Foster Brewing Co Ltd v Federal Commissioner of Taxation

The Foster Brewing Co. Ltd. appealed to the High Court against an assessment of income tax for the year ending 30 June 1915. The dispute concerned the deductibility of dividends paid by the company. The company, a holding company, claimed to deduct the full amount of two dividends paid in February and August 1915 from its assessable income. The Commissioner of Taxation, however, apportioned these dividends between the company's net profit for the relevant periods and amounts brought forward from previous periods, allowing a deduction only for the portion attributed to the net profit.

The legal issues before the court were whether the fact that the dividends were debited in the company's profit and loss accounts against gross sums comprising net profits and brought-forward balances was conclusive in showing that the dividends were not wholly income distributed to members within the meaning of section 16 of the *Income Tax Assessment Act 1915*, and, on the facts, whether the dividends were indeed wholly income distributed to members.

The Full Court initially held that the method of accounting in the profit and loss accounts was not conclusive on the question of whether dividends were paid out of income. Subsequently, Griffith C.J., hearing the appeal on the facts, found that the dividends were wholly income distributed to members. His Honour reasoned that immediately before each dividend payment, the company had no cash on hand, but received income from its investments which was credited to its overdrawn bank account, from which the dividends were then paid. He concluded that this demonstrated the dividends were paid out of actual income received during the relevant periods, and that any other conclusion would lead to the taxation of profits accumulated before the Act came into operation, which was not the intention of the legislation.

The appeal was allowed, with the court ordering that the dividends were to be treated as wholly income distributed to members and therefore deductible. The case was remitted for further action, with costs awarded to the appellant.