Grafton and South Grafton Friendly Societies Pharmacy Ltd v Federal Commissioner of Taxation

[1966] HCA 53

HIGH COURT OF AUSTRALIA

Owen J.

GRAFTON &SOUTH GRAFTON FRIENDLY SOCIETIES PHARMACY LTD. v. FEDERAL COMMISSIONER OF TAXATION

(1966) 116 CLR 469

6 September 1966

Income Tax (Cth)

Income Tax (Cth)—Friendly society dispensary—What constitutes—"Carrying on business for the benefit of members of a friendly society"—Income Tax and Social Services Contribution Assessment Act 1936-1960 (Cth), s. 121A*—National Health Act 1953-1959 (Cth), s. 91 (1)*.

Decision

September 6.
OWEN J. delivered the following written judgment:-
This appeal from a Board of Review relates to the assessment of tax for the year ended 31st December 1960 and the question which it raises is whether the taxpayer company was, during the relevant period, a "friendly society dispensary" within the meaning of s. 121A of the Income Tax and Social Services Contribution Assessment Act 1936-1960 (Cth). (at p470)

2. The company was formed in 1916 and since then it has carried on business in Grafton as a pharmaceutical chemist. The objects for which it was established are widely stated and include a power to enter into agreements with any society or body of persons registered as a friendly society under the Friendly Society Act of New South Wales for the supply of medicines and other services and goods to the members of such societies. Its nominal capital was 2,000 pounds divided into 8,000 shares of 5s. each. Article 5 of the Articles of Association provided that the maximum number of shares to be held by any member should be twenty (increased in 1933 to one hundred) and Article 6 provided that no share was to be held by any person who was not a member of a friendly society. That Article was, however, qualified to some extent by later provisions under which it became possible in certain events for a person who was not a member of a friendly society to become a shareholder. It is, I think, unnecessary to detail these provisions. The Articles provided also that no person should be eligible to be a director unless he was at the time of his appointment a member of a friendly society and that his office should be vacated should he cease to be such a member. Since the inception of the company every director has been a member of a registered friendly society. As at 31st December 1960, 4,094 shares of 5s. each had been issued and the names of 401 shareholders appeared upon the share register. So far as can now be ascertained, fifty-two of these, holding in all 787 shares, were members of friendly societies subscribing for pharmaceutical benefits. Forty-four other shareholders, holding a total of 482 shares, were members of friendly societies but not subscribers for pharmaceutical benefits. Six shareholders, holding a total of eighty-seven shares, were not members of friendly societies. One hundred and seventy-six of the names on the register, holding 1,720 shares, were dead but their names still remained on the register, and the balance of one hundred and twenty-three names, holding a total of 1,018 shares, consisted of persons whose whereabouts were then either unknown but not on the company's list of friendly society subscribers for pharmaceutical benefits or persons whose whereabouts were known but it was not known whether or not they were friendly society members. The individual shareholdings were small, the largest holding being fifty-six shares. In some of the years since the company's formation, no dividends were paid but in each year since 1939 an annual dividend has been declared ranging from 5 per cent to 20 per cent. The total amount of the dividend in each of these years was very small and a substantial proportion of it was unclaimed by the shareholders and was dealt with or remains to be dealt with under the Unclaimed Moneys Act of New South Wales. For example, for the year 1960 a dividend of 20 per cent was declared. The total amount involved was 205 pounds and of this 99 pounds was not claimed. It seems that the practice was that dividend cheques were not sent out to persons whose names appeared on the share register, presumably because many of them were dead, although their names still appeared on the register, and the whereabouts of others were unknown. Instead, advertisements were published in the local newspapers announcing the declaration of the dividend and asking shareholders to claim the amount payable on their shares. In its early days the company's accounts showed either losses or very small profits but since 1947 its profits have shown a substantial increase after making provision inter alia for income tax and substantial sums have been added to the company's reserve fund which as at December 1960 stood at 28,891 pounds. In 1961 its accounts showed a profit of 2,881 pounds . It has always been the policy of the directors to build up the reserve fund with a view to the ultimate rebuilding and modernizing of the premises which the company owns and in which it has always carried on its business. It has, at all times, had agreements with many friendly societies operating in the Grafton area to provide pharmaceutical benefits for subscribing members of those societies but at no time has its business been restricted to the supply of medicines and other services and goods to such members. It has dealt as well with any member of the public who wants to buy goods from its pharmacy or have prescriptions made up there. It is an "approved pharmaceutical chemist" for the purposes of the National Health Act 1953-1959 (Cth) and supplies customers with the pharmaceutical benefits for which that Act provides. So far as its dealings with friendly society members are concerned, its business was carried on in the following way and I take the year ended 31st December 1960 as an example, although much the same pattern has always been followed. Every subscribing member of a friendly society with which the company was associated - and by that I mean every member who wished to take advantage of the pharmacy benefits offered by that society - paid to his society a quarterly amount either of 4s. or 4s. 6d. - the evidence leaves me in some doubt which of these figures was the subscription in 1960. The amounts so subscribed were from time to time paid by the societies to the company and in 1960 such payments totalled 689 pounds. Between 1st March 1960 and 31st December 1960, 3,961 prescriptions for pharmaceutical preparations coming within the National Health Act were dispensed for subscribing members of friendly societies. In each case the payment to the company by the member concerned of a dispensing fee of 5s. which would have been charged to a non-member was waived by the company. The benefits thus given to members totalled 990 pounds. During 1960 4,660 prescriptions (other than what I may call National Health Act prescriptions) were also dispensed for members. Of these, 360 prescriptions were what were called British Pharmacopoeia prescriptions and these were dispensed free of charge. The average price that would have been charged for dispensing these prescriptions is estimated to have been 14s. per prescription and the monetary value of the concessions thus made to members was 252 pounds. In the case of the remaining 4,300 prescriptions dispensed for members, no charge was made if the dispensing fee that would otherwise have been charged amounted to 5s. or less. If it would have been more than 5s., the member concerned paid that fee less 5s. This benefit amounted in all to 1,075 pounds. Deducting from the total of these concessions the amount received by the company from the friendly societies, namely 689 pounds, the net value of the benefits to members for the year in question totalled 1,628 pounds . Had the company confined its business to friendly society members it would, if it had extended the same benefits, have made a substantial loss. No concessions were made to friendly society members who were not subscribers for pharmaceutical benefits nor were any concessions given to members of the general public who were not friendly society members. For the year in question the total number of prescriptions dispensed was 22,719, of which 8,621 or 38 per cent of the total number were for subscribing members of friendly societies and 14,098 were for members of the public who were not friendly society members. I should perhaps add that the evidence suggested that since the provisions of the National Health Act relating to pharmaceutical benefits came into force in March 1960 the number of friendly society members who contribute to societies for pharmaceutical benefits has tended to decrease, a fact which can be readily understood. (at p472)

