Hooper and Harrison Limited (in Liquidation) v Federal Commissioner of Taxation

The case of *Hooper and Harrison Limited (in Liquidation) v Federal Commissioner of Taxation* concerned an appeal to the High Court of Australia regarding an assessment for war-time profits tax. The dispute centred on the calculation of deductions allowable from the company's profits for the financial year ending 30 June 1919. The appellant company argued for a specific method of calculating these deductions, while the respondent Commissioner of Taxation employed a different approach.

The primary legal issues before the court were: firstly, whether dividends declared and paid after the expiration of an accounting period, but out of profits earned within that period, should be taken into account when calculating the allowable deduction for income tax paid in respect of those profits; secondly, if multiple dividends were paid out of the profits of the accounting period, whether they should be aggregated for the purpose of calculating the shareholder's hypothetical income tax liability; and thirdly, the correct rate of income tax to be applied in such calculations. A further issue concerned the definition of "accumulated trading profits invested in the business" for the purpose of calculating the capital of the business.

The majority of the High Court (Knox C.J., Higgins and Gavan Duffy JJ.) held that a deduction is allowed for income tax paid in respect of the profits of an accounting period, even if that payment occurs after the period has ended. They further determined that for the purpose of calculating the deduction under section 15(5)(c) of the *War-time Profits Tax Assessment Act 1917-1918*, dividends declared after the accounting period but paid out of profits from that period should be included in the calculation. However, they differed on the method of aggregation, with the majority finding that the Commissioner's method of calculating the tax liability for each dividend separately was correct, rather than aggregating the dividends before calculating the tax. The Court also unanimously held that for accumulated trading profits to be considered "invested in the business" under section 17(1), there must be an intention to permanently use those profits for the business's purposes.

The Court's decision on the calculation of deductions for income tax paid in respect of profits meant that dividends paid after the accounting period, but derived from profits within that period, were to be included. The majority found that the Commissioner's approach of calculating the hypothetical income tax liability for each dividend separately was consistent with the wording of the Act, which referred to the "aggregate of the amounts of tax that would have been payable by each shareholder". The dissenting judges, Isaacs and Rich JJ., argued that dividends paid after the accounting period should not be considered, and if they were, they should be aggregated. The court's ruling on the capital employed issue clarified that mere use of profits in the business was insufficient; a permanent intention to invest was required.