an ultimate source on the other; and that they could see nothing inconsistent with this conclusion in the reasoning of the Judicial Committee in Liquidator, Rhodesia Metals Ltd. v. Commissioner of Taxes (1940) AC 774 , nor anything unreal in the view that the same income may be derived from a number of territorial sources. (at p199)

38. It is not easy to reconcile Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , with the decision in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , or with the reasons given for that decision that have come to be treated as authoritative. One possible explanation of the case is that it intended to lay down, as a matter of law, that the direct or immediate source of a dividend must be held to be the situs of the share, even though the indirect or ultimate source may be found elsewhere. So to hold, however, would be to resolve the question of source by the application of a rule of law rather than by making a conclusion of fact, and this is the approach that the decisions from Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , to Federal Commissioner of Taxation v. Mitchum (1965) 113 CLR 401 , have steadily rejected. Another possible explanation of the case is that it depends on its particular facts, but the reasons for judgment do not appear to treat the question as simply one of fact. Perhaps the most acceptable explanation is that what was said in Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , relates only to the special provisions of the New South Wales statute, and this view finds some support in the emphasis which the Court placed upon the word "exclusively", and also in some of the observations in Parke Davis &Co. v. Federal Commissioner of Taxation (1959) 101 CLR 521 , to which I am about to refer. However, against this explanation it must be said that once it had been found that one of the dividends received by the taxpayer from Placer had been paid wholly and exclusively out of the dividends declared by Bulolo, the question that remained to be decided was whether the latter dividends had been derived from sources outside Australia, and it might have been thought immaterial whether those dividends were exclusively so derived. (at p199)

39. Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , fell for consideration in Parke Davis &Company v. Federal Commissioner of Taxation (1959) 101 CLR 521 . In that case the appellant, a non-resident, had received from another company, resident in Colorado, a distribution that was deemed under s. 47 (1) of the Act to be a dividend, and that was paid out of profits derived by the Colorado company from sources in Australia. It was held that the distribution formed part of the assessable income of the appellant by virtue of the combined effect of ss. 44 (1) and 47. The appellant argued that the income was exempt under s. 23 (r) as being income derived by a non-resident (the appellant) from sources wholly out of Australia because, it was said, the source of the dividend was the share whose locality was fixed by the register and was therefore in Colorado, and relied upon Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 . In the course of considering this submission, Dixon C.J., who delivered the judgment of the Court, said (1958) 101 CLR, at p 531 :

"I think that it would not be useful to institute a comparison between the provisions of the Commonwealth legislation and those of the New South Wales Income Tax (Management) Act 1936 as amended. It is enough to say that at one point in the complicated facts of Freeman's Case (1956) 30 ALJ 42 a question did arise as to the source of a dividend, and that for the purposes of the expression used in the New South Wales Act, we though that the fact that the dividend was derived from a share on a register in New South Wales showed that the source was in New South Wales."

After citing a passage from the judgment in Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ, at p 48 , which I have already set out, Dixon C.J. continued (1958) 101 CLR, at p 532 :

"It will be apparent from the emphasis placed on the word 'exclusively' that the Court, in deciding Freeman's Case (1956) 30 ALJ 42 was contemplating the possibility that a dividend may be attributed to different sources according to the character of enactment dealing with the matter and perhaps according to the facts, and that the Court did not intend to say that the only source to which a dividend could be imputed was the locality of the share. In the present case we are of opinion that the answer to the contention lies in the view we take of the relationship of s. 44 (1) (b) and s. 23 (r). The view we take of the relationship is that s. 44 (1) (b) is not cumulative upon and independent of s. 23 (r), but is carrying out s. 23 (r) and stating what, in the case of a dividend received by a non-resident, is the source for the purposes of s. 23 (r). If it were treated as cumulative and independent it would mean that in the case of a non-resident holding shares in an Australian company, assuming that for the purpose of s. 23 (r) so construed the share was regarded as the source of a dividend upon it, he would be liable to tax on dividends paid out of Australian profits if his shares were upon an Australian register of the company but not liable to such tax if his shares were upon a register kept in some place out of Australia by the company."