3. I have set out these matters in some detail for the purpose of showing that a substantial part of the company's business was done with subscribing members of friendly societies and by arrangement with those societies their subscribing members received considerable benefits. (at p472)

4. Section 121A of the Income Tax and Social Services Contribution Assessment Act provides that - (at p472)

5. "Where a friendly society dispensary, as defined by section ninety-one of the National Health Act 1953, is an approved pharmaceutical chemist for the purposes of that Act, ten per centum of the aggregate of the following amounts shall be deemed to be taxable income derived by that friendly society dispensary:-

(a) amounts received by the friendly society dispensary from the Commonwealth under the National Health Act 1953 in respect of the supply of pharmaceutical benefits; and
(b) the gross proceeds received by the friendly society dispensary from the sale or supply of medicines and other goods sold or supplied in the ordinary course of business, not including amounts received from a friendly society for the supply of benefits to the members of that friendly society."

And s. 91 (1) of the National Health Act 1953-1959 is as follows: "In this section, 'friendly society dispensary' means a pharmaceutical chemist, being a friendly society or a body (whether corporate or unincorporate) carrying on business for the benefit of members of a friendly society or friendly societies."
When the definition in s. 91 (1) is read into s. 121A the last-mentioned section would, as applied to the present case read: (at p473)

6. "Where a pharmaceutical chemist, being a body corporate carrying on business for the benefit of members of a friendly society or friendly societies, is an approved pharmaceutical chemist for the purposes of the National Health Act, ten per centum of the aggregate of the following amounts shall be deemed to be the taxable income derived by that body corporate:-

(a) amounts received by the body corporate from the Commonwealth under the National Health Act in respect of the supply of pharmaceutical benefits; and
(b) the gross proceeds received by that body corporate from the sale or supply of medicines and other goods sold or supplied in the ordinary way of business, not including amounts received from a friendly society for the supply of benefits to the members of that friendly society." (at p473)

7. A significant feature seems to me to emerge from an examination of the section when it is read with s. 91 of the National Health Act. It plainly contemplates that a company may be a "friendly society dispensary" carrying on business for the benefit of members of a friendly society notwithstanding the fact that the business of a company is conducted for the benefit of its shareholders. And I am inclined to think also that par. (b) of the section proceeds upon the basis that the business of a friendly society dispensary may not be confined to dealings with friendly society members but may cover also the sale or supply of medicines and other goods sold or supplied to any member of the public in the ordinary way of business. (at p474)

8. The company claims that s. 121A is to be applied in determining its taxable income while the Commissioner's submission is that that section applies only where the business of the pharmaceutical chemist is carried on for the sole purpose of benefiting members of a friendly society or societies and that since, in the present case, the shareholders in the company also derived benefit from the carrying on of the business and derived it in their capacity of shareholders and not in their capacity as friendly society members, the company cannot take advantage of s. 121A. The construction for which the Commissioner contends would require that the word "wholly" or "exclusively" be read into the section after the words "body corporate carrying on business" and I find difficulty in so reading it, particularly in light of the fact to which I have referred that it recognizes that a company may be a "friendly society dispensary" and entitled to the taxation advantages which s. 121A provides. (at p474)

9. I do not construe the section in that way. It is sufficient, I think, if the carrying on of the business does benefit friendly society members and by that I mean that it provides such members with real and not merely nominal benefits. The question is one of degree to be determined in the light of the circumstances of the particular case. In the present case very real benefits were derived by a large number of friendly society members, benefits which could never have been enjoyed had it not been for the fact that the company's activities have extended to dispensing medicines for and supplying goods to members of the public who do not belong to friendly societies. (at p474)

10. Accordingly I am of opinion that the appeal should be allowed with costs, the assessment set aside and the matter remitted to the Commissioner so that he may assess the company in accordance with the terms of s. 121A. (at p474)

Orders

Appeal allowed with costs. Assessment set aside and matter remitted to the Commissioner so that he may assess the appellant to tax in accordance with the terms of s. 121A of the Income Tax and Social Services Contribution Assessment Act.