Harrowell v Federal Commissioner of Taxation

[1967] HCA 27

HIGH COURT OF AUSTRALIA

Taylor, Windeyer and Owen JJ.

HARROWELL v. FEDERAL COMMISSIONER OF TAXATION

(1967) 116 CLR 607

8 September 1967

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Company in liquidation—Distribution by liquidator to shareholder company out of income—Liquidation of shareholder company—Distribution to its shareholders of amount of distribution received from first company—Whether distribution assessable income in shareholders' hands—Income Tax and Social Services Contribution Assessment Act 1936-1957 (Cth), ss. 44 (1)*, 47 (1)**.

Decision

September 8.
THE COURT delivered the following written judgment:-
The question with which we are concerned in this case arises as a result of successive distributions made in the course of winding up by the liquidator of two companies, E. Killen and Sons Pty. Limited (Killens) and Glenville Pastoral Co. Pty. Limited (Glenville). At all material times Glenville was the beneficial owner of the whole of the issued shares in Killens and the appellant is the executor and trustee of the estate of Barbara Lyle Fulton Harrowell, deceased, who, at all material times, was the owner of a substantial number of ordinary shares in Glenville. (at p609)

2. In the income year which ended on 30th June 1957, the liquidator of Killens made distributions to Glenville which, pursuant to s. 47 of the Income Tax and Social Services Contribution Assessment Act were, as to 243,316 pounds thereof, treated as assessable income in the hands of Glenville. This amount was so treated because, in the language of that section, the distribution represented to that extent a distribution of income derived by Killens. On 29th October 1957, in the course of winding up Glenville, the liquidator of that company then made a distribution to the holders of the ordinary shares in that company of 19s. 4d. per share, the total distribution amounting to 241,669 pounds 11s. 4d. of which the amount credited to the deceased was 9,666 pounds 13s. 4d. The question is whether this amount was assessable income in the hands of the deceased in the year ended 30th June 1958. (at p610)

3. In Glenville Pastoral Co. Pty. Ltd. (In Liquidation) v. Commissioner of Taxation (1963) 109 CLR 199 the question arose whether that company was liable for additional tax pursuant to Div. 7 of the Act on the ground that it could not, pursuant to s. 105A, be deemed to have made a sufficient distribution in relation to the year of income which ended on 30th June 1957. The basis for the contention that Glenville was so liable was that the above-mentioned distribution by the liquidator of the company reduced the company's funds below the amount of its paid-up capital. In these circumstances it was contended by the Commissioner that the distribution could only be regarded as a dividend to the extent that it was made out of funds in excess of an amount representing the company's paid-up capital. In so far as the balance was concerned it was said that it should be regarded, in the language of s. 47, "as income properly applied to replace a loss of paid-up capital". This argument was rejected for the reasons then given. Additionally the operation of s. 47 in relation to Div. 7 was briefly discussed and the case of Archer Bros. Pty. Ltd. (In Voluntary Liquidation) v. Federal Commissioner of Taxation (1953) 90 CLR 140 was considered. It is, perhaps, of some importance to note that the distribution made by the liquidator of Killens was said to represent to the full extent of 243,402 pounds trading profits of that company and that this sum was regarded as the source of the distribution subsequently made by the liquidator of Glenville. That this was so was not questioned on this appeal and, indeed, it is borne out by the facts appearing in the case stated. (at p610)

4. The argument for the appellant commences with the established proposition that distributions by a liquidator are not, apart from s. 47, dividends within the meaning of the Act. So much may be readily conceded and it is unnecessary to refer to the well-known line of authorities which revealed the situation with which s. 47 was designed to deal. It is not disputed that the distribution by the liquidator of Killens, being made out of a fund which represented to the extent of 243,402 pounds, income of that company, was deemed by the section to be dividends paid to Glenville by Killens "out of profits derived by it". But the argument for the appellant directs attention to the initial condition expressed by s. 47 (1) for its operation. It must appear that the distribution represents or, to some extent represents, income derived by the company in liquidation. Then it is said that whilst this condition was satisified in the case of the distribution by the liquidator of Killens it was not satisified in the case of the distribution by the liquidator of Glenville for the dividend which it had received was merely deemed to be a dividend paid to it out of profits derived by Killens. True, it is said, the effect of s. 44 was to make the deemed dividend paid to Glenville assessable income in its hands, but the argument asserts that it was not income, and was not deemed to be income, in the sense in which that expression is used in s. 47 (1). (at p611)

5. At this stage of the argument the decision in Gibb v. Federal Commissioner of Taxation (1966) 40 ALJR 394 was called in aid. There it was held that the inclusion in the definition of "dividend" of bonus shares did not, of itself, operate to give to the bonus shares in question in that case the character of income for the purposes of the Act ; it did no more than define the term "dividend" for the purposes of the Act, including, of course, s. 44. Accordingly the effect of the definition did not extend beyond enabling it to be said that bonus shares were, for the purpose of the Act, dividends, notwithstanding that in ordinary parlance they represented a distribution of capital. So, says the appellant, s. 47, which deemed the relevant part of the distribution made to Glenville to be a dividend paid to Glenville out of profits derived by Killens, does not enable the respondent to treat any part of the amount of the distribution made by the liquidator of Glenville as, necessarily, representing income derived by Glenville. (at p611)

6. The argument, however, is fallacious and the reasoning applied in Gibb's Case (1966) 40 ALJR 394 has no application to the circumstances of this case. Distributions by a liquidator to the shareholders of a company can be made only after the debts of the company have been paid or provided for and this must be borne in mind when we come to consider s. 47 (1). Accordingly, when the sub-section expresses the initial condition for its operation - "Distributions . . . to the extent to which they represent income derived by the company" - it proceeds on the basis that if a distribution is made to shareholders in the course of a winding up out of a fund which, either in whole or in part, represents income derived by the company, such distribution, or such part thereof, is to be regarded as a revenue profit and it is in that context that the distribution "is deemed to be dividends paid to the shareholders by the company out of profits derived by it". Within this framework there is, therefore, no room for the view that a deemed dividend under s. 47 may in some circumstances consist of or include a capital profit and the reasoning in Gibb's Case (1966) 40 ALJR 394 can have no application. It seems to us that the concluding words of the sub-section were introduced to accommodate its provisions to the language of s. 44. But it is clear enough that when the legislature used these words it was speaking of a profit derived by a company on its revenue account and not otherwise. Accordingly the sub-section, for the purposes of the Act, deems the distribution, to the extent to which the distribution is made out of income derived by the company, as dividends paid to the shareholders out of such profits. The distribution by the liquidator of Killens, representing, as it did, income derived by Killens, the conclusion is inescapable that the effect of the subsection was to invest the distribution with the character of a dividend paid to Glenville out of, and only out of, profits derived by Killens on revenue account and, therefore, income in Glenville's hands. That being so the appellant's contention must be rejected and the question raised by the case stated answered : The whole of the sum of 9,666 pounds 13s. 4d. was assessable income of the deceased in the year ended 30th June 1958. (at p612)

Orders

Question in the case stated answered : The whole of the sum of 9,666 pounds 13s. 4d. was assessable income of the deceased in the year ended 30th June 1958.

Costs of the case stated reserved for the decision of the Justice disposing of the appeal.