Federal Commissioner of Taxation v United Aircraft Corporation

The Federal Commissioner of Taxation appealed to the Full Court of the High Court of Australia against a decision of Starke J. which had quashed an income tax assessment issued to the respondent, United Aircraft Corporation. The dispute concerned whether royalties paid by an Australian company to the United States-based United Aircraft Corporation were income derived from sources within Australia, and therefore subject to Australian income tax.

The legal issue before the High Court was whether the royalties paid by Commonwealth Aircraft Corporation Pty. Ltd. to United Aircraft Corporation constituted assessable income for United Aircraft Corporation, a non-resident, under section 25(1)(b) of the *Income Tax Assessment Act 1936-1940*. This required determining if the income was derived directly or indirectly from sources in Australia, considering that United Aircraft Corporation had no patents or registered designs in Australia and had not carried on business operations within Australia.

Latham C.J. and Rich J. held that the amounts paid as royalties were not income derived directly or indirectly from sources in Australia. They reasoned that the agreement, while framed as a licence, was essentially an arrangement for the communication of information and technical assistance from the United States company to the Australian company. United Aircraft Corporation owned no property in Australia, nor did it conduct any business operations there. The payments were made in New York, and the core activities that generated the income – the provision of information and technical data – occurred in the United States. Therefore, the source of the income was considered to be in America, not Australia.

Williams J. dissented, finding that the royalties were derived from a source in Australia. He viewed the agreement as granting rights to use inventions and designs, and that the provision of blueprints and manufacturing equipment, even if delivered in New York, constituted property that was made available for use in Australia. He considered that the royalties were payments for the use of this property and the associated rights within Australia, thus establishing an Australian source for the income. The majority decision of Latham C.J. and Rich J. prevailed, and the appeal was dismissed.