Federal Commissioner of Taxation v Blakely

The Federal Commissioner of Taxation appealed to the High Court of Australia from a decision of a Board of Review that upheld an objection by Robert Blakely against an income tax assessment. The dispute concerned the Commissioner's assessment of Mr. Blakely for income tax on a proportion of the value of assets appropriated from a company, Bob Blakely Pty. Ltd., of which Mr. Blakely and his wife were the sole shareholders and directors. The company had ceased to carry on business, and its assets were appropriated by Mr. Blakely and his wife, who then carried on the business in partnership. The company was subsequently dissolved without a formal liquidation.

The legal issues before the High Court were whether the amount assessed to Mr. Blakely constituted assessable income under sections 44 or 47 of the *Income Tax Assessment Act 1936-1942*. Specifically, the Court had to determine if the appropriation of the company's assets by its shareholders amounted to a dividend paid by the company out of profits, or a distribution by a liquidator in the course of winding up. The Commissioner contended that the amount represented accumulated profits distributed to shareholders and was therefore taxable as a dividend under section 44, or alternatively, that it was a distribution in the nature of a winding up under section 47.

The High Court held that no part of the amount was assessable income. Latham C.J. reasoned that an appropriation of company assets by shareholders acting on their own initiative did not constitute a distribution by the company itself, as required by section 44. He distinguished this from a formal distribution by the company. Dixon and Fullagar JJ. found that what Mr. Blakely received was of a capital nature and not an income receipt. They also noted that section 47 did not apply as there had been no distribution by a liquidator in a formal winding up. The Court applied the principles from *Commissioner of Taxation (N.S.W.) v. Stevenson* and *Thornett v. Federal Commissioner of Taxation*, finding that the substance of the transaction was a capital receipt rather than a dividend distribution.

Consequently, the High Court answered the first question in the case stated in the negative, finding that the sum of £1,299 was not rightly included in the assessable income of the respondent. As the first question was answered in the negative, the second question regarding a rebate under section 107 did not arise.