The appellant in Parke Davis &Company v. Federal Commissioner of Taxation (1959) 101 CLR 521 , was in a position similar to that in which the appellant would have been in the present case if Mitchell Credits Ltd. had received its profits from Australia without the intervention of Pharmaceutical Investments Ltd., and the Court in that case had no need to consider the question as to the effect of s. 44 (1) (b) of the Act that now arises. However, the Court does seem to have taken the view that although for some purposes or in some circumstances the locality of the share may be regarded as the source of the dividend, it is not necessarily and for all purposes its source. (at p201)

40. In my opinion, however, Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , be explained neither that decision, nor Parke Davis &Company v. Federal Commissioner of Taxation (1959) 101 CLR 521 , nor any dictum in the English decisions on Case V of sch. D, warrants the conclusion that the question what is the source of income or of profits, for the purpose of s. 7 (1) or s. 44 (1) (b) of the Act, must, where a dividend payment has constituted the income or profits, be decided as a matter of law rather than as a matter of fact. If there is an inconsistency between Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , and Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , I would feel bound to prefer the latter authority, not only because the former was a decision on the different words of the New South Wales statute, but also because Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 , has frequently been followed and approved in this Court, and the test which it laid down has more recently than Commissioner of Taxation (N.S.W.) v. Freeman (1956) 30 ALJ 42 , been reaffirmed in Federal Commissioner of Taxation v. Mitchum (1965) 113 CLR 401 . I hold, therefore, that the sources of income, for the purpose of s. 7 (1), and the sources of profits, for the purposes of s. 44 (1) (b), must be ascertained as "a practical, hard matter of fact", and that in applying these sections to the present case I am not compelled, contrary to the realities of the situation, to hold that the source of each dividend is the locality of the share or shares on which it was paid. (at p201)

21. Accordingly I reject the Commissioner's contention and conclude that the source of the dividend in this instance was in Norfolk Island. There was situate the relevant share register and the fund of profits available for distribution and there were undertaken the business activities of the company paying the dividend, that is to say, the activity of holding shares and receiving payment of dividends, which was its only business activity. The fact that a further company in the chain and in which it held shares and from which it derived its sole income in turn derived its income from dividends the origin of which was Australia I regard as too remote to be relevant to the location of the source of the taxpayer's income. (at p229)

22. It follows that I regard this dividend as derived by the taxpayer from a source in Norfolk Island. (at p229)

23. Two further aspects should be mentioned; the first relates to the Commissioner's contention that because the taxpayer was a trustee of its shareholding s. 7 (1) had no application to it and that, instead, the relevant section was s. 44 (1) (b), made applicable by Div. 6 of Pt. III of the Act. It suffices that I express my agreement with what was said in this regard by Gibbs J., who held that the provisions of s. 7 (1) were intended to override the other provisions of the Act; I respectfully adopt his Honour's reasons for this conclusion. I may add that s. 44 (1) (b) cannot, in my view, be relied upon by the Commissioner as affecting the meaning of s. 7 (1) and as thereby justifying a search for some remote source of the taxpayer's dividend. In Parke Davis &Co. v. Federal Commissioner of Taxation (1959) 101 CLR, at p 532 , the Court said of s. 44 (1) (b) that it was not cumulative upon and independent of s. 23 (r) but merely carried out s. 23 (r) and stated what was, in the case of a dividend received by a non-resident, its source for the purpose of s. 23 (r). Its role is not, however, to provide any similar interpretive function for the overriding provisions of s. 7 (1). (at p230)

24. The second aspect concerns the Commissioner's reliance, in the alternative, upon s. 260 of the Act. If, as I have concluded, s. 7 (1) operates to exclude from the operation of the Act this income of the taxpayer then I consider that s. 260 cannot have any operation in relation to that income. (at p230)

25. In my view this appeal should be allowed and the assessment set aside. (at p230)

Orders

Appeal allowed with costs. Order that the assessment be set aside and further order that the matter be remitted to the Commissioner to be dealt with in accordance with the reasons of this Court.