Federal Commissioner of Taxation v Foster Brewing Company Limited

The Federal Commissioner of Taxation appealed to the High Court of Australia from a decision of Griffith C.J. concerning the deductibility of dividends paid by The Foster Brewing Company Limited from its assessable income for the year ending 30 June 1915. The company had claimed a deduction for two dividends paid in that year, but the Commissioner had apportioned these dividends, allowing a deduction only for the portion attributed to the net profit for the year, rather than the entire amount.

The central legal issue before the High Court was whether the dividends paid by the company were wholly income distributed to its members within the meaning of section 16 of the Income Tax Assessment Act 1915, and therefore fully deductible from the company's total income for the period. This required the court to determine the source from which the dividends were paid, particularly in light of the company's financial position and accounting practices at the time of payment.

The High Court, affirming the decision of Griffith C.J., held that the dividends were wholly income distributed to the members and were therefore entirely deductible. The court reasoned that the evidence demonstrated that immediately before each dividend payment, the company received income from its assets, which was credited to its banking account, thereby creating a credit balance sufficient to cover the dividend. This prima facie evidence of payment from current income was not displaced by the company's profit and loss accounts, which showed the dividends being debited to a general profit and loss account. The court adopted the common understanding that a dividend, when less than or equal to the profit for the period, is referable to that profit, and that the method of accounting should not override the factual reality of the source of funds.

Consequently, the appeal by the Federal Commissioner of Taxation was dismissed with costs.